Italy banking merger: Beginning or end?

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Mixed regulatory messages cloud the outlook after Italy’s first big bank merger since 2008.

Castagna and Saviotti italy-R-600
Banca Popolare di Milano (BPM) Giuseppe Castagna (left) with Banco
Popolare's CEO Pier Francesco Saviotti

Optimists say the long-awaited announcement of the first Italian popolari bank merger since a 2015 government reform is the start of a wave of consolidation. It will increase competitive pressures on other mid-sized lenders in Italy, they argue.

Thousands of cooperative shareholders, however, could still annul a fusion of Banca Popolare di Milano and its bigger, Verona-based rival Banco Popolare. Even if it goes ahead, the regulator’s stance may dissuade their biggest rival UBI Banca and others from following, while making it harder to fund similar mergers.

Popolari banks rushed to appoint M&A advisers in 2015 after the government abolished their one-share, one-vote rules. The reform was meant to make it easier for them to raise equity, and – as a welcome side effect at least – to spur consolidation. So it was disappointing that Banco Popolare’s stock dropped sharply last month, when its CEO Pier Francesco Saviotti announced the deal, and an accompanying €1 billion capital increase he said the ECB had required. The news prompted KBW research to raise its capital targets for Italian banks across the board.

Rapid action

Italian banks need to take rapid action to reduce bad debt, and Banco Popolare performs particularly badly in this. The capital increase will help improve asset quality and the merger targets a new €10 billion cut in bad debt, albeit in a rather vague timeframe. Despite a commitment to avoid redundancies (necessary to get trade union buy-in), the banks estimate €1.9 billion in present-value synergies after tax and integration costs. They are also adopting a leaner governance model.

The stock market’s reaction might have been better if the ECB had done more to clarify its requirements early on. After the reform (and recurrent leaks to the press), news of a proposal for a big Popolare merger like this is hardly a surprise, though the two banks’ CEOs were quoted in late February saying there was no need for a capital raise.

Saviotti has been quite open about his dissatisfaction with the capital call, and not without reason. Shareholders will be diluted when the bank is almost four percentage points above its latest Pillar 2 ratio and merger synergies will improve capital generation anyway.

The merged bank’s increased systemic importance (it will be Italy’s third biggest) could justify a higher regulatory buffer, and the ECB wants to stamp its authority across European banking. But the ECB will make consolidation less likely if its demands on mergers are hazy until it is too late for the banks to back out. It could be setting a precedent of punishing banks for getting bigger, preventing vital efficiency gains.