Monte Dei Paschi, An Example Of Italian Banks Solvency Problems

Monte Dei Paschi reacts to the ECB notification with its largest fall since MayMonte Dei Paschi faces a complicated situation because the volume of non-performing assets

Self Bank | A few months ago in Italy a fund was set up, mainly financed by private capital, to look for investors. The aim was to capitalise the banks and facilitate the sale of toxic assets (portfolios of unpaid or doubtful loans) which these lenders had on their balance sheets.

Unlike in Spain, where the banking system’s problems were an inheritance of the real estate bubble, in Italy the banks have been accumulating unpaid loans originating in the corporate sector.

This measure has had very little success due to the lack of interest on the part of investors, as well as the big difference between the price they were willing to pay and the price the banks were asking. If they were to sell these doubtful loans at the market price, the majority of the banks would not have enough capital to cover the accounting losses these sales would generate.

Since this kind of measure designed to clean up Italy’s financial system did not have the desired effect, the government is now looking at how it can directly help out the banks.

This is a practice which the EU does not view favourably as it prefers the use of a bail in to a bail out. A bail out is about injecting public funds, while a bail in is where the banks’ current shareholders and bondholders pay the bill.  It would not go down well if Italy were to inject public funds into its banks given that it is one of the most indebted countries in the world with a debt/GDP ratio of no less than 132%.

Monte dei Paschi di Siena (MPS) is one of Italy’s biggest banks and the one which has the largest amount of toxic assets on its balance sheet by a long shot. Despite the fact it has sold off part of these assets over the last few years and has plans to continue to do this in the coming years, it has been leaked this week that the ECB has recommended it sells off more. The idea is to be able to “massage” its results in the European banks’ stress tests which will be published on July 29. Since yesterday there has been speculation that the Italian government is trying to speed up the process of injecting capital into this bank in particular.

At the end of the first quarter, MPS’ exposure to toxic assets was over 47 billion euros. This is absolutely outrageous when you take into account that the bank’s market capitalisation which does not even reach 1 billion euros. Of the total 47 billion euros, there are 17 billion euros of bad loans and 27 billion euros of unpaid loans, which have increased almost 10% from a year earlier.

As Italy deals with the solvency problems in its banking system, the environment for the sector in general is not very favourable. With the Euribor at record lows, it’s difficult to generate profits via net interest income. Apart from these “assets,” it is estimated that MPS has nearly 22 billion euros of Italian public debt on its balance sheet. This is considered as investment grade, but is only three levels above junk bonds.

There are also concerns that this reputational crisis for MPS could be having consequences for its business and effecting the confidence of its clients, who are now more wary about depositing their money with the bank.


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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.