EXCLUSIVE-Italy's Banco BPM, BPER considering merger in first half 2021 -sources

* Tie-up viewed favourably by respective shareholders

* Process slowly getting into motion, source says

* Aim is to reach a deal in Q2 2021 -sources

* Deal could be shaped as a ‘merger of equals’ (Adds share reaction)

MILAN, Dec 10 (Reuters) - Italy’s Banco BPM and BPER Banca are considering a possible merger with a view to reaching a deal in the first half of 2021, three sources familiar with the matter said.

Rooted in the wealthy Lombardy region, Banco BPM, Italy’s third-largest bank has been scouting for partners since Intesa Sanpaolo bought mid-sized UBI this year.

Banco BPM has turned its attention to BPER after preliminary discussions with UniCredit led nowhere, while politics later derailed talks with Credit Agricole Italy , sources have said.

It has snubbed Monte dei Paschi, the bailed-out bank for which Rome is seeking a buyer.

Headquartered in the neighbouring Emilia Romagna region, BPER wants to build on the agreed acquisition of around 600 branches from Intesa-UBI, which will boost its assets to up to 120 billion euros, turning it into Italy’s fifth-largest bank.

Banco BPM and BPER both declined to comment.

By 1612 GMT, BPER had erased earlier losses and was up 1%, outperforming a 0.5% fall in Italy’s banking index. Banco BPM was down 1.7% having also trimmed its losses.

BPER’s top investor Unipol, a financial group that controls the country’s second-biggest insurer UnipolSAI, is behind BPER’s growth ambitions.

Unipol Chief Carlo Cimbri said last month the idea of a BPER-Banco BPM tie-up was “fascinating”.

Sources have said Cimbri’s words were a nudge to BPER CEO Alessandro Vandelli, who wants to focus on integrating the branches for now and delay further M&A.

Cimbri eyes Banco BPM’s distribution network for UnipolSAI’s products, sources say, betting Banco BPM can dissolve an existing partnership with insurer Cattolica.

Banco BPM boss Giuseppe Castagna has welcomed Cimbri’s overtures, but Vandelli has said discussing a deal would be “virtually impossible” for the next three to six months.

After overseeing the merger of Banco Popolare with Banca Popolare di Milano to form Banco BPM in 2017, Castagna has been keen to secure a role amid a growing wave of consolidation.

The sources said talks could start in earnest early next year after further analysis by Banco BPM and BPER.

One said the process was slowly getting into motion and if things worked out a deal in the second quarter was a possibility, although an acceleration could not be ruled out.

Banco BPM, which had 187 billion euros in assets at the end of September, recently said it would close 300 branches.

Two of the sources said BPER may aspire to a “merger of equals” in an all-paper deal despite its smaller size, adding Banco BPM’s Italian shareholders viewed the tie-up favourably.

A third person said governance adjustments may be agreed to rebalance the situation if Banco BPM made concessions.

Banco BPM is valued at around 2.8 billion euros on the Milan stock exchange, while BPER market value is 2.1 billion euros.

BPER recently raised 800 million euros in a share issue for the branch purchase, reducing the gap with Banco BPM.

While the deal to buy branches from Intesa-UBI, mostly in northern Italy, has increased overlaps, bankers say these would be manageable and leave ample scope for cost cuts. (Additional reporting by Valentina Za, Cristina Carlevaro, Giuseppe Fonte, Gianluca Semeraro; Editing by Alexander Smith and Elaine Hardcastle)