Italian banks: remedy to MPS’s ills was Lovaglio, actually

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Take your nasty medicine and you will get better, children were told back in the days before patient parenting. That advice still sometimes works in finance. Witness the resuscitation of Monte dei Paschi di Siena, the oldest bank in the world and one of the most accident prone.

Its stock, once the investment equivalent of toxic waste, is now much in demand. The Italian government has just sold 25 per cent of the bank to institutional investors for €920mn — a discount of less than 5 per cent to Monday’s closing price. 

This is a stunning break with tradition. MPS raised more than €23bn of equity in successive capital increases between 2008 and 2021. It burnt through the lot. Investors who stumped up the €2.5bn the bank raised in 2022 may have needed corralling by the Italian government, but they have now made a return of more than 40 per cent. 

In part, this is down to the work of chief executive and turnaround expert Luigi Lovaglio. He has taken an axe to headcount: operating costs will be down by 12 per cent this year, according to Mediobanca, a broker. The bank has offloaded non-performing loans. And MPS’s local franchise is so strong that, even amid its trials and tribulations, most clients have stayed loyal. Its €70bn of deposits are stable year on year. 

Economic conditions have worked in Lovaglio’s favour. Rising rates have boosted annual net interest income by 63 per cent to €1.7bn. As a result, MPS has a sturdy 16.7 per cent common equity tier one ratio, a measure of financial strength.

A couple of key court cases have gone MPS’s way. A mountain of potential legal liabilities is slowly deflating.

Yet, for all its recovery, MPS remains a medium-sized regional lender. Its lowly valuation — at 3.3 times this year’s earnings — reflects its challenged position. With rates peaking, its net interest income is heading downhill. And a lack of scale means that costs are relatively high. A cost income ratio of 48 per cent compares unfavourably with rivals Intesa at 41.9 per cent and UniCredit at 39 per cent. 

The hope, for investors, is that a cleaned-up MPS might make an attractive acquisition target. A mooted deal with UniCredit fell through in 2022. Mid-sized lenders BPER and BPM have since been touted as partners. A deal would be a good outcome for MPS and a buyer, so long as no political arm twisting is involved.