Italian Bank Monte dei Paschi di Siena will cost italians taxpayers more billions then expected
The financial situation of Monte dei Paschi is yet to be solved. It is almost certain that the 8.8 billion foreseen from the Italian government will not be enough to bring back stability to the bank, meaning Italians taxpayers not only will have to cope with the never ending financial problems of the national airline company Alitalia, but also by putting more money on the table to rescue the bank. Monte dei Paschi just released its quarterly result which are far from being reassuring. The “rehabilitation” plan foreseen by the executive Marco Morelli has stopped and the total loss for the period accounted for 169 million. In the first quarter of 2016 the bank reported a profit of 93 million. It seems that ECB wants the bank to conduct an ultimately cleaning operation regarding not performing loans. How would the latter be possible without damage given that the bank is evaluating the loans at 30-35% of their original value? A less generous valuation of NPLs recorded in the balance will end up increasing the need of capital of the bank; increasing the costs that the state and ultimately taxpayers are bearing.
If we go back of few months, MPS was about to hand over the entire amount of 27 billion in NPLs for something more than 9 billion to Fondo Atlante which was evaluating them at 33%. The NPLs were budgeted from the bank at 40% of their original value. The difference between the latter and the acquisition value of 33%, it would have generated a loss to be covered with the famous capital increase of 5 bill. which failed at the end of the 2016. Almost all transactions, that were lately achieved on the market, were closed at a much lower value.
A striking example was Unicredit which sold €17 bill of budgeted NPLs for only 2.2 bill; around 12.9% of their book value. Definitely a radical solution but it helps to reinforce the idea that Unicredit is doing a really deep cleaning so to focused again on the core business and on the recovery of productivity. On the contrary there is MPS, a bank which gives the impression it doesn’t want to face reality. Two months ago the gross NPLs were 29.4 billion and they were budgeted at 10.3 billion which is equal to something more than 35%. If we were to apply Unicredit valuation, the same NPLs should have been budgeted at 3.7 billion generating a gap in the capital needed of 6.6 billion. Even if we were not adopting a so aggressive solution such as the one of Unicredit (12.9%) and using a market average of 20-22% the generated gap would then be equal to 4.0 billion and the latter is only taking consideration of NPLs. It is evident that the “hole” in the bank’s accounts is way much bigger that the one represented so far.
If we were to apply Unicredit example on MPS, on top of the 8.8 billion provided by the state as a capital increased requested by ECB, we would have to add 6.6 more for a total of 15.4 bill. On top of that, an even more realistic valuation of NPLs owned by MPS will bring the latter valuation to almost 20 bill as the final amount needed to restore and reorganize the bank’s numbers. If we have a look to the quarterly results, the interest margin is equal to euro 457 million, 9% lower than last year. The bank earning coming from its core operations are decreasing. The total commission coming from general service is also lower of 2.4% compering to last year results. The only positive news is that the deposits flood has now been contained and stopped. In the event of a sale of the entire NPLs portfolio held by the bank, the market will not pay more than 20%. If this is the case the Italian government should more than double the 8.8 billion proposed in the first place as well as cutting costs and hence personnel to restore competitiveness. The capital increase should take place at the beginning of the summer while the dismissal of the entire NPLs portfolio should be conducted within 2017, unfortunately the process seems far from being quick and easy to solve once and for all.