Monte dei Paschi reached a settlement with Japan's Nomura Holdings to close a loss-making derivative trade, end years of litigation and remove a big financial burden to boost its chances of finding a buyer. Shares in the Tuscan bank jumped more than 8 percent on Thursday as analysts said the agreement would have a positive impact on the lender's capital ratios and risk profile.
The so-called "Alexandria" derivative trade, which Monte dei Paschi entered with Nomura in 2009, has been bleeding money at the Italian bank for years. The European Central Bank, which took over supervision of the euro zone's banking sector last year, had told the Italian bank to close the trade because its exposure to Nomura was breaching regulatory limits.
The Alexandria trade had 3-billion euros of Italian government bonds expiring in 2034 as its underlying asset, an investment funded through a long-term repurchase agreement for the same duration. It involved a series of asset swap and interest swap deals between Monte dei Paschi and Nomura. At the end of March, Monte dei Paschi's net exposure to Nomura, mostly linked to the Alexandria trade, reached 4.7 billion euros, or half of its regulatory capital - twice the amount allowed.
In a statement late on Wednesday, Monte dei Paschi said it would pay Nomura 359 million euros to wind up the deal, 440 million euros less than the cost would have been under the initial terms of the trade. The settlement adds 70 basis points to the bank's core capital ratio, a key measure of financial strength, it said. It also brought all litigation with Nomura to an end, although a criminal investigation into the deal is still pending. "This step is important for the future development of the bank," Monte dei Paschi CEO Fabrizio Viola said.
Monte dei Paschi, which has been rocked by the euro zone's debt crisis and by the involvement of senior executives in the Alexandria deal and other derivative trades, emerged as the weakest lender in Europe in a health check of banks last year. The ECB has told Monte dei Paschi to find a buyer to bolster its financial strength. As negotiations with Nomura dragged on, failure to close the trade was seen by bankers as a hindrance.
"We consider positively the closure of the Alexandria deal as it: i) reduces a significant factor risk for MPS; ii) frees-up capital; and iii) allows MPS to comply with one of the requests of the ECB," said Banca IMI in a research note. Before the announcement, shares in the bank had sunk 8 percent on Wednesday after Chairman Massimo Tononi said no tie-up was likely before 2016, and that the lender had so far received no expressions of interest. The agreement will have a negative net impact on Monte dei Paschi's 2015 results of around 88 million euros. As a result of the settlement, Monte dei Paschi's dropped a damage claim against Nomura for 1.5 billion euros in Italy. Related legal proceedings in London will also end, it said.
However, the Alexandria trade, which Italian prosecutors allege helped Monte dei Paschi conceal losses after its costly acquisition of a smaller rival in 2008, is still at the centre of a criminal investigation in Milan. Prosecutors have asked for Monte dei Paschi and Nomura, as well as former executives at both banks, to be sent to trial for alleged market manipulation and false accounting. A preliminary hearing in that case has been scheduled for next month.
In a separate statement, Nomura said that it would incur a loss of $287 million from the settlement, to be booked in the July-September quarter. It denied any wrongdoing, saying the decision to settle took into account "the views of the relevant European financial authorities and the advice provided by external experts."