Bank capital: MPS secures 11th hour rescue plan

Louise Bowman
Published on:

ECB demands MPS shed €10 billion loans; last minute private deal scrambled.

A private sector recapitalization of Italian lender Monte dei Paschi di Siena (MPS) was announced at the 11th hour last month after the results of EBA stress tests on July 29. To the surprise of no one, the bank performed disastrously in the tests, recording a fully loaded CET1 ratio of minus 2.44% in 2018 under an adverse scenario. 

The ambitious deal moves nearly €10 billion of NPLs off-balance sheet and pours another €5 billion of capital into MPS’s coffers. This should increase its CET1 to 11.4% and reduce its NPL ratio from the current eye-watering 34% to around 18%.

The recapitalization was pulled out of the bag on the day that the stress tests were revealed and was led by JPMorgan, which has a long history of working with MPS. The US bank arranged a hybrid equity raising to fund its acquisition of Antonoveneta in 2008 – a €9 billion deal that many view as the root cause of the woeful situation it finds itself in today. 

MPS CEO Fabrizio Viola has made it clear that the recap is the bank’s only option. "We don’t have a plan B; this is our plan," he said when it was announced. "This is quite worrying given the complexity of the transaction and the need for a number of external factors to fall into place for it to be successful," analyst Eoin Mullany at Berenberg Bank points out.


Matteo Renzi concern-160x186
Matteo Renzi

Concern over the health of Italy’s banks has risen sharply since June 23 when the UK voted to leave the EU. The country’s prime minister, Matteo Renzi, is under intense pressure to achieve capital support for the sector before the country votes in its own constitutional referendum in October.

The ECB’s decision to write to MPS in early July demanding that it reduce its net NPLs from €23.5 billion to €14.6 billion over the next two years brought the situation to a head. 

The bank had a strategy in place to reduce this burden that included the mooted sale of NPLs to a group of US bidders, including Cerberus and Fortress Group. 

But with €340 billion of doubtful and bad loans sitting in the Italian banking system – nearly €100 billion of which are in two banks alone, MPS and UniCredit – this is a problem that is not going to be solved with a quick fire sale.

Italy is acutely sensitive to the BRRD bail-in legislation that was ushered in by the EU at the beginning of this year. This is because one third (€250 billion) of bank bonds in the country are held by retail investors. The rescue of four regional banks, Banca delle Marche, Banca Popolare dell’Etruria e del Lazio, Cassa di Risparmio della Provincia di Chieti and Cassa di Risparmio di Ferrara, last year imposed bail-in on €750 million subordinated bondholders and prompted a vicious political backlash.

With an estimated €40 billion capital hole in the banking system Renzi had hoped to use the shock vote for Brexit in the UK to claim that system-wide financial stress justified the extraordinary injection of state funds into Italy’s banks. This was, however, firmly rejected by Brussels.

"I don’t think that Brexit is a fundamental reason to change these rules. Everyone knows the banks are insolvent," one asset manager in Milan tells Euromoney.

By late July, the EC had given Renzi fairly short shrift. "The rules say if there is risk to financial stability, then there are exceptions for burden sharing and bail-in," Margrethe Vestager, Europe’s competition commissioner, observed at a news conference in Brussels. "The important thing is to figure out what is financial instability. So far during very serious circumstances in Spain, in Greece, in Slovenia, the exceptions were never triggered."


The EU, in recognition of the seriousness of the problem, approved a €150 billion government guarantee liquidity-support programme as a lifeline to the banks at the end of June. But they do not need liquidity; they need capital.

Recapitalization is essential for Italy’s banks to deal with the NPLs that are at the root of this crisis. Despite private-sector appetite for Italian bad debt, the gulf between buyer and seller expectations has become unbridgeable. Many banks have provisioned for their bad debts at around 45 cents on the euro; buyers are not willing to pay much above 20 cents in many cases.

"The NPL sales market has ceased to function," says one bad debt specialist at a dedicated NPL fund in Italy. "Banks believe they have marked NPLs to where recovery will happen in, say, four years’ time. If they are pushed to sell now, they cannot bear the loss as it will wipe out the entirety of their capital. There have been some situations in the last three months where banks have refused binding offers from private buyers as it would have simply wiped out their capital."

The Texas ratio, a measure of bad loans as a proportion of capital reserves, illustrates the problem the banks face. A ratio of more than 100% indicates that action on capital is urgently needed. MPS has a Texas ratio of 145%. Intesa Sanpaolo has a ratio of 85%, UniCredit 95%, Banco Popolare 135% and UBI Banca 110%.

As the standoff between Renzi and the EU continued, NPL sales in Italy ground to a halt. "All the confusion about government intervention is creating the hope at the banks that they can achieve higher prices," says the asset manager. "This makes the banks even more reluctant to sell."