Shares in Monte dei Paschi di Siena were suspended after sliding by 8.5% on news of a stark ECB warning for the Italian bank.
The ECB had flagged funding and profitability risks as well as a weakened capital position in a letter to Monte dei Paschi, the bailed-out lender revealed late last week.
The regulator also told the Tuscan lender to boost provisions against bad loans in the coming years.
Traders said the request for fresh loan write-downs was damaging for the stock and could also have negative implications for other lenders.
Monte dei Paschi said the ECB had told it to put aside more money to cover impaired loans by 2026, in line with rules requiring eurozone banks to perform full write-downs within seven years for new loans that turn sour after April 2018.
A request to apply such a rule to existing loans was unexpected, analysts said, adding that it raised doubts over whether the ECB may make similar demands to other banks.
Even after a record €24bn sale of bad loans, Monte dei Paschi problem loans as of last September were equivalent to almost a fifth of its total lending. Provisions covered 56.4% of existing problem loans.
Banca Akros analyst Luigi Tramontana calculated that Monte dei Paschi would need to book €8.7bn in additional provisions to fully cover existing problem loans, though that did not take account of possible recoveries.
The ECB’s request “comes as a surprise to us”, Mr Tramontana said, downgrading the stock to “neutral” from “buy.”
Bankers say that a successful turnaround is essential to turn it into an attractive merger target, giving the Italian state a way out as demanded by EU law on state aid.
Under the terms of the bailout agreed with the European Commission, Monte dei Paschi must meet given targets at set deadlines or adopt offsetting measures.
Additional cost cuts risk further complicating the bank’s recovery efforts.
Italy’s government must draw up a plan this year to liquidate its stake in Monte dei Paschi.
Cabinet undersecretary Giancarlo Giorgetti was quoted by Italian newspapers the government would make a decision on the bank’s future in two to three months.
Banca Monte dei Paschi di Siena is preparing to sell covered bonds and will contact possible investors as soon as next week, a source said.
Monte Paschi is attempting to issue the debt after it was unable to complete the second tranche of a bond sale last year amid market turmoil.
Reuters and Bloomberg