2016/10/26 Spectral forms | The Economist http://www.economist.com/node/21709045/print 1/3 Will they Passera? Italian banks Spectral forms Two lenders seal a merger, while another ponders its options Oct 22nd 2016 | MILAN | From the print edition FROM the mists of Italian banking, new shapes are emerging. One is at last becoming flesh: on October 15th the shareholders of two lenders, Banco Popolare and Banca Popolare di Milano, approved a merger that has been months in the making. The substance of another—Banca Monte dei Paschi di Siena, the world’s oldest bank as well as Italy’s most troubled—is still shrouded, but it is likely to become clearer at a meeting of Monte dei Paschi’s board on October 24th. The merged bank, to be called Banco BPM, will surpass Monte dei Paschi to become Italy’s third-largest lender. Its creation is a small triumph for Matteo Renzi, the centre-left prime minister. Last year Mr Renzi introduced a reform obliging Italy’s ten biggest popolari, or co-operative banks, to become joint- 2016/10/26 Spectral forms | The Economist http://www.economist.com/node/21709045/print 2/3 stock companies by the end of 2016. The hope was that this would spur takeovers, yielding fewer, stronger, more efficient banks. The Banco BPM deal, which promises annual savings of €290m ($318m), or 10% of the combined cost base, is Mr Renzi’s first result. Two awkward obstacles stood in its way. Voting rules at the popolari give all shareholders an equal say, regardless of their stake: some retired Banca Popolare di Milano staff were against the merger, but failed to block it. And the European Central Bank imposed demanding conditions, including a €1 billion capital increase for Banco Popolare, that threatened to scupper the deal, the first since it started supervising the euro zone’s most important banks in 2014. The delay, Italian bankers grumble, has discouraged other possible mergers. That said, further consolidation could be on the way: UBI Banca, Italy’s fifth-biggest bank, is said to be eyeing three of four small lenders rescued by the state last year. Compared with rebuilding Monte dei Paschi, such takeovers are child’s play. The lender’s woes stretch back years. In 2007 it overpaid for Antonveneta, a bank it bought for €9 billion from Spain’s Santander. After the financial crisis it was laid low by losses on derivatives trades. It has since been crushed by bad loans, which make up about one-third of its book, the worst in Italy. Monte dei Paschi has had two bail- outs from the state. It raised €8 billion from share issues in 2014 and 2015, partly to repay the government. To little avail: its market capitalisation is a mere €600m. In July, anticipating dismal results in stress tests by European regulators, Monte dei Paschi presented a rescue plan. The brainchild of advisers led by JPMorgan, it envisages stripping bad loans with a gross value of €27.7 billion out of the bank. At their net value, estimated at €9.2 ...

1. 2016/10/26 Spectral forms | The Economist
http://www.economist.com/node/21709045/print 1/3
Will they Passera?
Italian banks
Spectral forms
Two lenders seal a merger, while another ponders its options
Oct 22nd 2016 | MILAN | From the print edition
FROM the mists of Italian banking,
new shapes are emerging. One is at
last becoming flesh: on October 15th
the shareholders of two lenders,
Banco Popolare and Banca Popolare di
Milano, approved a merger that has
been months in the making. The
substance of another—Banca Monte
dei Paschi di Siena, the world’s oldest bank as well as Italy’s
most troubled—is still shrouded, but it is

2. likely to become clearer at a meeting of Monte dei Paschi’s
board on October 24th.
The merged bank, to be called Banco BPM, will surpass Monte
dei Paschi to become Italy’s third-largest
lender. Its creation is a small triumph for Matteo Renzi, the
centre-left prime minister. Last year Mr
Renzi introduced a reform obliging Italy’s ten biggest popolari,
or co-operative banks, to become joint-
2016/10/26 Spectral forms | The Economist
http://www.economist.com/node/21709045/print 2/3
stock companies by the end of 2016. The hope was that this
would spur takeovers, yielding fewer,
stronger, more efficient banks.
The Banco BPM deal, which promises annual savings of €290m
($318m), or 10% of the combined cost
base, is Mr Renzi’s first result. Two awkward obstacles stood in
its way. Voting rules at the popolari
give all shareholders an equal say, regardless of their stake:
some retired Banca Popolare di Milano staff
were against the merger, but failed to block it. And the
European Central Bank imposed demanding
conditions, including a €1 billion capital increase for Banco
Popolare, that threatened to scupper the
deal, the first since it started supervising the euro zone’s most
important banks in 2014. The delay,
Italian bankers grumble, has discouraged other possible
mergers. That said, further consolidation could

3. be on the way: UBI Banca, Italy’s fifth-biggest bank, is said to
be eyeing three of four small lenders
rescued by the state last year.
Compared with rebuilding Monte dei Paschi, such takeovers are
child’s play. The lender’s woes stretch
back years. In 2007 it overpaid for Antonveneta, a bank it
bought for €9 billion from Spain’s Santander.
After the financial crisis it was laid low by losses on derivatives
trades. It has since been crushed by bad
loans, which make up about one-third of its book, the worst in
Italy. Monte dei Paschi has had two bail-
outs from the state. It raised €8 billion from share issues in
2014 and 2015, partly to repay the
government. To little avail: its market capitalisation is a mere
€600m.
In July, anticipating dismal results in stress tests by European
regulators, Monte dei Paschi presented a
rescue plan. The brainchild of advisers led by JPMorgan, it
envisages stripping bad loans with a gross
value of €27.7 billion out of the bank. At their net value,
estimated at €9.2 billion, these would become
the assets of a separate entity. This entity would be funded by:
€6 billion-worth of investment-grade
notes, which would be eligible for a state guarantee; a
mezzanine tranche of €1.6 billion, to be taken up
by Atlante, a fund backed by several financial institutions, set
up to invest in bad loans and ailing
banks; and €1.6 billion of junior bonds, to go to Monte dei
Paschi’s shareholders.
The spruced-up Monte dei Paschi would be recapitalised with a
€5 billion share issue. The details have
mutated over time, but the rough plan is to raise maybe €1.5
billion from a voluntary swap of

4. subordinated debt for equity, perhaps a little more from an
“anchor” investor and the rest from a rights
issue. The original idea was that the bank’s board should
approve the plan in late September. That was
pushed back after a change of chief executive in the middle of
last month.
Finding investors to put up money for a third capital increase in
as many years, even in a bank cleansed
of duff loans, was always going to be hard. Worse, investors are
unsettled by a constitutional
referendum on December 4th. If the reform fails, Mr Renzi may
be unhorsed. If it passes, markets may
become more benevolent.
2016/10/26 Spectral forms | The Economist
http://www.economist.com/node/21709045/print 3/3
In a further twist, Corrado Passera, a former government
minister and ex-banker, has pitched an
alternative. This would tap investors for only €3.5 billion, and
somehow squeeze €1.5 billion from
earnings, and bring in a private-equity investor. The bank’s
board said on October 18th it would press
on with the July scheme, but “continue to analyse in depth” Mr
Passera’s idea. It is due to approve its
new business plan on October 24th. The search for investors
will then begin in earnest.

5. The mist is lifting elsewhere, too. UniCredit, Italy’s biggest
lender, is also preparing to ask investors for
money. On October 13th it sold 20% of Fineco, a digital bank,
for €552m. Two days later it confirmed
that it was in talks with PZU, a Polish insurer, about Bank
Pekao, Poland’s second-biggest bank, of
which UniCredit owns 40.1%. Jean-Pierre Mustier, who became
chief executive in July, is due to
present a strategic review on December 13th. By then, one way
or another, much more may be clearer
about Italy’s beleaguered banks.
From the print edition: Finance and economics