Italy's MPS eyes tie-up that may well prove harder than expected

Italy's Banca Monte dei Paschi di Siena, the biggest bank to fail last year's European bank health check, achieved its first quarterly profit for nearly three years in the first three months of 2015. Now, the accepted wisdom is that MPS will move swiftly towards a tie up - a deal with northern Italian lender UBI Banca, for example, has been much touted.

But it may well prove harder than expected - not least because the Italian economy's return to growth is threatening to reduce the need for deal making among Italy's fiercely territorial midsized banks.

For MPS - the bank that calls itself the world's oldest - even a quarterly profit of €72.6m represents a milestone after a torrid and, at times, tragic three years. Fabrizio Viola, MPS chief executive, has also said that after the bank's €3bn capital raising, which is slated for coming weeks, it will finally be able to pay back the Italian state's bailout bonds.

Profitability, as at most Italian banks, remains weak, however. MPS now predicts net profit of about €880m in 2018, having previously hoped for €900m in 2017. By 2018, it expects its return on tangible equity to have reached about 8 per cent. But forecasts for what happens between now and 2018 are scant on detail.

Bankers close to MPS insist that when its capital raising is completed, it will at least be able to take a seat at the dealmaking table. A bigger question, though, is whether anyone will want it there.

Banks are being drawn to the table by a government reform of Italy's popolari mutual banks which, by no coincidence, coincides with MPS's cash call. A change in the law will force the 10 largest, with a combined €525bn in assets, to become joint stock companies.

For now, popolari are popular with investors. Shares in the largest popolari have risen about 35 per cent this year. Shares in MPS are up 20 per cent. But consolidation among popolari banks could lead to €1.8bn in savings, or 15 per cent of their current cost base, according to Bernstein analysts Johan De Mulder and Priyanka Agnihotri.

Bankers argue that, as well as paving the way for cost-cutting, consolidation will also result in bigger banks better placed for any cash calls that may be required under a new single banking supervisor.

But Italy's return to growth in the first quarter is removing the pressure for consolidation and raising expectations that the burden of Italy's more than €300bn in non-performing loans will start to lighten in an economic upturn.

Giuseppe Castagna, chief executive of Banca Popolare di Milano, has indicated on several occasions that he is ready to consider tie-ups. So has Banca Popolare CEO Pier Francesco Saviotti who has even indicated that Banca Popolare di Milano would be a suitable partner. Banca Popolare di Vicenza and Veneto Banca have hired advisers. Mr Castagna is expected to announce his adviser next week, according to people close to him.

With a more than 60 per cent jump in BPM's share price this year giving BPM a market value of €4.1bn, Mr Castagna's enthusiasm is clear. In any all-paper deal, he will come out on top, bankers say.

On the subject of Monte Paschi and its much-mooted tie up with UBI Banca, the situation is more complex. Victor Massiah, UBI's tough but well respected chief executive, has given no indication of appointing advisers soon. Along with Intesa Sanpaolo, UBI emerged as one of Italy's strongest banks in last year's stress tests - a position that people close to UBI say it is not planning on giving up. Its common equity Tier 1 stands at 12.6 per cent. But MPS's pro forma ratio fell to 10.9 per cent as of March 31 from 11.4 per cent at the end of December.

Neither Mr Massiah nor his shareholders are keen to consider a tie-up with MPS unless it comes very cheap, according to people close to them. Meanwhile, the MPS shareholders about to pump €3bn into the bank, having put €5bn in only last June, appear unlikely to have the appetite to sell the bank in a fire sale. Haunting the minds of popolari executives is also the realisation that the last round of Italian banking mergers in 2007 varied wildly in their outcome. The tie-up of Intesa and Sanpaolo to create Italy's most strongly capitalised bank was deemed a success, while MPS's €9bn cash buyout of Antonveneta irrevocably weakened its capital base. No one wants to be on the losing side this time.

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