(Bloomberg) -- Italian taxpayers may need to inject more than Banca Monte dei Paschi di Siena SpA’s entire market value into the troubled bank as its leadership and the Finance Ministry consider a capital increase of about 1.5 billion euros ($1.8 billion).
Officials at the ministry and Monte Paschi Chief Executive Officer Guido Bastianini discussed the recapitalization as they reviewed options to boost the bank’s stretched capital, according to people familiar with the discussion, who asked not to be named as the matter is private.
Monte Paschi received more than 9 billion euros from the state since 2009, with two bailouts before it was nationalized. While half that amount has been paid back, the remainder is represented by the government’s 68% stake in the bank, which has a market value of 900 million euros.
The rising pressure on capital may further complicate the Italian state’s plan to dispose of its holdings by the end of next year. UniCredit SpA executives have held informal contacts with the government over a possible combination, Bloomberg reported last month.
The talks with the Finance Ministry are at an early stage and the review may result in a decision against a capital injection. A spokesman for Monte dei Paschi declined to comment. A representative for the Italian Treasury didn’t have an immediate comment.
Monte Paschi’s 544-Year Journey From the Renaissance to Rescue
The bank, brought down by soured debt and losses on derivatives bets made by previous management, has struggled to restore profitability since its rescue. Now its capital is under pressure from costs related to a multi-billion-euro bad-loan disposal and increasing legal risks after its former chairman and CEO were convicted of false accounting and market manipulation.
Monte Paschi fell as much as 3.6% in Milan trading and was down 0.9% as of 10:16 a.m. The stock has declined by about 28% this year reducing its market value to 1.2 billion euros.
Monte Paschi’s directors on Thursday discussed the option of setting aside as much as 500 million euros to prepare for the potential legal peril, people with knowledge of the matter said. Monte Paschi said officials decided to reclassify some of its potential legal disputes from “possible” to “likely” after the court ruling. It didn’t disclose any talks about provisions.
The bank may need 1.2 billion euros to 1.8 billion euros of equity, and the Finance Ministry may tap the 1.5 billion euros set aside in August to back state-controlled companies, the people said. The amount could be much lower, depending on the bank’s provisioning needs, another person said.
“Any change to government exposure to MPS would need to be discussed with European authorities,” Citigroup analyst Azzurra Guelfi said in a note on Friday. “MPS is often at the center of investors’ questions on the future of M&A in Italy, but we expect this to be a complex matter, given for example the litigation pending as well as the group’s profitability and capital.”
Civil and criminal cases related to Monte dei Paschi’s former management have dogged the lender since it was bailed out by the state in 2017. In August, the bank said risks linked to disputes and legal cases rose to about 10 billion euros, for which it had set aside only a small portion of funds.
What Bloomberg Intelligence Says
“Monte Paschi’s recapitalization is inevitable, we believe, with the convictions of ex-Chairman Alessandro Profumo and ex-CEO Fabrizio Viola increasing the likelihood that more of the disclosed legal risk of 10 billion euros is realized. We calculate the bank could need 2 billion euros of capital to bring the CET1 ratio to 12.5%.”
-- Georgi Gunchev, BI banking analyst
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Monte Paschi Capital Injection Looms as Legal Risk Rises: React
The world’s oldest bank has already planned the sale of bonds to meet capital requirements after the transfer of about 8 billion euros of soured debt to state-owned firm Amco reduced its key common equity tier 1 ratio below 10%. In August, the European Central Bank gave the green light to the deal conditional on the sale of securities to restore capital buffers.
While years of restructuring lowered costs and reduced its bad loan pile, the bank’s struggles with low profitability and a slumping share price have become worse since the Covid-19 crisis started. Low capital buffers may make it harder to realize the Italian state’s plan to dispose of its 68% stake in Monte dei Paschi by the end of next year.
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