Paschi Tumbles as Derivatives Call Earnings Into Question

Banca Monte dei Paschi di Siena SpA, the world’s oldest bank, fell the most in more than a month in Milan trading on concern that losses from derivatives contracts are threatening the lender’s earnings.

The stock fell 5.7 percent to 27.75 cents in Milan trading today, the biggest decliner in Europe’s 46-member Stoxx 600 Banks Index, after Il Fatto Quotidiano reported Monte Paschi’s former managers signed a derivative with Nomura Holdings Inc. three years ago that will reduce 2012 earnings by 220 million euros ($293 million).

Monte Paschi said on Jan. 17 it will review its accounts after Bloomberg News first reported that the lender engaged in a transaction with Deutsche Bank AG at the height of the financial crisis that obscured losses before the Siena-based bank sought a government bailout. The Italian lender, which was bailed out in 2009, is seeking 500 million euros more from taxpayers, bringing the cost of its rescue to 3.9 billion euros.

“These transactions will hugely affect the bank’s accounts, making state aid essential for the bank’s survival,” said Fabrizio Spagna, a managing director at Axia Financial Research in Padua, Italy, who tracks financial stocks.

Monte Paschi, the only Italian bank that hasn’t met European regulators’ minimum capital requirements, said in November it needed the additional money to cover losses from derivatives. The lender may report 1.78 billion-euro loss in 2012, according to the average estimate of 16 analysts surveyed by Bloomberg.

Consob Criticized

The Bank of Italy and Consob, the country’s markets regulator, must now explain why they didn’t review Monte Paschi’s use of the derivatives, Senator Elio Lannutti, chairman of Italy’s Adusbef consumer group, said in a statement today. Neither the central bank nor Consob returned calls for comment immediately.

The lender discovered in October that former managers signed an agreement with Nomura to cover losses on a mortgage-backed derivative called Alexandria with new, riskier derivatives, Il Fatto Quotidiano reported today, citing an internal report by Chief Executive Officer Fabrizio Viola.

Nomura said today that Monte Paschi’s former chairman, Giuseppe Mussari, “fully reviewed and approved” the trade. Mussari, now head of the Italian Banking Association, didn’t respond to e-mails sent to his personal account or calls to the trade group’s Rome headquarters.

Monte Paschi said in a statement today the Alexandria derivative was part of “restructured transactions” whose effect is subject to a review that will be completed by the middle of February.

Project Santorini

Monte Paschi also entered into a derivative with Deutsche Bank in December 2008 under which it received 1.5 billion-euro loan that helped it to mitigate a 367 million-euro loss from an older derivative with the Frankfurt-based bank, Bloomberg News reported on Jan. 17.

Deutsche Bank reaped about 60 million euros in profit in the first two weeks of December 2008 through the loan, dubbed Project Santorini, according to more than 70 pages of documents outlining the deal and obtained by Bloomberg News. As part of the deal, the Italian lender made a losing bet on the value of the country’s government bonds, according to six derivatives specialists who reviewed the files. Monte Paschi never disclosed the effect of the 2008 transaction in its annual reports.

Monte Paschi’s earnings came under strain in 2008 following Mussari’s decision the previous year to spend more than the lender’s market value to acquire domestic competitor Banca Antonveneta SpA, just as bank stocks hit their peak.

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