The Wild Child of Italian Banking
The most battered of all Italy's banks has tried to give investors a glimpse of a brighter future.
On Tuesday, Monte Paschi's new CEO outlined plans to eliminate 2,600 jobs, shut 500 branches and slash the lender's pile of bad loans to almost double return on tangible equity by 2019.
It's encouraging -- if only because it shows the bank maintains some hope of avoiding a state rescue after years of losses, soaring bad loans and derivatives bets gone wrong.
But it still leaves unanswered the bigger question of how the bank expects to raise about 5 billion euros in fresh capital -- about five times Monte Paschi's market value -- by the year-end.
That explains the volatility of this bank's shares, which are up 30 percent in three days but down more than 80 percent in the past 12 months. The stock trades at a near 90 percent discount to its estimated book value, according to Bloomberg Intelligence.
That wild ride looks set to continue as Monte Paschi attempts to pull off what the bank itself describes as a "unique and unheard of" plan to rid itself of a pile of soured loans and raise fresh capital.
Investors had lost faith in former CEO Fabrizio Viola's ability to deliver the plan, which he described as the only solution available. Marco Morelli, his successor as CEO, is at least making more encouraging noises.
Paschi's plan now incorporates a voluntary debt-to-equity swap: bondholders (including individual investors) will be allowed to swap their 5.1 billion euros bonds for equity in the bank.
If approved, that should reduce the amount the bank would then need to raise from shareholders. If 60 percent of the bonds are converted, that would cut the bill by about 3 billion euros, according to Filippo Alloatti of Hermes Investment Management.
That's the good news. The bad news is that Monte Paschi is trying to execute a three-pronged plan in an exceptionally compressed and potentially volatile time-frame.
The bank wants to spin off 28 billion euros of souring loans, a debt-to-equity swap and a capital increase. If one leg fails, all fail.
Making this trickier still is the Dec. 4 referendum on crucial constitutional reforms that could cost Prime Minister Matteo Renzi his job. Even if the threat of financial instability may be over-stated -- bank reform and mergers in Italy are unlikely to stop -- market volatility is likely to surge.
Italy's ailing banking industry has had a torrid year. Piecemeal reforms and rescue plans haven't reassured investors Monte Paschi will avoid a state bailout. Morelli has put his stamp on the long-term strategy and delivered some encouraging tweaks to the short-term plan. But this is still a ride for only the very, very brave.
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