November 9, 2018 / 12:16 PM / 7 days ago

UPDATE 2-Monte dei Paschi shows restructuring progress in third quarter

* Treasury must draft plan in 2019 to sell stake by end-2021

* Top management to hold investors’ meetings next week

* Bank looking for chance to sell subordinated debt (Recasts after analyst call)

By Valentina Za and Maiya Keidan

MILAN, Nov 9 (Reuters) - State-owned bank Monte dei Paschi di Siena on Friday showed that its restructuring is advancing when it reported a third-quarter net profit driven by cost cuts that offset lower revenue and one-off charges.

The Tuscan bank’s ability to turn itself around is key for its merger prospects, which would make it easier for the government to sell its holding as required by European Union rules on state aid.

“They’re doing a good job of cleaning it up,” said a British hedge fund manager who met Monte dei Paschi’s senior management in London last month.

“The question of its long-term sustainability as an independent bank is a bigger question but a cleaned-up MPS would more easily come back into the realm of a consolidation target.”

Staff cuts helped the bank to lower operating costs by 3.5 percent in July-September. Revenue fell 2.7 percent in the period with commissions hit by fewer investment products sales.

Italian banks’ asset management businesses have been hit by rising uncertainty after Italy’s anti-austerity government locked horns with the EU Commission over next year’s budget law.

The banks have also seen their capital reserves eroded by the falling value of their large holdings of Italian government bonds.

Monte dei Paschi reduced its stock of Italian bonds booked at fair value by 2.9 billion euros in the quarter, lowering the capital hit from rising bond yields with a view to cutting it further by the end of the year.

The bank’s pro-forma core capital ratio was 12.8 percent in September from 13.0 percent in June, based on interim capital rules.

Net profit came in at 91 million euros down from 101 million euros the previous quarter.

“Net profit ... was approximately three times our ... forecast, thanks to better operating costs, lower loan impairments, less one-off charges and higher tax recoveries,” Banca Akros analyst Luigi Tramontana said.

Monte dei Paschi said a 1.4 billion euro drop in deposits was mainly due to the loss of some corporate clients because it had decided to cut rates paid on current accounts.

The bank was at the centre of Italy’s banking crisis for years and lost deposits heavily during times of stress, forcing it to raise interest rates to attract funds.

Monte dei Paschi’s shares were flat against a 0.7 percent drop in Italy’s banking sector by 1502.

The bank said it was working on bad loan sales for up to 3.7 billion euros to lower its impaired loan ratio to around 16 percent.

The ratio stood at 19.4 percent in September down from 36 percent at the end of 2017 before the bank completed a record 24 billion euro bad loan sale.

$1 = 0.8814 euros Reporting by Valentina Za, editing by Louise Heavens and Jane Merriman

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