Subject to ECB approval, the transfer will cut BMPS’s gross NPE Ratio from 12.4% to 4.3% and its Texas ratio from roughly 86% to 43%. The CET1 ratio , meanwhile, will fall slightly – from 14.7% to 13.3% (fully loaded) and from 12.7% to 11.1 % (pro-forma) relative to year-end 2019. The deal consists of EUR 2.313bn in NPEs (GBV EUR 4.798bn), UTPs with a net book value of EUR 1.843bn (GBV EUR 3.345bn); and smaller amounts of bonds, equities, derivatives and deferred tax assets.

Offloading this sizable slug of NPL, UTP and DTA exposure will help clear the way for the government to sell its 68.247% stake in the bank (which will fall marginally depending on options available under the deal). “The sale of large NPLs portfolios has been a key element in the de-risking strategy of Italian banks in recent years,” said Marco Troiano, deputy head of the financial institutions team at Scope Ratings. “This would be an important step for Monte at a crucial time when new balance sheet risks may start to pile up due to Covid-19.”

MPS has been slowly moving towards the terms of its restructuring plan, which included branch closures, headcount reductions, asset sales and raising EUR 1.45bn in Tier 2 subordinated debt. On the business front, management surrendered banking licences in London, New York and Hong Kong, sold the Belgian subsidiary to Warburg Pincus (for a 10bp CET1 capital uplift), and the NPL recovery platform to Quaestio Cerved Credit Management. The sale in February this year of 28 commercial properties to investment company Ardian capped a series of NPL and UTP sales that started soon after the bailout with the EUR 24.1bn (GBV)

The bigger operational headache for the bank’s new CEO is likely to be dealing with the impacts of Covid-19, including recession in Italy and depressed business conditions. These will hit the bank’s profitability, asset quality and balance sheet strength. So while the NPL position may make the bank look more attractive to potential buyers, it won’t solve the issue of poor profitability. The bank reported a EUR 244m loss in the first quarter as revenues and provisions reacted to the macro environment.

“I think GFC legacy asset-quality issues are less of a concern today,” said Troiano. “I believe investors will be more interested in how banks cope with Covid-19 and if they can find a sustainable way to long term value creation. With a cleaner balance sheet, MPS could be involved in a domestic consolidation process, which could be supportive of efficiency.”

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Author: Keith Mullin: k.mullin@scopegroup.com