Why Italy is attracting so many bank merger proposals #ItalyFinance

The unprecedented spree of merger proposals roiling Italian banks lately raises three questions: why is it happening, and why now? Are those proposals good or bad? And what should authorities and investors – the first being asked to approve them, the second to finance them – do?

The future of the Italian banking sector, until recently among the continent’s weakest, may well depend on those questions being given the right answers.

Like Tolstoy’s unhappy families, those proposals all differ from one another. First, Unicredit’s approach to Commerzbank is the boldest: it would create a unique and innovative cross-border bridge between Italy’s and Germany’s traditionally conservative banking environments. Unicredit is two times larger by market capitalisation and more profitable. It already owns a mortgage unit in Germany and close to 10% of Commerzbank itself. European Central Bank supervision must authorise the Italian lender rise to 28%, which would open up various possible combinations. The main obstacle to the deal is the fierce opposition of the German political establishment. Whether this opposition will survive the election outcome, which is expected to lead to a new Christian Democratic Union/Christian Social Union-led coalition, remains to be seen.

Second, Unicredit’s bid for Banco BPM, a mid-size retailer rooted in Lombardy, would strengten Unicredit’s domestic footprint in a cash-rich region. Here, too, the acquirer is larger and stronger, by cost and price-to-book. A concern is whether Unicredit, even with its considerable experience and managerial strength, would be able to digest two mergers at once.

The third proposal – MPS’s share exchange with Mediobanca’s shareholders – was the biggest surprise. The two entities are complete strangers geographically and by business model, let alone corporate culture. The former is smaller and weaker by most metrics, in spite of repeated capital injections by the Italian Treasury, which still owns a 11% stake in it. Many believe Italian politics to be active behind the scenes, as part of a strategy that would bring MPS’s large and government-friendly shareholders close to controlling the giant insurer and asset manager Generali, in which Mediobanca owns a large stake.

The latest proposal is the share exchange offer by BPER, a retailer based in the central-northern town of Modena, to Banca Popolare di Sondrio. The two partly overlap by business type but not geographically. Here the acquirer falls short of the acquired by price-to-book, but not by size.

Why Italy?

Why do these diverse cases all involve Italian entities? Nothing of the sort is happening anywhere else. The reason is that the Italian banking sector benefitted more than others from the clean-up engineered by the ECB after 2013, and more recently from the increase in interest rates and lending margins. Stronger banks are more inclined to expand. What we see is a welcome sign of strength and vitality in a country often considered the epicentre of Europe’s financial risks.

That said, the variety of situations calls for a roadmap, or at least a compass, helping authorities and investors to discriminate. The simplest possible criterion – balance sheet size – cannot be the only one, although it does matter. Size is a measure, crude as it may be, of the resources and structures the acquiring bank can deploy to manage the acquisition without being disrupted by it.

But size can even be a handicap if those resources and structure are used inefficiently. No single criterion measures how a bank’s managerial and business styles affect its value; market assessment provides a good summary. If the acquirer’s price-to-book is high compared to that of the acquired, the former has an advantage from intangible components of its value. This may also bring a tax advantage by generating badwills.

A crucial consideration is how elements of strength may combine. If the banks overlap geographically, for example, savings in structures and personnel are possible. Functional duplications, such as banks providing similar services, can also lead to cost-saving simplifications.

A fourth criterion is increasingly important for regulators. As argued by former Italian Prime Minister Mario Draghi in his 2024 competitiveness report, a major weakness of continental Europe is the fragmentation and small size of its banks. European Union regulation does not allow cross-border banking groups to conduct business efficiently. The report mentions regulatory changes that would remedy that.

A long journey starts with one step: that’s why the decisions the ECB is about to make are important. Of the four proposed deals, Unicredit’s cross-border project is the only one that seems to possess all the characteristics of a good combination.

ECB supervision already made a historic contribution after the 2008 financial crisis by restoring the soundness of euro area banks. Now it has another opportunity: helping complete the banking union and build a banking sector of continental dimension. It should not miss it.

Ignazio Angeloni is a Non-resident Fellow of the Institute for European Policymaking at Bocconi University and a former member of the European Central Bank Supervisory Board.

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