Italy to Nationalize Bank, Shed Loans

Italy to Nationalize Bank, Shed Loans

MILAN (AP) -- The Italian government is taking control of troubled bank Monte dei Paschi di Siena and will try to relaunch it in a plan that includes disposing of a massive 28.6 billion euros ($32.5 billion) in bad loans.

In detailing the plan Wednesday, CEO Marco Morelli said that the disposal of the nonperforming loans was "the most relevant issue" in the European Commission's approval this week of the rescue plan, which had been drawn up last year. The Italian government will inject 5.4 billion euros into the bank, giving it a 70-percent stake.

It is the third capital injection in recent years for the bank, Italy's third-largest, as it struggles to recover from poor management and a heap of bad loans that compounded during Italy's long economic crisis.

Under the bad loan disposal plan, 26.1 billion euros will be bundled and sold at 21 percent of gross book value, the vast majority to the government-organized Atlante II fund, while the bank retains 5 percent.

That compares with a price equal to 33 percent of value under a previous relaunch plan announced last fall but which had to be revised after the bank failed to come up with an investor to inject 5 billion euros.

The loss on the disposal will be booked by the bank in the first half of this year, while the transaction is expected to be completed by next June.

The remaining 2.5 billion euros in bad loans will be disposed in a separate procedure.

The five-year plan calls for a net income above 1.2 billion euros by 2021 as the bank refocuses on retail and small business customers. During the period, the bank will be under strict cost controls, capping top executive pay, reducing employees by a net 5,500 and shutting branches as it moves toward digitalization.

"The aim of management is to proactively recover what we did lose, now that we can operate in a clear set of rules on what the bank needs to do on its capital structure and on the liquidity provisions," he said. "I think that Monte de Paschi will walk, and run, pretty much along expectations."

Morelli called the plan a "key milestone in the process of returning to a growth path," but said the process would necessarily be slow.

The European Commission's approval had been a key sticking point in the rescue of the bank, as EU rules now try to avoid using taxpayer money to save banks. But the Commission cleared the government capital injection after it was agreed that the bank's shareholders and junior creditors would take losses first, for an estimated 4.3 billion euros, to minimize the bill for the government.