Turnaround Time for the World's Oldest Bank?

Banca Monte dei Paschi di Siena, a sign of Italy's economic woes, could be on the road to recovery.
By James Passeri ,


Editor's Note: This article was originally published on Real Money, at 12:25 p.m. on July 11.

Shares of Banca Monte dei Paschi di Siena, the world's oldest bank, which has become emblematic of Italy's broader economic woes, could be in for a turnaround.

The Siena-based financial company, whose shares trade on European exchanges as BMPS, is "one of the most leveraged banks in this situation," Hugo Cruz, an analyst with Keefe, Bruyette & Woods, said in a Monday phone interview.

But Monte dei Paschi could be able to reverse some of its most pressing problems -- including looming debt maturities tied to a 2013 government bailout -- by tapping into a government rescue fund to offload a nearly $31 billion loan portfolio.

Atlante, the Italian fund designed to help struggling banks stabilize their balance sheets, was launched in April with about 4.25 billion euros in capital, or roughly $4.7 billion. And Monte dei Pasche appears to be meaningfully considering tapping the rescue fund for help, analysts with Morgan Stanley (MS) - Get Report said in a Friday report.

The Atlante fund should have enough capital to buy a significant amount of Monte dei Pasche's nonperforming loans; it would hike its leverage to about 5x, the analysts added, noting "the issue remains that further funds would be needed to recapitalize the bank."

The U.K.'s decision to depart from the European Union has increased pressure on the Italian banking sector, which has been teetering on the edge of financial crisis. Shareholders of Monte dei Paschi have so far been delighted by bailout chatter tied to the Atlante fund, with shares of the bank climbing nearly 15% since Friday, in a year when more than three-quarters of Monte dei Pasche's market cap has disappeared.

"They need to raise so much capital," Cruz said, noting it's "unclear" what regulators are asking for the bank in return for a capital injection. "The stock is very binary," he added.

Morgan Stanley values Banca Monte shares at about $66, or more than double their midday trading levels Monday, noting the bank is "positively geared" for a healthier balance sheet.

Bondholders do not appear anywhere near as bearish as Monte dei Paschi shareholders, as bond prices have been climbing in secondary markets over the past few months. For example, the bank's 750-million-euro tranche of bonds maturing in 2022 currently trade at a premium and have climbed more than 5% since January lows.

-- Aidan Dougherty and Jason Keschner contributed to this report.

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