Banco Popolare Tumbles on Surprise Loss, Hitting Merger Partner

  • Quarterly result may affect value of planned capital increase
  • Popolare di Milano's share of joint bank fixed at 46%

Banco Popolare SC dropped the most in more than two years after the company reported an unexpected first-quarter loss and a slump in revenue. That prompted investors to dump the shares of Banca Popolare di Milano Scarl ahead of a merger between the two Italian lenders.

Banco Popolare’s stock fell 16 percent in Milan trading after the company posted a 314 million-euro ($357 million) loss, while analysts predicted profit of 41.6 million euros, according to the average of five estimates compiled by Bloomberg. Popolare di Milano, which made a profit, slumped almost 11 percent, the most since January.

Verona-based Banco Popolare agreed in March to buy Popolare di Milano in an all-stock deal that will create Italy’s third-largest lender with 171 billion euros of assets. As part of the plan, Banco Popolare, which will hold 54 percent of the joint bank, will tap investors for 1 billion euros.

Health Report

“First-quarter earnings show the different state of health of the two banks, underlining that the deal strongly penalizes Pop. Milano’s shareholders,” Fabrizio Bernardi, an analyst at Fidentiis Equities, said by e-mail. “In a deal in which the ratios are already fixed, the shares of the pair are strongly linked.”

The poor first-quarter results at Banco Popolare create the risk that the capital increase will be done at a large discount, said Stefano Girola who helps manage about 40 billion euros at Syz Asset Management in Lugano, Switzerland. The resulting dilution would also penalize Pop. Milano investors, he said.

Banco Popolare’s earnings don’t endanger the merger itself, set to be completed this year, the analysts said. Both lenders would have already considered the difference in quality between the two banks and Pop. Milano investors would have weighed that against the opportunity to add a partner with more than double its assets, said Gianni Piazzoli, head of advisory at Anthilia Capital Partners SGR SPA.

Popolare di Milano was down 8.7 percent at 51 cents as of 2:03 p.m. Banco Popolare fell the most since January 2014 and was 13 percent lower at 4.23 euros. The banks were the worst performers in the Italian benchmark FTSE MIB Index.

Revenue at Banco Popolare declined 18 percent to 786 million euros, driven by lower income from lending, trading and fees. Loan-loss provisions more than tripled to 684 million euros from a year ago as Banco Popolare complied with European Central Bank conditions for approving the merger.

Banco Popolare’s capital increase may be carried out in late May or early June depending on the market regulator, Chief Executive Officer Pier Francesco Saviotti said in a conference call with analysts.

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