M&A has been a long-running theme in Italy as the country’s banking sector remains highly fragmented. Fragmentation is undermining individual bank and overall sector profitability and returns. While Italy is hardly unique in Europe in this respect, Marco Troiano, deputy head of the financial institutions team at Scope, believes consolidation could bring benefits in terms of scale and capacity to invest in digital transformation.

NPL ratios in Italy have reduced sharply in recent years and the banks continue to engage in NPL and UTP offloads and present ever-improving metrics in this regard. A continuation of this process, leading to cleaner balance sheets across the sector, could make the consolidation theme more compelling.

Cross-border mergers involving the bigger Italian banks would appear to be off the agenda for now. “In theory, well executed cross-border M&A adds to the diversification of revenue streams and hence to the stability and predictability of earnings in the medium term – which is positive for bank credit,” Troiano said. “In truth, the immediate case for cross border M&A is much weaker than the case for domestic M&A, due to lower cost synergies and cross-selling opportunities.”

Troiano is more optimistic about domestic consolidation, even though there are some latent uncertainties about the impact of Covid-19 on the country’s banks, including on NPLs. “There is no sign yet of a new wave of NPLs but we do expect it to come eventually once moratoriums expire and if public support to borrowers starts to soften,” Troiano said. “This could prove an obstacle but everything has its price, and I believe the drivers for more M&A will prevail. Italy is overbanked, and the Italian banking system has to move on from the sub-par profitability of the last decade. With the interest-rate outlook as depressed as it is, management will be looking for cost cutting opportunities.”

Positive supervisory stance

The tone of the European bank M&A narrative has flip-flopped in recent years in line with changing market perceptions of supervisory reactions. The ECB’s guide clarifying its supervisory approach, published at the beginning of July and open as a public consultation until 1 October, revealed a much more open-minded and positive approach to bank M&A in the euro area. The ECB believes Europe’s banking sector is too fragmented and sees integration as a tool to raise sector profitability, which it accepts is too low.

The euro area’s top banking supervisor has no bias one way or the other towards mergers. It wants M&A activity to be led by market forces and for deals to have industrial logic. As long as the mergers presented to it are credible and the end-result is a sustainable business model with sound governance and risk management; it will adopt a flexible approach.

The ECB’s starting point on capital adequacy is the weighted average P2R and P2G of the entities involved. Based on the supervisor’s view of consolidation risks or benefits, capital requirements can be adjusted up or even down. The ECB accepts badwill as a fact of life in a market where banks trade at discounts to tangible book value. Its basic stance is that as long as badwill is used to reinforce the sustainability of the combined entity, and CET1 buffers boosted through badwill are not distributed until the sustainability of the combined entity has been firmly established, badwill will be recognised.

Intesa-UBI

Intesa Sanpaolo has received all approvals for its acquisition of UBI Banca, Italy’s fifth largest banking group – from the ECB, Bank of Italy, Consob, insurance regulator IVASS and from the competition watchdog. With all approvals granted, Intesa is pushing hard to get the deal over the line. Combining Intesa and UBI’s franchises would further strengthen Intesa’s domestic leadership. “None of the rumoured combinations would come close to challenging Intesa’s leadership in the domestic market if the UBI acquisition is successful,” Troiano said.

The EUR 0.57 cash component (added the day after Intesa received antitrust approval) on top of the 1.7 Intesa shares already on the table raised the offer to a 44.7% premium to UBI shares. Beyond the financial incentives, Intesa’s chief executive is plying an emotional line to get UBI shareholders on-side. The cash component, he wrote, “rests on [Intesa’s] belief that a closer bond with all UBI shareholders will make the new entity stronger and more cohesive as it faces the complex environment brought on by the Covid-19 pandemic. It will also provide liquidity to the hard-hit regions in which UBI Banca’s shareholders and stakeholders are concentrated”. UBI’s headquarters are in Bergamo in northern Italy, which was hit very hard by Covid-19. UBI shareholders have until 28 July to decide.

BPER Banca

As part of its deal to acquire UBI, Intesa is selling 532 branches to BPER Banca. This is above initial indications of 400-500. The supplementary agreement between the two banks estimates the transfer of customer deposits and indirect funding at c. EUR 29bn and EUR 31bn respectively, as well as of net loans estimated at c. EUR 26bn. Over 70% of assets and liabilities are related to customers located in the Northern regions of Italy. BPER is financing the cash purchase via a rights issue of up to EUR 1bn.

As part of ongoing efforts to clean up its balance sheet, BPER completed the sale in early July of 95% of the mezzanine and junior tranches of its SPRING bad loan securitisation to an institutional investor. As a result, the group was able to deconsolidate the EUR 1.2bn GBV portfolio. Bad debt disposals by the group in the last two years have amounted to roughly EUR5bn. The latest sale pushed the gross NPE ratio down to 9.3% pro-forma from 11.1%. The acquisition of branches from Intesa will improve the ratio to 8.4%.

Last year, BPER and Banca Popolare di Sondrio acquired the 39.99% of asset manager Arca (AUM of EUR 30bn) auctioned off by Banca Popolare di Vicenza and Veneto Banca in receivership, taking BPER’s stake to 57.06% and BP Sondrio’s to 36.83%.

Banco BPM

Banco BPM, Italy’s third largest banking group, would appear to be putting itself in play. Speculation about its future has been rife ever since its chairman said last year that the bank could be part of a process of consolidation through mergers of equals. Current speculation is that BPM is in friendly talks with UniCredit; media suggesting the two chairmen and CEOs have held preliminary discussions (denied by UniCredit’s CEO, who said the bank is not well disposed to consolidation at this time).

There is also speculation that BPM has held exploratory talks with Banca Monte dei Paschi di Siena; again media speculating that the chairs of the two banks had met. “The deal to transfer EUR 8.14bn in NPLs and UTP loans to AMCO has put BMPS back on the map,” Troiano noted. The transfer cut BMPS’s NPE ratio by two-thirds to 4.3% and improved its solvency metrics; a prelude to the government selling its 68.247% stake in the next year.

Author: Keith Mullin: k.mullin@scopegroup.com