In the first significant banking deal in almost a decade, Italy created its third-largest bank as Prime Minister Matteo Renzi rushes to shore up confidence in the flat-lining economy ahead of the crucial December referendum on constitutional reform.
In twin shareholder votes held on Saturday, shareholders of Banca Popolare di Milano (BPM) and Verona's Banco Popolare approved a merger that will create a new bank, to be called Banco BPM, with €171-billion ($247-billion) in assets, 25,000 employees and an 8.2-per-cent national market share.
The merger comes after a brutal year in the Italian banking industry, which is weighed down by €200-billion in non-performing loans, negative interest rates, perennial recapitalization problems at Monte dei Paschi di Siena (MPS), the current No. 3 bank and the weakest big bank in Europe, and plunging share prices. Italian banks trade at mere 0.2 times to 0.3 time tangible book value.
The ill health of many of the Italian banks, especially the regional lenders, has acted as a brake on the recovery of the Italian economy, the euro zone's third largest. Eight years after the financial crisis, the economy is barely growing and is still almost 10 per cent smaller than it was before 2008. The unemployment rate, at 11.4 per cent in August, has barely improved in recent years, in part because the bank lending dearth has put enormous stress on employers.
Backed by European Central Bank president Mario Draghi, who has been urging a bank cleanup and consolidation exercise for years, the centre-left government of Mr. Renzi opened the door to bank mergers last year by passing a law that forced mutual (or co-operative) banks to become joint-stock market companies.
The law removed restrictions on mergers and takeovers, allowing the creation of Banco BPM, the first bank deal of any size in Italy since MPS's nearly fatal, top-of-the-market takeover of Banca Antonveneta in 2007.
Other mergers are expected to follow, but there is no guarantee the Italian bank sector will spring back to life any time soon and Mr. Renzi is running out of time. He is desperate to produce good economic news before the Dec. 4 referendum, which will determine his political future.
The constitutional referendum will, in essence, ask voters whether they support Mr. Renzi's pitch to end the government's perfectly symmetrical bicameral parliamentary system by downgrading the senate to a far less powerful regional assembly. His goal is to streamline the law-making process by consolidating most of the power in the lower house, the Chamber of Deputies.
Mr. Renzi has said he would resign if the referendum goes against him and the polls point to a narrow No vote. The fear among investors is that a No vote would cripple Mr. Renzi and his government and possibly trigger a snap election that could see the election of the rising Five Star Movement, the anti-establishment party, and main opposition party, that has vowed to hold a referendum on the euro.
Carlo Gori, senior bank analyst at Moody's, said a losing referendum could hurt the banks and their recapitalization plans. "Investor confidence would be affected [by a No vote] and that would pose a risk for banks that need capital, though not all institutions have immediate needs," he said.
Banco BPM was created through a share swap and starts life with a market value of about €5.7-billion. The weaker partner in the deal was Banca Popolare, which was forced to undertake a €1-billion capital hike ahead of the merger. The ECB had made the capital-raising exercise a condition of the merger.
The new bank will sell non-performing loans, cut annual costs by €320-million, or 10 per cent of the combined total, by 2019 and seek the elimination of 1,800 jobs.
With bank consolidation under way, the future of MPS looms as the biggest risk to the Italian banking system. European regulators have ordered MPS, the world's oldest bank, to sell close to €30-billion of bad debts. A €5-billion recapitalization plan proposed by JP Morgan seems to be going nowhere. A new, competing plan has surfaced, this one led by veteran Italian banker and former industry minister Corrado Passera. His proposal is backed by Bob Diamond, the American banker who was CEO of Barclays until his resignation in 2012.