Monte Dei Paschi Di Siena: The Rise And Fall Of The Oldest Bank In The World

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The Tuscan town of Siena was an important city during the 12th and 13th centuries and before the rise of the powerful Medici family it was home to Italy’s richest banks. It is also home to the oldest bank in the world, the Monte dei Paschi di Siena, first founded in Siena in 1472. 20 years before Christopher Columbus set sail to discover the New World. When walking through Siena’s medieval old town, you’ll find the bank’s headquarters located in the atmospheric Palazzo Salimbeni.

It was originally founded to provide loans to ‘poor or miserable or needy persons’. Siena’s golden period of prosperity was cut short by the Black Death plague in the mid 14th century. The plague reached Siena in May 1348 and by October of that year, it had taken approximately two thirds of the town’s population of 100,000 inhabitants. Siena never recovered from this event and the majority of it’s population was reduced to poverty. The bank was created to provide loans to these people at an interest rate of 7.5%. Since its formation, MPS has played an enormous role in the development of Siena and even today during its troubling times, the bank remains the city’s largest employer. Tourism is arguably the second biggest source of income for the city. The city gets its fair share of tourists yet it’s nowhere near on the gargantuan scale of its more prominent Tuscan cousin Florence, which even outside of the peak Summer season receives tourists by the truckload. Should, in the worst case, the bank follow the same fate as Lehman Brothers and completely collapse, tourism would immediately become much more vital to the economic wellbeing of the town.

Although the history of the bank goes back to 1472, its present formation dates back to 1642 when Siena (which ceased to be a Republic in 1555) was part of the Grand Duchy of Tuscany. After the unification of Italy in the 19th century the bank expanded its operations across the country becoming one of Italy’s leading banks. Regardless of the bank’s territorial expansion, MPS had always had been strongly connected to the city of Siena. In 1995 the bank was renamed Banca Monte dei Paschi di Siena and all the banks’ financial, credit and insurance branches were united under this new name. A not-for-profit arm was also created called Fondazione Monte dei Paschi di Siena, which benefited the city and province of Siena substantially over time by investing large sums of money in the area’s education, health, culture, sports and tourism sectors. In 2006, Siena was elected as the city in Italy with the highest quality of life. Quite a feat considering how badly ravaged the city was by the Black Death more than six and a half centuries earlier. However, just a few years later the party would be well and truly over as the bank began it’s steep fall from grace.

The root of the bank’s problems go back to that same year when the bank was renamed and restructured. From 1995, the renamed Banca Monte dei Paschi di Siena went on an acquisition spree buying out several Italian banks. The idea was to increase the bank’s profitability and make it a more global bank. Unfortunately, not only did the bank overpay for many of its acquisitions, it also acquired banks in poor financial health. Some even say that BMPS acquired these banks without doing any thorough due diligence such as properly scrutinising all the banks’ accounts etc. One such example of these acquisitions was BMPS acquiring Banca Antonvenata from Santander in 2007 for 9.25 billion euros. Just a few months earlier Santander had acquired Antonvenata from ABN Amro for 5.7 billion euros. The deal with BMPS netted the Spanish bank a cool 3.55 billion euros. It doesn’t take a Warren Buffett to see that BMPS had royally goofed up on this one. But that’s not the end of the story. BMPS had in fact transferred over 19 billion euros to ABN Amro, Santander and Abbey National Treasury Service to acquire Banca Antonvenata since the bank had a deficit of 10 billion euros. BMPS may well have gone to the casinos of Las Vegas with the money, since no one in the bank had bothered to do any research before making the acquisition. Quite astonishing considering the amount involved in the transaction.

The following year in 2008, the Global Financial Crash unfolded. Highly leveraged and indebted banks such as BMPS were especially vulnerable. By 2009, the bank began to experience huge loses at some of its branches. The president of the bank at the time, Giuseppe Mussari, hid these losses in the bank’s accounts by entering into derivatives contracts with Deutsche Bank and Nomura. All this was made public in November 2012 and the share price of the bank subsequently began to dramatically slide. As I type this article the current share price is 2.78 euros. In July 2016 the share price was over 10,000 euros (100 euros in old money before a 100-1 share conversion in November 2016 where 100 old shares were converted into one new share).

Since 2013 BMPS has been at the receiving end of a number of bail outs to prevent it from collapsing and creating thousands of job losses (as of 2016, 25,556 people were working at the bank). In December 2016 the Italian government raised 20 billion euros to recapitalise the country’s ailing banks. Later in the summer of 2017 the bank was bailed out by the government for 8.1 billion euros in which the Ministry of Economy and Finance arm of the Italian government acquired a whopping 68.247% stake.

There may finally be some light though. According to a Reuter’s article recently published on 4th April 2018 concerning the latest developments of BMPS, two top executives of the bank went on record to say that it was on track to meet its targets in it’s debt reduction program. This includes a disposal in mid-2018 of a staggering 25 billion euros worth of bad loans ‘repackaged as securities’. How that will pan out is anyone’s guess and the question remains of whether the bank will ever be totally free from its shackles?

 

By Nicholas Peart

(c)All Rights Reserved

 

 

 

REFERENCES/FURTHER READING

https://sevenpillarsinstitute.org/wp-content/uploads/2017/11/MPS-Case-Study-Final-EDITED.pdf

https://www.telegraph.co.uk/news/worldnews/europe/italy/9530852/Decline-of-Monte-dei-Paschi-di-Siena-worlds-oldest-bank-leaves-city-paying-the-price.html

https://www.theguardian.com/business/2016/dec/22/monte-dei-paschi-the-history-of-the-worlds-oldest-bank

https://uk.reuters.com/article/uk-eurozone-banks-italy-monte-dei-paschi/monte-dei-paschis-bosses-confident-about-turnaround-plan-sources-idUKKCN1HB2CV

https://en.wikipedia.org/wiki/Banca_Monte_dei_Paschi_di_Siena

https://www.gruppomps.it/en/

Forget Bitcoin, Is This A Stock Market Bubble I See Before Me?

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Bitcoin has had a stellar year rising from a low of under $1000 a coin at the start of the year to an unprecedented high of almost $20,000 just last week. The general consensus is that Bitcoin is in a dangerous bubble that will pop very soon akin to the Dutch Tulip and South Sea bubbles of many moons ago. Yet the price keeps on rising. Analysts have been pronouncing the death of Bitcoin ever since the price was just a mere $0.23 a coin back in 2010. You can visit the website 99 Bitcoins to view the countless botched BTC obituaries. No matter whether you believe Bitcoin will continue on its dizzy heights or crash and burn, there’s no denying that the underlying blockchain technology will play a paramount role in the transition towards a cashless society.

 

A look at UK Fund manager Neil Woodford

With every person and their Jack Russell engulfed in the current crypto-mania epidemic, it is easy to overlook other potential red alerts on the financial landscape. Earlier this month, top fund manager Neil Woodford went on record stating that financial markets are entering a bubble phase yet elaborated on this by saying that while many stocks are overvalued there are also many companies, which are undervalued. Woodford has come under a lot of heat these last few months after a number of stocks in his CF Woodford Equity Income Fund portfolio have fallen substantially in value. Yet the stock selection of his portfolio is interesting. While the portfolios of other fund managers are weighted more towards large multinational and defensive companies such as consumer brands company Unilever or alcohol goliath Diageo, and are minimising exposure to the UK in the wake of all the uncertainty created by the 2016 Referendum result (as well as the possibility of an anti-business Jeremy Corbyn led Labour government abruptly coming to power), Woodford’s portfolio is heavily exposed to the UK. Woodford thinks that there is too much negative sentiment towards the U.K. economy and as a result many domestic U.K. companies are very attractively priced (due to panicky investors reducing their exposure to UK stocks) with potentially minimal downside and plenty of upside should sentiment towards the U.K. economy improve.

 

Warren Buffett, NASDEQ all time highs, and the 2000 dot-com crash

Any good student of the world’s most famous living value investor Warren Buffett would spot these opportunities and at the same time be very cautious of stocks with high valuations trading at close to all time highs. In the USA, the FANG (Facebook, Amazon, Netflix and Google) stocks fit the bill as well as several other stocks trading on the NASDEQ index which has been on an off the charts bull run. The incredibly high valuation of the NASDEQ Index combined with the mesmerising new highs breached by Bitcoin and other cryptocurrencies like Ethereum and Litecoin create the perfect storm for a repeat of the spectacular Dot.com crash of the early 2000s. At the height of the dot.com bubble, the NASDEQ composite shot up to a high of 5000 points around the turn of the new millennium before crashing to almost a 1000 points in 2002. Since the beginning of 2009, after the 2008 Financial Crash, the NASDEQ has been on an incredible run motoring from 1200-300 points to almost 7000 points reaching an all time high of 6,914 points this year. It is today trading very close to that high in the range of 6,840-80 points. Whether history has a habit of repeating itself or not it sure has a habit of rhyming, to quote Mark Twain.

 

Market sentiment and looking beyond it

One of Buffett’s most famous and often quoted mantras is; ‘be fearful when others are greedy and greedy when others are fearful’. Yet the Buffett pearl of wisdom I’ve always taken to my bosom is; ‘the market can remain irrational longer than you can stay solvent’. One would like to think that stocks are priced according to their fundamentals but it is always sentiment that is the winner. The current Bitcoin craze is the perfect example. Sentiment is incredibly positive and gung-ho towards this creation that is seen as revolutionary and a disruptive game changer in the world of money, and consequently many want in whatever the price. The FOMO (fear of missing out) bug is very strong. But sentiment can always change at the flick of a switch and when that happens it will be the fickle inexperienced investors with weak hands who bail out the first even if that means incurring staggering losses.

Neil Woodford is the quintessential student of Warren Buffett who is periodically on the look out for undervalued and unloved stocks whilst steering clear of expensive and hot overvalued stocks. If positive sentiment towards the U.K. economy returns at some point in the future and Sterling makes further gains against other major currencies, Woodford’s fund will end up not only beating the FTSE index but substantially outperforming the funds of other star fund managers. Brave investors with strong hands prepared to dip their toes into his fund at this stage could end up handsomely rewarded.

 

Why has the FTSE been reaching all time high levels?

The root of the FTSE trading at a very high level is because of the high valuations of big multi national companies such as Unilever, Diageo and British American Tobacco trading at (or at least close to) all time high levels and their current combined market caps representing a humongous slice of the total FTSE 100 pie. At around the beginning of 2000, shares in Diageo were trading below £5 a share. They recently reached a high of almost £27 with a total market cap in excess of £65 billion. Shares in British American Tobacco were also trading at below £5 a share around that same time period and over the years have performed very well reaching an all time high of £56.43 earlier this year with a market cap in excess of a whopping £120 billion. Unilever shares less than ten years ago in 2009 after the 2008 Financial Crisis could be snapped up for under £15. Earlier this year they reached a record high of £45.57 a share with a market cap almost nudging £60 billion.

One of the principle reasons why many FTSE companies have been reaching all time high levels in the last 12 months is because, since they are global companies, their earnings are received in many different currencies. When the Referendum result was announced in the U.K. last year Sterling dropped to a 30 year low of 1.34 against the dollar. Since this time, the value of Sterling continued to decline bottoming around the 1.20 mark against the dollar before returning to that initial 1.34 level against the dollar that it was just after the Referendum result. During the last 18 months, these multi national companies have benefited enormously from a weak Sterling valuation and yet in spite of this some are still trading on PE (A company’s share price against it’s earnings per share) ratios of 20 or more. Now what would happen if sentiment towards the U.K. economy were to improve and consequently Sterling were to climb to pre Referendum valuations of 1.40 to the dollar or higher? This would affect the foreign earnings of these multi national companies when converted back into stronger Sterling. And by extension lower their earnings per share. Their share prices would likely cool down quite significantly

 

Out of the Sinking: Recent performance of recovering blue chip miners

The Holy Trinity of Unilever, Diageo and BAT are all solid bullet proof defence companies but cheap they are not. At the height of the commodities slump less than two years ago around the start of 2016 all of the blue chip mining companies were trading at unimaginably low levels. Today with sentiment towards these mining companies vastly improved, they are trading at much higher levels and, consequently, are not the bargains they once were not so long ago. During that time one could have hovered up shares in Australian mining titans BHP Billiton and Rio Tinto at just over £5 and £19 a share respectively. Earlier this year BHP shares were trading at over £15 each (with an LSE market cap on the LSE in excess of £30bn) whilst Rio shares went over £38 (with an LSE market cap at one point breaching £50bn). Even more impressive is Anglo-Swiss multinational commodity trading and mining juggernaut Glencore. Today the shares are trading at over £3.50 (LSE market cap over £50bn). At the height of the slump Glencore shares could have been snapped up at less than 70p. Many junior mining companies with higher production costs didn’t survive the slump in iron ore prices but the blue chip mining companies with lower production costs got through this difficult period. Sentiment towards all miners at the time was very bearish and that was reflected in the share prices. But those investors brave enough to take the plunge are now, providing they are still holding their shares, sitting on enormous paper profits.

 

Hunting for bargains

Although some companies are trading at, or close to, historic highs and thus pushing the FTSE index close to record high levels and fuelling fears of a stock market bubble, a large number of companies are trading at heavy discounts. Interestingly the vast majority of these companies are UK domestic companies where sentiment towards the U.K. economy is poor. For example, many of the UK house-building companies, while not trading at the very low levels they once were after the Referendum result was announced, are trading on low PE ratios in the region of 10-11, which is less than the accepted fair value PE of 15. These include FTSE 100 companies Barratt Developments and Taylor Wimpey (both firmly in Neil Woodford’s fund) trading today at £6.28 and £2.03 respectively and both with similar market caps around the £6.5bn mark. If there is any future further weakness in the share prices that would obviously make them even more attractive as investment opportunities.

Two other UK companies in Neil Woodford’s portfolio which are currently very depressed are the FTSE 100 company Capita and the FTSE 250 company Provident Financial. The share price of the latter company collapsed spectacularly back in August this year from a high of close to £35 a share to at one very brief interval sinking to below a fiver. Since then they have currently been trading in the £7-£9 range and can currently be bought for around £8. The crash was rooted in the problems encountered in the business’s Home Credit division. It is a risky share and more downside cannot be ruled out but the potential upside if the business were to recover is huge. Woodford has taken a lot of criticism for the performance of this share yet he remains unfazed and in fact has been accumulating more shares at these new depressed levels. The business support services company Capita has also experienced a huge share price decline tanking from a high two years ago of over £12 a share to its current price of £4.74 a share. The decline in the share prices of both companies means that they now pay very generous dividends. Whether they will be maintained is anyone’s guess but in the case of Provident the current yield is too good to be true at over 15% and for Capita it’s just under 7%.

Two enormous British multi billion pound companies trading at depressed levels are BT Group and energy giant Centrica. BT shares have almost halved in value from a high of around £5 back in 2015 to a low of £2.42. The shares are currently trading at £2.70 with a current market cap of close to £27bn (with nearly that same amount wiped off its from its all time high – quite a dent to the overall FTSE index) and paying a generous dividend yield of over 5%. Centrica has been experiencing an even rougher ride falling from a high of over £4 in 2013 to a low of just £1.33 this year. The last time the share price was below £1.50 was over ten years ago in 2003. Currently the shares are trading at £1.45 and at this level paying a dividend of more than 8%. And at this price the market cap of the company is over £8bn (with around £14bn wiped off the company’s value from its high in 2013). The root of BT’s fall from grace is an accounting scandal at the Italian division of the company. Centrica is struggling with the prospect of political intervention via price caps for its customers and increasing competition. Both companies display certain levels of risk and sentiment is poor for those reasons. One could also come to the conclusion that much of these risks are priced in to the depressed share prices. There is also the risk that those companies now experiencing huge dividend yields because of their low share prices risk having their dividends cut. That cannot be ruled out.

Not all big multinational companies are trading at close to all time highs. The pharmaceutical giant GlaxoSmithKline has a huge global presence and is currently trading at above £13.14 after having fell to £12.70 from a high of over £17 all within the space of this year. At its current level it still has a collosel market cap at around £64.5bn and is now paying a dividend yield in excess of 6%. The company does come with quite a lot of risk despite its size. It has very high levels of debts and the pharmaceutical industry is very competitive. In spite of this GSK is a diversified pharmaceutical business and a huge money spinner. However I think it can still fall further especially if the dividend is cut (which may be a sensible idea to reduce the company’s debt pile) which I see as very likely. This would probably create further weakness in the share price and would be an absolute steal if £10 or less were breached (being a huge company further deterioration in the share price would dent the FTSE 100 composite substantially – every time the share price loses a pound in value, GSK – and by extension the FTSE 100 – becomes £4.9bn poorer).

One more solid British company, which I like that is trading at a low valuation is the defence and engineering service company Babcock. In 2008 after the Financial Crash, the shares were trading under £4 before going on an upward trend reaching an all time high above £14 in 2014. Since that high was reached the shares have been on a downward trend and are now priced at £6.76. This is a substantial discount to it’s all time high. As well as the attractive price its trading on a forward PE of less than 10 and currently offers a not to be sniffed at 3.89% yield. Babcock is also featured in Neil Woodford’s portfolio. What’s more, I see plenty of potential upside to the current price and even the possibility of the dividend being increased.

 

Disclaimer: For the record I am not a qualified financial adviser. I am not Nostradamus. I have no crystal ball. As always it is very important that you do your own research before making any investments. Never ever make investment decisions based solely on what someone says.

 

By Nicholas Peart

Written: 11th – 12th December 2017

©All Rights Reserved

Image: Clipart

 

 

 

Is Now A Good Time To Buy Gold?

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This is something I’ve been thinking about a lot these last few months. Looking at all the current global events including the upcoming US elections and the sense that the world is becoming increasingly unhinged, could gold (and by extension other precious metals such as silver) be a good place to put some of your savings/hard earned cash into?

Gold has traditionally been the place to put your money into during times of global unrest. Out of all the world currencies, the US dollar is often seen as the main currency. If you live in a country where the local currency is notoriously unstable, it is often seen as a smart idea to have any cash savings in US dollars. Especially since, unlike other major currencies such as the Euro or British Pound, the US dollar is accepted absolutely everywhere. Yet what happens when even the US dollar becomes unstable? This is where gold comes in.

All paper currencies, whether you have US dollars or Zambian Kwacha, are all just that; paper currencies. Furthermore, if the government wanted to, it could print more and more of its currency thus increasing the money supply and triggering inflation which reduces the value of a country’s currency against other currencies. Unlike paper money, gold is highly prized for its scarcity.

Gold can be seen more as a security to protect your money as opposed to making money. Of course if you buy gold at $1,300 an ounce and the price a few months later is $1,600, you would have made a nice profit if you ever decided to convert some of your gold back into cash (and conversely, if the gold price went down to $1000 and you needed cash you would be selling your gold at a loss).

There are also of course digital currencies out there with Bitcoin being the the most well known, established and traded of all the global digital currencies. Even if digital currencies may be seen as the future of money especially with the Bitcoin (which was once the pariah of the financial world) becoming increasingly accepted and recognised as a legitimate global currency, this is a world where my expertise is limited. I am also scared by the high chance of wild fluctuations and the whole intangibility of it all. Gold just seems less complicated. It is a precious tangible metal with a limited supply and that is all I need to know.

Looking at the gold price chart of the last twenty years, gold has already had a hell of a run going from a low of just $252 an ounce in 1999 to a high of $1889 an ounce in 2011. The current gold price as I write this article is $1307 an ounce; still several multiples of its 1999 low yet a good chunk lower than its 2011 high. Some say that the gold price could surpass its 2011 high and breach the $2000 an ounce mark if the world really did begin to tilt off its axis and spin in some crazy time signature. Yet predicting the future price of gold is a fool’s game. What I can say with ‘certainty’ though is that during times of ‘uncertainty’, gold is a good thing to have.

 

How To Purchase Gold

Gold can be purchased physically in the forms of established gold coins and gold bars. It can be good to personally own some bits of physical gold and keep them in a safety box (or dig a deep hole somewhere in your garden to hide and store them – just make sure you don’t forget where you put them!). On the other hand having lots of physical gold in the house can create a feeling of insecurity. If you are lucky enough to have a big gold pile, it would be best to keep it in a robust security vault by an established and reputable firm. Below I am listing some useful contacts…

Apmex based in Oklahoma, USA, is the world’s largest online retailer of precious metals selling more than 10,000 gold, silver, platinum and palladium products in the form of bars, coins, bullion, rare collectible editions etc.

BullionByPost based in Birmingham, UK is the UKs largest online gold dealer and a good contact to have if you are a UK resident.

For Australian residents, The Perth Mint is a good contact.

Other established global gold/precious metals dealers include the Canadian company Kitco and the Indian company RiddiSiddhi Bullion Limited.

The London based company BullionVault is an online peer to peer gold and silver bullion exchange. Since its founding in 2005, the company has been very successful. This is also a great place to trade gold and silver if you don’t have much money at your disposal since there is no minimum amount of gold or silver you can trade. BullionVault charges a flat 0.5% – 0.05% fee per trade depending on the amount of gold or silver you buy or sell. The other additional costs are the annual fees for storing and insuring the gold and silver you purchase which are 0.12% (0.01% per month – $4 minimum) of the value of your gold and 0.48% (0.04% per month – $8 minimum) of the value of your silver

 

By Nicholas Peart

5th November 2016

(All rights reserved)

 

image source: http://www.therealasset.co.uk