Tension mounts as Monte dei Paschi di Siena nears its end

Monte dei Paschi di Siena, the world’s oldest bank, is nearing its end. Sitting outside the branch where he has worked for 40 years, in the medieval hilltop city of Siena, a 59-year-old MPS employee is reeling from the bank’s dramatic downfall.

“Our city’s economy is inextricably intertwined with ‘Daddy Monte’. Entire generations and businesses have depended for hundreds of years on the wealth it generated. But now we are groping in the dark,” said LP, who did not want his name used.

The fate of MPS — which began life as a charitable pawnbroker in 1472 and collapsed into a €5.4bn government bailout four years ago — is being decided in the corridors of power in Milan and Rome.

UniCredit, Italy’s only global systemically important financial institution, is poised to snap up the best bits of MPS from the state, which owns 64 per cent. In doing so it could also set off the long-awaited consolidation of the country’s banking sector.

With thousands of jobs on the line, “Operazione Monte Paschi” has become a battleground in Italian politics, sparking infighting in the coalition government led by former ECB president Mario Draghi.

That tangled political fight will be on full show in crucial local elections in Siena on October 3. They were triggered by the resignation last year of former finance minister Pier Carlo Padoan, who left office to become chair of UniCredit after overseeing the MPS bailout in 2017.

Those elections have put on hold efforts by Padoan’s bank to buy MPS. But that is just the calm before the storm.

“Italy is bracing itself for the accumulated tension to be released,” said one Italian banker. 

Should UniCredit-MPS go ahead, a slew of other domestic deals are expected to follow, as smaller rivals attempt to bulk up to take on Italy’s biggest banks, such as Turin-headquartered Intesa Sanpaolo.

“Smaller banks will have to react if they want to be relevant and compete with the two largest banking groups in the country” said Marcello Messori, professor of European economy and economic governance at Luiss University in Rome.

Milan-based Banco BPM, one of the country’s many midsized banks, is seen as the most likely to drive consolidation. “BPM’s management would like to find a solution for the bank and not remain a takeover target for too long,” said an investment banker involved in multiple ongoing talks.

BPM executives have repeatedly expressed interest in buying BPER, which is seen as an ideal partner, both in terms of size and because it is headquartered in the neighbouring Emilia Romagna region. However, BPER has long been cautious of such a merger.

Much will depend on the fate of MPS, which is expected to be decided within months. UniCredit, under its new chief executive Andrea Orcel, plans to cleave off the most attractive parts of the Tuscan lender, leaving the government to deal with its risk-ridden underbelly. 

“However it goes, it won’t be an easy pill to swallow,” said Pierluigi Piccini, former mayor of Siena and ex-employee of MPS. “The bank has shaped the city, for better or worse”. 

A severe economic downtrurn would wipe out Monte dei Paschi’s capital

“Either the ability to break with the past is found or the city is destined to slowly perish.” 

MPS was nationalised in 2017 after it was revealed the bank hid hundreds of millions of euros in losses between 2008 and 2012 using complex derivatives contracts. Thirteen former bankers from MPS and other lenders have been jailed over the case, which shook Italy’s establishment and fomented the rise of populism in the country.

Since the bailout, MPS has been a thorn in the side of the Italian government, which faces a pressing European Commission-imposed deadline of the end of this year to sell its stake in the bank.

MPS’s precarious state was laid bare in July when the European Banking Authority’s stress tests revealed its capital would be wiped out in a severe economic downturn. MPS was the heaviest hit of the 50 EU banks tested.

To entice buyers for MPS, the government introduced temporary fiscal measures last year, which expire on December 31, to let acquirers turn target banks’ deferred tax assets (DTA) into tax credits, essentially allowing lenders buying struggling rivals to boost their own capital levels.

UniCredit chief executive Andrea Orcel
UniCredit chief executive Andrea Orcel plans to cleave off the most attractive parts of the Tuscan lender, leaving the government to deal with its risk-ridden underbelly © Simon Dawson/Bloomberg

Intesa Sanpaolo took advantage of the DTA scheme when it bought rival UBI last July and became Italy’s largest bank. That left UniCredit as the only domestic player big enough to digest MPS.

Carlo Messina, chief executive of Intesa, told the Financial Times that deciding MPS’s fate was the most pressing issue for Italy’s banks: “If a deal can be found and it removes an element of risk within the country’s banking sector, that’s really positive for Intesa and the rest of the industry.”

High-level talks between the Italian treasury and UniCredit made little progress over the past year, not least due to the sudden departure in February of UniCredit’s chief executive, Jean Pierre Mustier, after he fell out with his board over strategy.

But the prospect of a deal was galvanised by the arrival of Orcel in April. In July he announced that UniCredit had entered exclusive talks with Rome over acquiring parts of MPS, but crucially on Orcel’s terms.

Asset quality at Italian banks remains under pressure

The former-UBS boss has demanded that the deal has no impact on UniCredit’s capital position and that his balance sheet is not weighed down by MPS’s bad loans.

“Seven months ago, MPS was seen as the kiss of death,” said Davide Serra, CEO of Algebris, the fund manager and UniCredit bondholder. “But under Orcel’s conditions, it’s now a very attractive opportunity.”

UniCredit is unlikely to take on more than €50bn of MPS’s €80bn loan book and about 1,100 out of the bank’s 1,400 total branches, according to people involved in the talks. Jobs will also go but forced lay-offs are unlikely in the politically charged atmosphere.

The government would then use its “bad bank” manager AMCO to take on the riskiest loans, while state-owned bank Mediocredito Centrale would pick up MPS’s southern branches.

Orcel’s central role in the rescue of parts of MPS has not been universally welcomed. He advised MPS to buy Santander’s Antonveneta business for €9bn in 2007, on the eve of the financial crisis, a deal that many blame for some of the Tuscan lender’s woes.

But given the deadlines, Rome has had little choice but to cede to Orcel’s demands.

“There are no other options,” said a person involved in negotiations. “The only serious buyer is UniCredit.”

Alongside Italy’s bankers, the people of Siena are following every twist and turn.

MPS employs about 2,500 people in the city and the local economy is heavily dependant on the bank. Its foundation has supported the city’s hospital as well as its world famous Palio bareback horse race.

“If you don’t have at least one family member who works for Monte, then you’re not from Siena,” goes a local proverb. 

Annalisa Tognazzi, a 72-year-old who runs a tobacco shop a few meters from MPS’s headquarters, said the city may lose “the pillar on which it stands”, should the UniCredit deal go ahead.

“I’m worried. My brother who used to work for the bank is worried. My nephew who works for the bank is worried. The situation is catastrophic,” she said. 

“Seeing the world’s oldest bank being sold into pieces is really, really sad.”

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