The idea you can take two under-capitalized banks, both seriously in trouble with non-performing loans, merge them, and come out with a much better bank is ridiculous, but that is the route Italy seeks.

Banco Popolare CEO Pier Francesco Saviotti and Popolare di Milano CEO Giuseppe Castagna agreed on a merger plan in February. Shareholders approved the deal this weekend.

Castagna will oversee the combined company, while Saviotti will become chairman of the executive committee. The new bank will be called Banco BPM.


Please consider Italy’s Biggest Bank Merger Since 2007 Wins Investor Backing.

The approval of Italy’s biggest banking merger in almost a decade marks a first step in a process of consolidation urged by regulators, investors and Prime Minister Matteo Renzi. But plenty of obstacles remain to further deals among the country’s beleaguered lenders.

Renzi has encouraged Italy’s weaker banks to combine to shore up their finances and pushed through measures to abolish restrictions on ownership and voting rights, two longstanding hurdles to mergers. Yet further progress may be slow as Banca Monte dei Paschi di Siena SpA, one of Italy’s largest lenders, fights for survival and Renzi’s own political future hangs on the outcome of a December referendum he called to overhaul Italy’s political system.

Bad Loan Burden

Italian banks are burdened with about 360 billion euros ($396 billion) of non-performing loans, sluggish economic growth and record-low interest rates. Monte Paschi, shown in European stress tests to be the region’s most vulnerable lender to a severe economic shock, is seeking to tap investors for capital in a complex restructuring plan to stay afloat.

The troubled lender was bailed out twice by the government since 2009 and raised 8 billion euros of fresh capital from investors in the last two years. The bank is now studying a proposal from Corrado Passera, Italy’s former economic development minister, that envisages raising 5 billion euros through a share sale and long-term backers, according to a person familiar with the plan.

Renzi and his finance minister, Pier Carlo Padoan, have struggled to shore up lenders without resorting to direct state aid under European Union rules, which would probably force losses on retail investors. In April, they persuaded Italian banks to set up a 4 billion-euro rescue fund dubbed Atlante, a program critics have deemed too small to restore confidence given that soured debt is equivalent to a fifth of Italian gross domestic product.

The deal is the biggest bank merger in Italy since Monte Paschi’s acquisition of Banca Antonveneta SpA in 2007. It will create a lender with a market value of about 5.7 billion euros, 171 billion euros of assets and more than 25,000 employees.

Bigger Mess

Merging troubled banks does nothing but create a big mess out of smaller messes. The move does not raise any capital.

One potential benefit could be mass firings and shedding of top executives to reduce expenses, but not even that benefit looks likely at this stage.

Under banking rules now being phased out, small shareholders have the same voting power as large investors, no matter the size of their holdings. That rule has held up mergers.

But lack of mergers is not the problem, a massive pile of bad loans and severe under-capitalization is the problem. This deal solves nothing. These banks need capital, and the most likely way to come up with capital is a bail-in of depositors.

Why anyone would keep money in these banks is a mystery. Take your money out now, before you lose it.

Mike “Mish” Shedlock