Bank of Italy tells troubled Veneto Banca to consider merger
* Document shows request by central bank
* Veneto aims to plug capital shortfall in other ways
* Request comes ahead of ECB review of banks
By Valentina Za
MILAN, Jan 8 (Reuters) - The Bank of Italy has asked Veneto Banca to consider a possible merger with another bank to strengthen its finances after conducting an audit that forced the mid-sized lender to increase its provisions against bad loans.
The central bank has stepped up supervision of Italian banks ahead of a review by the European Central Bank (ECB), which will take on oversight of the sector in November as part of Europe's drive to prevent a repeat of the financial crisis.
Top Italian bankers have said they expect the review to spur mergers in the country's fragmented banking system, as weaker players are pushed into the arms of better-capitalised peers.
"The Bank of Italy has also asked the board to assess potential mergers with other banks," Veneto Banca said in a document for bondholders filed with market regulator Consob on Dec. 30 and published on its website.
Veneto Banca, one of 15 Italian banks under ECB scrutiny, said its board expected a planned asset sale and a bond conversion to be enough to bring its core capital in line with regulatory requirements, but it did not rule out looking at further options in the future.
The bank's Common Equity Tier 1 capital stood at 6.9 percent at the end of September, well below a minimum 8 percent threshold set by the ECB in the review.
Saddled with 145 billion euros ($197 billion) in bad loans after a two-year economic recession, Italian banks have seen their capital bases eroded by rising loan losses. Inefficiently-managed smaller lenders have been the worst hit.
Veneto Banca said the central bank had found "shortcomings in corporate governance and internal controls in the face of worsening asset quality, profitability and capitalisation, against the backdrop of a deep financial crisis and economic recession."
Veneto Banca said in December it would sell its 71 percent stake in Banca Intermobiliare and convert a 350 million euro bond issued in February 2013 into shares to beef up its capital base.
The board will formally approve the bond conversion in February, adding around 135 basis points to the bank's core capital, the document said. Another 100 basis points should come from the sale of the stake in Banca Intermobiliare.
Other Italian lenders are also striving to raise capital. Monte dei Paschi di Siena needs to complete a 3 billion euro rights issue to avert nationalisation, while Banca Carige has tried for months to sell insurance assets to partly plug a shortfall of at least 800 million euros.
Veneto Banca wants to bring its core capital to 9.5 percent by the end of June.
The bank posted a 39 million euro loss in the first half of 2013 versus a net profit of 70 million euros in the same period of 2012, hurt by higher loan loss provisions after two on-site inspections by the Bank of Italy between January and August.
Starting from late 2012, Italy's central bank has been conducting on-site inspections at the country's lenders in an effort to whip their balance sheets into shape ahead of the ECB review. The regulator has enforced stricter criteria to class loans and estimate potential losses.
Banca Etruria said last month it would seek a merger with a banking group "of high standing" as suggested by the Bank of Italy following an on-site audit.
($1 = 0.7349 euros) (Editing by Mark Potter)
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