JPm sul Monte - SUB- etc etc
The EC raised the bar and asked Monte to raise €2.5bn (around 100% of market cap)
of fresh equity (early in 2013 management’s intention was to pursue only a €1bn
capital increase) before the December 2014, coinciding with comprehensive
assessment’s deadline. However, the additional capital would only ensure Monte’s
compliance with the 2011 Capital Exercise solvency requirements. We highlight that
the additional funds will be used to repay €3bn of Monti bonds, which effectively
implies a reduction of capital – by 60bps – and pro forma 2Q13 core capital ratio
stands at 10.4% (total capital ratio at 15.8%) and would weaken the bank’s solvency
position in anticipation of the AQR and stress test.
We acknowledge that we have missed Monte’s senior and subordinated debt rally,
which has been propelled by the fact that Monti bonds were issued under old EU
State Aid rules and failure to raise €2.5bn of capital and proceed with the equity
conversion of some instruments will not result in losses for subordinated bonds.
However, we highlight that additional public capital injection could possibly be done
under new EU State Aid rules, which require the burden sharing of subordinated debt
bondholders. In addition, we believe the AQR could potentially increase problem
assets by 279bps (as of 2Q13 Monte’s NPLs were increasing at an annual rate of
380bps), while the latest IMF (FSAP) stress test2 (published on 27th September,
2013), found that, in an adverse scenario, entities with a significant presence of
foundations in their shareholders structure3 would have a capital shortfall of €5.4bn.
Amid limited organic generation capacity (Figure 7) we highlight that, while 5yr
SNR and SUB CDS have come down 200 and 240 points, respectively, since the
restructuring plan was announced on 7th of October 2013, the stock price fell 4% and
Eurostoxx Banks was up 2% over the same period, suggesting limited market access.
We think that it will be challenging for the bank to rebuild its capital base (as
highlighted in our note titled The 2.5bn Question, published 16 September, 2013),
while the comprehensive assessment may reveal additional capital needs in Monte’s
balance sheet and push the bank to request additional public funds, on which new EU
State Aid rules may apply. Hence, we maintain our Underweight rating on Monte 5yr
Senior CDS (370/380) ahead of the planned capital increase and the comprehensive
assessment and highlight a successful capital increase as a risk to our
recommendation.
