MPS capital plan only solves immediate crisis
By George Hay
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Monte dei Paschi di Siena has bowed to the inevitable. Italy’s third-largest bank always looked a good 1.5 billion euros short of capital to pass the European Banking Authority’s stress tests. That’s exactly the amount the Italian state will now pump into the Tuscan lender.
The good news for MPS’s battered shareholders is that the state funds are not in the form of equity. At two-thirds of the bank’s market capitalisation, the amount required would have been highly dilutive.
The bad news is that the state funds will be in the form of hybrid debt. One problem is that these new instruments will probably not count as proper core equity under new Basel III capital rules. Another is that the state will need to charge a hefty coupon to comply with Brussels state aid rules, hurting MPS’s already slim earnings. Finally, MPS already has 1.9 billion euros of similar “Tremonti bonds”, bestowed by Italy’s ex-finance minister in 2009.
As such, the newly-enlarged 3.4 billion euros of state bonds – call them “Monti bonds” – are a stopgap solution. The bank says it will pay back 3 billion euros by 2015. In the same period it will cut 10 percent of its branches and 15 percent of its workforce, and at some point raise 1 billion euros of Basel III-compliant capital.
That’s unlikely to be great for the MPS foundation, the public body which has already seen its stake in the bank diluted from 50 percent to 36 percent. The financially stretched foundation probably won’t be able to participate in the capital increase, further shrinking its stake. Scarce dividend payments and job cuts will further undermine MPS’s traditional role bankrolling Sienese culture and society.
But neither does MPS look a great bet for new investors. Even if it can deliver its plan – a big ask given Italy’s contracting economy – an 8 percent core Tier 1 ratio under Basel III and 7 percent return on tangible equity in 2015 is far from world-beating. Then there are legal probes and MPS’s sizeable holdings of long-dated sovereign debt. There could be many more crises to come.