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Monte dei Paschi di Siena restructuring plan brings back volatility

Italian bank Monte dei Paschi di Siena may have unveiled its latest restructuring plan, but it has done nothing to halt the volatility in its share price with swings of over 20% on some days. That volatility is set to continue.

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Source: Bloomberg

Shares in struggling Italian lender Monte dei Paschi di Siena  continue to be volatile, after new chief executive Marco Morelli lifted the veil on the bank’s new business plan for 2016 to 2019. The bank is targeting net profit of €1.1 billion and a return on tangible equity of over 11% by the end of 2019. It is going to slash about 2,600 jobs, including 1,400 from its previous restructuring plan, and will close 500 branches.

It also confirmed a €5 billion capital increase, to be carried out without pre-emptive rights, and the deconsolidation of non-performing loans with a face value of €27.6 billion, or net €9.1 billion at 33% of the nominal value. Before the capital increase, there will be a reverse stock split at a ratio of one new share for every 100 existing shares.

All this will be discussed by the bank’s board in a meeting on 24 November, and they should approve the capital increase. Mr Morelli has said that no specific assumptions have been made about the conversion of €5 billion of subordinated bonds that are evenly divided between retail and institutional investors. Another problem to solve concerns the pre-underwriting agreement, which expires on 31 December and whose membership will depend on market conditions.

Bank’s roadshow must be a success

Monte dei Paschi di Siena will imminently begin a roadshow to try and attract the interest of new anchor investors that could grab a €2 billion share of the capital increase.

The big rally in the bank’s share price on the day the restructuring plan was unveiled suggests the market was perhaps taking the success of the roadshow and the conversion of the subordinated bonds in a debt-to-equity swap for granted. This scenario would represent the best mix for the bank, as a conversion would cut the amount it needs to raise in the capital increase to below €5 billion. This might just be the reason why the market did not react badly to a decision to eliminate a pre-emptive rights issue to existing shareholders that had been talked about for a long time. The lack of an issue reduces the appeal of current shareholdings compared to the new shares being issued. At this point, more information on the price of the new bonds will be crucial to understand the dilutive effect of the issue.

The stock rallied to its highest level since 27 June on the day the restructuring was announced, but fell sharply again the following day. Any further violent and strong gains in the stock should find resistance at just above €0.48, the high point of 24 June just after the EU referendum. If the bank fails to convince institutional investors and it fails in the conversion of subordinated bonds, the stock could come back to re-test the minimum of a week ago, as the dilution effect would be passed on to current shareholders and bring further doubts about the success of the operation. In the meantime, the stock could stabilise around €0.30.

We believe that Monte Paschi is at the most important point in its long history as the world's oldest surviving bank. At this point, that the guns of the Piazza del Campo resonate on 24 November, you must arrive with a consortium of investors ready to invest in the revival of the new bank.

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