Italian bank Monte dei Paschi trades at a penny-stock price, has tumbled almost 50 percent this year and boasts the lowest valuation among European peers. So better-than-expected net income in the first quarter should come as a relief.
The glimmer of hope is faint, however.
Monte Paschi's profit was helped by a fall in bad-loan provisions, at their lowest in four years, while revenue held up better than expected despite a squeeze in lending margins.
That's welcome. But the bank's still sitting on a 47 billion euro ($54 billion) mountain of bad loans and faces the herculean task of selling unwanted assets while searching for a buyer to shore up its finances. These are big risks, to put it mildly.
This isn't just a Monte Paschi problem, it's an Italian one. The country is burdened by 360 billion euros of non-performing loans, a far higher proportion of overall loans than for Europe as a whole. Italy is trying to remedy things with a new rescue fund, Atlante, designed to help recapitalize lenders and buy soured loans.
The country is also proposing government guarantees and speedier recovery of bad debts. European regulators are pushing for mergers and capital hikes, too. It's a complicated mess that will take a long time to untangle.
Even among a bad bunch, Monte Paschi still looks like a big and vulnerable outlier. It has the highest non-performing loan ratio in Italy and its bad-debt pile is too big to be solved by Atlante, which raised 4.25 billion euros last week.
Sure, appetite from buyers for non-performing loans is picking up in Italy -- there were 3.2 billion euros of deals in the first quarter, according to Morgan Stanley. Yet the market remains thin. Monte Paschi raised the prospect of a "potential partnership" with a "specialized operator" on Thursday, but it's all slow going.
In the meantime, the risk of market panic remains. Funding from current accounts, deposits and bonds fell in the first quarter. The bank's chief had warned in January of "limited" deposit withdrawals as the share price plunged, although some of that was offset by short-term repo loans from other institutional investors. Even though the European Central Bank has shown itself willing to keep propping up banking with cheap cash, shareholder jitters about the health of the system haven't gone away.
Dispelling the market's darkest fears remains an uphill struggle for Monte Paschi, so there's plenty of room for any improvement in sentiment (slight or not). Its shares trade at 0.2 times book value, the steepest discount in the STOXX 600 Europe banks index.
But a turnaround needs more than a single quarter's surprise. If the new government-backed measures and search for private-sector buyers don't deliver soon, any flicker of light will be snuffed out.
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