By Deborah Ball and Giovanni Legorano 

ROME -- Italian bank stocks tumbled in Monday trading after voters rejected constitutional reforms, stirring fresh turmoil in the nation's battered financial sector and, people familiar with the matter say, possibly putting troubled lender Banca Monte dei Paschi di Siena SpA in line to be nationalized.

A decision on how to proceed may take several days, but no later than week's end, said one person close to the transaction.

Monte dei Paschi was down nearly 6% in the early afternoon, and Banco Popolare di Milano was off almost 8%. UniCredit SpA, Italy's largest bank by assets, fell more than 3%.

A person familiar with the matter said Monday that Banca Monte dei Paschi di Siena Spa and its advisers have decided to wait for at least three days before deciding whether to proceed with the bank's EUR5 billion ($5.30 billion) recapitalization plan, after the victory of a no-vote at Italy's constitutional referendum threatens to derail the plan.

The person said the advisers and Monte dei Paschi hope to know who the new Italian prime minister will be before taking any decision. Prime Minister Matteo Renzi pledged to resign after Sunday's defeat at the referendum.

Any sign that the new prime minister will follow in the footsteps of the current government and help achieve market stability will be seen positively by potential investors in the troubled banks.

The person said the investment banks working on MPS' plan and the Tuscan bank will decide on the recapitalization by Friday.

On Sunday, Italians rejected a change to Italy's constitution that was proposed by Mr. Renzi.

According to the people familiar with the matter, a nationalization of Monte dei Paschi is now more likely, since its plans for its critical capital increase are unlikely to proceed after the vote, though a small chance remains that the bank will find a private-sector solution.

The prospect of Italian banks needing a government rescue was echoed by European Central Bank Governing Council member Ewald Nowotny.

"The difference between Italy and other countries is that in Italy there's essentially been no state aid or takeovers," Mr. Nowotny said on Monday, speaking in Vienna. "It's not to be excluded that state aid is necessary," he said.

The bank met with its advisers on Monday to consider its next moves, the people said. Monte dei Paschi's board is scheduled to meet Tuesday.

However, a full decision on whether to nationalize the bank could come only when a new government is formed in Italy, according to the people familiar with the situation.

Another person familiar with the matter said the Italian government and the European Commission have been regularly in touch about Monte dei Paschi's potential nationalization, in case the bank's recapitalization plan hit a snag.

While it could take two weeks for a new government to choose cabinet members and secure votes of confidence in the parliament, a decision on how to proceed Monte dei Paschi could arrive sooner, perhaps as soon as Mr. Mattarella names a prime minister-designate. That could happen by the end of this week. But should the political process take longer, the bank won't wait beyond this week to make its next move, this person said.

Investors and executives involved in the transaction hope that Mr. Mattarella will ask Economy Minister Pier Carlo Padoan, a well-respected economist who has spearheaded the government's efforts to clean up Italy's banks, to form a new government.

After a prime minister-designate is named, the advisers and government officials would begin discussing critical details of an eventual rescue operation, including the amount the state would contribute and the size of the losses inflicted on investors, particularly junior bondholders. Retail investors hold EUR2 billion in junior bonds.

The prospect of political instability and a change of government in Italy have created volatility in financial markets for weeks and Italy's banks have markedly underperformed the rest of the Italian stock market so far this year.

Investors, policy makers and analysts are concerned that Mr. Renzi's resignation would bring an abrupt end to the government's efforts to clean up the banking sector, which is suffering from a double-whammy of low profitability and huge bad loans.

The bank's stock has lost 85% in the last 12 months and has priced in the prospect of a 'no' vote in the referendum.

The spillover of any troubles at Monte dei Paschi is unlikely to ripple directly into other European banking markets, analysts and bankers say. Since the financial crisis European banks have been pulling back their cross-border businesses to refocus on their home markets. Currently less than 2% of European banks' credit exposure is to Italy, according to analysts at Credit Suisse. The banks with biggest exposure to Italy are France's BNP Paribas SA and Credit Agricole SA.

Investors were watching closely Monday morning for any signs that deposit holders were withdrawing their money. If they see it, the government may have to move quickly with emergency measures to stop a run. The government and the bank will also have to announce a new plan to fix Monte dei Paschi's capital shortfall.

Elsewhere, the vote could complicate plans by UniCredit SpA, Italy's largest bank, to raise as much as EUR13 billion. The bank is far healthier than Monte dei Paschi and could wait for calm to return to the markets before asking shareholders for capital. News could emerge from a Dec. 13 presentation by UniCredit's top management in London, where they will unveil a new strategy.

In the longer term, the change of government and the likelihood of new elections next year could mean a long delay in any governmental efforts to find sector-wide solutions to the banks' problems.

The ECB's Mr. Nowotny said the problems in Italy's financial sector should be put into perspective, noting problems rest with individual banks, not the banking system as a whole.

"One has to see things with the right scope. These are problems of individual banks. It's not a problem with the whole banking system," he said. "And from my view these are problems that can be solved," he said.

-- Todd Buell in Vienna, Max Colchester in London and Natalia Drozdiak in Brussels contributed to this article.

Write to Deborah Ball at deborah.ball@wsj.com and Giovanni Legorano at giovanni.legorano@wsj.com

 

(END) Dow Jones Newswires

December 05, 2016 11:49 ET (16:49 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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