Paschi’s Biggest Challenges in Luring Investors in Four Charts

  • CEO Viola to lay out lender’s new business plan in September
  • Profitability, costs, capital and asset quality are crucial

When Fabrizio Viola presents Banca Monte dei Paschi di Siena SpA’s business plan next month, he’ll have to persuade investors to buy shares worth five times the ailing lender’s current market value.

“The strategic plan in September will be key to convince investors that the bank’s profitability prospects could justify its valuation,” Aldo Comi, an analyst at Societe Generale SA in Milan with a sell rating on the lender, wrote in a note to clients. 

Viola, the 58-year-old chief executive officer, intends to tap investors for as much as 5 billion euros ($5.6 billion) to replenish capital, after first moving 28 billion euros of bad loans off the bank’s books for securitization and sale. The lender announced the financing plan the same day European stress tests showed Monte Paschi would perform the worst in a severe economic crisis among the 51 banks examined.

Below are four charts that illustrate the key financial ratios Viola must address to win over investors.

More than a third of Monte Paschi’s loans have soured, twice the proportion of most peers. Under the plan, Viola will sell the portfolio of non-performing debt at about a third of face value, or 9.2 billion euros. Because the deal will take time, the bank will first move the loans into a separate entity that may be financed through a bridge loan.

Monte Paschi has cut extensively, lowering costs as a proportion of revenue by about 10 percentage points since 2011. Now, Viola needs to convince investors there’s the potential for further improvement -- by increasing revenue. Last year, he set a target for a cost-to-income ratio of 49 percent by 2018.

Soaring bad-loan provisions and slumping revenue led to four consecutive annual losses through 2014. Last year, the bank turned a profit only after a one-time accounting gain tied to a derivatives deal. The string of losses helps account for Monte Paschi’s 99 percent share decline since the end of 2010. The bank hasn’t paid a dividend since 2011.

In the stress tests, Monte Paschi’s non-performing loans and exposure to Italy’s sovereign debt wiped out its capital under the adverse scenario. That’s after the bank already tapped shareholders for funds twice in the past two years, and received two government bailouts since 2009.

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