MPS plans to create a bad bank which will combine the bulk of its unproductive assets (doubtful and foreclosed), with an estimated volume of 9.7 billion euros/10 billion euros – equivalent to 7.3/7.5% of the balance sheet. The bad bank would be managed by AMCO (an Italian state-controlled management company) and would allow(1) to value the bank’s productive assets – the valuation multiples of MPS are amongst the lowest in the sector with a Price to Book Value ratio of 0.17x vs the European average of ~0.3/0.4x; (2) to facilitate the cleaning up of the balance sheet, something that would be very difficult in the current environment – the EC estimates a fall of 9.5% in Italy’s GDP for 2020; (3) to significantly reduce the cost of wholesale financing – MPS’ subordinated debt has a cost of 10.5% (vs 1.9% for the sector in Europe) and (4) facilitate a corporate deal.
The Italian State controls 68.25% of the lender after an injection of 8 billion euros in 2017, although the current market capitalization is only 1.491 billion. Monte dei Paschi’s prospects are not good because:
The NPL rate is very high at 11.8% (vs 3.5% in Europe) – equivalent to 11.6 billion euros. It posted a loss of 244 million euros in Q1’20 (compared with a loss of 1.22 billion euros in Q4’19; and vs a loss of 1.033 billion in 2019). The cost of risk (provisions) does not seem high (83 bp in Q1’20), while it had an operating margin of just 181 million euros in the same quarter.
The capital ratio CET1 FL exceeds regulatory requirements, but eased to 11.9% in Q1’20 (vs 12.7% in Q4’19) – in the medium/low range of the European average. Covid19 greatly complicates the sale of unproductive assets in the wholesale market and has a significant impact on capital (around -230/380 bp on average on CET1 in Europe according to the EBA.) Will we see a corporate transaction? Very likely, although not before 2021. Our reasoning is as follows:
(1) the management team has recognized that size is important in an environment of zero rates, low growth, strong competition and limited access to financing.
(2) a merger with another bank would facilitate the exit, or at least allow for a reduction in the State’s participation in the bank’s capital. In principle, the Executive should privatise MPS in 2021.
Why in 2021?
(1) the period for obtaining all legal authorizations in this type of operation is usually not less than 6 months and
(2) we believe it unlikely that investment interest will arise before the impact of the coronavirus on provisions and capital is known.
Who might be interested?
We see two options.
A transaction with other Italian mid-size entities, in a similar situation to MPS and/or a foreign entity with exposure to Italy such as Crédit Agricole and/or BNP Paribas. With regard to the two big Italian banks (Intesa and Unicredit) it is unlikely they will show a serious interest in MPS. Intesa has just launched an acquisition offer for UBI, and Unicredit advocates reducing risks in Italy.
POSTED BY: THE CORNER 3RD JUNE 2020