A sale to a bigger, stronger player would be the most obvious conclusion to the saga of troubled Banca Monte dei Paschi di Siena SpA, according to banking industry experts. But with a capital hole as large as €2 billion and mounting legal costs, the lender is not a straightforward acquisition target. Not only that, but Italy's ruling 5-Star Movement is ideologically opposed to the idea of selling the 548-year-old Italian bank to a foreign suitor.

Monte dei Paschi is 68% owned by the Italian state after it was rescued from the brink of collapse in a €5.4 billion bailout in 2017. Under European Union conditions of the bailout, Italy must reprivatize the bank by the end of 2021. The lender is beset with troubles, however, and is facing up to €10 billion in pending legal claims linked to years of mismanagement. A Milan court also convicted three former executives, Alessandro Profumo, Fabrizio Viola and Paolo Salvadori — the lender's former chairman, CEO and president of statutory auditors, respectively — of accounting fraud and market manipulation in October. Monte dei Paschi booked €410.7 million in provisions in the third quarter this year.

To add to the bank's woes, current CEO Guido Bastianini recently told the board that it needs a cash injection of as much as €2 billion in order to prevent it from going below its capital requirements in early 2021. Monte dei Paschi's nonperforming loan ratio exceeds that of peers such as UniCredit SpA, Intesa Sanpaolo SpA and BPER Banca SpA and it reported a heavy load of NPLs in its third-quarter results, at €11.4 billion, although this figure is set to drop to €3.9 billion following a deal to off-load a chunk of toxic loans to state bad loan manager AMCO - Asset Management Co. SpA.

A difficult marriage

The Italian government is understood to be stepping up talks with UniCredit about a potential takeover of Monte dei Paschi, and the finance ministry is prepared to inject up to €2.5 billion into the bank to cushion the buyer against integration costs and legal risks, Bloomberg News reported Nov. 20

Although reports have suggested that UniCredit might be a potential suitor, CEO Jean Pierre Mustier has stated on several occasions that the bank will do no M&A for the foreseeable future.

"Could the bank end up being an M&A target? In normal times, Banca Monte dei Paschi di Siena would be a classic M&A target; the problem is that these are not normal times," Victor Galliano, a financials and financial technology analyst at Galliano's Latin Notes Ltd. and contributor to SmartKarma, an independent investment research platform, said in an email.

Monte dei Paschi's existing troubles could be compounded by potential loan defaults from zombie corporates as the result of the coronavirus crisis, of which we may only be seeing "the tip of the iceberg" at present, he said.

For DBRS Morningstar, a merger could still be the solution for Monte dei Paschi, but it will be difficult to pull off.

"We view the current situation as adding new challenges and higher execution risk to the Italian government's exit from the Bank's capital," they said in a Nov. 6 note

A political football

Political opposition from the 5-Star Movement is likely to complicate matters, according to Harold James, professor of history and international affairs at Princeton University, who has written extensively on European banks in the aftermath of the global financial crisis.

"The obvious solution is to sell it to a better capitalized bank, and UniCredit is the most likely candidate. That looks like one solution that is credible. But there is a lot of political pushback against it," he said in an interview.

The 5-Star Movement is "anti-big finance" and takes a dim view of the idea of "selling out" to a major international bank, instead favoring solutions such as a public share issue, he said.

"It's such an old bank and it is so affiliated with the region, and embedded with that local sense of place," he said.

Monte dei Paschi was founded in Siena, in Northern Italy, in 1472. Today, it has a presence all over the country, but the majority of its 1,509 branches are clustered in the wealthier north.

Barbara Casu, director of the Centre for Banking Research at the Business School, City University, agreed that a theoretical deal with UniCredit would likely face "strong political opposition."

The populist 5-Star Movement rules as part of a coalition with the center-left Democratic Party. The 5-Star Movement had been pushing to delay plans for a state exit from Monte dei Paschi, saying that it would expose the state to losses, while the finance ministry and Prime Minister Giuseppe Conte, who is from the Democratic Party, is eager to push ahead.