The entrance of the Monte dei Paschi di Siena bank headquarters is seen in downtown Siena, August 16, 2014. Italy's Monte dei Paschi di Siena is the bank with the biggest capital shortfall among euro zone lenders after a health check aimed at testing the resilience of the bloc's banking sector.STEFANO RELLANDINI/Reuters
Banca Monte dei Paschi di Siena SpA, the Italian lender with the biggest capital hole after a health check of European banks, slumped to a record low on concern that it may struggle to plug the gap.
Monte Paschi fell as much as 23 per cent to 77.4 euro cents in Milan, the lowest level since it was listed in 1999, and closed down 22 per cent at 78.5 euro cents. The shares have lost 28 per cent this year. Italy's stock-market regulator banned short sales of Paschi stock today and tomorrow.
"Monte Paschi's shortfall is higher than expected and investors are concerned about the capacity of the market to absorb a new capital increase," said Luca Peviani, who oversees €1-billion euros ($1.4-billion) at P&G SGR SpA in Rome. "The bank may be forced to be acquired at a discount given its weak position."
The world's oldest bank, twice bailed out in the past five years, must replenish €2.1-billion within nine months to meet European Central Bank requirements for capital buffers. The Siena, Italy-based company, which raised €5-billion from shareholders this year to prepare for the test and repay some state aid, hired UBS AG and Citigroup Inc. to explore all strategic options, without elaborating.
Chairman Alessandro Profumo told Italian daily newspaper Corriere della Sera that executives are working on the capital plan weighing "all, I mean all, strategic options." Luigi Tramontana, an analyst at Banca Akros SpA, suspended his hold recommendation on the stock citing uncertainty over the plans.
Twenty-five lenders failed a stress test led by the ECB, which found the biggest capital hole in the region's banking system lurking in Italy. Of the nine Italian banks that failed the test, four still showed shortfalls after measures they took this year, according to the ECB's report.
ECB President Mario Draghi is using the yearlong review to restore confidence in the financial system before taking over banking supervision in November. The health check revealed Italian lenders are lagging behind competitors, posting the highest fail rate in the region even after some of the country's biggest banks cleaned up their balance sheets in preparation for the review.
Monte Paschi hasn't overcome the financial strain wrought when it bought a rival in 2008 and later used derivatives to cover losses, transactions that have since backfired and are being criminally probed. A combination of Paschi, founded in 1472, with a competitor may lead smaller banks that are also burdened by bad loans and have struggled to boost profit after the financial crisis to follow its lead.
BNP Paribas SA, Credit Agricole SA and Banco Santander SA may be potential candidates to take over Paschi, said Stefano Girola, who helps manage $40-billion (U.S.) at Banque Syz & Co. SA in Lugano, Italy.
"The two French banks already have a strong presence in Italy, so a combination with Paschi would create synergies, while for Santander a Paschi takeover would be the trigger to enter in the Italian market," said Mr. Girola.
Santander sold Banca Antonveneta SpA to Monte Paschi for €9-billion euros in 2008, a transaction that stretched Paschi's capital just as Europe's sovereign-debt crisis ensued. A spokesman for Santander declined to comment on a Paschi tie-up.
The Bank of Italy would support a potential merger of Monte Paschi, Fabio Panetta, deputy director-general at the central bank, told reporters in Rome yesterday.
"We'd be extremely happy" if this type of transaction is a market operation, makes the bank stronger, and adds credit to the system, Mr. Panetta said. "This is how we feel about any operation that helps finance the economy."
Some investors say the smaller Italian banks, many of which are co-operatives, may struggle to combine as their shareholder structures hinder deal-making. Co-operative lenders give investors one vote each regardless of how much stock they own.