Monte Paschi Profit Surpasses Estimates on Lower Provisions

  • Bad-loan provisions drop to the lowest in four years
  • Decline in deposits offset by increase in repo funding

Banca Monte dei Paschi di Siena SpA, the Italian bank seeking a buyer to shore up its finances, posted first-quarter profit that beat analysts’ estimates as bad-loan provisions declined to a four-year low.

Net income fell to 93.2 million euros ($106 million) from 143.7 million euros a year earlier, the Milan-based bank, Italy’s third-largest, said in a statement Thursday. That compares with the 23.4 million-euro average estimate of five analysts surveyed by Bloomberg. Provisions for bad loans in the quarter fell to 346 million euros from 468 million euros a year earlier.

Chief Executive Officer Fabrizio Viola is reducing risk and selling assets at the world’s oldest bank, which has lost about half its market value this year. Investors had grown increasingly concerned about Italian lenders’ credit quality, prompting the government to set up the Atlante rescue fund in an effort to restore confidence.

The positive result “was due to trading, but we see some stabilization in core revenues and positive surprise on provisions,” Barclays Plc analysts Marta Bastoni and Rohith Chandra-Rajan said in a note to investors. Monte Paschi “showed some steps in the right direction” in improving its asset quality, they said.

The shares rose as much as 6 percent in Milan trading and were up 5.4 percent at 67 cents as of 9:14 a.m.

Revenue fell to 1.19 billion euros in the quarter from 1.37 billion euros a year earlier, hurt by volatile financial markets, faltering loan growth and record-low interest rates. Trading income declined 41 percent to 166 million euros, though Bernardi said that was a smaller drop than he estimated, because Monte Paschi incurred gains on securities available for sale.

‘Ongoing Restructuring’

The bank increased its bad-loan coverage ratio by 59 basis points from December to 49 percent. Monte Paschi’s common equity Tier 1 ratio on a transitional basis fell to 11.7 percent as of March 31 from 12 percent at the end of December.

The lower bad-loan provisions are “the positive result of the ongoing restructuring process,” Viola said during a conference call after markets closed Thursday. The bank is “well on track” on its targets to reduce bad loans, and further initiatives not included in that plan could be taken to speed such disposals above the target of 3.5 billion euros by 2018, the CEO said.

Partner Sought

The Siena-based bank said it’s seeking offers for its bad consumer-credit loans, as well as non-performing loans secured by real estate as collateral. It plans to sell an unsecured corporate portfolio in the second half, while also seeking a partner to help manage the recovery of non-performing loans.

“We are looking for a specialized operator with the know-how on recovery activity in Europe that aims to enter the Italian market,” Viola said. The bank may also benefit from the Atlante fund, as well as recent laws that allow bad-loan sales to benefit from a state guarantee on the less risky portions, he said.

At 120 billion euros, the bank’s direct funding was little changed from the previous quarter as an increase in repurchase agreements offset a decrease in other forms of funding, including deposits. Monte Paschi said in January that clients were withdrawing funds during a selloff that erased about half its market value in the first three weeks of the year.

Deposits Recovering

“Monte Paschi is on a recovery path for the deposits lost in January,” Viola said.

The stock has rallied since the creation of Atlante, which stepped in to buy shares of Banca Popolare di Vicenza SpA after investors balked at its initial public offering. Atlante also aims to help lenders by buying some of their distressed debt. Still, Ignazio Angeloni, a member of the European Central Bank’s supervisory board, told Repubblica in an interview published Thursday that while the fund should grow and tap international investors, Monte Paschi’s bad debts are too large for Atlante to absorb on its own.

“The market will remain focused on the evolution of asset quality and net interest income,” Manuela Meroni, an analyst at Banca IMI SpA, wrote in a note on April 29. “Monte Paschi could be one of the main beneficiaries of the potential revitalization of the non-performing loans market that could follow the establishment of the Atlante fund.”

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