Italy's third-largest bank, Monte dei Paschi di Siena, must quickly plug a capital shortfall to fend off the threat of a downgrade by rating agency Standard & Poor's, which dragged shares close to record lows on Tuesday. The bank, the world's oldest, may have to resort to some form of state intervention if it does not fully address by the end of June a 3.2 billion euro ($4.03 billion) capital shortage stemming from its large exposure to Italian bonds, the agency also said. "We could lower the ratings if we believe that MPS will find it challenging to accelerate handling of non-performing assets or sustainably strengthen its capital position while improving earnings capacity and financial flexibility," S&P warned. Any deterioration of MPS's credit rating would make it more difficult for the bank to raise money to issue bonds. "We will consider the likelihood that MPS may benefit from extraordinary support in case of need," S&P added, noting the systemic nature of the bank and expectations that the Italian government would be supportive. Monte dei Paschi has suffered more than its peers in the crisis and is expected to carry out a restructuring under new management led by Chairman Alessandro Profumo, a known turnaround banker. Although it has taken steps to boost its financial base, the bank still needs about 1.5 billion euros to build a large enough capital buffer, S&P said in a statement issued late on Monday. This comes on top of 1.9 billion euros of high-yielding hybrid government bonds the bank borrowed in 2009. The Tuscan bank must also put a lid on rising non-performing loans, which, at 16.2 percent of gross loans, put it above the Italian average, the agency said. Italian lenders are in a different situation to Spain's banks because they have less exposure to the real estate market and enjoy a relatively high level of household savings, Standard & Poor's primary credit analyst Renato Panichi said last week. However, sovereign debt pressure is weighing on Italian banks as well as the risk of higher non-performing loans, which have nearly doubled to an average of 11.2 percent since the start of the recession. Monte dei Paschi hopes to raise capital by selling some of its units or a group of branches. Management has also touted the option of issuing contingent capital bonds, which would be difficult in current market conditions. After months of wrestling, a debt restructuring agreement reached on Tuesday between creditor banks and Monte dei Paschi's top investor, a charitable foundation with strong ties with the city of Siena, could give MPS some of the financial flexibility it needs. But the market was not excluding on Tuesday the possibility of Italy stepping in with a new tranche of Treasury-sponsored hybrid instruments for Monte dei Paschi. Shares in the bank were suspended at 0822 GMT on Tuesday after falling 5 percent, a drop that brought the stock close to last week's record low of 0.175 euros. "Investors are concerned about the restructuring. We know the bank still has a capital shortfall and there could be a new intervention by the Italian Treasury," an Italian trader said. Standard & Poor's will review its BBB/A-2 rating within the next three months. Monte dei Paschi, which posted a 4.7 billion euros net loss in 2011, postponed to June 26 a presentation of its 2012-15 business plan that had been scheduled for just before the Greek election, Reuters reported.
