Monte dei Paschi’s bank headquarters in Siena
Italy has signalled its willingness to back an acquisition of Monte dei Paschi © REUTERS

A new year but old woes are facing Tuscan lender Monte dei Paschi di Siena, and its current owner, Italy.

The fractious coalition government in Rome continues to fight over the likely privatisation of the world’s oldest bank. Politicians are facing the risk of having to explain to voters that more public money might be needed to save it.

The Italian government was forced to bail out the bank in 2017 and it now faces a deadline imposed by the European Commission of the end of 2021 for the sale of its 68 per cent stake. MPS has already cost Italian taxpayers billions across the past decade. That might be for naught unless politicians can find a solution.

The issue will have resonance beyond Italy’s borders, testing the credibility of the EU’s efforts to unify banking regulation across the bloc and its policies seeking to rein in state aid for private companies. 

The only real strategic answer for the MPS dilemma that would be compatible with those rules is privatisation. And many analysts believe that means a takeover by UniCredit, Italy’s second-biggest bank by assets. However, such deals are rarely straightforward in Italy.

Rome has signalled its willingness to back an acquisition of MPS. When the bank announced its strategic plan this month, it said the government had committed to divest its stake in MPS with “market measures” and “transactions aimed at consolidating the banking system”. 

Some consolidation of Italy’s fragmented banking sector is already under way, spurred by Intesa Sanpaolo’s takeover of UBI Banca this year. However, Intesa is seen as too large to be allowed to take over MPS. Apart from UniCredit, other banks within Italy are widely seen as too weak or small to be an acquirer. And a takeover by a foreign bank would be politically difficult, even if one were interested.

UniCredit itself is still reeling from the departure of its chief executive Jean Pierre Mustier following the board’s rejection of the banker’s plans to spin off UniCredit’s Italian operations and float its foreign assets in Frankfurt.

Some analysts believe MPS may have to be gifted to UniCredit — and with sweeteners.

MPS was nationalised in 2017 after one of Italy’s biggest financial scandals when it was revealed the bank hid hundreds of millions of euros in losses between 2008 and 2012 using complex derivatives contracts. 

To increase its appeal to buyers, the bank approved a plan to clean up its balance sheet by selling €8.1bn in bad loans. The government also included a provision in the upcoming budget law that would grant a buyer around €2.5bn in deferred tax assets.

But MPS is facing up to a reported €10bn in legal claims from shareholders that it accumulated across the years. How much of those will materialise is unclear but the bank still faces a capital shortfall. In a 2021-2025 strategic plan announced this month, it targeted a €2bn to €2.5bn capital increase to plug its estimated gap. Rome might face pressure to supply those funds to make a deal cost-neutral for UniCredit.

The ideal scheme, say some in Milan, would be along the lines of the Veneto banks that were rescued and sold to Intesa Sanpaolo in 2017 for €1. That deal, orchestrated by UniCredit’s incoming chairman Pier Carlo Padoan — who at the time was Italy’s finance minister — cost taxpayers more than €5bn. The non negligible difference between the two cases is that Monte dei Paschi, unlike the Veneto banks, is not in liquidation. 

However, the prospect of a UniCredit takeover of MPS could be politically toxic. The populist Five Star Movement party, the senior partner in Italy’s coalition government, has voiced its opposition to such a deal.

A more realistic option, according to some lawmakers, would be to sell branches to other Italian lenders while reducing the bank’s size and preserving a public stake. Others believe MPS should play a public role in Italy’s economic recovery after the Covid-19 pandemic.

These options would not solve the conflict with EU state aid and banking rules. Nor would they solve MPS’s legacy issues which are deeply rooted in Italian politics and the leftwing parties that controlled the bank through foundations for decades.

Privatising MPS looks to be the only, painful, solution. EU regulators would have to oversee the process and Italy might be allowed extra leeway in the middle of the Covid-19 crisis. 

If so, this will be yet more evidence that consistent application of EU banking rules across member states is still a long way off.

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