UPDATE 1-Monte Paschi flags bad loans as bank's biggest problem

Tue Apr 29, 2014 9:19am EDT

(Adds CEO comment, background, context)

SIENA, Italy, April 29 (Reuters) - Bad debt is the main problem for Monte dei Paschi di Siena, its chief executive said, after the bank increased its planned share sale to 5 billion euros ($6.9 billion) to help plug any gap in its finances a Europe-wide check might find.

Italy's third-biggest lender had 21 billion euros of net soured loans at the end of 2013, accounting for 16 percent of its loan portfolio - one of the highest percentages among Italian banks.

"Credit quality is the most significant problem the bank is facing right now," CEO Fabrizio Viola told the bank's annual shareholder meeting on Tuesday .

The need to set aside more cash to cover potential losses and comply with an asset review being conducted by European regulators was behind the board's decision to increase the size of the cash call from 3 billion euros, a source with knowledge of the matter said.

"The asset quality review is giving the bank a very hard time," the source told Reuters, adding the bank needed to increase its coverage of bad loans in line with bigger domestic rivals like UniCredit.

Viola and Chairman Alessandro Profumo - both appointed in 2012 to turn the bank around - faced criticism on Tuesday from small shareholders worried about the prospect of a cash call that is 2 billion euros larger than the bank's market value.

"Our fear is even 5 billion euros may not be enough. We are not out of the woods yet," said shareholder and former Monte dei Paschi employee Romolo Semplici.

Italian banks are cleaning up their accounts and setting aside billions of euros to shield themselves from bad debts which rose sharply as Italy suffered its longest recession since World War Two.

But while Intesa Sanpaolo and UniCredit, the country's two largest banks, booked a combined 21 billion euros in provisions for bad debts last year to raise their coverage levels to 46 percent and 52 percent respectively, Monte dei Paschi has lagged behind.

The Tuscan lender - the world's oldest - set aside 2.75 billion euros for bad debts in 2013, and its coverage ratio of impaired loans stands at 42 percent, which analysts say is likely to fall short of European Central Bank requirements.

Monte dei Paschi, hit hard by the euro zone debt crisis and loss-making derivative trades, must also this year repay the bulk of a 4.1 billion euro state bailout it received in 2013, in line with its EU commitments.

Viola expects the larger cash call - which needs to be approved by shareholders at a meeting next month - to be launched in June and completed by mid-July.

Monte dei Paschi is one of eight Italian banks under ECB scrutiny to raise funds on the market so far this year. Altogether, they have announced plans to raise a combined 10 billion euros.

Viola said that the bank still had "a lot of work to do" to pay back cheap three-year loans it took from the ECB at the height of the crisis.

The bank, which borrowed 29 billion euros from the ECB, will have paid back 5 billion euros at the end of April, it said in notes prepared for the shareholder meeting, with the rest due to be reimbursed by February 2015.

Monte dei Paschi's shareholder structure has been shaken up since the start of this year with its former controlling investor, a banking foundation, cutting its stake to just 2.5 percent from 33.5 percent.

The foundation has sold a 6.5 percent stake to Latin American investors Fintech and BTG Pactual and struck a shareholder pact with the two funds, but the deal still needs to be approved by the Bank of Italy. U.S. money manager BlackRock also has a 3.2 percent stake in the bank. (Reporting by Silvia Aloisi and Stefano Bernabei; Editing by Erica Billingham)