Why Italy could see major mergers and acquisitions in banking

MILAN, Italy – European policymakers have longed for bigger banks across the continent.

And Italy could be about to get their wish with a huge M&A round, according to analysts.

Years after a sovereign debt crisis in the region and a government bailout for Banca Monte dei Paschi (BMPS) that saved it from collapse, many are looking at the Italian banking sector with fresh eyes.

“If you assess individual banks in Italy, it is difficult not to believe that something will happen, I would say, in the next twelve months,” said Antonio Reale, co-head of European banking at Bank of America, to CNBC.

Reale emphasized that BMPS has been rehabilitated and should be re-privatized. He also said that UniCredit is now sitting on a “relatively large pile of capital surpluses”, and more broadly that the Italian government has a new industrial agenda.

UniCreditThe markets in particular continue to surprise with some great quarterly profit figures. It deserved Last year 8.6 billion euros (up 54% year-on-year), satisfying investors through share buybacks and dividends.

Meanwhile, BMPS, which was saved 4 billion euros in 2017, must eventually return to private hands, under an agreement with European regulators and the Italian government. In March, Italian Economy Minister Giancarlo Giorgetti said there is “a specific commitment” with the European Commission on the divestment of the government’s stake in BMPS.

“Overall, we see room for consolidation in markets like Italy, Spain and Germany,” Nicola De Caro, senior vice president at Morningstar, told CNBC via email, adding that “domestic consolidation is more likely than European cross-border mergers as a result of having some structural barriers.”

He added that despite the recent consolidation in the Italian banking industry, involving Intesa-Ubi, BPER-Carige and Banco-Bpm, “there is still a significant number of banks and fragmentation at the mid-market level.”

“UniCredit, BMPS and some medium-sized banks are likely to play a role in the potential future consolidation of the banking sector in Italy,” De Caro added.

Speaking to CNBC in July, UniCredit CEO Andrea Orcel indicated that he does not see any potential for deals in Italy at current prices, but said he is open to that possibility if market conditions were to change.

“Despite our performance, we are still trading at a discount to the sector […] So if I were to make those acquisitions, I would have to go to my shareholders and say this is strategic, but actually I’m going to dilute your returns and I’m not going to do that,” he said.

“But if it changes, we are here,” he added.

Paola Sabbione, analyst at Barclays, believes the bar for mergers and acquisitions by Italian banks is high when they occur.

“Monte dei Paschi is looking for a partner, UniCredit is looking for possible targets. In theory, different combinations can arise from these banks. However, no bank is in dire need,” she told CNBC via email.

European officials have increasingly commented on the need for bigger banks. For example, French President Emmanuel Macron said in an interview with Bloomberg in May that the European banking sector needs more consolidation. However, there is still some skepticism about so-called mega deals. In Spain, for example, the government opposed BBVA’s bid for Sabadell in May.

“Europe needs bigger, stronger and more profitable banks. There is no denying that,” Bank of America’s Reale said, adding that there are differences between Spain and Italy.

“Spain has come a long way. We have seen a major wave of consolidation taking place[ing] immediately after the global financial crisis and continuing in recent years, with some excess capacity having somehow left the market. Italy is much more fragmented in terms of banking markets,” he added.

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