The JP Morgan chairman and chief executive is an Italophile, his bank has long had a presence in Italy and it has built close ties to the government. It also offers what few European banks can: a vast balance sheet to back a cleanup operation.
Resuscitating Italy’s banks is a daunting task laden with risk, and it is among the central challenges of European finance. The Italian banking system is burdened by hundreds of billions of euros of bad loans, and many of its smaller banks are on their knees. Post-crisis rules curtail the Italian government’s ability to ride to the rescue with bailouts, leaving the job to the private sector.
It appears to be getting harder by the day. Perennially troubled Banca Monte dei Paschi di Siena’s shares have slipped lower and lower – down by over half in just three months.
JP Morgan has positioned itself as Italy’s best hope. In July, it elbowed competitors aside to lead a high-stakes plan to rescue Monte dei Paschi, after petitioning the bank’s board and talking to high-level Italian government officials.
It is also among the lenders pitching to help Italy’s largest bank, UniCredit, drum up at least €8 billion ($ 8.9 billion) of capital, according to people familiar with the matter. And it recently helped small lender Banca Popolare di Bari to shift half a billion euros of bad loans off its balance sheet.
Its role hasn’t gone unnoticed. “I think JP Morgan is getting too much influence on Italian banking affairs,” said Pietro Laffranco, a member of the Forza Italia opposition party and a member of the Italian parliament’s commission on financial affairs.
This summer Dimon visited Italy to celebrate JP Morgan’s 100th anniversary in the country. During a lunch with Italian Prime Minister Matteo Renzi and the country’s finance minister, they discussed the situation at Monte dei Paschi, according to a person familiar with the matter.
“I love Italy myself,” Dimon, who has an Italian great-grandparent, told a local newspaper during his visit. “I wished I could spend more time here.”
JP Morgan’s biggest challenge will be Monte dei Paschi, Italy’s third-largest bank. The Tuscan lender needs to raise €5 billion of equity and sell off €28 billion of bad loans. JP Morgan is leading the work on evaluating and selling the bad loans into a separate vehicle, which will likely be funded with a loan from it and other banks. The US bank is also casting about for investors who will pump fresh capital into Monte dei Paschi.
It is unclear how much JP Morgan and the other banks involved will get paid in return. Monte dei Paschi’s board agreed only to pay its advisers €240 million in fees if the full equity amount is raised, according to people familiar with the deal. So far no bank has pledged to underwrite the Monte dei Paschi equity raise.
Potentially more lucrative is a plan to fund a vehicle packed with Monte dei Paschi bad loans with a roughly €6 billion loan. This could still yield several hundred million euros in fees and interest payments for the banks involved, bankers say. It is unclear how much JP Morgan will lend the vehicle.
Some investors are sceptical that the plan will work. Monte dei Paschi has already tapped shareholders twice for €8 billion in fresh funds in the last few years. That money has been all but vaporised: Monte dei Paschi’s stock-market value is about €550 million.
The bank’s board recently ditched both its chairman and CEO amid muted investor enthusiasm for the latest plan, which will take place after an Italian constitutional referendum on December 4 or could be delayed until early next year.
To raise the €5 billion of equity to recapitalise the bank, junior bondholders may now be encouraged to switch debt for shares, which could generate up to €2.5 billion in funds, people familiar with the deal say. To fill part of the remaining shortfall, bankers are hoping to find a group of sovereign-wealth funds or hedge funds to act as anchor investors, these people add.
Preliminary discussions are being held with Qatari funds to invest €1 billion into the bank, according to one person familiar with the deal. A final hurdle will be convincing Monte dei Paschi’s battered shareholders to sign off on a transaction that will greatly dilute their stakes.
If the deal to salvage Monte dei Paschi fails and mom-and-pop investors who put their savings into its bonds are burned, then panic could ripple through Italy’s fragile banking system. If JP Morgan succeeds, it will burnish its reputation as the Italian government’s favored consigliere and open the door to a stream of other local banks that need to restructure or merge.
In sliding into the lead role on Monte dei Paschi, JP Morgan has pushed aside Swiss rival UBS, which has twice advised the bank on past capital increases. Andrea Orcel, president of UBS’s investment bank, was once the Tuscan lender’s go-to adviser.
The Italian government has been trying to purge bad loans from its banking system for the last three years. Around the start of the year, JP Morgan helped the government formulate a plan to bundle up bad loans and sell them off with state guarantees. So far, just one bank has used the guarantees.
In March, JP Morgan, led by Guido Nola, co-senior officer for the bank in the country, pitched bolder plans to solve Monte dei Paschi’s woes. So did UBS. UBS teamed up with a former Italian government minister to pitch their solution. They said that the Italian lender couldn’t raise €5 billion from investors and would need to push bondholders to switch debt for shares. They added it would be difficult to execute a plan before the end of the year, according to people familiar with the matter.
Italian treasury officials and the Monte dei Paschi board backed the JP Morgan plan. It was made public alongside the results of a European stress test that showed the Italian bank would collapse in a major downturn.
The US bank became “global coordinator” for the rescue along with Italian bank Mediobanca. Banks are currently doing due diligence on the loans that will be split into the bad bank and sold off to investors. Dimon is getting updates several times a week, according to a person familiar with the matter.
This article was published by The Wall Street Journal