Officially there is still no capital shortfall. But given the (likely) failure in the European Central Bank’s stress tests underway and the ECB’s (MPS) will soon need fresh resources.
That's why the shares have tumbled on the stock market and why the government is working on a “backstop” for the Siena-based bank that, if necessary, can also be used for other banks that need it.
The situation burst into public view yesterday after Rome daily La Repubblica reported that MPS had received a letter from the ECB on the eve of the Brexit vote asking it to cut its non performing loans from €24.2 billion to €14.6 billion by 2018, almost double the amount targeted in the bank’s business plan.
The goal is to halve the NPL ratio to 20% and in theory the bank has two and a half years of time, but by comparing the market value to book value the result is an additional capital requirement of about € 4 billion: this explains why shares collapsed yesterday on the stock market by 13.99% tumbling to a market capitalization under €1 billion. This was enough to accelerate the bank into drafting a new plan for the sale of NPLs and for the government to draw up a plan for an injection of public funds.
The two plans are in fact connected. Because when the bank sells its NPL portfolio it will need fresh capital that the state, in whole or in part, will have to provide. Although it is likely that the recapitalization will come first, to enable the bank to sell off the €10 billion in non performing loans as requested by the ECB.
The knot that the Treasury is trying to untie is both technical and political. Because on one hand it needs to find the regulatory scheme that allows it to inject public funds, and on the other hand it needs to avoid a confrontation with Brussels and Germany over state aid.
The most likely hypothesis is a precautionary recapitalization by the state -- either directly or through state backed lender CDP -- and connected to the stress tests, expressly provided for in Article 32 of BRRD Directive. The rules must be interpreted, but there seems to be a glimmer of hope that goes beyond comparable alternatives such as the suspension of the bail-in rules, or government guarantees also on junior tranches of securitized debt.
Since today the bank is worth less than €1 billion, a recapitalization would mean that the state, or whomever funds the recapitalization, would end up controlling the bank.
At the same time, the Treasury, CDP and the Bank of Italy are working on a recapitalization of the government-mandates bank backstop fund Atlante and GACS (State Guarantees on Securitizations of NPLs), to put the MPS in a position to sell the €9.6 billion in NPL prescribed by the ECB . The request has thrown the bank into turmoil: the day after tomorrow, according to Il Sole 24 Ore-ItalyEurope24 sources, the board of directors of the bank will consider an initial proposal to be sent to the ECB, which will have three weeks to respond.
To draft the new NPL sale plan, MPS will have until October 3: as it turns out, the bank is studying a mix of steps that include the sale of some portfolios, the spin-off in an internal bad bank with a a slice of NPL but above all the sale of the unit -- both staff and tools -- that manages bad debt. The aim is to create a platform (similar to the one used by UCCMB / DoBank model, with Mediobanca as advisor) in tandem with an investor, who would end up 80% of the vehicle. The deadline for non-binding offers from people who -- on paper -- might also be interested in the junior tranches of securities.
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