Monte dei Paschi di Siena: A Phoenix Rising in Italian Banking?

Monte dei Paschi di Siena (MPS), once Europe's most troubled bank, has embarked on a remarkable turnaround. After a €5.4 billion state bailout in 2017 and years of legal and financial turmoil, the bank is now positioned as a potential value play in Italy's banking sector. Under CEO Luigi Lovaglio's leadership, MPS has slashed legal risks, strengthened its balance sheet, and pursued strategic acquisitions. Yet lingering reputational scars and unresolved litigation keep investors cautious. Let's dissect whether this phoenix is worth backing for the medium term.

Legal Risks: Acquittals Reduce the Shadow of the Past

MPS's darkest days were defined by massive losses from opaque derivatives trades and allegations of accounting fraud. Until recently, former executives faced criminal charges tied to hiding losses that led to the 2017 bailout. However, a series of court decisions since 2023 have dramatically reduced these risks:

• In October 2023, Italy's Supreme Court overturned a 2018 verdict, acquitting 15 defendants—including ex-CEO Alessandro Profumo—in a case involving €2 billion in hidden losses from 2009–2011.
• By February 2025, the Supreme Court confirmed these rulings, dismissing charges against former chairman Stefano Casaccia and others.

While a trial in October 2025 will assess four former executives for 2015–2016 accounting practices, the trend is clear: major legal liabilities are fading. Analysts estimate that resolving these cases could free up provisions, boosting capital buffers further.

Financial Turnaround: Strong Metrics, Stronger Balance Sheet

MPS's Q1 2025 results underscore its recovery:

• Net Profit: €413 million, up 24.2% YoY, driven by a 47% cost-to-income ratio (vs. 48% in Q4 2024).
• CET1 Ratio: A robust 19.6%, nearly double the regulatory minimum, thanks to cost cuts and asset sales.
• Non-Performing Loans (NPEs): Reduced to 4.4% of total loans, with a coverage ratio of 49.5%.

The bank's liquidity metrics also shine: Liquidity Coverage Ratio (LCR) at 156% and Net Stable Funding Ratio (NSFR) at 130%, both exceeding EU requirements.

Strategic Reforms: From Bailout to Expansion

Lovaglio's restructuring has focused on cost discipline and strategic growth:

1. Cost Optimization: Staff reductions and digitization cut operating expenses by 2.2% YoY in Q1 2025.
2. Revenue Diversification: Wealth management fees surged 15% YoY, while mortgage lending grew 36% QoQ, reflecting strong demand for consumer credit.
3. Mediobanca Bid: MPS's €12 billion hostile bid for investment bank Mediobanca aims to transform it into a diversified financial powerhouse. The deal hinges on securing tax credits requiring a 50%+1 stake, but success could unlock synergies worth €700 million annually.

Risks and Remaining Challenges

• Mediobanca Uncertainty: The bid's reliance on tax credits creates execution risk. A failed acquisition could strain capital reserves.
• Lingering Litigation: The October trial could reignite reputational damage if executives are convicted.
• Interest Rate Pressures: Net interest income fell 7.5% YoY in Q1 2025 due to lower rates, a headwind unless fee income compensates.

Investment Thesis: Buy with a Medium-Term Horizon

Why Buy?
- Valuation: MPS trades at a 0.3x P/B ratio, deeply undervalued versus peers (e.g., Intesa's 0.8x).
- Capital Strength: A 19.6% CET1 ratio offers a buffer against shocks.
- Strategic Momentum: The Mediobanca bid, if successful, could unlock premium multiples for MPS.

Caution Flags:
- Wait for the October trial outcome before scaling positions.
- Monitor Mediobanca's regulatory approval and integration risks.

Conclusion: A Calculated Gamble on Value Recovery

MPS's journey from near collapse to a financially resilient institution is a testament to Lovaglio's reforms. While legal ghosts still linger, the trend toward resolution, coupled with strong capital metrics and strategic boldness, makes this a compelling buy for investors with a 2–3 year horizon. The key catalysts—Mediobanca's fate and the October trial—will determine whether MPS truly soars or remains grounded. For now, the phoenix's wings look strong enough to fly.