Italy's MPS raises profit outlook as legal risks recede

By Valentina Za

MILAN (Reuters) - State-owned Monte dei Paschi di Siena on Wednesday became the latest Italian bank to upgrade its profit outlook after higher rates pushed third-quarter earnings above forecasts.

Monte dei Paschi (MPS) is 64% owned by the state, which is working on reducing its stake in the Tuscan lender in line with re-privatisation commitments taken with the European Union.

A sale attempt failed two years ago when the Treasury refused to stump up the billions of euros demanded by UniCredit to take on a bank that was then loss making and burdened by heavy legal risks after decades of mismanagement.

MPS Chief Executive Luigi Lovaglio told analysts net profit would top 1.1 billion euros in the full year, improving a previous forecast of more than 1 billion.

In the quarter, MPS also downgraded to 'remote' legal risks relating to 1.2 billion euros in claims after a favourable top court ruling over a major derivatives case involving the bank.

The bulk of the claims for which MPS has taken provisions are promoted by a single advisory firm and lack grounds, the bank has said.

A new ruling in a separate case is expected on Nov. 27, where a favourable outcome would have a positive impact on earnings, Lovaglio said.

Bankers say that positive developments at MPS could in fact make it more difficult for the state to sell it because they increase the price tag for potential buyers.

The shares dipped 0.5% on Wednesday but are up by around a third so far this year.

CHEAPER CURRENT ACCOUNTS

Net income in the three months through September came in at 310 million euros ($331 million), well above a 238 million euro average forecast in an analyst consensus gathered by the bank.

Income from the gap in lending and deposit rates, or net interest income, rose 60% year-on-year, surpassing analyst forecasts and more than offsetting slightly weaker net fees.

MPS said fees had suffered because of traditionally slower activity in the summer months, but also due to a decision to cut the costs of current accounts.

High-street banks in Italy have been able to keep at a minimum the portion of the increase in official rates they pass on to depositors. In many cases the so-called pass through on deposits is below 25%.

Several lenders, however, have opted, like MPS, to cut service costs for account holders.

MPS said its core capital ratio had strengthened further in the quarter to 16.7%, above expectations and up from 15.9% at the end of June. It sees it above 17% at the end of the year, it said.

($1 = 0.9363 euros)

(Reporting by Valentina Za and Francesca Landini; editing by Robert Birsel and Keith Weir)