PREVIEW-Capital gap to overshadow MPS business plan

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Fri Jun 22, 2012 10:00am BST

* Monte Paschi still has 1.0-1.4 bln euro capital shortfall

* State intervention may be needed to plug gap

* Business plan to be presented June 26

By Silvia Aloisi and Stefano Bernabei

MILAN/ROME June 22 (Reuters) - Concerns over capital are set to overshadow Banca Monte dei Paschi di Siena's new business plan next week, with Italy's third-biggest lender expected to announce a focus on its retail business and fewer loans to offset deposit outflows.

MPS (BMPS.MI), the world's oldest lender, must plug a 3.3 billion euros ($4.2 billion) shortfall by June 30 to meet tougher capital rules set by the European Banking Authority.

Its new management has taken measures to bolster its financial strength. But, with the deadline looming and little signs of flexibility by regulators, it still needs to find 1.0-1.4 billion euros, according to sources close to the situation and analyst estimates.

That might only be possible if the government stepped in to help, as the deepening euro zone crisis makes it too pricey for the bank to issue bonds and planned asset sales have not yet materialised.

Unlike struggling Spanish banks, Italian lenders have limited exposure to the real estate market and a relatively high level of deposits from retail investors.

But MPS has suffered because of its 25 billion euro exposure to Italian government bonds.

The Tuscan lender, the only domestic bank still with a sizeable capital gap under EBA rules, must also repay 1.9 billion euros of government-backed bonds it borrowed in 2009.

Any delay in fixing that weakness would further weigh on its shares, which have lost 50 percent of their value in the past three months.

"There is not much room for manoeuvre and the option of state help might be the most sensible one," Societe Generale banking analyst Carlo Tommaselli said.

While government intervention could come in the form of another issue of high-yield Treasury-backed bonds, that would add to Italy's already ballooning public debt.

An alternative solution would see state holding Cassa Depositi e Prestiti underwriting a capital increase in Monte dei Paschi, ending up with a stake in the bank.

Chief executive Fabrizio Viola has touted the possibility of issuing contingent convertible bonds - securities that convert into equity in times of stress. Industry sources say they would have to pay double-digit interest rates to attract investors.

Viola will present the business plan on June 26 together with newly appointed chairman Alessandro Profumo, the respected former CEO of Italian lender UniCredit (CRDI.MI).

"The decision does not lie just with MPS, it also depends on talks with authorities," a source close to the situation said.

Besides capital, the bank's balance sheet is also under pressure and the new business plan was expected to suggest a focus on retail business, les lending and cost cuts through to 2015. "Doing fewer things, better" was how Profumo put it recently.

FALLING DEPOSITS

Customer deposits fell 6.1 percent in the first quarter, extending a slide in the last three months of 2011.

Rating agency Standard & Poor's, which threatened this week to downgrade MPS, said non-performing loans stood at 16.2 percent of gross loans, above the Italian average.

"With a loan-to-retail funding ratio of 128 percent, MPS needs to gradually rebalance its assets and liabilities," Deutsche Bank analysts said in a report.

The Siena-based lender has limited financial flexibility because its largest shareholder, a charitable foundation with close ties to local politicians, is emerging from months of wrestling with creditors to restructure its own debt.

The foundation has had to cut its MPS stake to 36.3 percent and does not want to fund a new capital increase.

As it seeks to raise cash, MPS is in talks to sell its stake in unit Biverbanca for 200 million euros. It is also looking to sell 150 branches - 5 percent of its network - which analysts say would only reap 300 million euros.

MPS wants to slash its 38 billion euro financial portfolio, mostly invested in Italian government bonds.

Unlike larger competitors Intesa Sanpaolo (ISP.MI) and UniCredit, MPS's bond holdings have long maturities, with only a third coming due before 2016. Unless the market improves markedly, selling early would mean losing money.

($1 = 0.7873 euro)

(Writing by Silvia Aloisi; Editing by Dan Lalor)

((silvia.aloisi@thomsonreuters.com)(+39 02 6612 9723)) Keywords: MONTEPASCHI/

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