Monte dei Paschi Private Solution Fails; Italy to Nationalize Weakest Banks

The private plan to rescue Monte dei Paschi di Siena has failed, and the Italian government has moved to nationalize the bank while also arranging reimbursement for Italian savers who would otherwise suffer losses. We plan to maintain our fair value estimates and moat ratings for the Italian banks we cover. MPS was only able to raise about EUR 2.5 billion in private capital, short of the EUR 5 billion needed, after Qatar backed away from being an anchor investor. The still-in-process sale of EUR 28 billion in nonperforming exposures may also fail to find enough private capital and need to be funded by the government. In response, the Italian government has arranged for a EUR 20 billion bailout and will use the funds to recapitalize the bank as well as other weak Italian banks (notably Veneto Banca and Banca Popolare di Vicenza). Holders of Tier 1 and Tier 2 bond securities, who are mainly retail investors, will receive senior bonds worth 75% and 100% of the nominal value, whereas institutional investors will be forced to take losses. The Italian government bailout is allowed under European Union rules as it is being called a "precautionary recapitalization" and is essentially an emergency measure, in our view. Broadly, the plan is a decent one, as it allows the Italian banks to obtain needed capital while staying within broader EU rules on bailouts.