Monte dei Paschi: history lessons

From its head office in a 13th century palazzo to the painful fallout from the 2008 purchase of Banca Antonveneta, the past is present at Banca Monte dei Paschi di Siena. History delivered another poke on Monday, when it revealed that its exposure to Nomura breaches regulatory guidelines. The regulators worry when any single exposure is more than 25 per cent of a bank's capital. Monte dei Paschi's exposure to the Japanese bank is about €3.4bn, or 35 per cent of its capital.

That is the result of a series of 2009 deals between the two banks, named Alexandria. To simplify, they involved Monte dei Paschi taking cash in return for government bonds (which it promised to buy back), while also granting Nomura a credit line. The deal is at the centre of a dispute and lawyers are involved. So Monte dei Paschi will struggle to cut its exposure to Nomura for a while yet.

It is a good job, then, that capital is rising. The bank's shareholders will this week vote on a proposed €3bn rights issue, the proceeds of which will plug the hole found by last year's European Asset Quality Review and stress tests. Monte dei Paschi will certainly get its money - the issue is being underwritten by a gaggle of banks. But will investors, who coughed up for a €5bn equity issue last year (and have since seen the market capitalisation fall to €3.2bn) follow?

A 27 per cent share price jump since the start of this year suggests some people believe in the future. The bank is pushing its costs down, unwanted assets are being sold and, after a big impairment charge last year, bad loan coverage is improving. More significantly, once the new capital is raised Monte dei Paschi may even be healthy enough to take part in likely consolidation among Italy's popolari banks. With all that ahead, paying 0.5 times book value for the shares might not seem like such a bad idea. But given how much the bank is dominated by its troubled past, it is hard to have much confidence for the future.

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