Monte dei Paschi ups provisions after former executives' conviction

MILAN (Reuters) - Italy's bailed-out lender Monte dei Paschi BMPS.MI (MPS) has raised provisions against legal risks after the conviction of three former executives, dealing a blow to its fragile finances and stoking concerns about its capital needs.

FILE PHOTO: The logo of Monte dei Paschi di Siena bank is seen in a bank entrance in Rome, Italy August 16, 2018. REUTERS/Max Rossi

Italy in August earmarked up to 1.5 billion euros (1.4 billion pounds) to help the bank, of which it owns 68%. The Treasury had hoped to use the funds to ease a merger, but now a direct capital injection is also a possibility, two sources close to the matter said.

The sources said discussions were ongoing over ways to boost the bank’s capital base, which is set to be depleted by a spin-off plan in the works for its bad loans.

In a statement late on Thursday, MPS did not disclose how much it set aside against legal risks.

A person familiar with the matter said they were in excess of 400 million euros. That compares with 357 million in the second quarter, when MPS posted an 845 million euro loss.

The pandemic has further derailed a tough restructuring at MPS which had already ran into trouble due to lower-for-longer interest rates and Italy’s worsening macro outlook.

Pending legal claims worth 10 billion euros are one of the main hurdles Rome faces in finding a buyer for the loss-making Tuscan bank it rescued in 2017.

Disregarding the prosecution’s request to acquit, a Milan court recently convicted former CEO Fabrizio Viola and ex-chairman Alessandro Profumo for false accounting in the booking of two derivatives trades. The defendants deny any wrongdoing and will appeal.

MPS said the verdict had prompted it to class as “likely” instead of “possible” the risk of losing a number of pending legal disputes.

The bank’s sale process has become a bone of contention for Italy’s ruling coalition, pitting the 5-Star Movement against the Treasury, led by prominent Democratic Party member Roberto Gualtieri.

The 5-Star Movement wants the state to hold on to the bank for now to avoid exiting at a loss, while the Treasury has been working to merge it with a healthier rival, party sources have said.

Board members close to 5-Star wanted to start legal action immediately against Profumo and Viola as a result of their conviction, a move that would require much higher provisioning, burning through capital and compromising the planned clean-up of bad loans, three people familiar with the matter said.

However the court has yet to file the reasoning behind the Profumo and Viola convictions, which usually requires 90 days.

MPS said it was awaiting the reasons for the verdict.

To ease potential mergers, MPS aims to complete a deal by Dec. 1 to offload 8 billion euros in problem loans.

Additional reporting by Stefano Bernabei in Rome and Pamela Barbaglia in London; Editing by Jon Boyle, Tom Brown and David Goodman