Italy could have a new top three bank behind Unicredit and Intesa Sanpaolo by the end of next year as the country's co-operative lenders size each other up for take-over. After initially baulking at new governance rules that make it easier for them to be bought, Italy's mutual banks - known locally as popolari - have accepted their fate and advisers are working on several possible combinations.
At the heart of this financial courtship, played out against a backdrop of personal rivalries and competing regional loyalties, is the desire to create a robust local player that would be shielded from foreign predators. "Small isn't beautiful in our job," said Popolare di Milano CEO Giuseppe Castagna. "The bigger, more capitalised you are, the harder to gobble up. So the one thing we can do to face off foreign ambitions is have stronger, bigger banks," he added.
Like pasta varieties that are unique to certain regions and little known beyond, Italy has nearly 700 different bank brands servicing its local populations. To shake up the sector and support a sluggish economy, Prime Minister Matteo Renzi wants to see that number reduced. The supply of credit to businesses has been shrinking for the past three years, reflecting bad debts but also the sorry state of lenders struggling to make money.
Spain, which has slashed the number of banks to around 14 from 45 since a property bubble burst in 2008, could be an example of what is to come in Italy. Early, informal talks are concentrated among the four main popolari: UBI, Banco Popolare, Banca Popolare di Milano and Banca Popolare dell'Emilia Romagna. The most likely scenarios involve a combination of Banco Popolare with UBI, bringing together Italy's fourth- and fifth-biggest banks, or a tie-up between Banco Popolare and Popolare Milano. While the situation remains fluid, contacts between UBI and Banco Popolare have intensified in recent weeks, bankers said.
Both lenders declined to comment. A merger between the two
would leapfrog Monte dei Paschi di Siena as Italy's third-largest bank by assets, forming a new powerhouse with some 250 billion euros ($280 billion) in combined assets and strongholds in the rich northern Lombardy and Veneto regions. A Banco Popolare-Popolare Milano tie-up would come close, creating a new top four lender. UBI has also been tipped as the most likely candidate to rescue Monte dei Paschi - the worst performer in European bank health tests last year - but it has repeatedly poured cold water on such a deal. The Tuscan bank has been in crisis mode for years due to the effects of a costly take-over on the eve of the financial crisis, losses on derivatives trades and Italy's long recession.
A new group combining UBI and Banco Popolare would still be way behind heavyweights UniCredit and Intesa, which have 900 and 682 billion euros of assets respectively. Such a tie-up would likely push Popolare di Milano, which is based in the financial capital and like UBI thrives in Lombardy, towards a deal with Popolare dell' Emilia Romagna, a slightly larger lender that has its power-base in the neighbouring region around Bologna. The two banks declined to comment.
The dating game has been sparked by a reform introduced by government decree in January. That means the 10 biggest popolari will convert into joint-stock companies by the end of 2016, scrapping rules that give shareholders one vote each regardless of the size of their stake. Fearing the reform could attract foreign bidders, the local banks are taking pre-emptive action before anyone swoops in. Three or four-way mergers might make more sense in such an overcrowded market but they are more difficult to pull off. The first set of tie-ups are likely to be all-share deals but some banks may need to tap the market for cash as the European Central Bank - which would have to give its blessing to any deal - is reviewing lenders' overall riskiness.
Banco Popolare has already said its core capital will take a hit from the ECB review, though it says this will be limited. Italy's biggest popolari are valued at 0.7-0.9 times book value as their shares soared in anticipation of a merger frenzy. In Spain, BBVA paid 1.19 bln euros for state-rescued Catalunya Banc last year, valuing it at below 0.5 times its book value.
"No one wants to sell for cheap, and it's already complex enough to bring two banks together," said a top banker. "That doesn't mean we won't have more tie-ups at a later stage." Set up in the 19th century to serve the interests of local businesses, the popolari also want to maintain their identities. Popolare di Milano, for one, has set as a condition for any deal keeping the headquarters in Milan. Its CEO would prefer a tie-up with Banco Popolare, also because the CEO of that bank, Pier Francesco Saviotti, is likely to retire soon, bankers say.