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Monte dei Paschi’s patriotic mystery

As Monte dei Paschi di Siena’s shares gyrated last week, losing up to 34% of their value, the bank received a high honour, for a second year running — top primary dealer for Italian sovereign bonds.

That means, during 2015, it beat the behemoths of JP Morgan and Citi, as well as domestic duopoly Intesa and UniCredit, to the top spot.

International banks might well have had good reason to commit less capital to Italy in recent years — as the sovereign debt crisis unfolded, bank shareholders put pressure on managemers to cut their sovereign bond books, while the leverage ratio has started to bite for some firms.

It’s not unusual for banks to be long their own sovereign, but Monte dei Paschi has been at pains to emphasise just how much it has cut exposure to Italian government debt.

It said that by the end of September, it had shrunk its available for sale holdings down to €16.4bn, from €18.9bn the year before and €22.4bn. It had €3.4bn classed as “held for trading”.

Being a primary dealer, in Italy as elsewhere, depends far more on trading assets than on the bank’s wider government bond portfolio. The list of criteria to top the table is long, but includes being aggressive on price at auctions, quoting prices continuously and tightly, and shovelling plenty of volume.

Each characteristic gets a score, and the top score in each “solar year” wins, putting the bank in question first in line for syndicated bond mandates and derivatives business, at least in theory.

Most firms consider the business expensive. Bidding aggressively for sovereign bonds at auction exposes banks to potential losses, without the cushion of the new issue premium of a bond syndication, while the business also tends to stack up the leverage ratio of banks.

For many bankers, it is a necessary support to a broader bond business, but not profitable without that ancillary carrot, in the form of syndications or other government work such as privatisations. Ideally, privileged access to government debt trading facilities will also feed into the hedging and pricing of other bond trades.

But Monte dei Paschi can’t possibly see things that way.

Since January 2015, the firm has done four bond deals, according to Dealogic — two self-led covered bonds, a €150m corporate shared with eight others, and exactly one sovereign syndication. It occupied 20th place in the league table of all Italian deals.

Second placed primary dealer JP Morgan, meanwhile, was bookrunner on €29.44bn of Italian bonds in the same period, for an apportioned value of €6.69bn, according to Dealogic.

The other top ranked primary dealers have similarly muscular Italian bond businesses.

Banca IMI, the investment banking arm of Intesa Sanpaolo ranked third in the primary dealer table, did €55.34bn of Italian bonds, and was apportioned €19.8bn. UniCredit, ranked fourth, did €59.34bn and was apportioned €21.19bn, with Citi did €31.67bn for €5.88bn apportioned share.

MPS does not break out its trading operations in its results, but it did attribute €15m to “bond placement” for the third quarter, within its wealth management division. So a return of 0.004% on its €3.4bn of trading book government bonds?

It’s hard to understand, at least from the outside, what Monte dei Paschi is up to.

It is a firm that desperately needs to recover the confidence of investors, but, from its primary dealership position, it looks like it is heavily committed to a business that is only marginally profitable even for banks which win huge volumes of other bond business.

It is no longer wise to brag about the close connection between banks and sovereigns. Monte acknowledges as much in its results presentation, showing investors how it has managed its government exposures down.

The bank-sovereign “doom loop” was the fear that stalked the eurozone crisis from 2010-2012. It was supposed to be broken by a tough package of reforms, Banking Union, stress tests, recapitalisations, and bail-ins.

So what could one of Europe’s weakest banks possibly gain from making itself indispensable to its government in managing the continent’s second largest debt burden? Is Monte’s move pure patriotism, or is it insurance?

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