Paschi Leads Italy Banks Lower on Populists' Revamp Plans

(Bloomberg) -- Banca Monte dei Paschi di Siena SpA led the Italian banking index to its biggest three-day decline in more than a year after Italy’s populist parties set out plans to overhaul the state-rescued lender’s turnaround strategy and review rules that sought to strengthen the global financial industry.

Monte Paschi declined as much as 5.1 percent and was down 2.4 percent at 2.85 euros as of 2:47 p.m. The stock has fallen 12 percent in the past four trading sessions, giving up most of the gains made after the bank reported a profit on May 10.

Leaders of the Five Star Movement and League party on Friday agreed to a government plan after 10 days of talks. It includes a series of expensive policy goals and poses a direct challenge to European Union rules. The accord also calls for a review of Monte Paschi’s recovery plan. League economy spokesman Claudio Borghi said separately that the government should keep control of the bank, halt its program of branch closures and replace the current management.

“Making an out-of-the-blue proposal for such a intricate situation, which required so much time to be assessed, would be counter-productive,” former Prime Minister Mario Monti said by telephone.

The program also includes plans to reimburse retail shareholders of banks that have been wound down; review Basel banking accords, whose parameters “threaten the existence of Italy’s small and medium companies,” and separate investment banking from deposit-taking consumer banking.

Monte Paschi, undermined by souring loans and derivatives deals that backfired, requested state aid last year. The Italian government stepped in to take a stake of about 68 percent stake, injecting 5.4 billion euros in aid as part of an 8.3 billion-euro recapitalization. The shares, which were suspended for the first 11 months of last year, have dropped another 37 percent since resuming trading in October.

Stocks Suffer

The government plan is weighing on Italian bank shares, which are down for a third day. UBI Banca declined 4.1 percent. UniCredit SpA declined 2.8 percent and Intesa Sanpaolo SpA, fell about 2.7 percent. The FTSE Italia All-Share Banks Index has declined more than 7 percent in the last three sessions.

Before this week, bank shares had mostly weathered post-vote political news as investors focused on earnings and economic data. The gauge is still up 6 percent this year, overperforming the Stoxx Europe 600 Banks index, which fell 4 percent.

“Banks have been under pressure from the political developments,” said Matteo Brancolini, a fund manager at BPER Banca SpA. “It’s a classical case of fear of the unknown and investors don’t like the little they do know. The risk premium is up and is weighing on Italian stocks and bonds.”

The gap between the returns investors demand to hold Italian bonds compared with those of Germany touched a four-month high on Friday following reports that spending and tax plans of the two populist parties are likely to increase the cost of the country’s debt.

"In the short term, BTP spread widening will hit bank profits and balance sheets,” said Francesco Castelli, a portfolio manager at Banor Capital. “On a longer horizon, banks may find harder to dispose their NPLs at a decent price.”

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