Monte Paschi Seeks EU3 Billion as Draghi Questions Outlook

Banca Monte dei Paschi di Siena SpA began selling 3 billion euros ($3.3 billion) of stock as its chief regulator questions the bank’s ability to revive returns and boost capital after the fundraising.

Monte Paschi must “provide a permanent solution to its structural problems, namely non-performing exposures, weak capital situation and earnings underperformance,” the European Central Bank President Mario Draghi said in a May 12 letter included in the bank’s share sale offer document. “The rights issue alone will not be sufficient to address these structural problems,” Draghi said in the letter.

Monte Paschi also faces risks related to its exposure to Nomura Holdings Inc., a position that the central bank has asked the lender to cut by July. The bank may be fined or face curbs to its operations should it fail to meet regulators’ requests, Monte Paschi said in the prospectus.

“Monte Paschi’s structural issues cannot be solved with a capital injection but need an industrial solution such as a combination with another bank,” Fabrizio Spagna, managing director at Axia Financial Research in Padua, Italy, said by phone.

Remarks by the ECB, which assumed oversight for the region’s biggest lenders in November, show a “more pragmatic and direct” approach than local supervisors, he said.

Volatile Shares

Six years after buying Italian competitor Banca Antonveneta SpA, Monte Paschi is still grappling with the consequences of a deal that stretched its finances. Chief Executive Officer Fabrizio Viola, who is tapping investors for a second time in a year after failing the ECB’s check-up in October, is now juggling rebuilding capital buffers eroded by mounting bad loans with pressure to restore profit at the world’s oldest bank.

The CEO has also said he’s seeking a partner for the bank as part of his turnaround plan. The bank plans to use part of the funds raised in the offering to reimburse 1.1 billion euros it still owes taxpayers on aid and use the rest to plug the capital gap.

Monte Paschi shares were unable to set an opening price, limit up in Milan trading on Monday, while rights to new shares were halted limit down. Monte Paschi’s dilutive share sale may cause price anomalies and high volatility, Italian market regulator Consob said in a statement Friday.

Underwriting Group

Monte Paschi’s 9 billion-euro bid for Banca Antonveneta SpA in 2008, a deal completed during Draghi’s tenure as Bank of Italy governor, stretched Paschi’s capital just as Europe’s sovereign-debt crisis ensued. Attempts by some of Monte Paschi’s former executives to mitigate losses on other transactions backfired and are being probed by Milan prosecutors for misleading investors.

Paschi’s exposure to Nomura, including a 2009 derivative transaction dubbed Alexandria, represented about 35 percent of its regulatory capital base at the end of 2014, exceeding the 25 percent limit on one counterparty set by regulators. The transaction had a negative mark-to-market value of about 300 million euros as of May 11, Chief Financial Officer Bernardo Mingrone said during a call with analysts that day.

UBS Group AG is leading a group of banks, including Citigroup Inc. and Mediobanca SpA, that are underwriting the rights offering. Investors AXA Mutuelles and Fintech Advisory Inc. agreed to subscribe to the offer, Paschi said in the statement.