17 April, 2016

Italy Bank Mergers & Acquisitions (Banca Monte dei Paschi di Siena)

Photo: a Banca Monte dei Paschi di Siena branch in the city of Cosenza, Italy.

I wish to express my special thanks to my friend Rob van Kan for taking this photo and allowing me to use it. You may see more of Rob's photos via this flickr link:

Rob also maintains a blog on world affairs (in Dutch):

Banca Monte dei Paschi di Siena

Today, we generally think of banking for the following reasons: making a deposit of “money” into an account for safekeeping; obtaining a loan in its many forms; and relying on various banking products (such as a cheque, credit card, bank card, money order, electronic fund transfer, or even Apple Pay or PayPal) to make payments to facilitate transactions. While many of these banking functions only became common and universal from the late 19th century (some if not only the 2010s!), the origins of modern banks date back to Italy in the 15th century, which after the Dark Ages and the “Black Death” plague of the late 1340s, saw a re-birth of cultural, literary, science, economic and social advancement, hence the term “Renaissance era”.

Commerce between city states and dukedoms in Europe was on a major upswing during this time, and the need for money exchange and payments for trade transactions led to some innovative merchants setting up temporary money-dealing benches at trade fairs to offer an early form of trade finance. It was the word “banco”, Italian for “bench,” that evolved into words such as bank (English, Dutch, German and Danish etc.), banque (French) and pankki (Finnish). However, such early banks did not have permanent offices, and really only catered to travelling merchants at trade fairs. Meanwhile, the elites of society: the Pope, the archbishops, the princes, the dukes, the aristocrats and high government officials had close ties with the goldsmiths, who acted as private bankers at the time.

At the other end of society, which was the vast majority of the people, be they blacksmiths, farmers, labourers, artisans, servants or housewives, possessed far too little spare cash to attract the attention of the private bankers. Thus, most of the masses had no access to any bank and no ability to obtain a loan. This, however, began to change in the mid-1400s, when the Catholic Church and some political leaders took pity of the underclass’s grim livelihood by establishing charitable pawnshops or charitable loan agencies known as “monti di pietá” (or monte di pietá when singular, literally meaning "mount of compassion").  These monti di pietá offered low-interest-rate loans for collateral such as clothing, family heirlooms or tools.

While many of Renaissance Italy’s monti di pietá were founded by the Catholic Church, some were established by political leaders, which was the case for the Republic of Siena’s Monte Pio when the city state’s Magistrate Council along with local aristocrats provided 5,000 florins in 1472 to back the charitable loan agency.

The Renaissance period, despite its romantic sentiments in modern beliefs, was nevertheless a turbulent era.  Between 1551 and 1559, Henry II of France fought a war against Holy Roman Emperor Charles V (ruler of the Spanish Empire) and his ally Duke Cosimo I de’ Medici of Florence, for domination of Europe and the Mediterranean Sea. For decades, the Republic of Florence and Republic of Siena had been bitter political and economic rivals. In 1555, Siena fell and was annexed by Florence, but Monte Pio was allowed to continue operation. In 1580, it gained even more prominence when it assumed the role as the collection agency for the Ufficio dell’Abbondanza (“Office of the Food Surplus”) in Siena.

By the 1620s, demand for farming-related loans in Siena expanded at such pace that Monte Pio needed more capital. In 1624, Ferdinando II de’ Medici agreed to establish an agricultural loan agency based on the model of Monte Pio. However, the shrewd Grand Duke of Tuscany did not want to be personally liable to potential losses (and even bankruptcy, should it ever happen) of new agricultural loan agency.  To indemnify himself (remove his liability risk), Ferdinando II took the unusual and genius step of entailing the revenue from the state-owned pasture land to the loan agency. In essence, this reform gave the new loan agency a steady source of income, and its depositors a de facto state guarantee backed by the revenue of the pasture land. Yet it also transferred the risk of the business to the collective agricultural economy of Tuscany.  To emphasize this pasture revenue feature and modus operandi, the new loan agency was aptly named Monte dei Paschi di Siena (MPS), with the Italian word “paschi” meaning “pasture”.

Monte Pio and Monte dei Paschi both continued operations during the 18th century, amidst the political instability following the end of the House of Medici in 1737.  In 1784, the two Monti were amalgamated into a single entity but continued to maintain the dual mandates of charity and banking. One prime example was the financial contribution it made to help re-build Siena after a disastrous earthquake in 1798.

In 1833, Monte dei Paschi underwent a major re-organization, including the establishment of a separate savings bank (known as a “cassa di risparmio”). In 1872, a new charter once again confirmed Monte dei Paschi to be an institution belonging to the city of Siena.  The 1872 charter also stipulated that up to half of the bank’s profits be distributed to fund charitable or public utility works. Meanwhile, the Grand Duchy of Tuscany itself had ended back in 1859, and by 1861, it had become part of the newly-created Kingdom of Italy.

Despite its centuries-long existence, Monte dei Paschi di Siena’s operations only expanded beyond the provinces of Siena and Grosseto in the early 1900s. It nevertheless ranked second amongst all savings banks in the country by 1910.  In 1929, MPS brokered the merger of Credito Toscano and the Banca di Firenze (Bank of Florence) and acquired a stake in the resulting entity Banca Toscana. The global Depression in the 1930s hit Italy hard, but MPS struggled along relatively better than many rivals.

Italy after the end of World War II was known for its slow economic growth, strict bureaucratic regulation, high unemployment and inflation, and weak currency (the Italian lira). Nevertheless, MPS expanded further into different regions of Italy and opened representative offices in major financial centres of the world: New York, London, Singapore and Frankfurt.

In 1990, MPS acquired controlling stakes in a medium-term merchant bank called the Mediocredito Toscano as well as an agricultural lender called dell’INCA (Istituto Nazionale per il Credito Agrario).  In 1992, MPS acquired control of another Tuscany savings bank: Cariprato -- Cassa di Risparmio di Prato. It also launched an insurance joint-venture named Monte Paschi Vita with French mutual bancassurance giant Crédit Agricole. Also in 1992, MPS bought private bank Banque Atlantis in Geneva. Then in 1994, mutual funds were offered for the first time by the newly-created Ducato Gestioni unit.

Meanwhile, back in the late 1980s, the European Union began to constitute a “single-market” framework, which sought to guarantee free movement of goods, services, capital and people between all member states, to be effective in 1993. This opening of goods and services market would throw the Italian banking market wide open to competition from other EU banks. To prepare the backward and fragmented domestic banking market for the new competition, Italy proposed a remedy that centred on four goals: de-nationalization (relinquishment of state management), consolidation, modernization and strengthening. The first major reform involved the Italian government passing the Amato legislation in 1988, which required the state-administered savings banks to be converted into private-sector, for-profit joint-stock banks. In 1995, the Monte dei Paschi was formally separated into the Banca Monte dei Paschi di Siena (BMPS) SpA (SpA is the Italian term for “limited-liability company”) and the charitable organization Fondazione Monte dei Paschi di Siena. Initially, this separation was only a legal technicality, as the charitable foundation still fully owned and controlled the bank.  A second stage of the banking reform was the passage of the Ciampi legislation in 1998, which stipulated that the charitable foundations must gradually spin off their holdings of the savings banks, thus ending the centuries-old tradition of state-control and non-profit nature of the Italian savings banks.

In 1999, Banca Monte dei Paschi di Siena was partially floated on the Milan stock exchange. The stock listing not only gave BMPS access to capital from the international financial market, but much greater freedom to acquire or be acquired by other banks.

Recent transactions:

  • In 1998, MPS bought 70% of Banca Agricola Montavana, which had 290 branches in northern Italy.
  • In 2000, MPS bought a 94% stake in Banca del Salento and renamed it Banca 121. It took full ownership in 2005.
  • In 2001, MPS acquired a 4.75% stake in Banca Nazionale del Lavoro (BNL) and the two banks entered into merger talks but failed to settle on the terms.
  • In 2002, MPS took full control of Florence-based Banca Toscana, a bank with over 400 branches and one which MPS had had a stake in since 1929.
  • The wave of imprudent acquisitions in the 1990s, however, proved costly to MPS as bad loans soared. In 2003, MPS sold its 79% stake in Cariprato (acquired in 1992) to Banca Antoniana Popolare Veneta for EUR 411-million.
  • In 2007, MPS acquired 55% of Biverbanca, the new name for Cassa di Risparmio di Biella e Vercelli from rival Intesa Sanpaolo for EUR 399-million (USD $570-million). Biverbanca had 105 branches in north-western Italy.
  • Also in 2007, MPS acquired AXA SIM SpA for EUR 50-million (USD $69-million), an asset manager with EUR 1.9-billion in assets under management.
  • In early 2008, MPS made its boldest, yet most disastrous purchase when it spent EUR 9.0-billion (USD $13.2-billion) to buy Banca Antonveneta from Spain’s Banco Santander. Santander had only just taken control of Banca Antonveneta a few months earlier when it and Royal Bank of Scotland and Belgium’s Fortis jointly acquired Dutch banking giant ABN AMRO Holding NV for EUR 70-billion (USD $101-billion). ABN AMRO had acquired Banca Antonventa back in 2005 and was the first foreign bank to control a major Italian bank. Banca Antonveneta had 1,000 branches. This purchase made MPS one of the largest banking groups not just in Italy but in all of Europe by assets.
  • Shortly after that, MPS suffered devastating losses from derivative trading and careless lending made earlier in the decade.
  • In 2012, MPS unloaded its 60% stake in Biverbanca for EUR 205-million.
  • In 2013, MPS received EUR 4.1-billion of state aid from the Italian government to avoid a collapse.
  • In January 2016, MPS’s had non-performing loans totalling EUR 40.0-billion (USD $43.6-billion). Meanwhile, MPS shares tumbled and valued the entire bank at only EUR 2.2-billion.
  • In December 2016, MPS failed to raise new capital from private investors.
  • In July 2017, MPS together with the Italian government and EU agreed and approved a broad-range re-capitalization and nationalization rescue for the bank. Under the plan, the Italian state would inject EUR 5.4-billion (each EUR = USD $1.1350) into MPS, and junior bondholders of the bank would contribute another EUR 2.7-billion by converting their debentures into equity, which would make up the EUR 8.1-billion of capital required. The Italian state would control 70% of the re-capitalized MPS. Meanwhile, EUR 28.6-billion of bad loans would be removed from the bank's balance sheet into a separate "bad bank." MPS also agreed to close 600 branches, cut 5,500 jobs and cap its top executives' remuneration.

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