Paschi Rises After Posting First Quarterly Profit in Three Years

Monte Paschi Bank Branch

Alessia Pierdomenico/Bloomberg

Banca Monte dei Paschi di Siena SpA, which tapped Italy for two bailouts since 2009, rose in Milan trading as the bank swung to a profit after 11 straight quarterly losses.

The shares rose as much as 4.7 percent and were 2.6 percent higher at 10:14 a.m. in Milan trading Monday. The stock has gained 26 percent this year, compared with the 15 percent increase in the 45-company Bloomberg Banks and Financial Services Index.

Net income in the first three months of the year was 72.6 million euros ($81 million), beating the 44 million-euro average of seven analyst estimates compiled by Bloomberg, as Italy’s third-biggest bank earned more from trading and interest costs on state aid fell.

“The beat was low quality,” mainly related to a one-off trading gain, Carlo Tommaselli, an analyst at Societe Generale SA who has a hold on the stock, wrote in a note Monday. “The market is likely to welcome Monte Paschi post earnings after 11 consecutive quarters of losses.”

Chief Executive Officer Fabrizio Viola is cleaning up the balance sheet, reducing risk and selling assets to restore profit at the world’s oldest bank, engulfed in legal probes of alleged misconduct by former managers. The lender said Friday it will postpone profitability targets as it prepares to raise 3 billion euros from shareholders in coming weeks. A tie-up with a cooperative bank is possible, the CEO said in an interview with Il Sole 24 Ore on Sunday.

Monte Paschi targets a net profit this year, with a pre-provision profit of 1.6 billion euros to 1.8 billion euros, the bank said in a slide presentation Monday.

Necessary Change

Monte Paschi had the biggest capital shortfall among the banks that failed the European Central Bank’s health check last year. The ECB cited the bank’s high credit risk, difficulty of achieving adequate levels of profitability and an inability to generate capital organically, in addition to reputational and legal risks.

The bank now targets net profit of about 880 million euros in 2018, compared with 900 million euros in 2017 it sought previously. Monte Paschi expects a return on tangible equity, a measure of profitability, of about 8 percent in 2018 and a 4.8 percent compound annual growth rate in revenue in the four years through 2018.

Monte Paschi, which was requested by the ECB to cut its exposure to Nomura Holdings Inc. by July, said it has started talks with the central bank on how that exposure is calculated. Recent European Banking Authority rules and the planned share sale may eliminate the current breach of the regulatory limit, the bank said.

Nomura Deal

Paschi’s exposure to Nomura, including a 2009 derivative transaction dubbed Alexandria, was about 35 percent of its regulatory capital base at the end of 2014, exceeding the 25 percent limit set by regulators.

Closing Alexandria would cost Monte Paschi about 1 billion euros, according to a letter the bank sent to Milan prosecutors dated Feb. 18 and seen by Bloomberg.

Bad-loan provisions in the first quarter were almost unchanged at 468.2 million euros compared with 476.6 million euros a year earlier. The bank’s common equity Tier 1 ratio pro forma, including the approved share sale, fell to 10.9 percent as of March 31 from 11.4 percent at the end of December.

The bank’s net interest income rose 37 percent to 611.9 million euros from 445.8 million euros, after the lender repaid part of state aid, reducing the interest cost. Trading income quadrupled to 171.8 million euros, in part because of 122 million euros in one-time gains from the reduction of investments.

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