Paschi Drops on Exposure to Italian Debt Despite Profit Momentum

(Bloomberg) -- Banca Monte dei Paschi di Siena SpA fell the most in 11 weeks, as its earnings underscored the bank’s exposure to swings in the value of Italian debt.

Monte Paschi reversed earlier gains and fell as much as 9 percent in Milan trading. Yields on 10-year Italian government bonds broke above 3 percent for the first time in nearly two months ahead of a budget meeting between the country’s populist leaders and the finance minister.

The bank rode lower costs and an asset sale to a second straight quarter of profit, even though the debt slump hit revenue and eroded capital. Second-quarter net income totaled 100.9 million euros ($117 million), the Siena, Italy based bank said in a statement on Friday, confirming progress toward a turnaround after its Italian state rescue.

Monte Paschi was down 3.1 percent at 2.40 euros as of 12:11 a.m. , giving the bank a market value of 2.73 billion euros. The stock, which resumed trading in October after the government rescue, has declined 39 percent this year. The Italian state owns about 68 percent of the shares.

“Monte Paschi unveiled a positive set of operating results, unfortunately penalized by a negative trading line related to mark-to market of Italian government bonds,” Fabrizio Bernardian, an analyst at Fidentiis equities, wrote in a note.

Main highlights from earnings
  • 2Q revenue EU832.2m, down 9.5% y/y
  • 2Q operating costs EU581.4m, down 9% y/y
  • 2Q loan-loss provisions EU108.1m vs EU4.3b year earlier

Chief Executive Officer Marco Morelli is seeking to restore the lender to long-term profitability by cutting jobs and branches and improving asset quality. In the second quarter Morelli wrapped up two years of negotiations to take 24 billion euros of non-performing loans off its books, the biggest disposal of European soured debt to date.

The transaction is helping bolster confidence in the bank’s ability to tackle its legacy of bad debt. 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.

While the increased trust in the bank has boosted deposits, a selloff on Italian government bonds in the second part of the quarter hit the bank’s capital buffer. The common equity Tier 1 ratio, a measure of financial strength, declined to 13 percent as of June 30 from 14.4 percent at the end of March.

As with the previous quarter, the results show that Monte Paschi still has a long way to go in terms of generating income. Total revenue fell on a decline in lending and fees, and a trading loss due to “the negative effects related to the spread trend between BTP and Bund.” Revenue missed the 860 million euro estimate of four analysts surveyed by Bloomberg.

©2018 Bloomberg L.P.