By Silvia Aloisi and Danilo Masoni
MILAN (Reuters) - Italian bank Monte dei Paschi di Siena (MI:BMPS) said on Friday it had overstepped regulatory limits with regards to its financial exposure to Japanese bank Nomura (T:8604), in a surprise disclosure that could raise questions about whether the Italian lender's plans to raise capital and seek a buyer are on track.
Monte dei Paschi di Siena, Italy's third largest bank, said in a statement that it was looking at all possible measures to cut the exposure, or potential risk related to loans to Nomura, which it said equalled more than one third of its core capital at the end of last year.
Monte dei Paschi said it had been asked by Italian financial regulator Consob to release a statement explaining the results of a European Central Bank review of the Italian bank earlier this year. Monte dei Paschi had already emerged late last year as the worst performer in the ECB's region-wide health check of European banks.
In February, the ECB completed another assessment of the Tuscan lender, a review that looked specifically at Monte dei Paschi's level of bad loans among other things.
Most of the details of Monte dei Paschi's 2014 financial accounts and European regulators' demands on the bank have been disclosed. However, the lender's unexpected late-night statement on Friday and the request by Italy's market watchdog for more clarity on the bank's financial strength came at a delicate time.
Monte dei Paschi is about to embark on a 3 billion euro (2 billion pound) capital increase that it hopes will preface a sale to an Italian or international buyer.
The bank said the ECB had urged it, during its February review, to seek a merger partner.
In its statement on Friday, Monte dei Paschi said that on a consolidated basis exposure to Nomura was 34.68 percent of its regulatory capital base at the end of 2014, above the 25 percent regulatory limit.
A source close to the matter said on Friday Monte Paschi's exposure to Nomura was around 3 billion euros.
The bank entered in 2009 a derivative contract with Nomura called Alexandria, which turned out to be loss-making and is at the centre of a judicial investigation in Italy.
Prosecutors have said the bank entered the Alexandria contract and other complex derivative trades to conceal losses after stretching its finances to buy rival Antonveneta in 2007 for 9 billion euros.
Monte dei Paschi is seeking damages from Nomura over the trade, which included the purchase of Italian government bonds that the bank financed through a long-term repurchase agreement with Nomura. The Japanese bank has denied any wrongdoing and said it always acted correctly.
Monte Paschi said on Friday the European Central Bank gave an overall unfavourable assessment in its so-called SREP supervisory review of the bank due to the amount of bad loans it has as well as difficulty reaching adequate profitability levels and the bank's "inability" to generate capital.
Monte Paschi, which needs to carry out a 3 billion euro cash call by July to plug the capital shortfall exposed by European regulators, said in the statement the ECB review also singled out a reputational risk due to lawsuits against the bank as well as vulnerability due to liquidity and sovereign debt risks.
At the end of December the Tuscan bank, which was hit hard by the euro zone debt crisis as well as loss-making derivative trades, including the one with Nomura, had around 23 billion euros in problematic loans, nearly one in five of its customer loans.