Monte Paschi Seeks Return to Profit in Restructuring Plan

Banca Monte dei Paschi di Siena SpA, the bailed-out Italian bank, is seeking to return to profit after it reduces costs and increases capital under a European Union-backed reorganization plan.

Monte Paschi is targeting net income of 200 million euros ($272 million) in 2015 and 900 million euros in 2017, it said in a statement yesterday. Italy’s third-biggest bank plans to shed 8,000 staff, sell 3 billion euros of new shares and shrink its balance sheet by 25 percent under a plan that received EU approval two days ago.

Chief Executive Officer Fabrizio Viola and Chairman Alessandro Profumo are being forced by European regulators to conduct a more rigorous overhaul of the world’s oldest bank than initially planned to secure approval for state aid. The pair, appointed last year, sought the cash after their predecessors lost billions of dollars on Italian sovereign debt and derivatives contracts.

“The plan is reasonable,” resulting from the combination of limited revenue growth, a continuation of cost savings and conservative cost of risk assumptions, Andrea Unzueta and Ignacio Cerezo, analysts at Credit Suisse Group AG, wrote in a note today. “Balance sheet assumptions are more aggressive than anticipated.”

The stock rose as much as 2.3 percent in Milan today, and was up 1.9 percent to 18.8 cents as of 1:12 p.m., giving the bank a market value of 2.19 billion euros.

Eighteen of 22 analysts recommend selling Monte Paschi shares, compared with 14 of 23 analysts at the start of the year, data compiled by Bloomberg show. The average 12-month estimate for the shares is 16 cents.

Alleged Misconduct

Monte Paschi, engulfed by probes into alleged misconduct by its former managers, said it plans to cut its sovereign-debt holdings and trading activities and reduce its consumer credit and leasing portfolios. The bank will cut the assets on its balance sheet to 181 billion euros by the end of 2017 from about 207 billion euros on Sept. 30. Assets amounted to 240 billion euros at the end of 2011.

Total revenue is expected to increase 1 percent from 2012 to 5.2 billion euros in 2017, while operating costs are targeted to decline 3 percent to 2.5 billion euros. The common equity ratio should rise to 10 percent by 2017, the bank said.

“The plan entails a radical transformation in the way of banking,” the lender said in the statement yesterday. “In 2017, Monte Paschi will be a profoundly different bank,” reducing branches, employees and leverage in a bid “to return to a sustainable level of profitability,” it said.

The reorganization will allow it to repay 4.1 billion euros of state aid by 2017, the company said.

Rights Offer

Monte Paschi plans to reduce its 23 billion euros of Italian sovereign debt, the most among the country’s biggest banks relative to tangible equity, to about 17 billion euros in 2017. The lender, which has paid back 1 billion euros from the 29 billion euros it borrowed in the European Central Bank’s long-term refinancing operations, plans to repay the full amount by 2015.

The board approved a proposal on Nov. 26 to proceed with the stock offer in the first quarter of 2014 and appointed banks to guarantee the sale. The firm boosted the planned rights offer by 500 million euros, saying it will use the extra cash to pay interest on state aid, a move that will avoid surrendering a stake to the government in lieu of interest.

The bank, which pays 9 percent annual interest on the bonds it sold to the government in the bailout, must substitute the debt for stock if it hasn’t cash for the annual coupon.

Monte Paschi on Nov. 14 reported a sixth straight quarterly loss on state-aid costs and provisions for bad loans in the third quarter.

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