By Giuseppe Fonte, Valentina Za and Pamela Barbaglia
ROME (Reuters) - State-owned Italian bank Monte dei Paschi (MPS) <BMPS.MI> is weighing options to boost its capital to withstand higher provisions against legal risks and the cost of a bad loan clean-up, three sources close to the matter said.
The bank's board will resume discussions on Monday after it decided to set aside more than 400 million euros on Thursday after the conviction of three former executives.
Loss-making and burdened by 10 billion euros in legal claims, MPS has failed to lure buyers given Rome's reluctance to shield them from legal risks despite the Treasury pushing for a re-privatisation.
In a bid to ease that process, MPS is due to complete an 8.1 billion euro ($9.5 billion) bad loan spin-off by Dec. 1, which will reduce its equity capital by 1.1 billion euros.
That would bring the bank's core capital ratio to 9.5%, with the deduction of another 400 million euros of equity seeing MPS hit the 8.8% minimum regulatory threshold.
With the pandemic driving loan losses, MPS is looking at ways to shore up its finances ahead of third-quarter results on Nov. 5, one of the sources said, adding the reclassification of some balance-sheet items could help.
MPS declined to comment.
Italy has earmarked 1.5 billion euros to help the lender with the Treasury hoping to use the funds to ease a merger.
MPS' fate is causing rifts within Italy's ruling coalition where the majority of the 5-Star Movement opposes sale plans by Treasury chief and prominent Democratic Party member Roberto Gualtieri.
Party sources said leading 5-Star members wanted Rome to use the 1.5 billion euros to subscribe to a new share issue at the bank, now worth just 1.16 billion.
Having acquired full ownership, the state should extend the mid-2022 re-privatisation deadline, the sources said.
But a senior government official said the Treasury ruled out any extension and a separate source confirmed Italy had not requested any changes to the terms of MPS' 2017 bailout agreed with Brussels.
The official said the Treasury was still hopeful the money could be used to cover capital needs in the context of a deal with a healthier peer.
Even before the pandemic, MPS' turnaround had been thrown off track by lower-for-longer interest rates and Italy's worsening macro outlook.
The bank must rebuild capital after completing the bad loan spin-off to meet conditions set by the European Central Bank to authorise the transaction.
(Additional reporting by Foo Yun Chee in Brussels, Stefano Bernabei in Rome; Editing by Kirsten Donovan)