Stock Market Predictions

Monte dei Paschi shares rise on capital hopes

Stock Market Predictions

Monte dei Paschi, which will update investors on its capital-strengthening plans next week, must plug a 3.3 billion euro ($4.2 billion) shortfall by June 30 to meet tougher capital rules set by the European Banking Authority (EBA).

Its new management has taken measures to bolster its financial strength. But with the deadline looming large and little sign of flexibility from regulators, it still needs to find between 1 billion and 1.4 billion euros, according to sources close to the situation and analyst estimates.

That might only be possible if the government stepped in to help, because the deepening euro zone crisis makes it too expensive for the bank to issue bonds and planned asset sales have not yet materialized.

On Friday, MPS shares partially recovered from steep losses over recent weeks on speculation that the bank will not have to tap the market for a capital increase, implicitly pricing in some sort of state intervention. The stock closed 6 percent higher at 0.22 euros.

"The idea that they may not go to the market is enough reason to buy the shares," one Milan trader said.

Unlike struggling Spanish banks, Italian lenders have limited exposure to the real estate market and a relatively high level of deposits from retail investors.

MPS, however, has suffered because of its 25 billion euro exposure to Italian government bonds, which is proportionally higher than that of its domestic peers.

The Tuscan bank, the only Italian lender still with a sizeable capital gap under EBA rules, must also repay 1.9 billion euros of government-backed bonds that it borrowed in 2009.

Any delay in fixing its capital weakness would further weigh on its shares, which have lost 50 percent of their value in the past three months.

"There is not much room for maneuver and the option of state help might be the most sensible one," Societe Generale banking analyst Carlo Tommaselli said.

While government intervention could come in the form of another issue of high-yield Treasury-backed bonds, that would add to Italy's already ballooning public debt.

An alternative solution would be for state holding Cassa Depositi e Prestiti to underwrite a capital increase in MPS, ending up with a stake in the bank, or buy contingent convertible bonds - securities that convert into equity in times of stress.

Industry sources say that they would have to pay double-digit interest rates to attract private investors.

MPS chief executive Fabrizio Viola will present the business plan on June 26 together with newly appointed chairman Alessandro Profumo, the respected former CEO of Italian lender UniCredit (CRDI.MI).

"The decision does not lie just with MPS, it also depends on talks with authorities," a source close to the situation said.

Besides capital, the bank's balance sheet is also under pressure and the new business plan is expected to suggest a focus on retail business, reduced lending and cost cuts through to 2015. "Doing fewer things, better," was how Profumo put it recently.

FALLING DEPOSITS

Customer deposits fell 6.1 percent in the first quarter, extending a slide in the last three months of 2011.

Rating agency Standard & Poor's, which threatened this week to downgrade MPS, said that non-performing loans stood at 16.2 percent of gross loans, above the Italian average.

"With a loan-to-retail funding ratio of 128 percent, MPS needs to gradually rebalance its assets and liabilities," Deutsche Bank analysts said in a report.

The Siena-based lender has limited financial flexibility because its largest shareholder, a charitable foundation with close ties to local politicians, is emerging from months of wrestling with creditors to restructure its own debt.

The foundation has had to cut its MPS stake to 36.3 percent and does not want to fund a new capital increase.

As it seeks to raise cash, MPS is in talks to sell its stake in Biverbanca for 200 million euros. It is also looking to sell 150 branches - 5 percent of its network - which analysts say would reap only 300 million euros. ($1 = 0.7873 euro)

(Writing by Silvia Aloisi; Editing by Dan Lalor and David Goodman)