Reuters: Hot Stocks: UPDATE 1-Italy's Monte Paschi up on hopes of reducing state aid

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UPDATE 1-Italy's Monte Paschi up on hopes of reducing state aid Jan 7th 2013, 12:23 Mon Jan 7, 2013 7:23am EST * Shares up 10 pct after 12 pct rise on Friday * Italian govt bond rally could reduce bank's capital gap (Releads with shares, adds analyst comments) By Silvia Aloisi MILAN, Jan 7 (Reuters) - Shares in Italy's Banca Monte dei Paschi di Siena rose sharply for a second day on Monday, with a recovery in the domestic bond market expected to reduce the lender's need for state aid. Analysts said that sentiment in the overall banking sector was helped by a regulatory decision to ease new liquidity rules, but that Monte dei Paschi was benefiting in particular from the fall in Italian government bond yields. The Tuscan lender, the world's oldest, was forced to request 3.9 billion euros ($5.1 billion) in state aid last year after failing to meet tougher capital requirements set by the European Banking Authority. The need for state help was based on a capital shortfall of 3.3 billion euros, largely because it was forced to cover for potential losses on its Italian government bond portfolio at the height of the euro zone crisis. "The market is starting to take the view that Monte Paschi may not need all the state help it has asked for as the improvement in bond prices reduces its capital shortfall," said one London-based analyst who declined to be named. The stock was up 10 percent by 1053 GMT, after soaring 12 percent on Friday in heavy volumes. Analysts at Mediobanca said in a report on Monday that Monte dei Paschi's potential losses on its sovereign bond exposure would effectively be erased if the spread between 10-year Italian bonds and equivalent German Bunds were to fall to 160 basis points. The spread stood at 276 basis points on Monday, near a 16-month low of 271 basis points hit on Friday. The bank's chief executive, Fabrizio Viola, said in a newspaper interview that if the spread kept improving Monte dei Paschi could pay back the state earlier than otherwise thought. He said that Monte dei Paschi could avoid having the state take a stake in the bank by returning to a level of profit sufficient to pay in cash the interest on bonds it is issuing to the treasury. "We need to re-create the conditions so we can return to profit, and all the decisions we have taken in recent months go in that direction," Viola was quoted as saying in Rome daily Il Messaggero on Monday. Under the bailout scheme, Monte dei Paschi will issue 3.9 billion euros ($5.1 billion) of bonds to the Italian treasury by March. If the bank posts a loss, as is set to be the case for 2012 and perhaps even 2013, it can pay interest on those bonds either by issuing more bonds or by issuing new shares to the state. Monte dei Paschi, which posted a net loss of 1.7 billion euros in the first nine months of 2012, would have to generate about 400 million euros in annual profit to be able to pay interest on the state bonds in cash. Viola's turnaround plan, unveiled last June, forecasts a net profit of 630 million euros in 2015 after 4,600 job cuts and the closure of 400 branches. ($1 = 0.7666 euros) (Additional reporting by Jennifer Clark; Editing by David Holmes and David Goodman) Link this Share this Digg this Email Reprints

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