Banca Monte dei Paschi : Daring pays off

Luigi Lovaglio's announcement on 25 January that he was launching a takeover bid for Mediobanca was met with market scepticism. The market was expecting MPS to be at the centre of an M&A deal in Italy. But it was the target, Mediobanca, Italy's leading corporate finance bank since its founding in 1946, that came as a surprise given its size and very different DNA.
Nine months later, defying the odds and market scepticism, Monte acquired Mediobanca for € 16bn. This is quite a turnaround for a bank that was saved by a recapitalisation agreement with the Italian government in 2017.
True, the Italian government had long advocated the setup of a third banking group in Italy, alongside Intesa and UniCredit, and clearly "pushed" for the transaction as a shareholder in MPS. But far from being just a political stunt, the move makes genuine strategic sense. Monte has the wherewithal and emerges from the transaction with a solvency position that is still higher than that of many European banks. More importantly, it has diversified Monte's businesses without increasing the risk profile of the balance sheet and has strengthened its recurring profitability. As with any merger, there are execution risks. That said, the two banks are complementary and the merger is billed as a plug-in of businesses, and cost synergies will not be that significant.
MPS therefore looks set to end 2025 with a stronger credit quality, reflected in its upgrade to Investment Grade, already confirmed by Fitch this summer with Moody's expected to follow suit shortly.
In this credit update, we shall delineate Banca Monte dei Paschi's new image, highlight the challenges that lie ahead and update our credit opinion and recommendations.