Monte Paschi Seeks Investors as CEO Eyes $5.4 Billion in Capital

  • Bank starting talks with core investors on Tuesday, CEO says
  • Lender targeting annual profit of 1.1 billion euros in 2019

Morelli Seeks to Put Paschi Back on Profitability Track

Banca Monte dei Paschi di Siena SpA signaled it’s just starting talks to draw investors to a stock sale, reigniting concerns that the lender may struggle to secure its survival through private funds.

Three months after unveiling plans to cut soured loans, the Siena, Italy-based lender said on Tuesday that it’s seeking to hold talks with investors to win support for 5 billion euros ($5.4 billion) in fresh capital by the end of the year. As part of his overhaul, Chief Executive Officer Marco Morelli pledged to return Monte Paschi to profit, targeting net income of 1.1 billion euros in 2019.

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Morelli, 54, in the job for just six weeks, is seeking to persuade shareholders that the bank can turn a corner by cutting bad loans and reorganizing the business to improve returns. While previous CEO Fabrizio Viola failed to reverse a slump in shares, Morelli signaled confidence in his latest attempt to secure investor support, saying there’s been a “number of approaches from different parties.”

“There were hopes for a plan and they delivered nothing more than some notice of intent,” said Benno Galliker, a trader at Luzerner Kantonalbank in Lucerne, Switzerland. “The sentiment for the entire Italian banking sector is very bleak at the moment.”

Monte Paschi dropped 15 percent to 29 cents at 2:56 p.m. in Milan after earlier rising as much as 27 percent. The company has lost more than two-thirds of its market value this year.

In the third quarter, the lender slipped into a loss of 1.15 billion euros from a profit of 255.8 million euros a year earlier as it set aside 1.3 billion euros in provisions for soured loans, it said in a separate statement on Tuesday. The common equity Tier 1 ratio, a measure of financial strength, fell to 11.5 percent at the end of September from 12 percent at the end of 2015.

The bank plans to cut 2,600 jobs by 2019, compared with a previous goal of 2,700 remaining reductions by 2017. As of June 30, the bank counted 25,700 employees. It will shut about 500 branches out of about 1,900 outlets and dispose of 28 billion euros of soured loans.

Under the leadership of Viola, Monte Paschi struggled to reverse a slump in shares, amassing more than 6 billion euros in annual losses over the past four years.

“The focus on profitability and costs is finally the way to go,” said Alberto Gallo, a London-based partner at Algebris Investments. While the “delivery will be ambitious,” the plan goes in the right direction, he added.

Debt Swap

The bank committed to completing the capital raising by the end of the year, possibly in several tranches, include a debt-for-equity swap and a portion reserved for potential anchor investors. Shareholders will meet Nov. 24 to approve the proposed capital increase.

Monte Paschi is still waiting for authorization for the planned voluntary debt swap, according to Morelli. The swap transaction, whose terms are still to be defined, will involve all the 5 billion euros of outstanding institutional and retail subordinated bond holders, he added.

“Perhaps the most important disclosure made this morning is the confirmation that retail investors will be involved in the exchange,” said Miguel Hernandez and Geoffroy de Pellegars, analysts at BNP Paribas SA. “We expect bonds to stabilize around these levels until we have firm indications of interest in the share sale from institutional investors.”

The timing of the rescue offering will probably coincide with a vote on constitutional reform in Italy on Dec. 4 that may spark political uncertainty and market volatility. The bank aims to collect bondholder agreements on the swap before the vote to limit the impact on the recapitalization, according to people with knowledge of the plan.

Prime Minister Matteo Renzi, who has made revamping Italy’s troubled banking system a key priority, has previously said he will quit if his reform is rejected.

Core Investors

“With the clean-up loss charged in 2016, the key issue of this plan is that we still do not know who is going to underwrite the cash call,” said Fabrizio Bernardi, a Milan-based analyst with Fidentiis Equities. He has a sell recommendation on the shares.

The sovereign funds of Qatar and Abu Dhabi, as well as the People’s Bank of China are among investors that may be interested in the capital plan, newspaper Il Messaggero reported Oct. 22, without saying where it obtained the information. Corriere della Sera, another Italian daily, said that the sovereign fund of Kuwait may also weigh an investment.

Monte Paschi expects a return on tangible equity, a measure of profitability, of more than 10 percent in 2018 from the 8 percent targeted under a previous plan. As part of the overhaul, the lender is disposing of its debt recovery and merchant units, with Istituto Centrale delle Banche Popolari Italiane SpA having offered to buy the latter for 520 million euros.

Monte Paschi’s pains date back a decade, when acquisitions that overstretched its finances and bets on bonds and derivatives by previous managers backfired, forcing the bank to book losses and restate accounts. In 2013, Monte Paschi became the target of national outrage when news broke that it used complex derivatives transactions fashioned by Deutsche Bank AG and Nomura Holdings Inc. to hide millions of euros in losses.

The bank said it named Francesco Mele chief financial officer to replace Arturo Betunio who will leave the company on Nov. 25.

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