Monte Paschi Posts Loss That’s Double Estimates on Bad Loans

Banca Monte dei Paschi di Siena SpA, Italy’s third-biggest bank, reported a third straight quarterly loss, missing analysts estimates, on soaring bad-loan provisions and lower income from lending.

The fourth-quarter net loss of 1.59 billion euros ($2 billion) compares with a 5 billion-euro loss a year before, when it wrote down goodwill related to acquisitions, the Siena-based lender said in a statement today. That missed the 686.3 million-euro loss estimated by 11 analysts in a Bloomberg survey.

Monte Paschi, engulfed by investigations of its former managers, is selling assets, cutting costs and reducing risks to return to profit. 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 derivative contracts.

“It’s a balance sheet that’s a turning point and reflects all the new measures that make Monte Paschi a different bank than in its recent past,” Viola said during a conference call. “It’s a new bank.”

‘More Help’

Loan-loss provisions increased to 1.37 billion euros in the fourth quarter from 464.3 million euros a year earlier. Revenue declined 37 percent to 778.3 million euros, hurt by a net interest income drop of 52 percent to 434.5 million euros.

“The bank will likely need more help going forward, as its bad loans continue to rise, and its operating profits struggle,” said Alberto Gallo, head of European credit research at Royal Bank of Scotland Group Plc in London. Bad loans as a proportion of total lending may rise 1 percentage point to 2 percentage points a quarter, for “at least” another four quarters, he said.

Fourth-quarter revenue was hurt by a 171 million-euro interest payment on the first state aid received in 2009.

Profumo, 56, and Viola, 55, are reviewing the business plan they presented in June, after losses linked to derivative contracts hidden by former executives forced the bank to seek additional aid, bringing the total to 4.07 billion euros, to comply with regulators’ capital requirements.

The bank’s core tier 1 ratio, a key measure of financial health, decreased to 8.9 percent on Dec. 31 from 11.4 percent at the end of September. Taking into account the additional state aid received this year, the pro-forma core tier 1 ratio was 11.3 percent at the end of 2012.

Cutting Costs

Monte Paschi was unchanged at 18.5 cents in Milan trading today. Shares declined by 49 percent in the last 12 months, giving the bank a market value of 2.16 billion euros.

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. A revised plan has to be submitted to the European Banking Authority by June.

Viola said today that the bank will cut more than 3,000 jobs by the end of the year, or 70 percent of the targeted reductions by 2015. The lender will also reach the target for branch closings this year.

Regulators and prosecutors are scrutinizing derivative deals dubbed Alexandria, Santorini and Nota Italia that obscured losses under former management. Bloomberg News first reported on Santorini on Jan. 17.

Repurchase Agreements

Alexandria, Santorini are accounted as long-term repurchase agreements in the company’s liabilities, Chief Financial Officer Bernardo Mingrone said during the conference call, rejecting questioning about a possible misrepresentation.

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.

Monte Paschi’s deposits declined in February following the announcement of possible losses linked to derivatives, Mingrone said. “We were somewhat impacted in February but we were quick in recovering ground in March,” he said, declining to provide the level of deposits in the first quarter.

Monte Paschi held 25.8 billion euros of Italian sovereign bonds at the end of the fourth quarter, increasing the amount by 3.8 billion euros from the previous three months.

The duration of the holdings was 6.7 years, which “isn’t a short duration and this is one of our problems,” Viola said. He reiterated that the bank would like to reduce those government bond holdings “depending on market conditions.”

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