Monte dei Paschi finally grasps capital nettle

LONDON: Banca Monte dei Paschi di Siena's owners have finally smelt the coffee. The foundation that owns 46 percent of the world's oldest bank said on Feb. 1 it would support moves to plug the bank's capital deficit. With another European stress test looming, it's about time.

Monte dei Paschi needs more capital. An ill-timed 9 billion euro deal in 2007 to buy domestic rival Antonveneta depleted reserves just as the crisis hit. The bank only just passed the first European stress test last July largely because it has 1.9 billion euros of so-called "Tremonti bonds" crisis loans from the Italian state.

Repaying these bonds in 2013, while lifting the bank's core Tier 1 capital ratio from 7 to 8 percent, could require around 3 billion euros. Selling commercial property assets and its French subsidiary will help narrow the gap, but even then Monte dei Paschi will still need at least 2 billion euros in fresh equity. Generating this organically looks tough.

One solution would be for Monte dei Paschi to merge with a large rival like Intesa Sanpaolo But even assuming such a deal cleared competition hurdles, there are other objections. The businessmen and dignitaries that control the foundation like to exert their influence over lending decisions. A merger would reduce their clout.

A rights issue also has drawbacks. The foundation has historically viewed Monte dei Paschi as a source of dividend income rather than a target for fresh investment. The foundation might be able to raise cash for a rights issue by selling its shareholdings in Mediobanca and Intesa. But even if it did not take up its rights, the dilution would be bearable. If Monte dei Paschi raised 2 billion euros at the current 0.9 euro share price, the foundation's stake would be diluted to 34 percent -- still a dominant position.

Success depends on Italian or international investors stepping in to pick up the shares the foundation doesn't buy. But a similar 2 billion euro capital increase by Banco Popolare is gaining more support than expected, while investing in Italy is more attractive than some of its European neighbours. Now that the foundation is willing to play ball, Monte dei Paschi's capital headache could soon ease.

CONTEXT NEWS

The major shareholder in Banca Monte dei Paschi di Siena has indicated it would support plans for a capital increase, Il Sole 24 Ore reported on Feb. 1.

Gabriello Mancini, chairman of Fondazione Monte dei Paschi di Siena, told the newspaper that if the bank needed capital it would be "available to evaluate it and to support the bank's requirements". The foundation currently owns 46 percent of the bank.

Monte dei Paschi only just avoided failing a stress test carried out by bank regulators last July. It also took 1.9 billion euros of government aid to bolster its capital reserves during the financial crisis.

Monte dei Paschi shares rose 0.7 percent to 0.92 euros on Feb. 2 after falling over 2 percent the day before. The bank also postponed plans to issue a euro-denominated covered bond due to market conditions and feedback from investors, according to the Wall Street Journal.