Fitch: Weak Profits to Drive Mid-Sized Italian Bank M&A Post AQR

Mon Jul 28, 2014 7:23am EDT

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(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Peer Review: Italian Medium-Sized Banks here MILAN/LONDON, July 28 (Fitch) Italian medium-sized banks are likely to consolidate in 2015-2016 to overcome pressure on profitability, Fitch Ratings says. Completion of the ECB's asset-quality review and stress tests is likely to be a catalyst as it will remove uncertainty about capital and asset quality. A smaller number of more efficient and viable banks would be positive for the sector as they should have greater capacity to absorb losses. Banks' operating performance remains under pressure from high loan impairment charges, flat lending volumes and low interest rates, despite the relief to net interest income from lower funding costs since late 2013. The structural profitability of commercial business was weak in 2012 and 2013, excluding income from banks' securities books, primarily from the carry trade on Italian government bonds. We believe profitability weakness is likely to remain as the nascent economic recovery in Italy is fragile and scope for improving efficiency at medium-sized banks is more challenging than at large banks, which benefit from economies of scale. Greater scale would also help medium-sized Italian banks absorb the costs of operating in the increasingly heavily regulated European banking sector. Reaching a critical size would also benefit banks in the workout and disposal of impaired exposures as it would allow them to industrialise the recovery process, create or attract the required servicing skills, and structure larger portfolios of non-performing loans to reach a wider range of interested buyers. Consolidation has already started, to some extent following the Spanish blueprint to create larger banks active in several regions. Some medium-sized Italian banks have bailed out or are showing interest in smaller troubled banks, such as Banco di Desio e della Brianza acquiring Banca Popolare di Spoleto in April. Other banks such as Banca Popolare di Vicenza are openly acquisitive and ready to assess opportunities that arise. Future transactions may be more transformational as they could be mergers of equals. Some weaker, medium-sized institutions might also become part of larger and stronger banking groups. We believe M&A deals are likely to take place after the ECB's asset-quality review and stress test results, as there is a risk some medium-sized Italian banks may have capital shortfalls. But most gaps are likely to be technical and to be met with capital already raised by banks this year. Five of the eight Italian medium-sized banks we rate have raised capital so far and one is in the final stage of doing so. Fitch rates eight Italian medium-sized banks. For more information on the sector, see our report "Peer Review: Italian Medium-Sized Banks" on www.fitchratings.com Contact: Francesca Vasciminno Senior Director Financial Institutions +39 02 87 90 87 225 Fitch Italia S.p.A. Via Privata Maria Teresa, 8 20121 Milan Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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