BMPS mkt cap (as of 15/02/13): €2.8bn

Banca Monte dei Paschi di Siena, the world’s oldest bank (founded in 1472) and Italy’s third biggest lender with €224bn assets, has been at the centre of attention in recent weeks following disclosure that the bank suffered a €730 million loss related to three loss-making derivative transactions (namely Alexandria, Santorini and Nota Italia). These were respectively structured investments in a) CDOs, b) BMPS’s legacy investment in Sanpaolo IMI shares, and c) in Spanish and Austrian covered bonds and sale of Italian sovereign protection. As a result of the losses the bank’s capital shortfall increased, precipitating a Government-backed recapitalisation which was already underway.

In October 2012 the bank reported a capital shortfall of €1.5bn as a result of the EBA’s stress test exercise, which was calibrated on the bank’s capital position as of June 2012. Moreover, the bank also had (and still has) €1.9bn of so-called “Tremonti” bonds, issued in 2009 as part of the Italian Government support package to the banking sector following the 2007-09 global financial crisis. These no longer qualify as core capital and the bank had applied in November 2012 for a €3.9bn Government bailout under the new banking sector support scheme to cover the €1.5bn EBA shortfall, replace the €1.9bnTremonti Bonds and cover an additional €500m losses from past lossmaking deals (the latter correspond to the recent derivative deals). The bailout will be fully financed by “New Financial Instruments”, so-called “Monti” bonds. Unlike the Tremonti-bonds, the new instruments qualify as core tier 1 capital and entail a so-called alternative coupon satisfaction mechanism, which obliges MPS to pay the annually due coupon “in kind” in the event of insufficient distributable profits. After a long discussion with the EU, Italy agreed on coupon rate of 10% that will be paid to the Italian Government through a combination of cash, shares and other structured products (i.e. contingent capital). The coupon will successively increase by 0.5% every two years until a maximum of 15%. The bailout was approved by the EC in December 2012.

As a fundamental condition of the state bailout shareholders had to approve two authorisations allowing the board raise up to € 6.5bn in equity capital. Both authorisations waive pre-emption rights of existing shareholders. The first is a €4.5bn authorisation, allowing the conversion of Monti bonds into equity capital. The second is an authorisation to issue up to €2bn MPS shares to cover the interest payments. The authorisations are valid for five years.

The bailout will temporarily improve the bank’s capital base and protects MPS from an immediate full nationalization. However, if the environment continues to deteriorate it is possible that the bank will be nationalised as a result of this transaction.

MPS is controlled by the homonymous Foundation, which holds 37.5% of its voting shares, and which is governed itself by the Town Hall of Siena, the Regional Authorities, the University of Siena and the Archdiocese. This shareholder structure makes the bank particularly averse to pursue an equity capital increase as this will effectively result in a change of control, given the above institutions lack the necessary resources.

The Bank has suffered important losses in the recent years and has underperformed the industry. Misfortunes for MPS started in the summer of 2008, when it acquired Antonveneta Bank from Santander at € 10.1bn. In 2011 the bank reported a net loss of €4.7bn.

During 2013 MPS shares reached a peak price of € 0.29, but then dropped by more than 20% to €0.23 following the investigations by the Italian Central Bank about the Antonveneta deal and the derivatives losses and the arrests of some former top managers of the bank.

When looking at the numbers, it seems that the derivatives losses exceeded the budgeted €500m by only an extra €200m by year end 2012, which certainly does not justify the recent media attention. However, the losses may have worsened during January and February due to the impact of the elections on the market, forcing the bailout process to be accelerated.

 

The European Commission’s approval for the bailout was conditional. The bank has to prepare a restructuring plan with binding targets within six months. The Commission has also declared that the recapitalization of MPS through the hybrid securities is fundamental to preserve the health of the Italian financial system. The bank is now planning to close about 400 branches and to cut its workforce by 4,600.


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