Monte dei Paschi buying out Axa JV would be shrewd use of excess capital

Having bolstered its balance sheet after years of turmoil, Banca Monte dei Paschi di Siena SpA would be well-served in deploying its excess capital in a buyout of its bancassurance joint venture with AXA SA, analysts said.

Monte dei Paschi's common equity Tier 1 ratio — a key measure of financial stability — stood at 18.14% as of the end of 2023, well above the average of Europe's largest banks, S&P Global Market Intelligence data shows. With management targeting a level of around 14%, the bank has ample funding available to bring in house the bancassurance business.

Taking full ownership of the joint venture would boost Monte dei Paschi's fee income at a time when interest rate cuts means European banks' lending margins may have peaked. The bank could still have €1.1 billion of excess capital left over after buying out Axa, according to Paola Sabbione, an analyst at Barclays.

"We think that Monte dei Paschi should be investing the extra capital to internalize fees, and the joint venture with Axa would be the best move," a different bank equity analyst told Market Intelligence, speaking on condition of anonymity.

The bancassurance partnership between Monte dei Paschi and Axa began in 2007 and was most recently renewed until 2027. The joint venture, which sells a range of insurance and financial services products through Monte dei Paschi's branches, contributed €86.6 million to the Italian bank's profit in 2023, according its annual report.

Acquiring the joint venture in full would require less than €500 million of excess capital, Deutsche Bank analysts estimated in an August report. The analysts also noted that Monte dei Paschi's true excess capital could be much higher than the roughly €2 billion that has been widely reported due to its stock of deferred tax assets, giving it even more room for inorganic growth opportunities.

Incorporating the joint venture would "have a positive impact on our plan," the bank's CEO Luigi Lovaglio said during an August earnings call, though he cautioned that it does not solely depend on the bank.

Should Monte dei Paschi decide to not accelerate the repurchase, it could do so when the current agreement ends in 2027, according to Barclays analyst Sabbione.

Buying out Axa's stake in the partnership would follow a similar move by UniCredit SpA, which on Sept. 25 took full control of its bancassurance joint ventures with CNP Assurances SA and Allianz SE. The businesses generated €85 million of profit and about €500m in distribution fees in 2023, UniCredit said.

The move was positive for UniCredit as it advances its strategy of diversifying revenues, and in a sector with good profitability, Equita analyst Andrea Lisi wrote in a research note carried by Dow Jones Newswires.

Road to recovery

Monte dei Paschi, which holds claim as world's oldest bank, has been embroiled in a series of scandals since the global financial crisis. It ultimately required a government bailout in 2017, the largest in Italian bank nationalization since the 1930s.

Yet in recent years it has undergone a major turnaround, drastically improving its asset quality, capital and profitability.

The bank has slashed its nonperforming loan (NPL) ratio from 35.8% in 2017 to 3.64% last year, aided by the sale of sizeable portfolios to a state-backed debt manager.

It increased its net income more than 20 times between 2022 and 2023, achieving a €2.07 billion profit. The result is expected to moderate in 2024 and 2025, according to Market Intelligence mean consensus estimates, but the bank is noenthless on course to establish sustained profitability.

Monte dei Paschi's excess capital and focus on shareholder returns means it has the highest estimated forward dividend yield among its peers, S&P Global Dividend Forecasting data shows. The €0.25 per share dividend the bank paid in 2023 could more than triple to €0.77 in 2024 and €0.78 in 2025, according to the data.

A further boost to capital could come from the sale of its French subsidiary Monte Paschi Banque SA, for which negotiations are ongoing. A divestment would increase the bank's capital by a few basis points, Lovaglio said in August.

Monte dei Paschi did not respond to requests for comment by the time of the publication.