Europe's clapped-out banks are attracting investor attention now that their painful overhauls are underway or largely completed. In Greece, John Paulson and other hedgies are piling into the Piraeus and Alpha banks as a proxy for the country's oft-promoted but ever-delayed economic turnaround. The shares of both banks, up about 6 per cent on Tuesday, have surged in recent weeks.
Next target: Italy?
Italy's third-largest lender and the world's oldest bank, Banca Monte dei Paschi di Siena (MPS), also rose on Tuesday, the day after its rescue plan was unveiled. It does not appear that the hedgies are yet willing to give MPS their vote of confidence, though they might. If they and other investors take a pass on Italy's former banking darling, it could yet nationalized or sold for a euro to bank that covets a brand that was in the banking game when Michelangelo and Leonardo da Vinci were young men and before Columbus sailed to the New World.
By some measures, the shares are ultra cheap. But the risks are enormous. Unlike the Greek banks, MPS is not so much a bet on economic recovery; it is bet on a risky turnaround plan.
Since its founding 541 years ago by the General Council of the Republic of Siena to grant loans to "poor or miserable or needy persons," MPS has survived every nightmare of the ages –– war, pestilence, plague, depression. Protected and nurtured by the Sienese republic, it generated enormous and steady wealth for Siena and its mini Tuscan empire, turning it into of Europe's most consistently attractive and culturally rich small cities.
The gravy train ended in 2007, the year before the financial crisis, when MPS, then led by one Giuseppe Mussari, paid a stunning €9-billion ($12.6-billion) for Antonveneta, a lender in the Venice region that fell out of the carve-up Dutch bank ABN Amro. The price was equivalent to 20 times earnings, or about twice the going multiple for rival Italian lenders. European Central Bank boss Mario Draghi would rather forget that he approved this absurd takeover when he was head of Italy's central bank.
The financial crisis, coupled with the takeover it could not afford, send MPS shares into free fall. The senior executive team was sent packing, and the new team, lead by CEO Fabrizio Viola, uncovered a stunner in the form of a derivatives deal gone bad. In 2008, MPS has used a secret contract with Deutsche Bank to conceal a loss of €367-million suffered on a previous swaps deal. A year later, another swaps deal was arranged, this time with Nomura Securities. That deal also blew, generating contract losses of €720-million.
Since then, the world's most durable bank has been in crisis mode, with no assurances that it would survive. On Monday, its rescue plan was finally approved. In exchange for European Union support of €4.1-billion, MPS pledged to raise €2.5-billion in new investor capital in 2014 to repay state aid, an amount that is only slightly less than its market value of €2.8-billion. It would also see the bank shed 8,000 employees by 2017 (compared to its previous goal of 4,640 job eliminations by 2015) and reduce overhead costs by €440-million by 2017.
The overhaul sets a profit goal of €900-million by 2017 and puts a tight lid on management pay. MPS expects EU approval of its plan by mid-November.
The turnaround plan is ambitious, if necessary, and hinges on the capital-raising plan. If the plan fails, the state aid would be converted into shares that would be owned by the government – a nationalization. Since MPS is too much of a gamble for small investors, it appears that the bank's capital raising effort will live or die on the interest of the hedge funds, or lack thereof.
The hedgies may be put off by the executive risk of the turnaround plan and, crucially, the amount of rot in MPS's loan portfolio, which is already high and could go higher if the Italian economy, in deep recession, stays in reverse.
But there is a big upside. MPS shares are trading about 0.5 times book value, a substantial discount to the peer group average of 1 times. MPS shares are up 13 per cent in a week. While it appears the discount to book value is already proving to be attractive, it is too early to say that the world's oldest bank will see another year, let alone another century.