Europe Economy

Monte Paschi Shares Plunge on Derivative Loss Fears

Banca Monte dei Paschi di Siena
Alessia Pierdomenico | Bloomberg | Getty Images

Shares in Banca Monte dei Paschi di Siena, Italy's third-biggest lender, fell more than 5 percent for the second day in a row on Wednesday on worries of mounting losses on some financial derivative positions which it took in 2008 and 2009.

The stock was down 5.2 percent at 0.2632 euro by 1035 GMT, having earlier fallen as much as 9 percent. The price had already dropped 5.7 percent on Tuesday after reports that it is expected to book a loss of at least 220 million euros ($292 million) on one particular derivatives deal related to its debt holdings done three years ago.

That deal, called Alexandria and designed by Japanese bank Nomura, is one of several troubled structured transactions the bank is reviewing to assess their impact on its accounts, Monte dei Paschi said on Tuesday.

At least one other derivative trade, a 2008 deal with Deutsche Bank, is also thought to be under scrutiny, analysts and banking sources say.

"It is essential for the bank's management to clarify, in an exhaustive and timely manner, the exposure to derivatives and potential losses that can arise from those positions," said Luca Comi, banking analyst at ICBPI Equity Research.

The loss on the deal with Nomura is the latest setback for Monte dei Paschi, which requested 3.9 billion euros in state aid to plug a capital hole stemming from its government bond portfolio and hedging bets gone wrong. The bank had already raised its state aid request by 500 million euros in November, citing a possible hit on its capital from past structured transactions still in its portfolio.

But some analysts are beginning to question whether that 500 million cushion will be enough to cover for any losses linked to the derivative contracts. Italian newspaper Il Fatto Quotidiano quoted an anonymous source on Tuesday as saying the loss on the Nomura trade alone could amount to 740 million euros.

"If losses above 500 million euros emerged, the group would struggle even more to fix its capital position," Comi said.

According to sources with knowledge of the situation, the transaction with Nomura was made to restructure a position in distressed structured credit assets Monte dei Paschi had bought from German bank Dresdner in 2005. Under the asset swap deal, Monte dei Paschi changed its underlying exposure to 30-year Italian government bonds.

"Nomura got the BTPs as collateral, and as the spread widened MPS found itself having to increase margins. MPS also swapped the interest rate to variable from fixed. It all proved to be a bad investment from both a yield and capital angle," one of the sources told Reuters on Wednesday.

Nomura said on Tuesday the trade had been approved by the Italian bank's board and its then chairman Giuseppe Mussari, but Monte dei Paschi said the Alexandria deal had never been submitted to its board for approval. Mussari stepped down late on Tuesday as head of Italy's banking association, denying any wrongdoing.