Monte Paschi's Capital Levels Slide After String of Losses

  • CET1 tumbles to 6.5% from 8.2%; ECB minimum level is 10.75%
  • Deposits rise as rescue plan prospects ease client concerns

Banca Monte dei Paschi di Siena SpA, the Italian lender seeking a state-backed rescue, is seeing its financial strength ebb after a run of losses and stricter accounting rules.

The bank’s common equity Tier 1 ratio dropped further below minimum levels set by the European Central Bank for this year, declining to 6.5 percent as of March 31 from 8.2 percent at the end of December, the Siena-based lender said in a statement Thursday evening. That compares with regulatory requirements of 10.75 percent.

The bank -- which posted its third straight loss -- is in talks with the European Commission to obtain approval for a so-called precautionary recapitalization after market fundraising attempts failed in December. The European Central Bank said Monte Paschi must raise 8.8 billion euros ($9.7 billion) to bolster its balance sheet. The government would contribute about 6.6 billion euros, according to a Bank of Italy calculation, with the rest covered by creditors.

“The decline of the capital level was expected and doesn’t change the bank’s situation -- it urgently needs state support to be recapitalized,” said Fabrizio Bernardi an analyst at Fidentiis Equities.

Tighter accounting standards for 2017 prevented the bank from deducting past losses from the CET1 calculation, which was measured under so-called transitional rules, Monte Paschi said. The bank said reasons for the decrease in CET1 also included the lower market value of securities booked as available for sale. Its fully loaded CET1 ratio, which applies stricter rules, declined to 5.8 percent from 6.5 percent at the end of December.

Capital Rules

The slide in Monte Paschi’s CET1 ratio brings the bank closer to the minimum of 4.5 percent required under EU capital rules. If it falls below this level, the ECB could consider pulling its license and putting it into resolution. EU law states that a bank is “failing or likely to fail” when it infringes the conditions for authorization, including prudential requirements.

There was some positive news: Monte Paschi saw deposits rebound in the first quarter as the prospect of a rescue plan stabilized withdrawals. Customer deposits and current accounts increased by 5.5 billion euros in the first quarter, driving total direct funding to 109 billion euros at the end of March.

Customer funding recovered and credit quality -- even if is still under pressure -- is broadly stabilising, according to Anna Maria Benassi, an analyst at Kepler Cheuvreux. “All in all, first quarter results are encouraging considering the difficult situation of the bank,” she said.

The bank’s unencumbered counterbalancing capacity, a measure of liquid assets available, rose to about 16 billion euros from the 7 billion euros at the end of 2016, boosted by the sale of 11 billion euros of state-backed bonds, Monte Paschi said. The liquidity coverage ratio rose to 164 percent at the end of March from 108 percent at the end of December. 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.

Paschi posted a net loss of 169.2 million euros in the three months through March, compared with a profit of 93.1 million euros a year earlier. Losses were impacted by 131 million euros of non-operating components, including the contribution to the single resolution fund and one-off provisions for risks and charges, the bank said.

Monte Paschi, undermined by derivatives deals that backfired and souring loans, 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 the expected losses from selling non-performing loans on its books. Monte Paschi lost 87 percent of its market value in 2016 before the shares were suspended on Dec. 23.

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