This time is different for Italy's banks
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This time is different for Italy's banks

Matteo Renzi

Consolidation has been a perennial theme in Italian finance, but the country has little to show for it. This time is different.

Accompanied by the right structural reforms, Banco Popolare’s merger with Banca Popolare di Milano is a momentous occasion for Italy’s banking system.

When Mario Draghi was sworn in as governor of the Bank of Italy in 2006, he replaced Antonio Fazio, who had resigned amid accusations he helped Banca Popolare Italiana block ABN Amro’s competing bid for Banca Antonveneta.

At the time, Draghi was calling for the consolidation of Italy’s banking sector, which had more institutions than any other European country, and in his time as the Italian central bank’s governor, he even managed to oversee a number of positive advancements for the country’s cooperative banks — or popolari.

In 2008, for example, Banca Popolare Italiana successfully merged with Banco Popolare di Verona e Novara to form Banco Popolare, while in the previous year, Banche Popolari Unite had merged with Banca Lombarda e Piemontese to form UBI Banca.

But both of those lenders are still at the centre of the debate about Italy’s banking reform.

The first, Banco Popolare, merged with Banca Popolare di Milano last week, while attention has now shifted to the second, UBI Banca, with which both Banco Popolare and Banca Popolare di Milano had mulled merging in the early stages of 2016.

The cyclical nature of these developments should be enough to call into question any received wisdom about how consolidation must equal progress.

Mergers and acquisitions are not going to wipe out Italian banks’ huge stack of non-performing loans, which total nearly €330bn, and will not limit the effect of low interest rates or more stringent capital rules, which are hampering profitability globally.

But last week’s merger between Banco Popolare and Banca Popolare di Milano still represents a huge step in the right direction.

First, the deal created the third largest financial institution by assets in Italy, and the new big player says it can fuel its future profitability with nearly €365m of pretax synergies by 2018.

More importantly, it was the first merger to be completed following a series of banking sector reforms introduced by prime minister Matteo Renzi last year.

The reforms cleared some of the main obstacles preventing a wave of consolidation sweeping the country, by requiring the country’s largest popolari to become joint stock companies, and — crucially — removing shareholders’ rights to have one vote each, regardless of their size.

The influence of the European Central Bank, as chief supervisor of the single supervisory mechanism, was important too.

Pier Francesco Saviotti, chief executive at Banco Popolare, initially opposed further capital measures, before giving in to the ECB’s concern that the resulting financial institution might be too weak to withstand the likely pressure on its balance sheet.

Saviotti, who had been instrumental in bringing the merger to its successful conclusion, said the “merger was too important” for him to dig his heels in, despite arguing that both banks would have been able to manage their €26bn combined total of non-performing loans without asking investors for more money.

But the €1bn of additional capital to be raised by the combined institution before the end of October may be instrumental in helping the fledgling bank improve its asset quality ratios, which have been less than desirable at both Banco Popolare and Banca Popolare di Milano in recent years.

Most of that extra capital may be put towards loan loss reserve coverage, or absorbing losses from sales of impaired loans, which analysts at CreditSights believe could be a “game-changer” in terms of working through asset quality problems “while maintaining moderate positive return on equity”.

The ECB has had a hand in simplifying the group’s corporate governance, according to reports in the Italian press. The merged lender will have a board of 19 members initially, but that will drop to a less sprawling 15 in 2019.

Renzi’s government is not just relying on future mergers and acquisitions taking place, but on those deals producing stronger and more modern institutions.

If Banco Popolare and Banca Popolare di Milano’s merger has provided a blueprint for those expected to follow, it may just be — as Renzi described his government’s banking reforms — an “historic moment” for Italy’s financial system.

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