Executives at Banco Popolare SC and Banca Popolare di Milano Scarl are racing to reach a merger accord that meets the European Central Bank’s (ECB) capital demands as Italy’s biggest banking deal in years threatens to unravel. After a month of talks with the lenders failed to assuage the ECB’s concerns over capital and governance, the central bank sent a letter this week urging the firms to form a company with a strong capital position. That prompted speculation the proposed merger will collapse unless they raise funds from investors.
“The banks are running out of time,” said Vanni Lucchelli, a partner at Compagnia Fiduciaria Lombarda SpA in Milan. “Talks can’t go on for months amid leaking and speculation.”
The banks’ top executives are determined to reach a merger agreement and fulfill the ECB’s requirements, the Italian Treasury said in an e-mailed statement Friday, adding that the transaction has the backing of all stakeholders and investors. The banks and their advisers are working on a plan that would include bad-loan and asset sales to meet the ECB’s demands on asset quality, said a person with knowledge of the matter who asked to not be identified.
The ECB also asked the banks to submit a multiyear business plan for the combined company within a month, and indicated that the new entity should have transparent and efficient governance. The banks said Friday they will hold board meetings by March 22 to discuss the latest developments. Separately, Banco Popolare’s annual general meeting is scheduled for Saturday.
“It will be quite embarrassing for Banco Popolare’s managers to face shareholders at the annual meeting without having answers about the bank’s future,” Lucchelli said.
The ECB is pushing Italian banks to tackle an estimated 360 billion euros ($407 billion) of troubled and defaulted loans that are undermining new lending and weighing on the
Officials reviewing the merger, the largest since the ECB took over banking supervision in late 2014, are setting a high bar.
Italian bank shares have tumbled as the ECB intensified scrutiny of the country’s lenders. Banca Carige SpA, told by the central bank last month to submit a new funding plan after losses widened, has tumbled 56 percent this year. Banca Monte dei Paschi di Siena SpA, Italy’s third-largest lender, dropped 50 percent. Banco Popolare has plunged 45 percent.
A failure of the merger would set back a long-awaited round of consolidation that both the Italian government and the ECB are seeking to spur lending, strengthen banks and help the economy recover from a three-year recession. Italy approved a law last year forcing the biggest cooperative lenders to become joint-stock companies, as restrictions on ownership and voting rights for these community-oriented banks have stood in the way of consolidation.
“The conditions imposed by the ECB will have to be met at any cost,” said Francesco Confuorti, chief executive officer of Advantage Financial SA, a Milan-based investment firm. “If the deal is not signed, this will be a very bad signal that would highlight the persisting weakness of the country’s banking industry.”
Banco Popolare CEO Pier Francesco Saviotti and Giuseppe Castagna, his counterpart at Popolare Milano, agreed on a merger plan after months of negotiations in February. Castagna would oversee the combined company, while Saviotti would become chairman of the executive committee, people with knowledge of the plan said.
The merger would create a lender with about 245 billion euros in assets, behind only UniCredit SpA and Intesa Sanpaolo SpA among Italian banks.