ECB Urges Italy Banks Planning M&A to Target Strong Capital

  • Banco Popolare, Banca Popolare di Milano seeking merger
  • ECB requested banks to submit business plan within a month

The European Central Bank is urging Banco Popolare SC and Banca Popolare di Milano Scarl, locked in merger talks for weeks, to form a lender with a strong capital position and asset quality amid increasing investor concerns that the deal will falter.

The ECB in a letter requested the banks submit a business plan within a month, Banca Popolare di Milano and Banco Popolare said in separate statements Friday. The new lender, which would be Italy’s third largest, should have financial strength “even through appropriate capital actions,” the central bank said.

“The demanding conditions imposed by the ECB are raising concerns among investors that the deal will fall apart unless the lenders raise fresh capital,” said Niccolo Pini, who helps manage about 3 billion euros ($3.4 billion) at Banca Ifigest SpA. “The ECB conditions highlight the persisting weakness of the country’s banking industry, putting pressure on the whole sector.”

The ECB is stepping up pressure on Italian banks to tackle an estimated 360 billion euros of troubled and defaulted loans that are undermining new lending and weighing on the economy. Lenders from Banca Monte dei Paschi di Siena SpA to cooperatives including Popolare di Vicenza SCpA and Banca Carige SpA have faced ECB scrutiny of their balance sheets, with some threatened with resolution.

Italian Consolidation

Shares of Banco Popolare rose 1.5 percent at 10:44 a.m. in Milan trading after dropping 14 percent on Thursday. Banca Popolare di Milano advanced 0.2 percent after declining for the past three days. That helped pare losses to about 27 percent this year.

The ECB also indicated that the entity resulting from the merger should have a transparent and efficient governance. The two banks said in their statements that they will hold board meetings by March 22 to discuss the matter.

A merger between the two lenders may encourage more deals, with the government pressing for consolidation of the so-called popolari to spur lending and help the economy recover from a three-year recession. It would be the first combination since the approval of a law forcing Italy’s biggest cooperatives to become joint-stock companies a year ago.

Banco Popolare Chief Executive Officer Pier Francesco Saviotti and Giuseppe Castagna, his counterpart at Popolare Milano, agreed on a merger plan after months of negotiations. Castagna would oversee the combined company and while Saviotti would become chairman of the executive committee, people with knowledge of the plan said. Banco Popolare Chairman Carlo Fratta Pasini will continue in that role for the combined company, the people said.

The merger would create a lender with about 245 billion euros in assets. Only UniCredit SpA and Intesa Sanpaolo SpA are larger.

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