Italian bank tie-ups offer exit from profit torpor

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By Lisa Jucca

(The author is a Reuters Breakingviews columnist.)

MILAN, April 15 (Reuters Breakingviews) - Banca Monte dei Paschi di Siena (MPS) offers Italian peers an escape from their profit torpor. Marrying the state-controlled lender run by Marco Morelli with similar-sized rivals UBI Banca or Banco BPM could boost combined earnings. Prospective suitors fear government meddling, a multibillion-euro cash call and legal risks. But scaling up is the only way to address the lenders' chronic underperformance in Italy's stagnant economy.

A deal would make financial sense, though. Combining MPS with either BPM or UBI would create a lender with total assets of more than 250 billion euros, ranking only behind UniCredit and Intesa Sanpaolo . The pair could also slash costs. Savings of 9 percent of combined expenses - in line with recent Italian bank mergers - would boost total earnings by between 40 and 50 percent, according to Breakingviews calculations based on Refinitiv estimates for 2019. The suitor would get access to 1.9 billion euros of unused tax credits that MPS has racked up because of past losses. Funding costs would probably fall.

There are hurdles. The state would still be a large minority shareholder in any combined bank. Any deal would probably also require a capital increase to enable MPS to write off more bad debt: 16 percent of the lender's loans are bad or doubtful. The bank also faces 1.5 billion euros of legal claims from past derivatives trades that led to its demise. And a merger would require the government to revisit its state-aid deal with the European Commission.

Such concerns are legitimate. Yet most mid-sized Italian banks are seeing earning returns on equity equivalent to about half their cost of capital. With Italy's economy contracting and interest rates set to remain ultra-low, standing still is even less attractive.

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- Banca Monte dei Paschi di Siena (MPS) Chief Executive Marco Morelli told a shareholder meeting on April 11 the board was considering possible tie-ups.

- Asked on April 12 about a possible merger with either MPS or peer Banco BPM, UBI Banca Chief Executive Victor Massiah said his bank was open to studying any type of proposal provided it created value and resulted in effective governance.

- Banco BPM Chief Executive Giuseppe Castagna on April 6 appeared to play down an interest in Tuscany-based MPS by saying his bank was more interested in banks close to its northern Italian home turf.

- MPS had 15.8 billion euros of gross non-performing loans on its balance sheet at the end of 2018, equivalent to 16 percent of gross customer loans.

- The bank also faces legal claims worth 1.5 billion euros, mostly from shareholders and former shareholders, connected to allegedly improper financial disclosure between 2008 and 2015.

- MPS shares, which have lost nearly 50 percent of their value over the last 12 months, were up 4 percent at 1.40 euros by 0800 GMT on April 15.

Monte Paschi 2018 results presentation

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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