Italian lenders’ tie-up paves way for consolidation
Italy’s banking sector is braced for further consolidation following its first merger in a decade, agreed last week between mutual banks Banca Popolare di Milano and Banco Popolare.
The deal to combine BPM and Banco Popolare, creating the country’s third-largest banking group by market capitalisation holding €170bn in assets, comes as the Italian banking sector is coming under strain. Investors’ concerns over banks’ exposure to €360bn in gross non-performing loans have sent shares plunging roughly 25 per cent since the start of year.
Nonetheless, demands by the ECB for additional capital and governance, in its role as chief supervisor of the single supervisory mechanism, have left market participants concerned about the difficulties ahead for potential merger candidates, says bankers and analysts.
The ECB demanded that Banco Popolare, which has €21.7bn of gross deteriorated loans compared with €5bn at BPM, acquire a further €1bn via a capital raising — even though both banks passed most recent stress tests. The announcement of the merger and the conditions being imposed led to shares in both banks falling 6 per cent.
Johan De Mulder, analyst at Bernstein, said the weeks of wrangling over the merger terms between BPM and Banco Popolare showed that “the ECB is getting serious about wanting to offload bad debt from bank balance sheets”.
“A successful merger will be used as a template for further consolidation in the sector and shows the ECB’s game in pushing for more aggressive disposals and potential capital raises,” he said.
A law passed by the government of Matteo Renzi in January last year fired the starting gun on the consolidation process. It decreed that Italy’s 10 largest mutual banks, with combined assets of about €500bn, must become joint stock companies by the end of 2016. The Italian government wants consolidation to boost profitability and lending in the fragmented sector of more than 600 banks.
Adding to the momentum, the government this year passed an additional reform to speed up the consolidation of Italy’s smaller co-operative banks.
Davide Serra, founder and chief executive Algebris, a financial-only fund, said the Italian banking system needs “more consolidation as it has more banks than pizzerias”. “But ECB supervisory actions have destabilised market confidence,” he said.
Bankers said the focus now shifts to UBI Banca, with €120bn in assets. Both BPM and Banco Popolare held aborted merger talks with the lender — Italy’s next largest mutual bank in the wake of the merger.
Banca Monte dei Paschi di Siena, Italy’s third-largest banking group by assets, and Genoan Carige, the worst performers in the European stress tests of 2014 are also seeking buyers. Giuseppe Castagna, chief executive designate of the merged BPM-Banco Popolare, has also described the new group as a “consolidator” that could consider more deals.
“We look forward to further consolidation,” said one senior Italian government official.
Still, bankers consider the next potential “flash points” of the Italian banking sector — and test of investor confidence — are capital increases worth about a combined €2.5bn due next month at Popolare di Vicenza and Veneto Banca. These were again demanded by the single supervisor in Frankfurt and underwritten by Italy’s largest banks UniCredit and Intesa Sanpaolo, respectively.
“The key test will be the capital raisings at Veneto and Vicenza,” said Mr Serra