SIENA, Italy (Reuters) - Siena’s 55,000 residents say they fall into three categories: those who work for Monte dei Paschi, those studying to work for it and those who have retired from the world’s oldest bank.
But Banca Monte dei Paschi di Siena’s ties to the town where it was founded in 1472 are under threat.
Pressed by impatient creditors, its top shareholder - a charitable foundation - is being forced to cut its 49 percent stake by almost a third, loosening Siena’s grip on Italy’s No.3 lender and potentially leaving it open to takeovers.
For the population of Siena, living amid the medieval city’s frescoed palazzi, the enforced sale of the stake in the town’s largest employer, known locally as “Babbo Monte”, or “Daddy Monte”, is nothing short of an earthquake.
“The bank is the jewel in the crown for Siena, it’s the pride of the city, the one that created most jobs. Working there is a dream for the young,” said Rino Rappuoli, a senior executive at Novartis and one of Siena’s most respected figures.
The fault line is the Fondazione Monte dei Paschi, which is controlled by Tuscan politicians and reinvests dividends from the bank in local social and cultural projects.
Between 1996 and 2010, the foundation spent more than 1.3 billion in the province of Siena on projects including a biotech facility and the training of horses for the city’s famous horse race, the Palio di Siena.
But as it sought to keep control of the lender, the foundation ran up 1.1 billion euros in debts. It has responded by slashing donations and selling a 15.5 percent stake in the bank to repay a large group of creditors, including JP Morgan, Credit Suisse and Mediobanca.
Creditors are expected to extend a March 15 deadline for completion of the sale to the end of April.
The foundation will still have a 33.5 percent blocking minority, enough to veto any hostile takeover bid under Italian law, but a taboo has been broken.
Bankers and Monte dei Paschi insiders, who do not want to be named, say the foundation may have to sell more shares as Italy’s economic recession eats into the bank’s profit.
“The money ran out. And in a place like Siena where the foundation dominates the city, the fallout is huge. Either they repay their debts, or they will lose control,” said a banker.
Italian banks are still reeling from the worst phase of the euro zone sovereign debt troubles, when their stocks suffered a massive sell-off and bond yields rose to unsustainable levels.
Analysts regard Monte dei Paschi as one of Europe’s most vulnerable banks. It has a return on equity of just 2.4 percent and faces a 3.3 billion euro capital shortfall to meet tougher requirements set by European regulators.
“The crisis is a structural one, and Siena has to take it on board and adapt,” Simone Bezzini, head of the Siena province, told Reuters in a recent interview.
Together with the city council, the province still names 13 out of the foundation’s 16 supervisory board members. But the arrival of new investors heralds a shake-up at the bank.
Only months after the rare appointment of an outsider as managing director, the lender will pick a new board in April, with former UniCredit Chief Executive Alessandro Profumo tipped for the chairman’s job.
According to the foundation’s by-laws, the bank’s headquarters — now housed in a restored 13th-century fortress, Rocca Salimbeni — must stay in Siena and the chairman and a majority of board members have to be Siena residents.
Fabrizio Viola, the man running the bank, comes from Rome and Profumo is a native of Genoa.
The foundation’s woes, it reported its first ever loss in 2010, cast doubts on the unique shareholder model at the heart of Italy’s banking system. Foundations like Monte dei Paschi’s have stakes in most of Italy’s leading banks.
These institutions, controlled by local authorities, were created when Italy privatized its banks in the mid-1990s in an effort to preserve the charitable role that lenders had when they were essentially state-owned.
Over the years, most foundations have diversified their investments and reduced their dependence on banks, or had their stakes diluted by a wave of banking mergers.
Yet, they still play an influential role which goes well beyond the size of their banking holdings. The core foundations that hold around 10 percent of Italy’s top bank UniCredit, for example, were instrumental in pushing Profumo out in 2010.
Critics say that since their managers are handpicked by local authorities, Italian foundations only serve the interests of the politicians controlling them.
“The foundations are an Italian scandal, they are the most powerful weapon in the hands of politicians to control the economy,” said Michele Boldrin, an Italian economist at Washington University in St Louis.
“In the case of Monte dei Paschi, the city of Siena dilapidated its vast wealth just to retain a grip on the bank, so that politicians could keep their power.”
In good times, Monte dei Paschi’s dividends allowed the foundation to bankroll a myriad of projects in Siena and the surrounding region — both strongholds of Italy’s main centre left party, the PD.
But things started going wrong in 2007, when Monte dei Paschi bought smaller domestic peer Antonveneta to expand its foothold in Italy’s wealthy northeast. It paid 9 billion euros just months before the beginning of the global financial crisis.
The purchase catapulted Monte Paschi into Italy’s big league after Intesa Sanpaolo and UniCredit, but it strained its finances to the limit, and the bank never fully recovered.
The economic downturn which followed cut the bank’s dividends, the foundation’s main source of income. That coincided with it having to fund two cash calls in 2008 and 2011 to maintain control of the bank.
With the bank seen posting a big 2011 loss due to writedowns on the Antonveneta deal and no fresh dividends in sight, the foundation’s finances are not likely to improve anytime soon.
Around 90 percent of its 5.5 billion euros in assets are invested in the bank, but the book value of the shares is more than double the current stock price — meaning it faces a potential loss of more than 3 billion euros.
Last year, the foundation’s funding dried up to just 18 million euros from 197 million euros in 2006.
Editing by Lisa Jucca, Alexander Smith and Anna Willard