Monte Paschi Seen Revealing Losses Masked by Derivatives

Banca Monte dei Paschi di Siena SpA, engulfed by criminal probes into the conduct of its former management, may disclose as early as today the size of losses the bank hid in 2008 and 2009 using derivatives.

Monte Paschi, the subject of investigations spanning from allegations of market manipulation to false bookkeeping, will probably restate earnings because of losses obscured by the structured deals dubbed Santorini, Alexandria and Nota Italia. The bank’s board is meeting in Siena today to discuss the impact on its balance sheet.

Chief Executive Officer Fabrizio Viola and Chairman Alessandro Profumo are trying to reassure investors that Italy’s third-largest bank will succeed with a turnaround plan that is central to a 3.9 billion-euro ($5.3 billion) taxpayer bailout due this month. Monte Paschi is seeking state funds to boost capital after failing to meet European regulators’ minimum requirements in a rescue that some lawmakers and consumer groups oppose.

“This is the occasion to clean up the balance sheet, even if I don’t think management will come down heavily on provisioning, which might scare investors,” said Jacopo Ceccatelli, a partner at JC & Associati SIM, a Milan-based financial advisory firm. “I expect losses of around 700 million euros, in line with market expectations. Still, we’re a long way from a turnaround and regaining market confidence.”

Monte Paschi’s shares fell 22 percent since Bloomberg News first published details of the Santorini deal on Jan. 17. The benchmark Stoxx 600 Banks Index dropped 1.3 percent.

The lender increased a bailout request by 500 million euros to 3.9 billion euros in November to cover losses from derivatives arranged by the previous management.

Structured Deals

Monte Paschi borrowed about 1.5 billion euros from Deutsche Bank AG in December 2008 as part of Project Santorini, a derivatives deal that helped it disguise a 367 million-euro loss. The bank has said it will conduct a “thorough” review of several such arrangements to determine their effect on the previous years’ accounts as well as any future impact.

The company may declare 500 million euros of losses from the trades, Riccardo Rovere, an analyst at Mediobanca SpA in Milan who has a “neutral” recommendation on the stock, wrote in an e-mailed report to clients last week.

The Alexandria deal, a contract arranged in 2009 with Nomura Holdings Inc., may bring a loss of 220 million euros and total losses on derivatives to more than 700 million euros, Il Fatto Quotidiano newspaper reported on Jan. 22.

Prosecutors Investigate

Prosecutors are also investigating the bank under a law on company responsibility to see whether crimes were committed by former executives, according to people familiar with the operation, who declined to be identified. Former Monte Paschi employees, including former Chairman Giuseppe Mussari, are due to be questioned in Siena this week and next, one of the people said.

Mussari, 50, who led the bank from 2006 until early 2012, quit as head of the Italian Banking Association on Jan. 22. He said at the time that he “always acted according to the law.” Calls to his lawyer weren’t answered outside business hours.

The criminal probe is focused on Monte Paschi’s 2007 agreement to buy Banca Antonveneta SpA for 9 billion euros. Banco Santander SA had valued the lender at 6.6 billion euros when it purchased ABN Amro Holding NV’s Italian assets two months previously.

“The purchase left Monte Paschi short of capital, it was the trigger for a snowball effect that led the bank to act in a more and more aggressive and opaque way, underestimating risks,” Massimo Intropido, head of Milan-based financial research firm Ricerca Finanza, said by telephone.

Monte Paschi, which reported 5 billion euros of losses in 2011 because of writedowns related to the purchase of Antonveneta, is expected to post a 1.94 billion-euro loss for 2012 when it reports earnings on March 28, according to the average estimate of 14 analysts surveyed by Bloomberg.

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