* 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)
By Silvia Aloisi and Stefano Bernabei
MILAN, May 16 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
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.
(Reporting By Stefano Bernabei and Silvia Aloisi; Editing by
Hans-Juergen Peters and Mike Nesbit)