The rescue of Italy's flailing Monte dei Paschi (BMDPY) grew more doubtful Monday when the bank told investors it may have to write-off more loans in the coming months and also face billions of dollars in lawsuits.
The world's oldest bank said that it faces litigation, thought to stem from alleged misrepresentations during past capital raising, that could ultimately cost it as much as €8 billion ($8.5 billion). It has already made nearly €700 million of provisions against its likely final bill.
Adding to the bank's woes, listing rules required that it disclose that an ongoing review of its nonperforming loan portfolio by the European Central Bank could also result in it being instructed to write-off more bad debts - which would further damage its capital buffer.
Monte dei Paschi stock fell more than 16% Monday in response to the news, to trade at €17.17. The current trading level places the stock close to its record low after adjusting for the 100:1 share consolidation that took place when the market opened.
The two-pronged threat of further costs could mean that the bank now finds it all but impossible to convince investors to back its latest rescue.
Hailed as a final solution to its woes, MPS's latest rescue will not work without a buyer for is €27 billion bad-loan portfolio, or without debt holders who are willing to exchange notes for an equity stake and investors who are willing to provide the bank with €2 billion of new cash-equity.
In return for the capital injection, Monte dei Paschi has pledged to deliver a return-on-equity of more than 11% by 2019, along with €1.1 billion of net income - which would be a record for the bank.
But investors have been wary of buying the story, given that the Tuscan lender is now on its fourth capital raising since 2012. It does not help that the Italian economy is also in the midst of a tentative recovery and that the Mediterranean nation now faces the spectre of political upheaval if the government fails to secure enough support for crucial constitutional reforms in a referendum on Dec 5.
Eoin Mullany, an analyst at Berenberg, said of the looming referendum Monday; "This political uncertainty could hinder Monte Paschi's attempts to raise €5bn of capital and may impact the new strategy UniCredit plans to deliver on 13 December."
Furthermore, the costs of another write-off against the value of its loan portfolio have not been factored into the bank's estimation of what kind of financial performance it can deliver in a post-bailout world.
Markets have already had a hard enough time accepting the pledge of an 11% RoE from Monte dei Paschi as being credible. Now, even the most benevolent of investors just might have the excuse that they need to rebuff the bank in its appeals for assistance.
The most crucial spoke in the wheel of the Monte dei Paschi rescue is the sale of its €27 billion NPL portfolio. The bank's own arithmetic has given it a sale value of 33% of gross-book value, equivalent to 33 cents on the euro.
However, the lender's board could be about to run into another road block.
Following an Italian nonperforming loan conference held over the weekend, Mullany at Berenberg flagged concerns among investors over the current prices of Italian NPLs, saying that further write downs will be needed across the industry if Italy is to coax international investors into buying them.
Mullany wrote; "From our discussions with investors, we believe that some funds are not hitting their IRR targets on Italian NPLs ... Given the uncertainty surrounding asset values in Italy, it is apparent that further write-downs are required to securitise these NPLs"