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.
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
Worth a read Mish.
I try not to imagine how bad it must get for the Euro to be let go or a new ‘solution’ forced through. The people running the show, they must think everyone looks to them instead of being involuntary spectators… what do you do with 300 mn people tied into a false account… I don’t think supranational governance is going to convince any but the public sector… oops, I forgot there is no private sector left.
Trying letting workers go in Italy. Bucket loads of capital needed to do that in a meaningful way if you want to make a dent in a 25K headcount.
Then there’s new tech attacking old business models at higher turn-over per head. Barbarians at the door.
DB asked it’s employees to work as if at a start-up.
It’s too late and they don’t have the culture in European banking to adjust quickly. They are going to go extinct without very profound change. So profound they may not be recognisable afterwards.
I once looked at acquiring a mid market Italian heavy manufacturing enterprise for my boss. The single biggest balance sheet item was a yuuuggggeee liability consisting of various payments due during a RIF. The liability was something like 4x market value of R/E plus M&E.
Not certain since it was over ten years ago, but I recall it would cost more than 2x annual wage to lay off a employee. It was a staggering liability.
needless to say, my boss walked after about 15 minutes “analysis’ and the enterprise shut down 30 months later. I’m guessing the Italian taxpayer picked up the tab.
tragic because it was a decent business, just needed 20% fewer employees
Mike McGuire said:
Two idiots = one solid dope
Mike McGuire said:
It isnt that difficult although many think they know better, let the market determine the market. When there is any intercession, artificially, there will always be an issues. You cannot control the market, The market controls the market. Free money, What did anyone expect. Mismanagement, pensions, tenure. It goes on and on.
Mike McGuire said:
Lastly, he that does not learn from history is doomed to repeat it. Never ceases to amaze me how these “experts” havent a clue. Let the market work. Period.
Ron J said:
“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.”
It certainly won’t be a benefit to those being fired. Additionally, they in turn will probably add to the add to the number of non performing loans.
It would be a benefit were it not for inane rules.
The same setup exists in France
Both countries in huge need of reform, Greece as well
German social benefit and re-org costs are also high.
Of course it doesn’t do anything meaningful vis-a-vis the hopeless insolvency of these two zombie banks.
The name-change following the merger MIGHT make “former depositors” feel a little less irate, once they are bailed-in and become “equity holders” in the “new and improved” institution.
IMHO, this is just a lame attempt to sugar-coat the upcoming depositor bail-ins.
Chris Wagner said:
My take is that it’s all part of a master plan to create TBTF banks and then get the Empress in Berlin to bail them out (through the back door of Target 2, it has begun). Anything to circumvent the EU’s official “bail in rules”.
There will be technological solutions cutting back on traditional banking services. In the U.S., there are apps to let customers scan or photograph checks etc.
Wondering if state guarantee of capital raising ventures is still viable/legal in EU. The Spanish government backed issuance to float banks, for example, with accounts/losses only after ten or fifteen years. Atlante sounds like the Midas fund that did not take off there, a basis for leverage in any way lawyers can invent.
What is wrong with bankers? Will the world ever get bankers who are prudent stewards of the deposits that have been entrusted to them?
Do away with deposit insurance. Make these clown function in a world where their reputation is the final word, not the taxpayers’ checkbook backing them up.
Even with bail-ins, the banks are still insolvent and the bad loans are still bad. Maybe they can stay insolvent a little bit longer, that’s all. Bail-ins will accomplish one thing for sure, as in Greece, which is to shutdown local businesses and increase unemployment. It is mostly businesses that need to have large accounts as part of paying vendors, employees, etc. So, bail-ins of the really large accounts essentially removes from the economy investment capital and money on deposit to pay wages and vendors. It is like the 1930s bank failure scenario déjà vu. With multiplier effects on the downside..
The biggest accounts, which belong to government entities, are exempted from EU bail-ins. Being socialist, bailing-in only the capitalist businesses no doubt brings cheers, and is a good way to target enemies (e.g. Russian accounts in Cyprus).
So, explain to me how confiscating the working capital of private businesses will improve matters (in real terms, not the moral hazard stuff which does not apply to people with no choice). I can only see it contracting employment by shutting down the businesses whose bank assets (working capital) have been confiscated. Plus the multiplier effect of shutting down the downstream vendors who do not get paid and have to fire their employees and close their doors. If these previously viable businesses also had bank loans, then the number of insolvent bank loans goes up with bail-ins. Net-net, a big loser. I see no logic whatsoever, unless the idea is to stamp out capitalism to create your socialist equality. Moral hazard as the “sole” argument does not cut it at this stage of the game in the EU.
Another step in the EU becoming a chapter in history books. Put the unelected hacks in Brussels on the unemployment line and let these countries go back to doing their own thing.
The yield on 10 yr Italian bonds are up 4% today, and up more than 35% since August 2016. Early stages of a solvency crisis for bad banks, and a liquidity crisis for the rest of the system.
Because of corruption for the money drainage could go on for several months longer … @ the end all the italian bankers will loose their job and their independance to the americans … Ironically enough this is what happened to the Bulgarian banking industry in the 90’s and the Italians were the (one of the ) biggest buyers ;o) to the extend that the BulBank is better capitalized than its parents …