Paschi CEO Says Share Sale Key Step to Cut Funding Costs

Fabrizio Viola, chief executive officer of Banca Monte dei Paschi di Siena SpA, said the bank’s planned 5 billion euros ($6.9 billion) share sale will allow it to reduce funding costs and build a capital buffer.

Monte Paschi will use money to reimburse part of state aid and to create a cushion as the European Central Bank assesses capital, Viola said in an interview yesterday with Bloomberg Television in Siena, Italy, after the lender’s annual meeting. “The capital position is crucial in order to reduce the cost of funding.”

Earlier this month, Italy’s No. 3 bank agreed to boost the planned rights offering to 5 billion euros from the 3 billion euros it announced in November to absorb “eventual negative impacts” from the ECB’s review. Viola, 56, is seeking to turn around the lender that’s engulfed in legal probes of alleged misconduct by former managers, by cutting jobs and selling assets to return to profit by 2015.

“The work we have done on the operating efficiency is very strong, so I am waiting for consolidation of the results in terms of cost saving” this year, Viola said. “My hope is to start to see some recovery also on the revenue side.”

State Aid

Monte Paschi in March posted a seventh straight quarterly loss on bad-loan provisions and reorganization costs in the last three months of 2013. The bank reported an annual loss of 921 million euros.

Monte Paschi’s capital increase will help to reimburse 3 billion euros of the 4.1 billion-euro bailout received last year and interest payments on the aid due July 1. The reimbursement will cost the bank more money because of additional payments to the Italian Treasury due to the higher price of shares sold by Fondazione Monte dei Paschi to investors this year.

“Given that the Foundation sold blocs at an average price 3 percent above the face value underlying the government bonds, the higher cost for Monte Paschi is 90 million euros, 55 million euros after taxes,” Giovanni Razzoli, an analyst at Equita SIM SpA, wrote in a note today.

The bank pays 9 percent annual interest on the bonds it sold to the government in the bailout and must swap the debt for stock if it doesn’t have the cash for the payment.

“We asked the Treasury to delay the interest payment by a few weeks to repay it in cash with money raised in the share sale,” said Viola. The stock offer is expected to be completed by mid-July, he said.

The bank fell 2.7 percent to 24.32 cents in Milan at 2:10 p.m., giving the company a market value of 2.84 billion euros.

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