By Silvia Aloisi and Stefano Bernabei
SIENA, Italy Feb 6 Monte dei Paschi di Siena , Italy's third biggest lender, said on Wednesday losses linked to three problematic derivative trades totalled 730 million euros ($988.3 million) as it sought to draw a line under a scandal over risky financial transactions.
After a six-hour board meeting, the bank said in a statement that the losses, stemming from trades made between 2006-09, would weigh on its net assets in 2012 and were calculated before any possible fiscal effect.
The impact on the 2012 results has not yet been determined and would depend on the accounting criteria used, including a possible restatement of previous financial results.
Monte dei Paschi, the world's oldest bank, has been at the centre of a financial and political storm since last month when it said it uncovered serious problems stemming from a series of complex derivatives and structured finance deals.
The bank's woes spiralled out of control in the wake of the 9-billion-euro acquisition of smaller rival Antonveneta in 2007, which left Monte Paschi badly weakened just as the global financial crisis erupted in 2008.
The derivative trades are at the heart of a fraud probe into former management of the bank which has deepened questions about the role of banking supervisors and the influence of local politicians ahead of Italy's parliamentary elections on Feb. 24-25.
The findings of an internal review of the trades, which the bank's current management says were partially hidden, were submitted on Wednesday to the board, which is chaired by former UniCredit chief executive Alessandro Profumo.
Wednesday's announcement, which broadly confirmed a preliminary estimate of the losses made by the bank last month, followed media reports that the cost to Monte Paschi from the trades could reach as high as 900 million euros.
The statement said the review of the bank's financial portfolio was now concluded.
The three derivative transactions are the "Nota Italia" trade with J.P. Morgan in 2006, the 2008 "Santorini" trade with Deutsche Bank, and the 2009 "Alexandria" trade with Nomura.
The bank said the impact on net assets of the Alexandria trade would be 273.5 million euros; that of Santorini 305.2 million euros; and that of Nota Italia 151.7 million euros. It said there had been accounting mistakes in the past for all those three trades.
Other trades were also examined, including a deal known as Patagonia, but they did not have a negative impact for the bank.
DRAG ON REVENUES
The loss from the trades under review will likely increase the overall 2012 losses for the Tuscan lender, which had already posted a net loss of 1.66 billion euros in the first nine months.
Sources close to the matter have told Reuters that Monte Paschi, which last month secured final approval on a 3.9-billion-euro state loan, has been negotiating with Deutsche Bank and Nomura to restructure or close the deals.
One source said the negotiations with Deutsche Bank were going well while those with Nomura were dragging. Deutsche Bank and Nomura declined to comment.
Profumo and Monte dei Paschi's chief executive, Fabrizio Viola, who say they discovered the extent of the derivative deals in October, are keen to clean up a balance sheet burdened by hedging bets gone wrong.
"They want to pull out this painful bad tooth, which is also a drag on revenues, and then there will be no more skeletons in the closet," the source close to the situation said.
In November, Monte dei Paschi increased its request for state aid by 500 million euros, citing a possible hit from unspecified structured transactions.
Monte dei Paschi can at least take comfort from a fall in the spread between Italian 10-year government bonds and equivalent German Bunds in recent weeks, which is cutting the capital shortfall deriving from a mark-to-market of its huge Italian government bond portfolio.
The bank said that shortfall had narrowed to 2 billion euros from more than 3 billion six months ago.
Even before the derivatives scandal emerged last month, Monte dei Paschi was being investigated over its costly acquisition of Antonveneta, which stretched its finances months before the collapse of Lehman Brothers.
In the first nine months of 2012, Monte dei Paschi, which has the biggest Italian government bond portfolio relative to assets among Italian banks and which was hit hard by the euro zone debt crisis, reported a 15.6 percent annual fall in customer deposits and securities issued.
The bank also had gross impaired loans worth 28.3 billion euros, representing a higher proportion of total loans than the average for other Italian lenders.