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Rescue for world’s oldest bank

– Nestled in the hills of Tuscany, Banca Monte dei Paschi di Siena, the world’s oldest bank, once hosted shareholders with its own vintage Chianti and mounds of beef brisket.

At its last annual general meeting in October, they got sandwiches and mineral water.

Chairman Alessandro Profumo and Chief Executive Fabrizio Viola have little time to savor Monte Paschi’s priceless art collection and its vino di Toscana “Rosso 1472,” grown just outside its base in the city of Siena. Appointed this year, they’re slashing costs to reverse a decade of missteps that brought the 540-year-old lender to its knees.

Monte Paschi’s Italian owner, a foundation by the same name, once lavished $2.5 billion on art, science and culture in Siena, north of Rome, and helped expand its airport. Former Chairman Giuseppe Mussari, who stepped down in April, spent $11.6 billion in 2007 to acquire rival Banca Antonveneta, a price that exceeded Monte Paschi’s own market value. A losing $35 billion bet on Italy’s sovereign bonds followed.

Mussari is now head of the Italian Banking Association, representing the nation’s 699 banks.

Shareholder Gianni Acciughi, 60, who took early retirement from Monte Paschi in 2009, was scathing about the management style of the time. They were working on “slides and reports and not on reality,” he says.

Acciughi turned up at the shareholders’ meeting in Siena on Oct. 9 with his 25,000 shares. They’d net him just over $6,485 today, an eighth of what they were worth in September 2008, the month Lehman Brothers pushed the global economy into financial crisis.

“We used to get Tuscan beef brisket and the local handmade Pici pasta on China plates, along with award-winning wines in fine crystal glasses,” Acciughi said by telephone from his home in the city. “This year, I had to go out to buy a slice of pizza because I only found crumbs of sandwiches.”

Profumo, speaking at the meeting, told shareholders the lunch symbolized the new diet the bank is on.

Profumo and Viola are cutting 4,600 of the bank’s 31,170 staff by 2015 and closing 400 branches as part of a rescue plan. They’re now asking the Italian government to lend them $4.4 billion, the second bailout in three years. The deal is currently under European antitrust scrutiny.

“The financial assets, the inability to value the risks correctly, that was the biggest mistake,” Viola, 54, said in an interview at Monte Paschi’s headquarters on Nov. 6. “We have to clean things up and turn the bank into an engine of renewal.”

Monte Paschi’s offices are based at the 12th-century “Palazzo Salimbeni,” a neo-gothic landmark it owns in Siena’s historic center. The palace is home to paintings and sculpture spanning five centuries of Tuscan art, including works by Il Sassetta, Pietro Lorenzetti and Beccafumi.

Monte Paschi’s biggest shareholder is Fondazione Monte Paschi, a nonprofit entity set up in 1995. Pressure on Monte Paschi’s finances is forcing the Fondazione to break with traditions such as appointing managers from within the bank and its own directors to run operations.

Profumo, 55, hired in April when Mussari stepped down, was CEO of UniCredit for 13 years. Viola, who had arrived at Monte Paschi three months earlier, previously ran two Italian cooperative banks in northern Italy focused on retail and corporate clients.

Profumo and Viola’s job of turning the bank around is being made harder by a slump in Italy’s $2 trillion economy, where the jobless rate is 10.8 percent and households and businesses are defaulting on loans in increasing numbers. Monte Paschi’s focus on local tradesmen and mortgage financing means asset quality deteriorated at a faster pace than peers.

In its third-quarter earnings on Nov. 13, Monte Paschi made a loss of $61.47 million. Nine analysts surveyed by Bloomberg expected a profit of $134.1 million. Provisions for bad debt almost doubled.

The bank’s ratio of non-performing loans to total lending was 12 percent in September, greater than UniCredit’s 8.3 percent and the 7.3 percent of Intesa Sanpaolo, Italy’s two biggest banks, according to calculations based on the lenders’ earnings statements.

“The biggest challenge for the pair is to eradicate bad habits and change the bank’s culture that is so deeply rooted,” Marco Elser, a partner at investment bank Advicorp in Rome, said in an interview. “You can’t ride two horses at same time. Paschi should have made a choice between the past and the future; its hybrid behavior just brought it to disaster.”

“They are on the right track for a turnaround, focusing on costs and capital,” said Marco Giorgino, a professor of finance at MIP Politecnico di Milano university.

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