February 10, 2020 / 5:10 PM / 16 days ago

Fitch says Monte dei Paschi debt disposals could drive rating upgrade

MILAN, Feb 10 (Reuters) - Italian bank Monte dei Paschi di Siena’s debt rating could be upgraded by Fitch if the lender manages to complete a planned sale of bad loans without eating into its capital base excessively, the ratings agency said on Monday.

Italy, which owns 68% of Monte dei Paschi after a 2017 bailout, has been in talks with EU competition authorities for months over a scheme to rid the bank of most its remaining impaired loans without subjecting it to heavy losses.

The government must sell its Monte dei Paschi stake by the end of next year and sources have said the Treasury is looking to cut the bank’s problem debt below 5% of total lending to make it more attractive to potential merger partners.

On Friday Monte dei Paschi said it had reduced its problem loans to a little more than 12% of total lending in 2019, down from 17% a year earlier and 36% in 2017.

A 5% impaired loan ratio would be well below an Italian industry average of about 8% and within the European Banking Authority’s 5% threshold, which triggers a soured debt reduction strategy, a Fitch statement said.

“If the transfer price is close to the book value of the loans, avoiding significant capital erosion, completion of the disposal could lead to an upgrade,” it said.

Sales of problem loans eat into a bank’s capital buffers, so Rome is negotiating a solution in line with EU state aid laws that could spare Monte dei Paschi from a large capital hit.

The bank has been restructuring under Chief Executive Marco Morelli, whose mandate comes up for renewal in the spring.

To clear the bailout, Italy and Brussels agreed tough restructuring targets that Monte dei Paschi has been unable to meet fully because of a worsening economic situation and a lower-for-longer interest rate outlook.

“Monte dei Paschi’s pretax income turned modestly positive in 2019 thanks to lower operating and restructuring costs, but the bank’s ability to generate revenue remains weak,” Fitch said.

The bank posted a 1 billion euro ($1.1 billion) 2019 loss after tax rule changes in Italy forced it to write down its deferred tax assets, though the move had no capital impact.

In a major restructuring milestone, Monte dei Paschi last month managed to sell a long-delayed junior bond. ($1 = 0.9162 euros)

Reporting by Valentina Za Editing by David Goodman

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