Monte Paschi Faces $1 Billion Loss on 'Surprise' Trades

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

Banca Monte dei Paschi di Siena, Italy's third biggest bank,revealed on Thursday it could face losses of as much as 720 million euros($956 million) on past trades in financial derivatives which new management only recently discovered.

Already one of Europe's most under capitalized banks,Montedei Paschi had to ask last year for 3.9 billion euros in state aid to plug a capital hole stemming from its vast government bond portfolio and hedging bets gone wrong.

But on Wednesday the Tuscan lender said it was reviewing three more loss-making structured trades related to its lending which only recently came to light and were negotiated by its previous management.

"Yes.The actualized shortfall is around that amount," the bank's chief executive Fabrizio Viola was quoted by daily newspaper Il Messaggero as saying when asked if 720 million euros was a certain loss rather than simply a maximum risk.

A source close to the matter said the loss was a preliminary estimate and that the net figure might be different because of tax considerations.

Monte Paschi's share price has dropped by almost 20 percent since Monday on concerns over the level of losses, valuing the world's oldest bank at around 2.9 billion euros ($3.9 billion).

The shares were trading at 0.238 euros at 1039 GMT on Thursday, down 6 percent on the previous day's close.

Analysts are concerned about the extent of possible losses at the bank and have urged the lender to come clean on whether there might be any other surprises.

"Given that the bank's statement spoke of an analysis exclusively of three products,the worry is there could be more and that's spooking the market," one analyst said, asking not to be named.

Viola, who has said the three products were never submitted to the bank's board, told Il Messaggero the management would now open every drawer in the bank for caution's sake. "But I think we're very close to completing the (clean-up) job,"he said.

The bank said on Wednesday that 500 million euros it requested in extra state aid in November would be enough to absorb a hit on its capital from the structured trades, which were linked to its massive 24 billion-euro Italian government bond portfolio.

"The bank is facing some tough challenges as its asset quality deteriorates and this is eroding its capital base. There is a risk of nationalization and a chance bondholders could be asked to share the burden of a bank restructuring," a bank analyst said, asking not to be named.

The bank is scheduled to hold a shareholder meeting on Friday to vote on a cash call underpinning the state bailout.

Hidden Documents

Earlier on Thursday the Bank of Italy said the lender,which is already being probed over the pricey acquisition of smaller rivalAntonveneta in 2007, was cooperating with regulators and judicial authoritieson the structured trades.

The deals in question are the so-called"Alexandria" trade with Japanese bank Nomura,the"Santorini" trade with Deutsche Bank and a derivative called"Nota Italia".

The findings of a review on the trades are expected to be submitted to the board by mid-February.

The central bank also said the new management, headed by chairman Alessandro Profumo, had produced documents that had previously been hidden.

"You'll have to ask them (the old management). I can only make suppositions. And I prefer to keep them to myself," Viola told Il Messaggero when asked why the Bank of Italy had not been informed.

Italian media reported Profumo, who previously headed Italy's biggest bank UniCredit, as saying the bank's shareholders might take legal action against previous management.

Former Monte dei Paschi Chairman Giuseppe Mussari stepped down as head of Italy's banking association late on Tuesday, although he has denied any wrongdoing.