A pedestrian passes an automated teller machine (ATM) at a branch of Banca Popolare di Verona bank, a subsidiary of Banco Popolare, in Verona, Italy. The surprise announcement on Friday that Banco Popolare is planning a €1.5bn ($2.05bn) rights issue lifts to about €6bn the total being raised among 15 Italian banks under scrutiny from the European Central Bank in its sector review.


Reuters/Davos/Milan


Bankers expect a thorough European Central Bank (ECB) health check of the eurozone’s largest banks to reignite domestic and cross-border merger activity by rebuilding confidence among lenders.
The sovereign debt crises that nearly caused a break-up of the single currency in 2011/12 has generated mistrust among banks and caused an effective breakdown of cross-border bank investment flows as they hoarded capital at home.
But the ECB’s asset quality review, an assessment of the balance sheets of more than 120 banks that is due to be completed next autumn, should bring transparency on the quality of banks’ loans and other assets, bankers and regulators at the World Economic Forum in Davos said.
The initial increase in merger activity is expected to take place within single countries as weaker companies restructure and accept effective takeovers by domestic rivals, but bankers believe this will then spread to a pan-European level.
“The pre-conditions are there,” Deutsche Bank CEO Anshu Jain said when asked whether the EU health checks on banks and the move towards banking union would bring cross-border deals.
However, Jain added that progress will not come overnight. “I am not predicting a wave (of deals),” he said.
Bankers say that the latest checks on capital and stress tests of banks’ resilience to shocks must be rigorous, pointing to the 2011 tests that found no weaknesses among Spanish and Irish banks, even though the countries subsequently asked for bailouts of their banking sectors.
European Monetary Affairs Commissioner Olli Rehn said that banks are already preparing for the results of the stress tests by raising capital on the market, with about €80bn ($109.5bn) raised to strengthen banks over the past couple of years.
There is unlikely to be significant further consolidation in the Spanish banking sector, which has already shrunk from about 50 players at the start of the sovereign debt crisis to fewer than 10.
Italian banks, however, appear still to have some way to go as the likes of Banca Monte dei Paschi di Siena and Banco Popolare, the country’s third and fourth-largest banks respectively, seek to raise more capital.
Mid-sized Italian banks are candidates for mergers, Bank of Italy Governor Ignazio Visco and the CEOs of Italy’s two largest banks, UniCredit and IntesaSanpaolo, told Reuters in interviews in Davos.
“For sure, some (mid-level) banks will need some additional capital. It’s possible to start to see consolidation at that level,” UniCredit CEO Federico Ghizzoni said.
“It will be interesting to see what happens after the asset quality review, not only in Italy but also at the European level,” he said, adding that he expects cross-border deals.
However, Giovanni Bossi, CEO of smaller Italian bank IFIS, cautioned against merging “two small weak players to create a larger weak one”.
Some bankers said that consolidation would not be constrained within the euro zone because banks need to scale up to afford technological investment and cut costs.
One banker said he expected a consolidation wave among Swiss private banks as they move towards a system of automatic exchange of tax information with foreign authorities.
Another senior executive at a European bank said that the forthcoming banking union under ECB supervision will also bring M&A activity. “With time, there will be cross-border mergers,” he said.
The surprise announcement on Friday that Banco Popolare is planning a €1.5bn ($2.05bn) rights issue lifts to about €6bn the total being raised among 15 Italian banks under scrutiny from the European Central Bank (ECB) in its sector review.
Profit-sapping loan losses have continued to afflict Italian banks even as the country’s longest postwar recession began to recede at the end of last year, prompting the Bank of Italy to demand that lenders boost provisions and beef up capital before the ECB’s check-up this year.
Monte dei Paschi di Siena must raise €3bn to repay state aid and stave off nationalisation. Its top shareholder forced it to delay the cash call to mid-May, sinking management plans to launch in January before the rush to the market begins.
Smaller peers Banca Popolare di Milano (BPM) and Carige must also tap investors in the coming months.
Unlisted Veneto Banca, meanwhile, says that a planned conversion of debt into equity and asset sales should boost its core capital ratio above the 8% target set by the ECB.
Meanwhile, Banco Popolare said late on Friday that UBS and Mediobanca would guarantee its cash call, with shareholder approval expected by March. Yesterday’s Il Sole 24 Ore newsapaper reported that the move could prompt Carige to bring forward its own fundraising.
Carige declined to comment but an Italian banker who asked to remain anonymous said: “Everyone’s main worry is about hitting the market in late spring when there will be other rights issues and all eyes will be on Monte Paschi.”
Analysts say that, like Banco Popolare, other banks may have stepped up loan write-downs in the fourth quarter ahead of an end-December snapshot of balance sheets that the ECB will use in its assessment.
“Bad loans are a systemic problems for Italian banks and a key variable for the size of additional capital needs,” said one Milan-based banking analyst who asked not to be named.
“In Carige’s case, for example, fourth-quarter results will be important to put a final number on their capital increase. Banks that must write down loans further will have done so ahead of the ECB’s review.”
Il Sole 24 Ore said that Carige’s new top executive, who took over in October in a management overhaul demanded by the Bank of Italy, may bring forward approval of fourth-quarter results.
Banco Popolare said loan loss provisions in the fourth-quarter had increased substantially because it had reclassified some loans as non-performing, in accordance with stricter European guidelines enforced by the Bank of Italy during its continuing on-site audit.
Banco Popolare said early calculations suggest that loan-loss charges of €1.7bn have taken its full-year loss to a bigger than expected €600mn. The bank is due to report 2013 results at the end of February.
Small and mid-tier Italian banks have been the worst hit by thousands of bankruptcies among Italian businesses.
In pointing this out, Bank of Italy Governor Ignazio Visco has criticised the governance structure of co-operative banks such as Banco Popolare and BPM, and of those controlled by a foundation shareholder, saying it hampers fundraising efforts.
The charitable foundations that are key shareholders in Monte Paschi and Carige are reluctant to lose their influence over the banks in favour of new investors. But for all the fundraising obstacles, cheap shares may convince investors that some Italian banks are worth the risk.
“In principle, I’d be an investor (in certain Italian banks) ahead of the ECB review,” BCS Asset Management portfolio manager Ed Shing said. “I don’t think it will show up any major holes, the economy there is recovering and some of the valuations are still attractive.”
The central bank has not provided an estimate of total capital needs that may result from the ECB’s review, but it has repeatedly pointed to an International Monetary Fund calculation pegging the overall shortfall for Italian banks at up to €14bn.