UPDATE 2-Monte Paschi may issue CoCo bonds to meet EBA goal
* CEO says bank studying CoCo bonds option
* Bank has 3.3 bln euros capital shortfall, according to EBA (Adds source on Treasury not planning to buy possible bonds)
MILAN, May 16 (Reuters) - Banca Monte dei Paschi di Siena , Italy's No 3 lender, said it could issue contingent convertible (CoCo) bonds to help plug a 3.3 billion euros ($4.2 billion) capital shortfall, acknowledging for the first time that its existing plan to fill the gap may be inadequate.
CoCo bonds, which convert into equity if banks hit trouble, have so far been used sparingly as they are viewed as costly to sell for weaker lenders struggling to meet tougher capital requirements set by the European Banking Authority last year.
"It is a project that we are studying also in consultation with regulators as it would be the first time in Italy," chief executive Fabrizio Viola told analysts on Wednesday after the bank released weak quarterly results.
Under a reform announced last week, Spain plans to buy this type of bonds from its troubled lenders to help them raise funds. An Italian Treasury source told Reuters, however, that Rome would not underwrite any Coco bond issued from Monte dei Paschi, adding the aim of such an instrument would be precisely to avoid the state entering a bank's capital.
Monte Paschi shares closed down 3.9 percent, extending a 7 percent fall on Tuesday after U.S. agency Moody's cut the bank's rating to one notch above non-investment grade.
Viola said last week the bank had completed two of the three planks of its strategy to plug the capital gap - the conversion of hybrid financial instruments into equity and a review of its models for calculating risk-weighted assets.
He said those two measures covered over half of the deficit, with asset sales expected to fill the remaining shortfall.
But in its result statement on Tuesday, the Siena-based bank said it could not say what the outcome of ongoing negotiations with potential buyers would be.
One source with direct knowledge of the situation told Reuters the bank still needed to find around 1.3 billion euros.
Concerns over the capital shortfall have weighed on Monte dei Paschi shares, which have lost 70 percent of their value in the last year, and were among factors cited by Moody's for its two-notch rating cut, part of a mass downgrade of Italian banks.
"The balance sheet and capital still seem to be under a lot of pressure," Societe Generale analyst Carlo Tommaselli said in a report after the results, pointing to a 13 percent rise in net doubtful loans from the previous quarter - the worst level among Italian banks.
Customer loans were flat while deposits from customers fell a further 6.1 percent, extending the decline reported in the fourth quarter of 2011.
The bank's core Tier 1 ratio, a measure of financial strength, stood at 10.5 percent including 1.9 billion euros of state-sponsored bonds. Net of those, which the bank has said it will pay back next year, the ratio fell to 8.7 percent according to analyst estimates.
The EBA, which requires banks to have a core Tier 1 ratio of 9 percent by June, has said CoCo bonds must be converted into equity if that ratio falls below 7 percent.
Adding to its woes, Monte dei Paschi was jolted last week by news it is under investigation for alleged market manipulation and obstruction of regulators over its pricey acquisition of smaller Italian lender Antonveneta in 2007.
Viola, who was appointed in January to help turn the bank's fortunes around, said he did not have any information for the time being that could imply a "significant capital risk" for the bank stemming from the probe.
He is due to present a new business plan by June 15. ($1=0.7828 euros) (Reporting By Stefano Bernabei and Silvia Aloisi; Editing by Hans-Juergen Peters and Mike Nesbit)
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