Banca Monte dei Paschi di Siena (BMPS) Market cap (as of 31/10/14): €3.11bn

Banca Monte dei Paschi di Siena (MPS), Italy’s third largest lender and world’s oldest bank, has again become the center of discussion following the subpar results of European Central Bank’s stress tests released on October 26. MPS has suffered great losses in the recent years and has underperformed the industry. Over the past years, it has sold assets, closed 500 branches and cut 8,000 jobs to boost its finances, which were drained by the €10.1bn Antonveneta deal in 2008 and further worsened by the euro zone’s debt crisis and a scandal over loss-making derivatives trades. The Tuscany-based bank, has been struggling to revive its business despite several attempted bailout plans, most recent one being this year’s €5bn rights issue.
On Sunday, the European Central Bank has published the results of the comprehensive assessment, a thorough year-long examination of the resilience and positions of the 130 largest banks in the euro area as of 31/12/2013. The examined banks accounted for assets of €22 trillion, which represent 82% of total banking assets in the euro area. “This unique and rigorous exercise is a major milestone in the preparation for the Single Supervisory Mechanism, which will become fully operational in November,” said Vítor Constâncio, Vice-President of the ECB. “This unprecedented in-depth review of the largest banks’ positions will boost public confidence in the banking sector. By identifying problems and risks, it will help repair balance sheets and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth.”
The comprehensive assessment, which joined up the asset quality review (AQR) and a forward-looking stress test, was aimed at strengthening banks’ balance sheets, enhancing transparency and building confidence. The new element of the assessment was that information acquired from the AQR was incorporated in banks’ balance sheet starting points (adjusting the 2013 year-end figures) and subsequently in related stress test projections. In particular, the AQR conducted by the ECB and national competent authorities (NCAs) examined whether assets were properly valued on banks’ balance sheets. The AQR made banks comparable across national borders and business models, applying common definitions for previously diverging concepts and a uniform methodology when assessing balance sheets. Subsequently, the stress test was performed on the participating banks by ECB and NCAs in cooperation with the European Banking Authority (EBA). The EBA also designed the stress test methodology, while the adverse scenario was developed by the European Systemic Risk Board (ESRB) in cooperation with the NCAs, the EBA and the ECB. Accordingly, banks were required to maintain a minimum Common Equity Tier 1 (CET1) ratio of 8% under the baseline scenario and a minimum CET 1 ratio of 5.5% under the adverse scenario. It is important to highlight that the stress test is not a forecast of future events, but a prudential exercise to test banks’ ability to withstand weakening economic conditions.

The result of the comprehensive assessment was finding an aggregate capital shortfall of €25bn at 25 banks level. However, 12 of the 25 banks have already covered their capital shortfall by increasing their capital by a total of €15bn in 2014 (Figure 1). As for the remaining 13 banks that still have capital shortfalls, the ECB requires them to prepare capital plans within two weeks of the announcement of the results and to cover the capital shortfall within 9 months. In particular, the AQR showed that as of 2013 year-end the book values of banks’ assets need to be adjusted by €48bn, which are reflected in the banks’ accounts. Furthermore, using a standard definition for non-performing exposures (NPEs) (any obligations that are 90 days overdue, or that are impaired or in default), the review found that banks’ NPEs increased by €136bn to a total of €879bn. The comprehensive assessment also showed that a severe scenario would deplete the banks’ top-quality, loss-absorbing CET 1 capital by about €263bn. This would result in the banks’ median CET1 ratio decreasing by 4 percentage points from 12.4% to 8.3%. This reduction is higher than in previous similar exercises and is a measure of the rigorous nature of the exercise whose credibility was crucial. “This exercise is an excellent start in the right direction. It required extraordinary efforts and substantial resources by all parties involved, including the euro area countries’ national authorities and the ECB. It bolstered transparency in the banking sector and exposed the areas in the banks and the system that need improvement,” said Danièle Nouy, Chair of the Supervisory Board. “The comprehensive assessment allowed us to compare banks across borders and business models, and the findings will enable us to draw insights and conclusions for supervision going forward.”


As shown in Table 1, 4 out of 13 banks which still show a capital shortfall are Italians (Monte dei Paschi, Carige, Popolare di Vicenza and Popolare di Milano) but what is really striking is the fact that MPS’s shortfall is almost equal to one fourth of the aggregate figure across Europe, making it the weakest bank in Europe even when 2014 capital raising actions are taken into account. In fact, even after a €5bn rights issue which was accomplished this year, MPS was judged by the ECB to have a €2.1bn capital shortfall, in the event of an adverse scenario in which interest rates spike, thus delivering a huge hit to the bank’s holdings of the Italian debt.
Taking a closer look at the numbers, compared to the initial CET1 of €8,504m (10.19% of RWA) and the 5.5% threshold equivalent to €4,177m, the final result of BMPS’s capital assessment shows a regulatory capital shortfall of €2,111m, which includes an AQR component of €(2,852)m, a component relative to Adverse Stress Test Scenario at 2016 cumulatively amounting to €(5,243)m, a Join-up component of €(483)m (which integrates the AQR and the Stress scenario), and mitigation actions amounting to €2,139m (The amount is calculated adding the €5bn capital increase, net of €3bn in repayment of State Aid in the form of NFIs, and the €139m revaluation of the stake in Bank of Italy). The CET1 ratio evolution showed below in Table 2 does not consider the impact of mitigation actions, however if we adjust this result accordingly we derive an AQR adjusted CET1 ratio of 9.55%, an adjusted CET1 Ratio after baseline scenario of 8.82% (Still above the 8% threshold) and an adjusted CET1 Ratio after adverse scenario of 2.72%. The difference between the 5.5% threshold and the CET1 Ratio after adverse scenario yield accordingly a capital shortfall of €2,111m.

tab 2

After the results release the Board of Directors of BMPS has begun a review of the potential actions to be included in the Capital Plan, which will be submitted for approval by Supervisory Authorities within the terms established by regulations. Resulting changes in the Restructuring Plan already approved by the European Commission, will be subject to approval by the same authority. In addition, the Bank’s Board of Directors also appointed UBS and Citigroup as financial advisers for the structuring and execution of the mitigating actions of the Capital Plan as well as to explore all strategic alternatives for the Bank.
Alessandro Profumo, the current chairman of MPS and former head of Unicredit, is expected by many to look for potential merger deals. Mr. Profumo has had a successful string of acquistions in eastern Europe and Germany while at Unicredit, but the situation is quite different with MPS, seeing as the potential deal would come from a position of weakness, rather than targeted expansion.
Among the prospective acquirers, BNP Paribas seems to be the most suitable candidate. It has successfully passed the stress test and has a Basel III tier one capital ratio of 10.1%. On top of that, BNP already has a strong presence in Italy through its BNL business and is considered a likely consolidator of the European retail market. A potential hindrance, however, could be the recent $8.9bn fine filed by the US Department of Justice for breaching sanctions in Sudan, Iran and Cuba. Other candidates include Banco Santander, UBI Banca and BBVA. The top two Italian banks, Unicredit and Intesa Sanpaolo, seem highly unlikely to pursue an acquisition and have already denied any such rumours.
As with many Italian banks, the biggest concern for prospective buyers is the quality of MPS’s loan book. In fact, the European Central Bank found 15 Italian lenders collectively overvalued their loans by €12bn, accounting for a quarter of the overvaluation of loans across the 130 banks the ECB looked at. In addition, the macroeconomic perspective for Italy has also been revised downwards with the International Monetary Fund predicting a decline in gross domestic product of 0.2% this year, compared to the 0.3% growth previously expected.

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