January 22, 2013 8:27 pm

Monte dei Paschi fights to stay independent

Pedestrians pass a Banca Monte dei Paschi di Siena SpA branch in Rome©Bloomberg

Having survived the Napoleonic invasion and two world wars, Italy’s Monte dei Paschi di Siena is fighting to maintain its independence from the government in the greatest challenge of the bank’s 500-year history.

It emerged on Tuesday that Italy’s oldest bank is due to book a €220m loss in its full-year results dating from an earlier derivatives deal linked to its vast portfolio of Italian sovereign debt.

The move comes as the Tuscan bank is this week due to win shareholder approval for a capital increase underpinning the issue of €3.9bn of government bailout bonds to shore up its balance sheet.

The revelation of the derivatives losses, the latest in a string of setbacks at Monte dei Paschi, came as part of an accounting overhaul instigated by a new management team led by chairman Alessandro Profumo and chief executive Fabrizio Viola.

Mr Profumo, former chief executive of Italy’s UniCredit, and Mr Viola, the former head of a regional Italian bank, were brought in last year after the bank failed to meet capital requirements set by the European Banking Authority.

Italy’s third-largest bank by assets, which is majority owned by a local Siena foundation, was hit by heavy losses on its €24bn portfolio of Italian sovereign bonds during the European debt crisis.

Speaking to the Financial Times before the news emerged of the latest derivatives losses, Mr Viola said he was convinced that “the state doesn’t want to take a stake. It’s done everything to avoid it.”

He added: “Neither of us want this support to transform itself into equity. We are going to spend the last drop of our sweat seeing that it doesn’t happen.”

Mr Profumo has described 2013 as a “year of transition” for the bank which is cutting 2,000 jobs, or 14 per cent of its workforce, and closing about 400 branches, or 13 per cent of its network, with more closures expected to follow, and making asset sales.

In a statement on Tuesday, Monte dei Paschi said it was reviewing the derivative transactions, which were designed to limit its exposure to swings in the value of its Italian sovereign debt portfolio, and would present its findings to the board next month.

The derivates contract was structured by Nomura, the Japanese bank. Monte dei Paschi is also reviewing a separate derivatives contract structured by Deutsche Bank.

The Tuscan bank said on Tuesday that the derivates contract structured by Nomura did not appear to have been approved by its board, raising further questions for its former management, which was led by ex-chairman Giuseppe Mussari. Mr Mussari resigned Tuesday night as head of the Italian banking association.

In November, Monte dei Paschi raised the prospect of an additional hit to its capital from structured deals when it increased its request for state aid by €500m. It indicated then that there could be an impact on its capital from past transactions related to its exposure to sovereign debt.

“The market is bracing for a significant negative impact on the bank’s earnings, which may increase Monte dei Paschi’s total capital shortfall,” Georgios Banos, Royal Bank of Scotland analyst, wrote.

The bank’s share price fell by more than 5 per cent on Tuesday giving it a market capitalisation of €3.2bn.

Of the €3.9bn of state bailout bonds the bank is due to receive, €1.9bn will be used to redeem earlier state bailout bonds issued in November 2008.

The remaining €2bn will be used to improve the bank’s capital ratio which under Mr Mussari became one of the most weakly capitalised in Europe.

The capital position of the bank had also deteriorated as a result of the decision by Mr Mussari to buy out a northern Italian lender, Antonveneta, in 2007. The deal, at almost 20 times annual earnings, was more than twice the average multiple for Italian peers at that time.

Monte dei Paschi has reported a €1.7bn loss for the first nine months of 2012, and a return to profit is not forecast until 2015. This has caused concern among analysts that the bank may not be able to repay the state bonds, raising the prospect that the Italian government may be forced to take a stake in the bank’s equity.

Mr Viola said that if he had to describe his job in one word it would be “execution”. He said: “The bank was lacking on several fronts in the past but most definitely on execution.”

Mr Profumo expects bad loans to peak by the end of this year. The bank reported a 71 per cent increase in money set aside for bad loans in the third quarter of last year and analysts expect that trend to continue.

Summing up the grim mood at the bank, Mr Viola said: “I am committed to getting stuff done rather than talking to investors. Hopefully in a few months I will have something to talk about. I think this is the right approach. I am not bullish, but I am less bearish.”

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