At last, an Italian bank merger looks like it might actually go ahead. But there is much more work to be done to fix Italy's troubled banking sector.
The proposed union of Banco Popolare SC (Popolare) and Banca Popolare di Milano (BPM) combines a firm with a relatively weak balance sheet with one in a relatively strong position. On top of that, Popolare plans an additional 1 billion euro ($1.1 billion) rights offering. The pair claim the combined entity, with the new equity, would have a healthy capital ratio of 13.7 percent, and its provisioning for bad loans would be brought in line with the level at other big Italian lenders.
There are hopes too that the first significant bank deal in Italy in years could provide the impetus for more to follow suit. Regulators who have been pressing for consolidation believe there are too many banks in Italy, spread too thinly and with expenses that are too high and revenues too low.
Don't hold your breath. First, it's unclear a single deal will really pave the way for a series of others in quick succession. Italy last year abolished restrictions on ownership and voting rights in the banking sector, which had been seen as an obstacle to deals.
But the Popolare-BPM deal still had to meet the ECB's demands that a post-merger bank will be better governed and better capitalized. The European regulator was flexible on these issues -- this time. It's unclear how it would look upon other mergers.
The new combined bank could become a consolidator of smaller players, but that will be on hold until management digests the transaction they've just announced. And other consolidators -- bigger banks or foreign investors -- are likely to want to see how this deal plays out, including proposed layoffs and other cost savings, before they follow on.
Second, even if some deals do go through, it's not clear that will result in the sort of efficiency gains that regulators are looking for. Take the Popolare and BPM merger. They say they can produce cost savings equivalent to 10 percent of their combined cost base. That's significant -- if they can really pull it off.
But revenue synergies would be a disappointing 1 percent of the combined revenue base. With senior executives of the two banks holding down the top slots at the merged company, it's hard to envision much fresh thinking will take hold after this merger, or any other merger in the Italian banking sector that follows the same game plan.
Beyond the question of mergers, there's one very important issue facing the Italian banking sector: the country's estimated 360 billion euros of troubled loans that are a drag on lending and the broader economy. The banks have been unable to sell non-performing loans at prices they deem acceptable, despite the Italian government's plan, announced in January, to provide a guarantee for securitized packages of such loans. The nation's lenders are reluctant to write down the value of their loan books further, as that would also hurt their capital position.
Italian bank stocks have recovered from their lowest levels in January, but they continue to languish, and are down about 25 percent this year as a group. A first significant merger in the sector in years is a step in the right direction. But it's going to take a lot more to convince investors that a major corner has been turned.
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