Italian banks: by popolari demand

Investment bankers' pitch books were piling up in the C-suites of Italy's popolari mutual lenders long before the bank reforms of Matteo Renzi's government became law last month. Alas, hopes that consolidation might at last reach the lower echelons of the country's banking industry have so far manifested themselves in share prices - not deals.

The reforms oblige popolari banks with assets above €8bn to become joint stock companies within 18 months and to modernise their voting structures. In the past, a few institutional investors with local interests dominated these banks, blocking consolidation. Annual meetings this month will reveal whether bold reform can proceed.

The mutuals' status quo is unsustainable. Of the 25 lenders that failed the European Central Bank's stress tests last year, nine were Italian. Investors took the combination of capital needs and government reform as heralding popolari mergers, driving up their shares.

And how. Of the four biggest by market value, those of UBI Banca (Italy's fifth biggest bank, which aced the ECB review and is seen as a buyer) are up 23 per cent this year; Banco Popolare's are up 42 per cent; Banca Popolare dell'Emilia Romagna's 44 per cent; and Banca Popolare di Milano's 64 per cent. All now trade between 0.8 and 0.9 times tangible book value, for returns on equity mostly below 6 per cent. In other words, deals - and higher returns - are priced in.

The issue is how quickly the banks can lift returns, once they demutualise and consolidate. With cost-to-income ratios of between 67 per cent (Banco Popolare) and 56 per cent (BPER) there is ample scope to cut costs. Citigroup estimates between 10 per cent and 20 per cent of an acquired bank's cost base could go.

But combining sub-scale banks might not create more efficient lenders. Mergers, hard as they are, are easier than cutting branches and jobs. There will be plenty of work to do after the investment bankers have taken their fees and gone home.

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