Italy to nationalize bank, shed $32.5B in bad loans

In a bid to end years of struggles, the Italian government is taking control of bank Monte dei Paschi under a relaunch plan agreed by European officials that includes the disposal of a massive 28.6 billion euros ($32.5 billion) in bad loans.

In detailing the plan Wednesday, CEO Marco Morelli said that ridding the bank of the load of soured loans was "the most relevant issue" in the European Commission's approval this week of the rescue plan.

The Italian government will inject 5.4 billion euros into the bank, giving it a 70-percent stake, as part of a total boost of 8.1 billion euros. Under the deal, the government must exit within five years.

The Monte dei Paschi rescue comes just a week after the government announced plans to save two small Veneto banks where thousands of savers have lost billions of euros.

Italian Finance Minister Pier Carlo Padoan said Wednesday that the moves had "removed impediments to growth. We are putting the worst behind us."

It is the third capital injection in recent years for Siena-based Monte dei Paschi, Italy's third-largest by assets, 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, compared with a 2016 loss of 2.3 billion euros, 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 bank could resume trading on the stock exchange by late September, Morelli said.

Morelli says he agreed to a steep 70 percent pay cut, with no bonuses for the period the bank is under state aid, under a formula negotiated in Brussels. He is one of six managers taking cuts.

He said the clear rules on capital structure and liquidity will help the bank recover consumer confidence and business it has lost during its protracted crisis.

"I think now Monte dei Paschi is back in place," said Morelli, who took over nine months ago. "What the top management experienced in the last nine months is pretty much unheard of. ... I think the experience is one of an emergency room hospital department. We did have an emergency every five minutes."

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.