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An Italian Bank Deal Still Makes Perfect Sense

Elisa Martinuzzi

(Bloomberg Opinion) -- It took years for Italy’s banks to cleanse their books of the bad debt they built up after the financial and sovereign debt crises. After a few months of the coronavirus, they may be staring at another wall of soured loans.

Among the countries worst hit by Covid-19, Italy’s strict lockdowns have crippled its economy and its small and medium-sized companies in particular. The nation’s banks are heavily exposed to the SME sector and government-backed loans and grants can only soften the probable blow from credit losses.

While Italy’s biggest banks have capital cushions that should see them through the crisis without needing to tap investors, regulators say some smaller, less profitable lenders might not make it on their own. Under these market conditions, one would think that consolidation in the Italian banking sector makes perfect sense. But Unione di Banche Italiane SpA, a mid-sized commercial lender based in Bergamo — a hot spot of Italy’s virus outbreak — has ideas of its own. 

UBI, as the bank is known, is so keen to thwart an unsolicited takeover by its bigger rival Intesa Sanpaolo SpA that it’s making an unusual claim: The coronavirus is a material adverse change and should invalidate the bid. This attempted rejection of Intesa might make sense if UBI were trying to squeeze out a better price for its investors, but that doesn’t appear to be the case. It just seems to want to pursue its own plans, a strategy shareholders might end up regretting.

Days before the stock markets peaked in February, Intesa made an all-stock offer for UBI that valued the country’s fifth-largest bank at about a 25% premium. Intesa Chief Executive Officer Carlo Messina didn’t endear himself to his UBI counterparts: His hostile bid, a big no-no in banking, came hours after UBI’s CEO Victor Massiah had presented a new strategic plan. Nonetheless, the rationale for a combination is as compelling now as it was before the coronavirus hit — if not more so.

Under UBI’s pre-pandemic strategy, the lender was trying to repair its measly profitability by improving efficiency, focusing on higher-margin corporate investment banking and getting rid of more of its bad debt. Massiah also sees UBI as a potential aggregator of smaller Italian banks. An alternative deal with Banco BPM SpA has been mooted.

It’s unclear why Massiah’s approach is more appealing than a takeover by Intesa. The suitor may have to dial back its lofty dividend expectations for the merged company as the pandemic wrecks the economy, but if it achieves two-thirds control of UBI, it should be able to deliver chunky cost cuts by combining the two businesses.

A tie-up between UBI and Banco BPM, by contrast, would leave little room for maneuver should credit losses spiral and the revenue outlook weaken, as expected. Analysts at JPMorgan Chase & Co. predict that non-performing loans in Italy could surge by 162 billion euros ($178 billion), under its worst-case scenario. While UBI has slightly better credit quality than its peers, 23% of its loan book is to SMEs, compared to Intesa’s 20%. The figure stands at 34% at Banco BPM.

There is an argument that Italy could do with a third strong lender to rival Intesa and UniCredit SpA, and that UBI could team up with somebody else to deliver that. Italy’s antitrust authority is reviewing the deal. But with the economic damage caused by Covid-19, the Intesa-UBI deal has become more attractive. UBI’s shareholders should at least have their say on whether they support the idea.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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