Banco Popolare and Banca Popolare di Milano (BPM) outlined yesterday their merger plan, which creates Italy’s third biggest bank with a stronghold in the country’s wealthiest northern regions.
The much anticipated deal, which was announced late on Wednesday after months of negotiations, is contingent on a €1bn capital increase to be undertaken by Banco Popolare. The European Central Bank (ECB) demanded the move to approve the tie-up.
The merger could prompt more deals in a fragmented industry, buttressing profits and capital levels at a time when negative interest rates are hitting revenues and a long recession has left Italian banks with €360bn ($403bn) of bad loans.
“It was a complicated negotiation, made more difficult by hurdles we had not anticipated,” BPM chief executive Giuseppe Castagna, who will be the CEO of the combined group, told analysts, referring to the conditions set by the ECB.
“The result is absolutely the best possible we could achieve. A solid bank is born, and I know this was the main concern of all analysts and investors.”
Some analysts, however, said asset disposals might be needed to further boost capital as the banks implement a plan to increase their combined level of provisioning against problematic loans — another condition set by the single supervisor. The two banks together have a gross bad loan pile of €27bn, but plan to reduce that by €10bn by 2019.
After the cash call, to be completed by the end of October, and the measures to increase provisioning, the group’s Common Equity Tier 1 capital cushion is expected to reach 12.3% of risk-adjusted assets, the banks said.
The merged bank, to be headquartered in Milan and Verona, will have around €171bn in assets, 2,500 branches and more than 25,000 staff — making it the country’s third biggest lender behind Intesa Sanpaolo and UniCredit.
The deal creates a banking heavyweight in northern Italy, with synergies from the tie-up estimated at €365mn a year from 2018.
Banco Popolare chief executive Pier Francesco Saviotti, who had long ruled out the need for a cash call, said he considered the ECB requests “excessive” — in a sign of the tensions that accompanied negotiations with the single supervisor.
He said the ECB had offered “no alternative”, adding the group would have no problems in completing the fund-raising.
The cash call, for which a pre-underwriting agreement has been signed by Mediobanca and Merrill Lynch, could include the issuing of financial instruments that can be converted into shares and a private placement, the banks said.
A source familiar with ECB thinking said on Wednesday the regulator had given a preliminary go-ahead to the deal. The banks said the ECB is expected to give its formal approval by August.
The two banks still need to present a business plan within a month. The deal also needs the approval of both lenders’ shareholders, with a vote due to take place by November 1, 2016.