Monte Paschi Rescue Won’t Spur Recovery as Losses Seen

Banca Monte dei Paschi di Siena’s

4.07 billion-euro ($5.2 billion) state rescue won’t resolve the troubles of Italy’s third-largest bank, which is poised to report a second straight loss on soaring bad-loan provisions.

The world’s oldest bank may post a 2012 net loss of 2.33 billion euros ($3.03 billion) when it publishes results on Thursday, based on the mean estimate of 10 analysts surveyed by Bloomberg. The Siena-based lender had a 4.69 billion-euro loss in 2011, and will probably be unprofitable in 2013 as well, analysts’ estimates show.

Italy’s economy remains mired in its longest recession in two decades and a month-old political impasse threatens to increase sovereign-debt yields and bank funding costs. The lender’s outlook is further complicated by probes into the actions of former managers after derivatives were used to hide losses.

While the bailout will replenish capital, “concerns on low profitability, poor credit quality and high exposure to the country’s sovereign debt remain,” said Wolfram Mrowetz, the chairman of Alisei Sim, a Milan-based brokerage. “There are too many structural issues still to address.”

Monte Paschi fell as much as 3.9 percent, the worst performer in the 40-member Bloomberg Banks and Financial Services index, and was down 2.4 percent to 19.42 cents as of 10:47 a.m. in Milan trading. Shares almost halved in the last 12 months, giving the bank a market value of 2.27 billion euros.

Bad Loans

Chief Executive Officer Fabrizio Viola and Chairman Alessandro Profumo, appointed last year to turn around the 541-year-old bank, are trying to regain the confidence of investors after the lender was forced to seek a second state rescue in four years and to take a 730 million-euro hit linked to the derivative contracts.

An increasing number of Italian firms and families are struggling to repay debts as austerity measures put in place by the caretaker government of Mario Monti curb economic activity. At the same time, the Bank of Italy is forcing lenders to set aside more money against doubtful loans.

Bad loans at Italian banks rose to a record in January, exceeding 126 billion euros, the Italian Banking Association said last week, adding that further deterioration is expected.

Monte Paschi may report a 43 percent jump in bad-loan provisions to 666 million euros in the last three months of 2012 from a year earlier, the survey of analysts found. The bank’s fourth-quarter loss probably amounted to 761 million euros.

Capital ‘Quality’

“The group now has to focus on improving the quantity and quality of its capital,” Azzurra Guelfi, a London-based banking analyst at Citigroup Inc., wrote in a report on March 8. “Monte Paschi has a high stock of non-performing loans, and we are concerned about asset quality conditions in Italy.”

The bank’s ratio of non-performing loans to total lending was 12 percent in September. That exceeds the 8.3 percent ratio at Milan-based UniCredit SpA, Italy’s biggest bank, and the 7.3 percent at Intesa Sanpaolo SpA, the second largest, calculations based on their third-quarter earnings statements show.

Monte Paschi’s loans exceed its deposits by 30 percent, an “unsustainable” level, Profumo told reporters in October.

Fourth-quarter revenue may show a decline of 3 percent to

1.21 billion euros and net interest income a drop of 22 percent to 710 million euros, analysts estimated.

Profumo, 56, and Viola, 55, are reviewing the business plan they presented in June, after the losses linked to derivative contracts hidden by former executives forced the bank to seek additional aid to comply with regulators’ capital requirements.

‘Execution Risk’

The new management said in June it would strengthen finances by selling its leasing and consumer credit units, closing 400 branches and eliminating 4,600 jobs by 2015. The revised plan has to be submitted to the European Banking Authority by June.

“The executives’ plan seems convincing and I don’t expect major changes,” Alessandro Frigerio, a fund manager at RMJ Sgr in Milan, said by phone. Still, “it faces execution risk due to the investigations, which may still raise unwelcome surprises and are subtracting managers’ time from their core business.”

Profumo and Viola declined to comment for this article.

Regulators and prosecutors are scrutinizing derivative deals dubbed Alexandria, Santorini and Nota Italia that obscured losses. Bloomberg News first reported on Santorini on Jan. 17. The bank’s shares have since dropped 34 percent in Milan.

Prosecutors are also probing former executives for alleged market manipulation, false accounting and obstruction of regulatory activity during the 2007 takeover of Banca Antonveneta SpA, people with knowledge of the matter have said.

Italian Debt

“The new management team contributed to bringing more confidence in the stock by capping the downside of the derivatives-related losses,” said Antonio Guglielmi, an analyst at Mediobanca SpA in London. That said, “the bank’s future remains more in the hands of external factors than in the hands of the new management.”

Guglielmi cited political gridlock, a sluggish economy and the potential for wider spreads on Italy’s sovereign debt.

Monte Paschi’s holdings of Italian government bonds, which amounted to 22 billion euros at the end of September, put the bank at risk if Europe’s debt crisis worsens.

Italian bonds fell following the inconclusive national election on Feb. 24-25, driving 10-year yields as much as 45 basis points higher to 4.90 percent. While yields have since retreated to 4.52 percent, risks remain.

ECB Loans

The bank’s holdings of Italian debt are the largest among the nation’s biggest banks relative to its tangible equity. Between 2009 and 2011, Monte Paschi made an ill-fated bet on sovereign debt, buying government securities and arranging structured deals underpinned by Italian bonds.

Monte Paschi may also struggle to repay 29 billion euros in funds obtained by the European Central Bank in its longer-term refinancing operation, said Andrea Vercellone, an analyst at Exane BNP Paribas SA, in a January note.

Monte Paschi is one of the 10 biggest users of the ECB’s 1 trillion-euro LTRO, which must be repaid by 2015. It plans to sell assets to reimburse the loans.

The planned sale of assets “would provide the necessary liquidity, but in our view no buyer would be willing to acquire unfunded businesses at book value,” Vercellone said.

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