BMPS: Relating to “Alexandria”, “Santorini” and “Nota Italia”, an overall impact of €730 million as of 31 December 2012, gross of any eventual tax effect

14-2-2013 — /europawire.eu/ — Improvement of the Bank’s forecast results for the financial years considered under the Business Plan (2012 – 2015) and successive financial years Strong capital base with pro forma Core Tier 1 as at September 30, 2012 at circa 12.1%  taking into account the New Financial Instruments (“NFI”) and the impact of errors’ correction

The Board of Directors, after detailed analyses carried out with the support of the Bank’s counsels, has established the existence of certain errors in the accounting treatment of three structured transactions named “Alexandria”, “Santorini” and “Nota Italia”,   (the “Transactions”) entered into in previous years.

The errors will be corrected in the Bank’s consolidated and non-consolidated draft financial statements as of and for the year ended 31 December 2012, as required by the accounting principles in force and taking into account any guideline of the competent Authorities[1].

The complex investigations carried out by the Bank on the Transactions have led to the discovery during the month of October 2012 of an agreement relating to the “Alexandria” Transaction (the “Mandate Agreement”), from which agreement emerges the linkage between the restructuring in 2009 of the “Alexandria” notes and the financial value for Nomura of the transactions (two repurchase transactions) entered into in such context. The investigations have been then extended to “Santorini” given the structural similarities of these two Transactions.

Even though the “Nota Italia” Transaction is not similar, from a structural point of view, to the other two Transactions mentioned above, the Bank has proceeded with analysis of this Transaction in the context of a global review of the Bank’s finance portfolio that covers also other transactions (including the transaction named “Patagonia”).

Even though the Board of Directors came to the same conclusion for all three Transactions, the identification of the errors is based on specific grounds and circumstances. In relation to “Alexandria” and “Santorini”, the errors that have been identified amount, as at the date of occurrence, respectively to Euro 308 millions and Euro 429 millions, and concern the initial measurement of the fair value of the liability assumed in the contest of these two Transactions.

In relation to “Nota Italia”, the error, which on the date of occurrence was of a negligible amount,  is attributable to an incorrect interpretation of the contractual characteristics of the financial instrument (in particular, of its derivative component) which has resulted in an incorrect application of the method used for the determination of the instrument’s fair value. On 23 January 2013, the Bank has restructured the “Nota Italia” Transaction by removing the derivative component linked to Italian sovereign risk against a payment of Euro 139 million[2]. The restructuring – which was made at a time characterised by favorable market conditions – has improved the Transaction’s risk profile by removing its volatility component.

The impact of the correction of errors on the net equity, as at December 31, 2012, gross of any eventual tax effects, if applicable, is illustrated in the following table:

Table 1[3]  (pdf attachment)

With reference to “Alexandria” and “Santorini”, the errors’ correction entails an improvement of the Bank’s forecast results for the financial years considered under the Business Plan 2012 – 2015 and for the whole duration of the LTR (up to 2034 for “Alexandria”, up to 2031 for “Santorini”), as indicated in the table below:

Table 2[4]  (pdf attachment)

On 28 November 2012 the bank communicated its decision to increase the amount of government securities by Euro 500 million based upon the potential impact on capital resulting from analysis of the transactions described above.

With regard to capital ratios, it should be noted that:
–    proforma Core Tier 1 as at 30 September 2012, inclusive of NFIs stands at approx. 12.1%;

–     as at 31 January 2013, the AFS reserve (EBA calculations) at Euro -2.0 bn.

In reference to the 2012-2015 Business Plan, it is noted that:

–  On 9 October 2012, the extraordinary shareholders’ meeting of BMPS resolved to accord authority to the Board of Directors to increase capital, in one or more tranches, pursuant to articles 2443 and 2441, paragraph 5, of the Civil Code, including through the issuance of convertible bonds in accordance with article 2420-ter of the Civil Code, for up to a maximum amount of EURO 1 billion, in exclusion of the pre-emptive rights of existing shareholders;

–     On 20 December 2012, a Memorandum of Understanding was entered into with the majority of Trade Unions who signed an agreement  on all issues pertaining to the projects set out in the Business Plan. All cost reduction targets previously announced to the market remain unchanged and Business Plan economic objectives are confirmed thanks to the activation of the Income Support Fund, financed with “solidarity-based” one-off labour cost reduction initiatives which will enable approx. 1,000 employees – eligible for retirement in the next 5 years- to leave employment as of 31 December 2012.  The agreement also concerns the introduction of a new Supplementary Corporate Labour Agreement whose savings, added to those from early retirement outflows, will produce a positive structural impact already in 2013. The agreement will be a basis for back office processes and personnel relocation due to Group reorganisation with new Regional Areas, Local Market Units and branch network rationalisation. Core elements of the employment relationship will be safeguarded (welfare, health and safety, conditions for personnel).  The contents of the Supplementary Corporate Labour Agreement will be more relevant and appropriate to the prevailing context and will confirm the Montepaschi Group’s focus on young resources with the introduction of economic supplements for new recruits. In confirmation of the industrial importance that Banca Mps attaches to the back office project as a strategic lever in delivering objectives of efficiency, productivity and profitability, strict safeguard clauses have been identified to maintain the employment levels of personnel involved.

–      On 28 December 2012, BMPS finalised the disposal of its 60.42% shareholding in Cassa di Risparmio di Biella e Vercelli (Biverbanca) to Cassa di Risparmio di Asti. The sale was settled at a price of approximately Euro 209 mln. By way of this transaction, BMPS recognises a total net effect of approx. Euro 25 mln in its income statement, subject to the usual adjustments within agreed financial parameters. The transaction has a 10 bps impact on the current Tier 1 ratio of the MPS Group;

–     On 25 January 2013, the extraordinary shareholders’ meeting of  BMPS resolved to accord authority to the Board to increase capital, in exclusion of the pre-emptive rights of existing shareholders, for an amount of up to Euro 4.5 bn at the exclusive service of the exercise of the Bank’s right to convert the New Financial Instruments provided for by Law Decree no. 95 of 6 July 2012, converted with amendments by Law no. 135 of 7 August 2012, as subsequently amended; and/or to increase capital,  again in exclusion of the pre-emptive rights of existing shareholders, pursuant to articles 2443 and 2441, para. 5 of the Civil Code, through the issuance of ordinary shares for an amount of up to Euro 2 bn at the exclusive service of the interest payments to be made in shares pursuant to the regulations applicable to the New Financial Instruments as set forth in Law Decree no. 95 of 6 July 2012, converted with amendments by Law no. 135 of 7 August 2012, as subsequently amended.

[1] See Bank of Italy announcement of January 28, 2013.

[2] USD 185 million.

[3] The figures are gross of  any tax effects. The above figures are unaudited.

[4] See previous note entirely