Paschi Quarterly Loss Larger Than Estimated on Provisions

By Sonia Sirletti and Francesca Cinelli

Banca Monte dei Paschi di Siena SpA stepped up bad-loan provisions as Italy slipped back into recession in the second quarter, leading to a bigger-than-estimated loss for the bailed-out lender. The shares slumped.
Italy’s third-biggest bank late yesterday said its net loss for the period was 178.9 million euros ($239 million), more than the average estimate of a 71.5 million-euro loss of six analysts surveyed by Bloomberg News.
“The tough economic environment may lead to a time delay on our delivery on the revenue side,” Chief Executive Officer Fabrizio Viola said on a conference call yesterday.
Italy’s economy, the euro area’s third largest after Germany and France, shrank in the second quarter, extending a slump that has dragged on for most of the past three years. Viola, 56, is cutting jobs and selling assets in an effort to turn around the
bank, which posted its ninth consecutive quarterly loss. Monte Paschi, which has turned to the government twice since 2009, raised 5 billion euros from investors in June, mainly to reimburse taxpayers.
The shares fell as much as 11.7 percent to 1.01 euros as of 9:22 a.m. in Milan trading before being halted, limit down.
“Our expectation of the first signs of an improvement in Monte Paschi (BMPS)’s core business in the second quarter did not materialize,” Anna Maria Benassi, an analyst at Kepler Cheuvreux, wrote in a note to clients today. Benassi has a “hold” rating on the stock.

Photographer: Marc Hill/Bloomberg

Fabrizio Viola, chief executive officer of Banca Monte dei Paschi di Siena SpA.

Turnaround Delivery

Monte Paschi last month repaid 3 billion euros of state aid and agreed with regulators to refund the remaining 1.1 billion euros by 2015. The annual interest on bonds it sold to the government in exchange for its help increased to 9.5 percent in 2014 from 9 percent last year.
“Now that the capital increase has been completed, the company can focus again solely on the ordinary activity and the market is now focused on the delivery of the turnaround,” Azzurra Guelfi, a London-based analyst at Citigroup Inc., wrote in an Aug. 1 report. “We identify as main potential issues for the stock weaker asset quality and more challenging funding conditions than peers.”
Bad-loan provisions rose to 731 million euros in the second quarter from 545 million euros a year earlier. The net loss was 36 percent lower than the 278 million euros in the year-earlier period.
“In the second quarter, we have been inclined to take a more conservative approach on provisions because of the ongoing scrutiny by European Central Bank,” Chief Financial Officer Bernardo Mingrone said during the conference call. “We migrated some impaired loans to higher risk positions, and updated the value of real estate assets used as collateral.”
Banks across Europe have cleaned up balance sheets in preparation for oversight by the ECB, which will become the euro-area bank supervisor in November. Monte Paschi, one of 15 Italian lenders the ECB is scrutinizing, wrote down 1.2 billion euros of loans in the last three months of 2013.

Extraordinary Items

Monte Paschi’s share sale boosted the bank’s common equity ratio under phased-in rules, a measure of financial strength, to 13.5 percent as of June 30. Monte Paschi’s CFO said the bank has an estimated capital buffer between 4.5 billion euros and 6.5 billion euros, which he said “should be sufficient” to face the ECB’s asset review and stress tests.
Monte Paschi’s earnings were affected by several one-time charges and gains. Its tax rate more than quintupled after the government raised the levy on gains from Bank of Italy shares and revised its treatment of deferred assets. The bank posted a 92 million-euro gain from the sale of its stakes in the asset management service firm Anima Holding SpA.
Fee and commission income increased 2 percent to 426 million euros, as Monte Paschi joined other lenders in the country including UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), in moving clients towards more lucrative products like asset management and insurance. Total revenue dropped 2 percent to 996 million euros, hurt by lower income from trading.
Monte Paschi, one of the 10 biggest users of the ECB’s longer-term refinancing operations, said it has paid back 11 billion euros of the 29 billion euros it borrowed in the LTRO, and plans to reduce borrowings to 14 billion euros by the end of the year.