The World’s Oldest Bank Faces Yet Another Reckoning
(Bloomberg Opinion) -- After a decade of scandals and multiple bailouts, Banca Monte dei Paschi di Siena SpA is back in the spotlight. This time, the Italian government is shopping around the 1.5 billion-euro ($1.7 billion) lender ahead of a European Union deadline for Rome to exit the bank next year.
Loaded with legal risks that dwarf its market value, any investor will be loathe to buy Monte Paschi with those liabilities — not least in the midst of a pandemic.
The risk to Italian taxpayers is that Rome offloads its majority stake in the world’s oldest bank at any cost. A sale to UniCredit SpA, as is being discussed, might solve Italy’s immediate problem of meeting the EU deadline, but the bigger bank would demand strong financial guarantees. A Paschi merger would also make it harder for UniCredit to pursue more compelling deals.
It’s no surprise that Italy has restarted talks with UniCredit to sound it out on Monte Paschi. Foreign banks haven’t shown much interest and Intesa Sanpaolo SpA, UniCredit’s main rival, is busy buying UBI, another lender that might have made a good merger partner for Paschi.
Equally predictable is that UniCredit is pushing back. The company wants the government to cover any capital shortfall from a potential merger and the legal costs, according to press reports. History isn’t on Rome’s side. In 2017, the state funded Intesa’s purchase of two failing lenders.
Why would UniCredit accept anything less this time? Chief Executive Officer Jean Pierre Mustier has focused on returning capital to shareholders after cleaning up his own bank. Strategically, taking over another mid-tier Italian lender, Banco BPM SpA, makes more sense. A BPM deal would reinforce UniCredit’s position in Lombardy, the economic engine of Italy.
A merger in Germany, UniCredit’s second-biggest market, would be even more compelling. While cross-border deals remain difficult in Europe, if Germany’s Commerzbank AG were to come up for sale, UniCredit would be better off pursuing that purchase.
The reason Mustier is being pressured over Paschi is that other avenues for the ailing lender are much less appealing. A combination with Popolare di Bari, which Italy is in the process of rescuing, wouldn’t return Monte Paschi to private hands.
Adding to Rome’s urgency, Monte Paschi is close to selling 8 billion euros of bad loans to another state-owned entity later this year, a key milestone in its rehabilitation. The sale will erode Paschi’s capital, which the European Central Bank wants the lender to strengthen. A merger with a stronger bank would solve that problem.
A greater risk is that Monte Paschi loses some of the 10 billion euros of legal claims against it, forcing it to set aside more funds and further eroding capital. The pandemic could also lead to a fresh avalanche of bad loans. Should it need to raise more capital, even with the backing of the state, the costs would be prohibitive and eat into already weak profitability. Analysts expect the bank to make just 76 million euros next year, which could be wiped out by higher interest costs.
It’s arguable that Monte Paschi should have been wound down years ago — it was probably insolvent at the time of its last state rescue — but more visibility on the potential legal liabilities would at least strengthen Italy’s negotiating hand. While a return to private ownership could help salvage what’s left of the storied lender, Rome must do everything possible to keep a lid on the taxpayers costs.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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