Paschi Posts Second Straight Loss, Eroding Capital Level

  • Monte Paschi direct funding decreased 28 billion euros in 2016
  • Bank posted 2.53 billion-euro net loss in fourth quarter

Banca Monte dei Paschi di Siena SpA reported a second straight quarterly loss on higher bad-loan provisions as the bank’s liquidity dropped and capital buffers eroded.

The net loss of 2.53 billion euros ($2.7 billion) in the three months through December compares with a loss of 196.6 million euros a year earlier and brings its 2016 loss to 3.38 billion euros, the Siena-based lender said in a statement on Thursday.

Provisions for bad loans rose to 2.45 billion euros while the common equity Tier 1 ratio, a key measure of financial strength, fell to 8 percent from 12 percent at the end of last year, mainly because of the loss for the period, the bank said.

Monte Paschi’s future is uncertain as investors wait for the terms of a rescue plan to emerge after the lender’s plan to raise capital on the market failed. The European Central Bank says the bank must raise 8.8 billion euros to bolster its balance sheet under a precautionary recapitalization plan requested by the Italian lender. Talks are under way on a new business plan that must be approved by European authorities.

“A nationalization is urgent at this point,” said Vanni Lucchelli, a partner at Compagnia Fiduciaria Lombarda SpA in Milan. “The results are alarming.”

Liquidity Drop

Monte Paschi said on Dec. 21 that cash was drying up and that it may run out of liquidity after four months under a stressed scenario. The lender has asked the Treasury for permission to access the Italian bank guarantee program, which allows it to increase liquidity by issuing additional state-guaranteed liabilities. Under the program, the bank last month sold two bonds for a total of 7 billion euros. Monte Paschi lost 87 percent of its market value in 2016 before shares were suspended on Dec. 23.

The liquidity position showed an “unencumbered counterbalancing capacity” of about 7 billion euros at the end of 2016, down by about 17 billion euros from a year ago, because of the difficulties of raising funds on markets, Monte Paschi said.

Direct funding at the end of December declined 14.7 billion euros from a year earlier to about 105 billion euros. “This downward trend is impacted by the commercial funding decrease of about 28 billion euros, mainly as a result of tensions related to the negative results of the stress tests and of the unsuccessful market recapitalization transaction,” Monte Paschi said. It recorded a decrease in current accounts, deposits and bonds.

“All of Monte Paschi’s problems and the concerns about the bank’s survival led to a downward spiral of self-fulfilling expectations that generated a bank run and liquidity squeeze,” said Fabrizio Spagna, managing director at Axia Financial Research in Padua, Italy.

Italy Rescue

Undermined by derivatives deals that hid losses, Monte Paschi has received 4 billion euros in taxpayer-funded bailouts, which it has repaid, and 8 billion euros from investors since 2009. The lender must raise capital to help cover expected losses when it sells non-performing loans on its books.

After Paschi failed to raise funds on the market, it has become the centerpiece of a 20 billion-euro rescue plan for Italian banks. It’s the country’s biggest intervention since Benito Mussolini seized banks in 1933 -- including Paschi -- as part of his wholesale nationalization of the private sector.

Italy’s banks are struggling under the weight of a 360 billion-euro mountain of bad loans, a plight that has eroded profitability and undermined investor confidence. The nationalization of Monte Paschi could be followed by rescues for lenders including Veneto Banca SpA and Banca Popolare di Vicenza as part of the government package.

    Before it's here, it's on the Bloomberg Terminal.