Italian Bank consolidation eases impact of low rates, inflation
Consolidation among Italy’s second-tier banks continues to make strategic sense as the risk of increasing costs amid inflationary pressures adds to long-standing pressure on profitability from low interest rates, Fitch Ratings says.
BPER Banca’s (BB+/Stable) agreement to acquire troubled bank Carige, announced on 14 February, is the latest deal involving second-tier banks, which have been striving to improve the meagre profits generated by their traditional banking operations.
The Italian banking sector has been reshaped by consolidation in recent years, particularly in the second-tier segment. Consolidation has been used primarily to bolster profitability. It has also been used to solve crises at some smaller banks, and to absorb struggling business models, with the authorities providing incentives to support deals, such as allowing a portion of deferred tax assets to be converted into tax credits and count towards regulatory capital.
BPER has been one of the most active acquirers among second-tier banks in recent years. It will become Italy’s fifth-largest domestic bank by total assets following the acquisition of Carige, having been at the lower-end of the top ten until a few years ago.
The Carige deal, which follows BPER’s integration of over 600 branches acquired from Intesa in 2021, will cement BPER’s business profile. It will be capital-neutral and we believe the execution risks are modest. Carige will be recapitalised by Italy’s deposit guarantee scheme before the acquisition.
Cost-cutting is a driver for inorganic growth, particularly given inflationary pressures. Mid-sized banks have limited scope to reduce costs by themselves, but consolidation with other banks can generate good opportunities to cut costs by rationalising internal functions and processes, reducing branches and office space, and accessing cheaper funding.
It typically takes longer for consolidation to lead to higher, more diversified revenue through an enlarged geographical presence and client base. However, improved revenue streams could be an important upside in the medium term, particularly if the banks’ physical networks have little overlap or if there is scope to cross-sell fee-generating products, as there should be for BPER after acquiring Carige.
Traditional mid-sized commercial banks have struggled the most with low interest rates given their limited business diversification and reliance on net interest income. They have intensified efforts to diversify revenues, primarily by offering asset management and insurance to individual clients.
They are structurally poised to benefit when interest rates eventually rise, but those that manage to reduce their costs and diversify their revenues will be best-placed to achieve the highest returns.
Unipol Gruppo (BBB+/Stable), one of Italy’s largest insurers and BPER’s largest shareholder, is aiming to increase its role in the bancassurance segment and to this end has been backing BPER’s expansion.
It has also recently built up nearly a 7% stake in Banca Popolare di Sondrio (BB+/Stable), becoming the bank’s largest shareholder following its conversion into a limited company. With Unipol’s backing, BPER could be set for further expansion.
