Paschi Shows Ray of Light With Unexpected Quarterly Profit

(Bloomberg) -- Banca Monte dei Paschi di Siena SpA made progress toward a turnaround after its Italian state rescue, relying on cost cuts and lower bad-debt provisions to swing to an unexpected profit. The stock rose the most since November.

First quarter net income at the Siena-based lender totaled 188 million euros ($224 million) compared with a 169 million-euro loss a year earlier. That beat the average analyst estimate of a 40.5 million-euro loss.

“Monte Paschi’s results mark a step ahead in the banks’ revamp ” said Stefano Girola, a portfolio manager at Fiduciaria Orefici Sim SpA. “They have to keep on working to clean the books and maintain a healthy commercial network to generate revenues.”

Monte Paschi rose as much as 11.6 percent in Milan trading, the most since Nov. 20, and was up 9.9 percent as of 9:47 a.m. The stock is still down 24 percent this year compared with a 3 percent decline for the 48-member Stoxx Europe 600 Banks Price Index.

Chief Executive Officer Marco Morelli is seeking to restore the lender to long-term profitability by cutting jobs and branches and improving asset quality. The CEO said he expects earnings to stabilize in 2018, after two years of losses due to restructuring.

Loan-loss provisions declined to 138 million euros in the quarter from 309 million euros a year earlier as Monte Paschi accelerates the reduction of deteriorated debt. Morelli announced Thursday the completion of the securitization of 24.1 billion euros of non-performing loans, wrapping up 19 months of negotiations to finalize the biggest disposal of Italian soured debt.

The transaction is helping bolster confidence in the bank’s effort to tackle its legacy of soured debt. Burdened by mounting bad loans and losses on derivatives bets made by previous management that have since gone wrong, the bank was forced to ask state rescue last year.

Banca Akros upgraded the stock to buy, its first such recommendation since Monte Paschi resumed trading in October. “We think this set of results should reassure investors on BMPS’ profit generation,” said analyst Luigi Tramontana.

The results showed that Monte Paschi still has a long way to go on generating income. Total revenue fell 6 percent as net interest income slid 7.9 percent and fees and commissions also dropped, after the lender sold the merchant acquiring business last year, which generated payment services fees.

The bank is speeding up the reduction process of non-performing loans, with the sale of 1.5 billion euros of unlikely-to-pay loans underway and additional 3 billion euros of bad loans planned to be sold by the end of the year, the bank said in the statement.

“Lower, costs, better than expected revenue and loan-loss provisions that are one half of what we had boosted Paschi’s results,” Fabrizio Bernardi an analyst at Fidentiis equities wrote in a note. “Below the operating line, the bear gains size because of the release of taxes and provisions for a lawsuit.”

Other highlights from earnings:

• 1Q revenue fell 6% to EU877m
  • 1Q fees and commission fell 4.6% to EU406.5m
  • 1Q net interest income declined 7.9% to EU421.5m
• 1Q operating costs declined 8.7% to EU573m
• 1Q tax recovery of EU83m
• 1Q release of provisions for risks and charges of EU53m
• NPL coverage ratio rises to 68.8% vs 65.5% at year end
• Gross NPLs at EU42.6b at end March
• CET1 ratio transitional at 14.4%

To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net, Chiara Remondini in Milan at cremondini@bloomberg.net.

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen

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