Banks

Italy swoops in to save another bank leaving taxpayers on the hook for over $25 billion

Key Points
  • Italian state has now guaranteed taxpayer money for a third bank in just over a week
  • Struggling BMPS launched a fully-fledged restructuring plan Wednesday morning
  • Controversies continues over European Commission approving bailouts
BMPS is the oldest bank in Europe and the oldest restructuring story: Pro
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BMPS is the oldest bank in Europe and the oldest restructuring story: Pro

The Italian state has stepped in with funding to save yet another failing bank, meaning taxpayers now stand responsible for over 22 billion euros ($25.4 billion) of bailout money recently extended to the sector.

Finance Minister Pier Carlo Padoan announced late Tuesday that the government had received approval from the European Commission to pump 5.4 billion euros into Banca Monte dei Paschi di Siena (BMPS) in exchange for the lender undertaking a major restructuring overhaul.

BMPS revealed an outline of its new 2017 – 2021 plan on Wednesday morning which it says will deliver a net profit of over 1.2 billion euros and a return-on-equity of over 10 percent by 2021. Management has committed to implementing a headcount reduction of around 5,500 and to close around 600 of the bank's existing 2,000 branches as well as a pay cap for senior management. BMPS also said that its CET1 ratio (its common equity tier 1 ratio which is a key standardized measure of a bank's financial strength) should reach 14.7 percent by 2021.

Toxic assets are at the heart of the bank's demise and its plan includes the intention to sell down 28.6 billion euros of gross non-performing loans (NPLs), of which 26.1 billion euros will be securitized (converted into marketable securities).

Italian government criticized from both sides on Veneto banks decision: Banor Capital
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Italian government criticized from both sides on Veneto banks decision: Banor Capital

The move comes barely more than a week after Italy again received support from the European Commission for its pledge of a state guarantee of up to 17 billion euros as part of a plan to dismantle two troubled Venetian banks.

The use of taxpayer money to resolve problems within the banking system and therein protect retail bondholders in all three banks has been highly controversial given it flies in the face of the European Commission's commitment to avoid bailouts and all of the recent legislation that it has passed geared towards that purpose.

The banking sector has been struggling for years under the weight of a mountain of bad debt, and defenders of the state aid say the government's and the Commission's broader aim of lowering systemic risk validates the decision.

Additionally, the goal of shoring up the wider Italian financial system is now making progress, according to analysts at Citi.

"The stock of NPLs in Italian banks' balance sheets is significant but, given recent system developments, it is expected to show a large decrease before year-end," said Azzurra Guelfi, banking analyst at Citi in a note on Wednesday morning.

Furthermore, having bought into the new equity at a discount, the state could even stand to benefit from the BMPS transaction, says Gildas Surry, senior analyst at Axiom Alternative Investments.

"Over the next five years, definitely the state has a case where potentially it could get a good return on its investment," Surry told CNBC on Wednesday.

Indeed, there could also be an opportunity for brave investors, suggests Surry, if Italy follows the path trodden by Spain which has seen its banking sector shrink from around 70 lenders to closer to a dozen since the financial crisis.

"Potentially BMPS is a consolidation play because ultimately the bank will be clean and definitely there is consolidation to take place in Italy from the 400-plus institutions down to probably 150," he offered.

Jacopo Landi | NurPhoto via Getty Images

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