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Some in government want desperately to preserve the 400-year-old brand of the Tuscan lender, but these conservationists should let go. The state should sell down its stake as quickly as possible and get out of the way. That is the best approach to support what is most worthwhile in Monte dei Paschi.
The bank is in about the best shape it has been since its disastrous 2007 deal to buy Banca Antonveneta SpA from Spain’s Banco Santander SA for €9 billion ($9.5 billion), which sprang from the equally cursed Royal Bank of Scotland-led carve up of ABN Amro on the eve of the global financial crisis. Monte dei Paschi overpaid for Antonveneta, tried to mask its losses and began its downward spiral. It has since destroyed about €18 billion in capital from investors and taxpayers.
Monte dei Paschi’s latest capital raise came only last November, when shareholders, including the government, kicked in €2.5 billion to help fund up to 4,000 job cuts and bolster its balance sheet. Now, after years of mismanagement, political meddling and plain old procrastination, its current executives seem to have put the bank on the right track. It’s cutting costs and boosting revenue – helped, of course, by 10 interest-rate increases from the European Central Bank since last summer. Monte dei Paschi’s cost-to-income ratio, which was as high as 75% in 2020, is expected to drop to just 50% this year and drift back up to 54% next year — still a very respectable level.
Consequently, the bank’s returns, which have vacillated wildly between weak profits and deep losses, are forecast to exceed 10% this year and next, according to analysts’ consensus forecasts on Bloomberg. That’s a rare feat anywhere in the euro zone.
The hard part was getting the political cover for staff reductions. So now, with these profitability forecasts and a strong capital ratio, Monte dei Paschi has become a much more attractive merger partner, except for one very important thing: The government’s majority stake.
Any deal for Monte dei Paschi would be far easier paid for in shares than via a rights issue and cash payout by an acquirer. But any share-based transaction would leave the enlarged lender with the government as a significant minority shareholder. No one can blame potential merger partners, such as Banco BPM SpA or BPER Banca SpA, for wanting to avoid that fate. Politicians and banking are typically a dysfunctional mix.
Something needs to happen soon. The European Commission has repeatedly put Italy on notice that it must get out of Monte dei Paschi, and the bank’s valuation isn’t about to leap higher. Across Europe, the bank earnings cycle is nearing its peak: There are few, if any, rate rises to come, and funding costs are going to catch up with lending income. Loan growth is collapsing and in Italy has already begun shrinking. There’s an economic slowdown ahead and potentially rising repayment problems.
Deputy Premier Matteo Salvini has been the leading voice demanding the Monte dei Paschi name is protected. The bank is a leading lender to small and medium-sized businesses, which are big backers of his League party. Antonio Tajani, the other deputy premier and head of coalition partner Forza Italia, wants to sell quickly. Realizing the roughly €2 billion value of the government’s 64% stake would create more room to fund spending promises.
Monte dei Paschi’s shares dive and jump with each ministerial comment, which only illustrates the problems of its ownership. If it starts selling and commits to letting the bank decide its own fate, then private investors can assess and price its future as a functional lender and probably a merger target. That’s the most promising route to preserving what is good about Monte dei Paschi and getting the best price for taxpayers.
More From Bloomberg Opinion:
• Finally, a Payday for European Bank Investors: Marc Rubinstein
• Capital Markets Reopen for Europe’s Banks: Marcus Ashworth
• Meloni Is Taking a Brazen Risk With Markets: Rachel Sanderson
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
More stories like this are available on bloomberg.com/opinion
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