Paschi Plunges After Larger-Than-Expected Loss on Provisions

Aug 08, 2014 5:14 am ET

Aug. 8 (Bloomberg) -- Banca Monte dei Paschi di Siena SpA plunged after a worst-than-expected second-quarter loss as the bank stepped up bad-loan provisions and Italy slipped back into recession.

Italy’s third-biggest lender dropped as much as 11.7 percent in the first trading since earnings were published after Milan markets closed yesterday. That was the biggest decline since June 25. The stock was down 7 percent to 1.07 euros at 10:52 a.m., having shed 3 percent of its value this year, compared with a 5 percent decline of the Bloomberg Banks and Financial Services Index.

“The tough economic environment may lead to a time delay hion our delivery on the revenue side,” Chief Executive Officer Fabrizio Viola said on a conference call yesterday.

Monte Paschi said its net loss for the period was 178.9 million euros ($239 million), more than twice the average estimate of a 71.5 million-euro loss, according to a Bloomberg News survey of six analysts. It was the bank’s ninth consecutive quarterly loss, coinciding with a contraction in Italy’s economy, the euro area’s third-largest after Germany and France.

Turnaround Delivery

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 for aid twice since 2009, raised 5 billion euros from investors in June, mainly to reimburse taxpayers.

“Our expectation of the first signs of an improvement in Monte Paschi’s core business in the second quarter did not materialize,” Anna Maria Benassi, an analyst at Kepler Cheuvreux who has a “hold” rating on the stock, wrote in a note to clients today. Benassi cut the target price on the stock to 1.20 euros from 1.43 euros.

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.

Capital Buffer

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. Mingrone said the bank has an estimated capital buffer between 4.5 billion euros and 6.5 billion euros, which “should be sufficient” to face the ECB’s asset review and stress tests.

“The bank should not be at a capital hike risk as the buffer looks decent but, as one of the most fragile banks in the euro zone, the stock could be under pressure until the comprehensive assessment results are released,” Carlo Tommaselli an analyst at Societe Generale SA wrote in a report today.

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 and Intesa Sanpaolo SpA, 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.