Report
Carine Maciol

Banca Monte dei Paschi : Tomorrow never dies

The oldest bank in the world, as it likes to remind people, will survive this new crisis. It has reached an agreement with European and Italian regulators for a preventative recapitalisation. - Requested last December, following the failure of its standalone capital increase, this preventative recapitalisation was approved by the European Commission on 4 July. It includes a € 5.4bn injection by the Italian state and burden sharing by subordinated bondholders for a total of € 4.5bn (through a conversion into shares). - > - Besides a capital increase, the 2017-2021 restructuring plan comprises the sale of € 28.6bn of gross non-performing loans, including € 26.2bn through a securitisation, in which Atlante will subscribe to equity/mezzanine tranches. The sale of loans at 21% of their value will lead to a net upfront loss of € 3.9bn in the first half of this year, whereas the loans will not be deconsolidated until H1 2018. The resulting reduction in the cost of risk (with a target of 60bp in 2019) will be one of the drivers of the bank’s return to profitability (net profit of € 600m in 2019), along with cost-cutting efforts. The focus is on digitalisation and on shrinking the network and headcount. By 2019-2021, the bank is counting on higher interest rates, Italian economic growth and new customers to boost revenues and attain a net profit of € 1.2bn and an ROE of over 10%. - After the € 8.1bn capital injection (state and burden sharing) and the recording of a € 3.9bn loss following the sale of NPLs, the CET1 ratio works out at a comfortable 13.8% (vs. 6.5% in March 2017). Since the bank has no more Tier 1 and Tier 2 debt at this stage (as it has been converted), it will have to meet its SREP total capital ratio target of 12.94% with core Tier 1 capital alone. We estimate that the distance between the published CET1 and the requirement is modest at 100bp. - Management has underlined that it wants to return to the markets in 2018 to issue Tier 2 debt. To fill the 2% buckets and to lengthen its distance from requirements, BMPS has to issue around € 1.5bn of Tier 2 debt (2%*€ 66bn of RWA). By 2019, BMPS is aiming for a CET1 of 12.7% and a total capital ratio of 14.9% (the difference being due to Tier 2 issues). In this case, the distance to SREP CET1 requirements will be more comfortable at 2.575%. - The materialisation of this scenario wholly depends on the bank’s return to the bond markets and to its ability to convince investors of the success of this new plan. - For investors who wish to take a position in this credit to play its potential recovery, the possibilities are limited to a few retail bonds and the Senior Benchmark 2019 3.625%, which is trading at a spread of Asw+142bp and offers a yield of 1.24%. We are raising our recommendation to Buy on this paper.
Underlying
Banca Monte dei Paschi di Siena S.p.A.

Banca Monte dei Paschi di Siena Group is engaged in business areas such as leasing, factoring, corporate finance, investment banking and consumer credit. Co.'s Operating Segments are as follow: the Retail & Corporate division, made up by the Retail Banking and Corporate Banking segments, and the Corporate Centre. The Retail banking segment's areas of business include funding, lending, the provision of insurance products, financial and non-financial services (including through electronic payment instruments) to retail customers. The corporate banking segment's areas of business include lending and providing financial products and services to businesses.

Provider
Oddo BHF
Oddo BHF

​Oddo Securities provides securities brokerage and research services. The company offers equity, economic, and derivatives research and credit analysis services. It focuses on insurance, automotive, building materials, pharmaceuticals, telecommunications, information technology, and agri-food industries.

Analysts
Carine Maciol

Other Reports on these Companies
Other Reports from Oddo BHF

ResearchPool Subscriptions

Get the most out of your insights

Get in touch