Italian banks may finally be giving in to the imperative of concentration. Months after Intesa Sanpaolo offered to buy UBI Banca, state-owned (68%) Banca Monte dei Paschi di Siena (MPS) is considering a merger with Banco BPM. The biggest winner would be the Government.
On paper, there is some logic in the operation, which BPM denied on Tuesday. Starting with BPM president Massimo Tononi holding the same position in Monte dei Paschi, while BPM hired Andrea Rovellini, MPS chief financial officer, in May as head of risk management.
The expanded group, worth 3.8 billion at pre-disturbance prices, could cut costs. If I could cut 5%, as Intesa intends with UBI, with a discount rate of 10% and deducting 25% of taxes, I would save 1.8 billion, which is worth MPS’s own funds. It is key that the merger would help the government sell its stake, the product of a bailout in 2017, giving it a third of a larger and more profitable bank.
But BPM investors have less to gain. A large public shareholder eager to sell would weigh on the stock. Capital could also be a problem. MPS sold a small number of toxic loans on Monday, lowering its CET1 to 11.1%, less than 12.9% of BPM. And while that lowered its delinquent debt ratio to 4%, analysts expect it to accumulate new bad debt provisions equivalent to 1.2% of total loans this year, up from 1% of BPM. The combined group may need new capital if the economy worsens.
Then there is MPS’s high-cost base and litigation risks (potential $ 4.8 billion), after its near collapse. Operating expenses will be 74% of revenue this year, compared to 65% for the other five major Italians.
Still, the other possible BPM partners are busy. The purchase of UBI by Intesa would end BPER Banca acquiring hundreds of its branches. BPM investors may have to decide between running out of a deal or having a risky one.