Italy’s Monte Paschi Flunks Stress Test, Plans to Raise Capital

  • Italian treasury says Paschi won’t need any state bailout
  • Deutsche Bank outperforms Barclays in test of 51 banks

Taking the Temperature of European Banks

The world’s oldest bank is also Europe’s riskiest.

Italy’s Banca Monte dei Paschi di Siena SpA was the only one of 51 lenders tested by European regulators to have its capital wiped out in the exam’s toughest scenario. The bank, which has been bailed out twice by the government since 2009, said it plans to sell as much as 5 billion euros ($5.6 billion) of stock if it can offload a bad-loan portfolio.

The European tests released Friday showed that most lenders would keep an adequate level of capital in a crisis. Among the region’s biggest banks, London-based Barclays Plc fared worse than Deutsche Bank AG and almost as poorly as Italy’s UniCredit SpA. Monte Paschi and Allied Irish Banks Plc fell below the minimum capital level required by regulators. 

“The results are better than expected for the bigger banks, including Deutsche Bank and UniCredit," said Carlo Alberto Carnevale Maffe, professor of business strategy at Milan’s Bocconi University. "What remains a worry is Monte Paschi, which needs urgent measures to replenish capital."

Persistent doubts over the resilience of lenders, particularly those in Italy, have made banking shares the worst performers on the Stoxx Europe 600 Index this year.

No Bailout

The exam gives supervisors across the European Union a common basis for measuring lenders’ financial resilience. Even before this year’s tests, the Italian government was weighing methods to shore up Monte Paschi that had sparked speculation about a government bailout. The nation’s treasury said Friday that such measures won’t be needed.

Monte Paschi’s ratio of fully loaded common equity tier 1 capital to risk-weighted assets, a measure of its buffer to withstand losses, dropped to negative 2.4 percent in the adverse scenario, which simulated a severe recession over three years. UniCredit’s ratio fell to 7.1 percent, the second-worst result of the five Italian lenders examined.

Intesa Sanpaolo SpA, Italy’s second-largest bank, emerged as the strongest in Europe, Chief Executive Officer Carlo Messina said in a statement, maintaining a ratio of 10.2 percent in a simulated recession.

“Italian banks’ credibility was strengthened,” Italian Banking Association President Antonio Patuelli said in a statement Saturday. “European and Italian institutions must continue their work to create common rules for fair competition in the banking sector.”

The test broke with past practice by having no pass/fail mark. More than three-quarters of the lenders maintained a ratio of more than 8 percent, while Allied Irish Banks, the second-poorest performer, saw its ratio fall to 4.31 percent.

Deutsche Bank’s ratio fell to 7.8 percent in the adverse scenario, outperforming the 7.3 percent result at Barclays.

For more on Deutsche Bank’s stress-test result, click here

The legal minimum for all banks is a ratio of 4.5 percent. Regulators also ask banks to hold a series of buffers. On top of that, supervisors add additional requirements for each lender, while banks deemed systemically important must have an extra cushion of capital to help absorb the damage their failure would cause.

The adverse scenario included shocks to economic output, interest rates and exchange rates, as well as plunging real estate prices. Analysts have questioned the exam’s reliability because the scenario doesn’t include flat or negative interest rates, the U.K.’s decision to leave the EU, and didn’t assess lenders from Portugal or Greece.

Monte Paschi

Monte Paschi’s share sale will be its third in two years, and the target of 5 billion euros in new stock is more than five times its current market value. The offering depends on its ability to find buyers for its soured debt. The bank plans to sell a 27.7 billion-euro bad-loan portfolio for 9.2 billion euros, or 33 percent of its gross value.

For a QuickTake explainer on the effectiveness of stress tests, click here

It’s "certainly positive for subordinated debt holders,” who might have had to share losses in a government bailout, said Jacopo Ceccatelli, chief executive officer of Marzotto SIM SpA, a Milan-based broker-dealer. Still, "there are more uncertainties on the equity side given the huge dilution."

Italy had sought European approval to inject taxpayer funds into Monte Paschi, which traces its roots to 1472. The nation’s treasury said Friday that there was no need for such an intervention, although it had discussed potential options with the European Commission that would be compatible with state-aid rules.

If the Paschi re-capitalization plan is successful, the bank will keep its current capital levels while halving its non-performing loan exposure, according to a note by Royal Bank of Canada analysts including Fiona Swaffield.

Long Overdue

“We continue to see the development as a long overdue clean-up of the Italian banking system,” the note said. “While the execution risk for the restructuring deal remains, we view the plan as a positive development for the sub-sector.”

UniCredit said it will work with the ECB to determine whether any additional measures or changes to its capital plan are needed, the company said in a statement.

Following Rules

Italy’s lenders are saddled with about 360 billion euros of non-performing loans, a legacy of years of economic stagnation. Unlike in Spain, where the weakest banks were bailed out in 2012, the Italian authorities didn’t force banks to resolve the situation. The ECB has now taken over supervision of the country’s biggest lenders and its demands for action have helped bring matters to a head.

“The results of the bank stress tests demonstrate that there are still banks in the European community that are still not doing their homework,” Wolfgang Steiger, the general secretary of the business group of Chancellor Angela Merkel’s Christian Democratic Union party, said in an e-mailed statement. “This applies in particular to Italian financial institutions. There is no regulatory way around the bail-in rules. These rules must now be adhered to.”

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