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Categorized | Banks

Monte dei Paschi shares drop below 20 cents

Posted on September 21, 2016

A man walks on a logo of the Monte Dei Paschi Di Siena bank in Rome, Italy September 24, 2013. REUTERS/Alessandro Bianchi/File Photo©Reuters

Shares in Monte dei Paschi di Siena, Italy’s third-largest bank by assets, have fallen to under twenty cents amid growing investor concern that the world’s oldest bank will be unable to pull off a €5bn recapitalisation and €30bn bad loan disposal demanded by regulators.

The increasing possibility that Monte Paschi will have to be bailed-in under new EU rules come as worries mount over the political and financial stability of the Eurozone’s third-largest economy, which will this autumn hold a referendum on constitutional reform.

    Political analysts consider the referendum, which is due in late November or early December, to be a major political risk to Europe as it threatens to unseat Italy’s reformist prime minister Matteo Renzi and bring anti-euro populist party Five Star Movement to power.

    Despite the efforts of bankers and the Italian government to keep the events separate, the referendum and Monte Paschi’s woes have entered a “doom loop” which threatens to undermine both events, say senior bankers.

    Mr Renzi had pushed for a market solution to dispose of about €30bn in Monte Paschi gross bad loans and raise €5bn in capital rather than face a bail-in of the bank, which would hit retail investors and savers.

    Yet against the backdrop of the referendum, senior bankers who are part of the JPMorgan-led consortium providing a soft underwriting for the mooted deal admit it is tough to find €5bn in new capital for a bank which emerged the worst loser from July’s European bank stress tests.

    Bank of America Merrill Lynch analysts said in a research note this week that investor concerns are focused on whether a €5bn capital increase for a bank with a market value of €550m, as of close on trading on Tuesday, “is even possible”.

    BAML downgraded Monte Paschi’s subordinated bonds to “underweight” as expectations rise of a debt-for-equity swap replacing up to €2bn of the mooted capital plan.

    Bankers admit JPMorgan, which risks embarrassment if it fails to pull off a deal, is working on an alternative recapitalisation. They are seeking an anchor investor, potentially from a sovereign wealth fund or private equity, and to swap Monte Paschi’s subordinated debt held by institutional investor for equity, say senior bankers.

    JPMorgan has also pledged a bridge loan of an unspecified size to prop up the bank’s capital when it disposes of its bad loans and before it raises the fresh funding in the market.

    The spreading pain of Italy’s bank saga

    Ingram Pinn illustration

    The country’s political and economic future is being threatened, writes Sarah Gordon

    A failure of Monte Paschi’s recapitalisation has wider implications of the Italian banking sector which is straining under €360bn of soured loans, of which €200bn are classed as non-performing. It could hit UniCredit, Italy’s largest bank by assets, which needs to raise up to €10bn to bolster capital as it ups provisions on its bad loans, according to senior bankers. Bankers do not rule out regional banks Veneto Banca and Popolare di Vicenza also needing to boost their capital, raising the likelihood of a bail-in or resolution of an Italian bank in the next 12 months.

    In a sign of the increasingly desperate attempts by the Italian government and JPMorgan to make the bank palatable to spooked foreign investors, Monte Paschi’s former chief executive Fabrizio Viola and chairman Massimo Tononi have quit in the past two weeks after a spat with Italy’s Treasury, which owns 4 per cent of the bank, and JPMorgan.

    Mr Viola stood down after receiving a call from Italy’s finance minister Pier Carlo Padoan, who said that investors saw the former chief executive, who had asked the market for €8bn in the past four years, as an obstacle to buying the shares, said a person with direct knowledge of the conversation.

    Marco Morelli, Monte Paschi former deputy chief executive, a former JPMorgan banker and most recently head of BAML in Italy, started as Monte Paschi’s new chief executive on Tuesday. His first task was to face angry unionists who fear thousands of jobs cuts at the bank as it seeks to slash costs to survive.

    This story has been amended to correct the bank’s share price.