Banca Monte dei Paschi di Siena SpA, the world’s oldest bank, is the worst performer in European regulators’ stress tests and may see all of its capital wiped out if the economic slump continues.
This news follows talks of UniCredit holding discussions with the Italian government to take over the bank. Monte Paschi was bailed out by the government in 2009. The bank was nationalized in 2017 through a 5.4 billion-euro ($6.4 billion) state bailout.
The exercise by the European Banking Authority (EBA) showed that EU banks took a 265 billion euro ($314.7 billion) hit in a test of their resilience to economic shocks, but most of them came out looking strong with enough of a buffer to ride through the downturn. The EBA scrutinised 50 top lenders and their ability to withstand economic shocks. The banks account for 70% of EU banking assets.
The Siena-based bank’s common equity tier 1 ratio fell to a negative 0.1% in an adverse scenario, according to the tests released late Friday. Paschi said in a note that the bank had already sent a capital plan to the European Central Bank in January. which envisaged a 2.5 billion-euro capital increase as “a fall back option.”
According to La Stampa, an Italian newspaper, if the takeover of the bank goes through, there will be job cuts. It is estimated that 5,000 people will lose their jobs over the course of the next five years. Bank unions have already been sounded out for negotiations. The newspaper further added that the Treasury could cover about 2 billion euros.
The bank has struggled to deliver consistent profits and rebuild capital due to souring loans and derivatives deals that backfired.
A sale to UniCredit would be the Italian government’s favored solution. But there are some hurdles to overcome, the foremost being political opposition to the deal.
Along with Monte Paschi, three other banks failed the stress test with their leverage ratio falling below the regulatory minimum of 3%. One of the others was HSBC Holdings Plc’s continental European unit. The UK bank is planning to transfer its unprofitable French retail operations to Cerberus Capital Management in a $3 billion deal. Spain’s Banco de Sabadell SA also failed to make the grade.
Marco Troiano, an analyst at Scope credit rating agency, said the depletion of capital at each bank under the test’s harshest scenario will be closely scrutinised, and could potentially lead to hostile takeovers,
“Since the start of COVID, there has been a problem of visibility of banks’ relative asset quality. This stress test will increase transparency across the industry,” said Javier Garcia, a partner at consultants Oliver Wyman.
In general, the largest European Union banks showed they’re better prepared after the pandemic to deal with a severe economic crisis than they were three years ago. The results will be used by the European Central Bank in the euro zone, to determine capital requirements.
