Monte dei Paschi to shed non-performing assets to attract investors

Investing

Italy’s Banca Monte dei Paschi di Siena has announced a plan to slash its exposure to bad debt by about two-thirds, to de-risk its balance sheet and boost its chances of merging with domestic and international peers. 

MPS, which is majority owned by the Italian government, will sell €8.14bn of non-performing loans, €3.18bn from a bridge loan issued by JPMorgan and UBS, and €1.09bn in net equity to AMCO, a state-owned asset management company. Overall this will cut the Italian lender’s non-performing exposures to 4.3 per cent, from the current 12.4 per cent.

The plan received an informal green light from the European Commission last month but it still needs to be approved by the European Central Bank. If successful, the operation will lead to “a significant de-risking of the bank, well beyond the European Commission’s 2017 target, which is a mandatory preliminary step for new strategic operations”, MPS said in a statement on Monday night. 

The bank also said the operation would lead to a decrease in its funding costs.

Analysts welcomed the announcement as a step towards spurring tie-ups within Italy’s fragmented banking sector, and said the Tuscan lender could be a possible target for Italian and international investors.

“I expect consolidation to include Monte dei Paschi if it manages to offload its bad debt pile,” said João Soares, a banking partner at consultants Bain & Company in London. 

Several domestic investors, however, remain sceptical of MPS’s attractiveness to buyers. “There is growing concern in the industry that the government will put pressure on us to buy Monte dei Paschi,” said one Milan-based investor. 

One Treasury insider said the Italian government, which owns 68 per cent of MPS, is keen to sell down its stake. It expects that the asset disposal plan will make the bank a more attractive target for other lenders, by reducing the debt on its balance sheet.

Investors have suggested that the economic fallout from the coronavirus pandemic will force regional Italian lenders to start looking at potential combinations. While overall European banks’ balance sheets are stronger than during the last crisis, Mr Soares noted that Italian banks are, on average, more fragile than their northern European peers: “A large dispersion remains, regardless of attempts to restructure.”

The mooted sale of MPS and the potential hostile takeover of UBI Banca, the country’s third-largest bank, by Intesa Sanpaolo are seen by industry insiders as the forerunners of a wider sector consolidation. 

But both operations are expected to face hurdles. Last month UBI sought to invoke a material adverse change (MAC) clause, claiming that the pandemic had changed the terms of the deal. It also raised multiple competition concerns with the Italian antitrust regulator in an attempt to block Intesa’s takeover.

Meanwhile several investors said MPS was not a very appealing takeover target — regardless of its level of NPLs — because of its high cost base and a client portfolio that is largely made up of retail investors and SMEs, which are likely to be affected by the coronavirus crisis.

Mr Soares remains bullish on the potential for mergers in the Italian banking sector. This is partly because together the top three lenders only own 50 per cent of the total banking assets — compared to most other European countries, where the figure stands at about 70 per cent.

“After each crisis there has been additional consolidation in fragmented markets,” he said.

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