Monte Paschi Share Sale Seen as Turning Point for Lender

Banca Monte dei Paschi di Siena SpA investors heeded its 5 billion euro ($6.8 billion) cash call, enabling the bailed-out Italian lender to repay state aid and make a stronger case to European regulators.

Investors bought 99.85 percent of the 5 billion new shares offered at 1 euro each, the Siena-based lender said in a statement on June 27. That price, announced June 5, is 35.5 percent less than the theoretical value of the shares, minus the rights, at the close of trade that day. The long-delayed exercise almost tripled Monte Paschi’s market value, and led Moody’s Investors Service to upgrade its credit rating.

“The ongoing restructuring, a diverse shareholding and a better macro environment are luring investors,” said Stefano Girola, who helps manage 30 billion euros at Banque Syz & Co. SA, in Lugano, Switzerland. “Monte Paschi has now a more solid balance sheet and can offer an interesting return, making it a possible takeover target.”

Chief Executive Officer Fabrizio Viola and Chairman Alessandro Profumo are seeking to revamp Monte Paschi after a decade of missteps brought Italy’s third-largest lender to its knees. Engulfed in legal probes of alleged misconduct by former managers, controlled by a local entity partly run by the region’s politicians and crippled by acquisitions at the peak of the market, Monte Paschi turned to the government for help twice since 2009, securing its most recent bailout just last year.

“If we reimburse state aid, we are profitable and this is a good way to compare with what we started,” Chief Financial Officer Bernardo Mingrone said in an interview in Milan on June 9. “Things that are under our control, we’re doing well.”

Back in Favor

Monte Paschi joins other Italian banks, including Banco Popolare SC and Banca Popolare di Milano Scarl, in raising money to shore up balance sheets as nations shunned during the sovereign-debt crisis return to favor with investors.

In all, eight Italian banks are raising more than 10 billion euros this year, benefiting from renewed confidence as Italy emerges from the deepest recession since World War II. The rise to power of Matteo Renzi, Italy’s 39-year-old prime minister, has also improved the mood.

“Investors’ attitude has changed with peripheral and Italian banking stock coming back into favor,” said Jacopo Ceccatelli, a London-based partner who manages 2.4 billion euros at financial advisory and asset management firm JCI Capital. “Italian banks and Monte Paschi in particular are cheap compared with peers, and the aggressive share sale of Monte Paschi is seen as a turning point in a favorable environment.”

Italian banks trade at an average of 0.85 times the net value of their tangible assets, with Monte Paschi at 0.68 times that measure. That compares with 1.15 times on average for the 47-member European STOXX 600 Banks Index, data compiled by Bloomberg show.

High Volatility

The offering sent Monte Paschi’s stock on a wild ride, with trading suspended for most of the first two days and several times thereafter to limit volatility. Shares shot up 42 percent during the first two weeks before plunging 32 percent in the third week. Monte Paschi shares fell 0.5 percent to 1.46 euros, trimming their gain this year to 33 percent.

“I don’t expect a sell-off in the short term,” Luca Rubini, managing director at Fidentiis Equities in Milan, said by phone. “The share sale subscription required a medium-long term strategy because it was dilutive and onerous.”

Moody’s Upgrade

Moody’s raised its rating on Monte Paschi to B1 from B2 on June 26, saying the fully underwritten rights offer has strengthened the bank’s capital buffer against “very poor asset quality and net losses expected for 2014 and potentially also 2015.”

Viola and Profumo, who took over two years ago, are cutting costs, selling assets and curbing risk under a plan to return to profit by 2015. They plan to use proceeds from the rights offer to pay this year’s bailout bill, or 3 billion euros of 4.1 billion euros received in state aid. Some money will also go to shore up the bank’s balance sheet in case capital shortfalls crop up during the European Central Bank’s review of its assets.

In April, the lender increased the rights offer from 3 billion euros to create a bigger buffer for the ECB’s review, part of a wider inspection of euro-area banks to make sure they have properly valued their assets.

ECB Review

“The higher size of Monte Paschi’s share sale will help to cover the shortfall resulting from the ECB assessment, but the bank will also need to continue reducing costs and consolidating,” said Alberto Gallo, head of European macro-credit research at Royal Bank of Scotland Group Plc in London.

Monte Paschi is one of the 15 Italian lenders under scrutiny by the ECB, which takes over banking supervision for the euro area in November. With the extra funds, the bank has said it will have a common equity Tier 1 ratio, a key measure of financial strength, of 11.3 percent under the latest Basel rules.

The lender reported last month an eighth straight quarterly loss, hurt by charges and interest payments on its bailout. Loans to customers dropped 5.6 percent in the first quarter from a year earlier, while risk-weighted assets declined to 81.1 billion euros.

Turbulent Years

The last two years have been among the most turbulent in the 542-year history of Monte Paschi, the world’s oldest lender. After restating accounts in February 2013 to reflect losses that had been masked from its books by the previous management, the bank was forced to postpone the fundraising because its biggest investor at the time, Fondazione Monte dei Paschi di Siena, wanted to cut its stake before being diluted.

The non-profit entity lowered its holding to 2.5 percent from 33 percent this year to reimburse debt that piled up in previous years as it borrowed to back Monte Paschi’s acquisition of Banca Antonveneta SpA in 2007.

Takeover Target?

“The reduction of the foundation’s weight helped to eradicate the local influence on the bank that was so deeply rooted,” Massimiliano Romano, head of research at Milan-based broker Concentric Italy, said by telephone. “It’s also a crucial step for the bank to become more attractive.”

Some analysts and fund managers, including Girola and Romano, expect Profumo’s next step will be to find a foreign bank with which to merge. Past speculation about a possible takeover by competitors such as BNP Paribas SA and Santander may come back given the renewed interest for peripheral countries and Italy’s improved economic outlook, according to Girola.

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