Source: Japantimes

15 Billion Euro. That’s the magical (and real) number the Italian bank Banca de Monte Paschi has to be worried about. 15 Billion Euro is the approximate amount its customers have withdrawn from their bank accounts since January.

As you can imagine, this puts a lot of stress and pressure on the bank, as, just like Lehman Brothers, it isn’t as much a solvency issue as much as it is a liquidity issue to keep the bank alive. Indeed, the bank has failed the stress test of the European Banking Authority (miserably), and is now being forced by the powers that be to immediately clean up its balance sheet to avoid any potential huge defaults.

The bank had already been saved twice by the Italian government, but remains in an incredibly bad shape, as the total amount of bad debt in Italy is almost reaching half a trillion Euro, but is facing more issues if it cannot raise more cash soon.

Source: Bloomberg.com

The original plan consisted of trying to offload a portfolio with bad loans into a separate entity, and subsequently raise an additional 5B EUR in an equity sale. This would be necessary to continue to meet the regulatory minimum level of capital to survive a crisis, as under the stress test scenario of the EBA, Banca Monte Paschi was the only bank ending with a negative capital ratio, so something really has to be done.

In fact, the situation is probably even worse now, as the continuous outflow of the consumer deposits will decrease the capital levels, considering the loan-to-deposit ratio will continue to increase, even though the total value of the loan book would be stabilizing. Cash is needed to avoid a vicious cycle: the more cash customers are withdrawing, the more precarious the financial situation of the bank becomes, forcing more customers to withdraw more cash. And we all know how this type of story usually ends…

Source: Bloomberg

Banca Monte Paschi does have a fancy and shiny new presentation, outlining its strategic plan to become a profitable bank again (oh irony), but two of the three pillars of this ‘re-vamp’ process will be very difficult to realize. Not only does the bank need to raise 5B EUR in equity (good luck with that, as the market capitalization is just half a billion right now), it’s also calling for almost 30B EUR in bad loans to be separated into a bad bank, for which it will need an additional 10B EUR, through senior debt, mezzanine loans and junior notes. Good luck with that as well.

It will be really interesting to see the balance sheet of BMPS at the end of this year, as the result of the Italian referendum will very likely have had another negative on the confidence in the Italian financial system, as all larger banks also had to confess they needed to raise cash to fund bigger capital buffers.

BMPS is being hit pretty hard. After all, Italian citizens withdraw cash from the weaker banks, and can deposit the cash on an account with a stronger bank. That’s exactly what we saw in Europe during the global financial crisis (some banks were literally ‘saved’ by the incoming deposits from clients withdrawing cash from their accounts at banks that were perceived to be even less stable).

Source: quarterly results

In the first nine months of the year, the total amount of direct funding has decreased by a stunning 14%, fueled by a huge decrease of current accounts and dime deposits (both -15% on a YoY basis), while the total amount that has been lent decreased by just 7%. This means the loan-to-deposit ratio increased from 92% at the end of September 2015, to 99%. That’s still fine, but the simple fact the total amount of funding related to bond issues by the bank (-34%) indicates the capital markets are starting to close for Banca Monte Paschi.

The 5B EUR recapitalization plan and the move to remove almost 30B EUR of bad debt from the books might need more time, and BMPS has asked the ECB  for more time to work everything out. Surprisingly, the ECB is reported to have denied this request, and that’s unexpected as the ECB has an important role of market-soothing, and by providing BMPS a few additional months to sort everything out, the credibility in the market would probably be restored in a better way than twisting a bank’s arm to show the public how tough the European regulators are on the participants in the financial system.

Source: Bloomberg

The 5B EUR capital injection is necessary, but won’t save the company by itself. After all, the current book value is almost 9B EUR (Banca Monte Paschi is trading at 19.5 EUR, and has a book value of in excess of 300 EUR/share), and the 5B EUR will only plug a cash outflow hole the equivalent of just one quarter of customer deposit withdrawals.

Sounds like a temporary fix, coming from the bank that warned of a bail-in dozens of times in its capital raise prospectus and other public materials.