Italy’s Monte Paschi flunks stress test, plans to raise capital

Bloomberg

The world’s oldest bank is also Europe’s riskiest.
Italy’s Banca Monte dei Paschi di Siena SpA was the only one of 51 lenders tested by European regulators to have its capital wiped out in the exam’s toughest scenario. The bank, which has been bailed out twice by the government since 2009, said it plans to sell as much as 5 billion euros ($5.6 billion) of stock if it can offload a bad-loan portfolio.
The European tests released Friday showed that most lenders would keep an adequate level of capital in a crisis. Among the region’s biggest banks, London-based Barclays Plc fared worse than Deutsche Bank AG and almost as poorly as Italy’s UniCredit SpA. Monte Paschi and Allied Irish Banks Plc fell below the minimum capital level required by regulators.
“The results are better than expected for the bigger banks, including Deutsche Bank and UniCredit,” said Carlo Alberto Carnevale Maffe, professor of business strategy at Milan’s Bocconi University. “What remains a worry is Monte Paschi, which needs urgent measures to replenish capital.”
Persistent doubts over the resilience of lenders, particularly those in Italy, have made banking shares the worst performers on the Stoxx Europe 600 Index this year.

No Bailout
The exam gives supervisors across the European Union a common basis for measuring lenders’ financial resilience. Even before this year’s tests, the Italian government was weighing methods to shore up Monte Paschi that had sparked speculation about a government bailout. The nation’s treasury said Friday that such measures won’t be needed.
Monte Paschi’s ratio of fully loaded common equity tier 1 capital to risk-weighted assets, a measure of its buffer to withstand losses, dropped to negative 2.4 percent in the adverse scenario, which simulated a severe recession over three years. UniCredit’s ratio fell to 7.1 percent, the second-worst result of the five Italian lenders examined.
Intesa Sanpaolo SpA, Italy’s second-largest bank, emerged as the strongest in Europe, Chief Executive Officer Carlo Messina said in a statement, maintaining a ratio of 10.2 percent in a simulated recession. “Italian banks’ credibility was strengthened,” Italian Banking Association President Antonio Patuelli said in a statement Saturday. “European and Italian institutions must continue their work to create common rules for fair competition in the banking sector.”
The test broke with past practice by having no pass/fail mark. More than three-quarters of the lenders maintained a ratio of more than 8 percent, while Allied Irish Banks, the second-poorest performer, saw its ratio fall to 4.31 percent.
Deutsche Bank’s ratio fell to 7.8 percent in the adverse scenario, outperforming the 7.3 percent result at Barclays. For more on Deutsche Bank’s stress-test result, click here
The legal minimum for all banks is a ratio of 4.5 percent. Regulators also ask banks to hold a series of buffers. On top of that, supervisors add additional requirements for each lender, while banks deemed systemically important must have an extra cushion of capital to help absorb the damage their failure would cause.
The adverse scenario included shocks to economic output, interest rates and exchange rates, as well as plunging real estate prices. Analysts have questioned the exam’s reliability because the scenario doesn’t include flat or negative interest rates, the U.K.’s decision to leave the EU, and didn’t assess lenders from Portugal or Greece.