Paschi Can't Shake the Blues, Hurting Image of Italian Banks

(Bloomberg) -- Banca Monte dei Paschi di Siena SpA just can’t seem to put its troubles behind it.

After more than a year of digging itself out from a collapse that ended in a state takeover, the Tuscan lender faces renewed concerns about its capital and profitability. Along with Banca Carige SpA’s struggles, that’s adding to the perception that Italian banking at large is still far from fixed.

Shares of the world’s oldest bank dropped in Milan trading after the European Central Bank highlighted weaknesses in the Italian lender’s capital and profitability. The ECB told the bank that its inability to issue the second tranche of a junior bond last year hurt its capital position, Monte Paschi said in a statement late Friday. And Monte Paschi faces another test of its ability to issue debt, with a covered bond sale which, people familiar with the matter said, it will start contacting investors about this week.

Chief Executive Officer Marco Morelli is seeking to turn around the rescued lender by cutting costs, selling non-performing loans and curbing risk. The ECB highlighted weaknesses that the bank needs to address, including profitability, which it said is “underperforming” a restructuring plan reached with European and Italian officials.

Shares Drop

Monte Paschi dropped as much as 9.3 percent, the most since May, and was down 8.8 percent at 1.37 euros as of 12:02 p.m. local time. The stock has lost about 69 percent of its value since it returned to trading as a state-controlled company in October 2017. The Italian government owns about 68 percent of the bank.

The 750 million euros ($860 million) of junior bonds the bank managed manage to issue in January last year fell by 6 cents on the euro at about 51 cents, a record low.

“No matter how many rescue interventions, the problems of the past keep coming back again and again,” said Jacopo Ceccatelli, chief executive officer of Marzotto SIM SpA, a Milan-based broker-dealer. “That is true both for Monte Paschi in particular and generally for the Italian banking sector.” Despite the perceptions, “improvements have certainly been made and, if the global environment does not deteriorate too much, there could be light at the end of the tunnel.”

Italian Banks

Monte Paschi’s issues add to uncertainty about Italy’s banking sector, in which some smaller lenders are still struggling to fix multiple problems. Cabinet Undersecretary Giancarlo Giorgetti said the government may have a “Monte Paschi problem” in the wake of the crisis at Genoa-based Banca Carige.

Carige is the last Italian lender asked by the ECB to bolster its finances. Faced with the bank’s potential failure, Italy’s cabinet approved measures to support Carige’s liquidity and funding and signaled its support for possible recapitalization in an urgent, nighttime meeting last week.

Monte Paschi faces significant funding challenges, given the current turbulence in the Italian markets, the ECB said in its letter. Regarding non-performing loans, the ECB recommended that Monte Paschi gradually increase coverage levels of the existing stock of non-performing loans over the next several years. That goes beyond an earlier ECB demand for banks to increase coverage on only newly generated NPLs.

The request was described by analysts as a negative surprise that may have implications for other lenders. “The market will have to assess whether such a case-by-case approach is something that will be applied to MPS only or to other banks in Italy and outside of Italy,” said Riccardo Rovere, an analyst at Mediobanca.

Undermined by souring loans and derivatives deals that backfired, Monte Paschi last requested state aid in 2017. The Italian government stepped in to take a stake of about 68 percent, injecting 5.4 billion euros in aid as part of an 8.3 billion-euro recapitalization. Shares, suspended for most of 2017, have lost 70 percent of their value since they resumed trading in October of that year.

--With assistance from Chiara Remondini, Antonio Vanuzzo and Thomas Beardsworth.

To contact the reporter on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net

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

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