Italian banks step up consolidation efforts

The Italian banking sector has kicked off the week with news of a potentially blockbuster merger, showing the theme of mergers and acquisitions (M&A) in European banking is very much alive.

Over the weekend, Banco BPM, Italy’s fifth largest bank by market capitalisation, announced that it would pursue a merger with Banca Monte dei Paschi di Siena (MPS), Italy’s third largest bank by market cap. In its statement, BPM said the transaction would create the second largest domestic operator by size and create “significant synergies” for both institutions, supported by a strong capital position and limited execution risks.

That was followed on Monday morning by the news that Intesa Sanpaolo, Italy’s second largest bank by market cap, had launched a voluntary public tender and exchange offer on all ordinary shares of MPS, with the exchange price implying a 12.5% premium versus the closing price of MPS on Friday. Intesa has also entered into an agreement with Unipol (the second largest insurer in Italy) to acquire certain assets of MPS, including branches, central activities, and some assets and liabilities; in short this proactively addresses any potential antitrust constraints arising from the transaction. Unipol has also announced that as part of the acquisition, it will propose to merge the acquired MPS assets with BPER Banca, Italy’s fourth largest bank by market cap of which Unipol owns 20%. 

We see a few interesting takeaways here.

First, it is worth taking a step back for a moment to appreciate how far the Italian banking sector has progressed since the nadir of the Eurozone crisis over a decade ago. Back then, MPS – following the catastrophic acquisition of Banca Antonveneta – faced multiple rounds of capital injections totalling €26bn, and in 2015 the non-performing loan (NPL) ratio for Italian banks peaked at around 17%. As recently as 2022 MPS faced enormous pressure from the European authorities over potential breaches of state aid rules and had to rely on a state-led equity injection, with the support of some holders of its subordinated bonds. This time around, the M&A headlines have nothing to do with saving banks that are on the ropes. Italian banks’ gross NPL ratio is around 2-3% at the sector level, while the average Common Equity Tier 1 (CET1) ratio is at 16.0%, in line with the average for Eurozone banks. The troubled times seem like a distant memory.

Second, we cannot be certain which path these potential transactions will take, with BBVA’s unsuccessful pursuit of Banco Sabadell, UniCredit’s failed attempt to acquire BPM and its ongoing efforts to acquire Germany’s Commerzbank front of mind. There are always political considerations to proposals that would otherwise appear to make perfect economic sense. Notwithstanding that, and irrespective of which shape the final combinations will take, the consolidation is a positive outcome for credit investors. Banks can achieve better economies of scale with respect to technology, strengthen their competitive landscape in specific regions, and reduce the number of relatively weaker players – factors that may matter less now that macroeconomic conditions are very supportive but can become critical in a stressed environment.

Finally, we believe these developments continue to support the theme of an ongoing improvement in the broader European banking space. We have seen consolidation in Italy before, but further strengthening at the top of the sector can only improve the relative credit standing of the country’s biggest banks. It is a dynamic that in our view has contributed to the strong performance of credit spreads in subordinated bank debt (Additional Tier 1 and Tier 2 bonds) in recent months but also over the years, and at a minimum we believe these transactions will help to support current valuations that appear historically tight.