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Carige's boardroom drama blights restructuring plans, casts doubt on governance

An internal conflict at the top of Banca Carige SpA risks disrupting the troubled Italian lender's capital increase and restructuring plans, opening the prospect that it will ask for state help or that the regulator might take control of its management, analysts said.

A board meeting May 30 left the bank with two options, neither good: losing the support of key investor Vittorio Malacalza at a time when it is raising capital to cover for a stack of impaired loans, or losing its top management while it is carrying out a deep restructuring agreed with the top European regulator.

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Vittorio Malacalza, deputy chairman of Carige and its largest shareholder with 17.6% of the bank's equity, told the board May 30 he had lost confidence in CEO Guido Bastianini and CFO Massimo Perona, with the main problem being the CEO's proposal to convert some bonds into equity. Malacalza said he would resign "should his stance not be broadly endorsed by the board," according to a statement from the bank.

Another board meeting is scheduled for June 9, when Bastianini is expected to step aside, according to Italian financial newspaper MF. Malacalza has already started searching for possible replacements, the Il Sole 24 Ore newspaper reported.

"I don't think Malacalza will quit in the end but if he does the bank would have a serious problem," said Andrea Corvatta, a portfolio manager at FinLABOsim in Milan. "I think it would be positive news if the CEO stepped down because shareholders will have to participate in the capital increase."

He added that should Malacalza leave, Banca Carige likely "would struggle to achieve the planned restructuring and capital increase required by the European Central Bank."

Under that ECB agreement, the bank is preparing to launch a €450 million cash call, its third since 2014. In addition, Carige has agreed to reduce its holdings of nonperforming loans by about half, to €3.7 billion by the end of 2019. The bank aims to spin off NPLs with a face value of €2.4 billion and agreed at the May 30 board meeting to sell €940 million of the duff loans in a transaction of undisclosed value.

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The bank may also carry out a "liability management exercise," likely a bond buyback or debt-for-equity swap, on up to €645 million of Tier 1 and Tier 2 debt.

"Given the lack of confidence in the CEO by the bank's main shareholder, none of the [cash call, LME and NPL spinoff] has been approved and [all] may be delayed or revised," analysts from Milan's Banca Akros wrote in a report.

They noted that at 10.9%, Carige's common equity Tier 1 ratio is below the 11.25% required under the ECB's Supervisory Review and Evaluation Process, or SREP.

"The bank's CEO is now expected to step down in about 10 days, only one year after he took his post. But the bank's situation remains fragile, as it is loss-making and the 10.9% CET1 ratio is below the SREP guidance and due to absorb additional losses," they wrote.

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They also said Carige might have to restart negotiations with the ECB Single Supervisory Mechanism, which oversees Europe's largest banks, for reapproval of its business plan. The SSM has cleared the bank's business plan already, but only after rejecting a previous version for being too lenient.

"A change in the management team and strategy would likely, at best, significantly delay the process [of restructuring]," UBS analysts wrote May 31, adding: "If Mr. Malacalza resigns, he might not be involved in the capital increase, complicating its success."

Moreover, these hurdles might lead to a "tightening of the ECB's regulatory stance" and reverse a recent improvement in underlying operating metrics, they added.

UBS had warned in March that should the capital increase and liability management exercise not prove sufficient to meet the bank's needs, "the best alternative would be a precautionary recapitalization by the state," which would necessitate the bail-in of junior debtholders.

The Italian government is trying to shore up the country's banking system through a €20 billion fund, much of which is earmarked for the rescue of Banca Monte dei Paschi di Siena SpA, and which could also be used to prop up Banca Popolare di Vicenza SpA and Veneto Banca SpA. Italy's top 15 banks together carry Europe's largest pile of bad loans, at €271 billion in December 2016, according to the DBRS rating agency.

Carige was downgraded to deeply subinvestment grade status by credit rating agency Moody's in March because of the potential for bondholder losses given the need for capital to meet the ECB's NPL mandates.

Malacalza could not be reached for comment.

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