Banco Pop. Said to Plan Capital Hike to Win ECB Deal Support

  • Bank planning to raise 1 billion euros through mix of actions
  • ECB demanding lenders have strong capital position after deal

Banco Popolare SC is planning to raise about 1 billion euros ($1.1 billion) through a share sale, bad loan and asset disposals to meet the European Central Bank’s approval for a planned merger with Banca Popolare di Milano Scarl, two people with knowledge of the matter said.

The lender sent a letter to the ECB on Monday proposing a series of actions to strengthen its capital as requested by the Frankfurt-based regulator, the people said, asking to not be identified because the matter is private. Banco Popolare will raise money through a placement to institutional investors that may include some foundations already invested in the company, one of the people said.

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.

It’s important that the merger is successful because it may be the first of many, Daniele Nouy, chairman of the ECB’s supervisory arm said in a report to the European Parliament in Brussels on Tuesday. While the ECB welcomes mergers in Italy, they have to be successful and make sense from a regulatory standpoint, she said.

Spokesmen for the two lenders declined to comment.

Banco Popolare fell as much as 7.3 percent in Milan trading, making it the worst performer on Europe’s 47-member Stoxx 600 Banks Index. The shares were down 2.7 percent to at 7.06 euros as of 1:47 p.m. Banca Popolare di Milano rose 0.9 percent to 69.6 cents.

“It is fairly evident that the possible rights issue of Banco Popolare aimed at cleaning up the balance sheet will result in a much better net entity with Popolare di Milano shareholders net-net gainers in the sense that they will not have to face the burden from restoring BP’s asset-quality weakness,” Fabrizio Bernardi, an analyst at Fidentiis Equities, wrote in a note on Tuesday.

Banco Popolare reviewed its options after the ECB urged the two Italian lenders to form a company with a strong capital position and transparent and efficient governance. Chief Executive Officer Pier Francesco Saviotti said on Saturday that the bank is considering options for increasing capital, including selling shares, bad loans and non-core assets.

The two lenders said last week that they will hold board meetings by March 22 to discuss the matter. Banco Popolare said in a note late Monday that it postponed the meeting to March 23 “for purely technical reasons.”

Banco Popolare’s Saviotti and Giuseppe Castagna, his counterpart at Popolare Milano, agreed on a merger plan in February after months of negotiations. Castagna would oversee the combined company, while Saviotti would become chairman of the executive committee, people with knowledge of the plan said.

The tie-up would be the largest since the ECB took over banking supervision in late 2014. It would create a lender with about 245 billion euros in assets, the largest among Italian banks after UniCredit SpA and Intesa Sanpaolo SpA.

The size of the planned capital increase was reported earlier by Italy’s Ansa.

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