May 11, 2018 / 3:12 PM / 7 months ago

Monte dei Paschi profit points to better times for Italy's banks

MILAN (Reuters) - A return to profit for troubled Italian bank Monte dei Paschi di Siena (BMPS.MI) added impetus to signs of a tentative recovery among the country’s battered lenders on Friday.

Italian banks have been laid low by a recession that pushed soured loans up to nearly one fifth of total lending, forcing them to write down debt for 138 billion euros ($165 billion)in the past five years — wiping out profits and capital in the process.

But an economic recovery has brought default rates among Italian companies back down to pre-crisis levels, easing the pressure on banks.

Monte dei Paschi reported better than expected first-quarter net profit of 188 million euros on reduced loan losses and cost cutting on Friday, sending its shares 15 percent higher.

“The surprise element in the earnings - which made you think we’re at a turning point - was the lower-than-expected loan losses,” said Pietropaolo Rinaldi, a fund manager at Anthilia Capital Partners in Milan.

“This was true for nearly all of the banks, from Monte dei Paschi to UniCredit and also mid-tier players such as BPER, the only exception was Banco BPM.”

“If the level of loan losses seen in this quarter is confirmed going forward I think we can safely say the worst is behind us,” he added.

DIFFERENT JOURNEY

Unable to raise cash from investors to fund a clean-up, Monte dei Paschi last year turned to the state for help and is now 68 percent owned by the government following an 8 billion euro rescue which also hit its bondholders.

The Tuscan bank has been for years the biggest threat to Italy’s financial stability and lingering concerns about its future had pushed its shares down 40 percent since they returned to trade in Milan in late October following a 10-month hiatus.

“We’re confident we’re back on track ... the first quarter is the first step of a journey which for all of us from now on is a different journey,” CEO Marco Morelli said.

Carige (CRGI.MI), a smaller rival which managed with difficulty to raise capital at the end of last year to stave off being wound down, also swung to a first-quarter net profit on Friday.

Earlier this week, heavyweights Intesa Sanpaolo (ISP.MI) and UniCredit (CRDI.MI) both topped forecasts with their best first quarter results in a decade, fuelling share gains.

“Another striking element ... has been the ability to cut costs to counter weak revenues amid low interest rates. And on the background you have decent capital levels and falling bad loans - still high in some cases but rapidly falling bad loans,” Rinaldi said.

RE-RATING

With the exception of Intesa, Italian banks trade below their book value as investors feared they may need to raise capital to shed soured debts.

The discount versus European peers however has been narrowing as sales of bad debts have finally gained steam after stalling for years as banks were reluctant to sell at a loss.

Italy’s banking index .FTIT8300 has gained 13 percent so far this year against a near 3 percent drop in the wider European sector .SX7P.

Yielding to regulatory demands, all major Italian banks raised their bad loan reduction targets at the end of last year, stepping up writedowns under a favorable phase-in regime linked to a new accounting rule kicking in this year.

“Italian banks continued to re-rate ... despite ongoing political uncertainties and the lack of a government,” Credit Suisse analysts said.

“The market is giving credibility to the more ambitious non-performing loan disposal plans.”

The entrance of Monte dei Paschi bank headquarters is seen in downtown Siena, Italy, October 27, 2017. Picture taken October 27, 2017. REUTERS/Stefano Rellandini

Monte dei Paschi on Thursday completed a jumbo 24 billion euro bad loan securitization sale. CEO Morelli said on Friday the bank would look to lower its soured loans to around 10 percent of total lending by 2021, improving on a previous 13 percent target.

After shedding 75 billion euros in soured debts from a post-recession peak of 360 billion euros, Italian banks in aggregate still held problematic loans equivalent to 15 percent of total lending in December — three times the European average.

(Adds dropped word to quote in paragraph 10)

Editing by Keith Weir

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