March 24, 2016 / 11:20 AM / 3 years ago

Banco Popolare, BPM say merger to create 'a solid bank'

MILAN (Reuters) - Banco Popolare BAPO.MI and Banca Popolare di Milano (BPM) PMII.MI outlined on Thursday their merger plan to create Italy’s third biggest bank with a strong foothold in the country’s wealthiest northern regions.

The much anticipated deal, unveiled after months of negotiations, is contingent on Banco Popolare carrying out a 1 billion-euro ($1.1 billion) capital increase - a condition set by the European Central Bank (ECB) to approve the tie-up.

The merger may prompt more deals in a fragmented industry, buttressing profits and capital levels at a time when negative interest rates are hitting revenues and a long recession has left Italian banks with 360 billion euros of bad loans.

“It was a complicated negotiation, made more difficult by hurdles we had not anticipated,” BPM Chief Executive Giuseppe Castagna told analysts, referring to the ECB’s demands.

Castagna will be the CEO of the new combined group.

“The result is absolutely the best possible we could achieve. A solid bank is born, and I know this was the main concern of all analysts and investors,” he said

Some analysts however said asset sales might be needed to further boost capital levels as the banks move to increase their combined level of provisioning against problematic loans - another condition set by the single euro zone supervisor.

The two banks together have a gross bad loan pile of 27 billion euros, but plan to reduce that by 10 billion euros by 2019.

After the cash call, to be completed by end-October, and the additional provisions, the group’s core capital is expected to reach 12.3 percent of risk-adjusted assets, the banks said.

The merged bank, to be headquartered in Milan and Verona, will have around 171 billion euros in assets, 2,500 branches and more than 25,000 staff - making it the country’s third biggest lender behind Intesa Sanpaolo (ISP.MI) and UniCredit (CRDI.MI).

Banca Popolare di Milano (BPM) Chief Executive Giuseppe Castagna (L) and Banco Popolare's Chief Executive Pier Francesco Saviotti shakes hands after the BP-BPM merger project presentation in Milan, Italy, March 24, 2016. REUTERS/Flavio Lo Scalzo

Synergies are estimated at 365 million euros a year from 2018, although the banks said there would be no compulsory job cuts.

Shares in Banco Popolare fell 4.5 percent, while BPM’s lost more than 5 percent due to the dilution effect of the capital increase and the lack of planned asset disposals, brokers said.

Banco Popolare Chief Executive Pier Francesco Saviotti, who had persistently ruled out the need for a cash call, accused the ECB of being “excessive” in its requirements.

He said the ECB had offered no alternative. “They want a bank that is tall, blonde, blue-eyed and rich. We had to take the bull by the horns to meet their demands,” he said.

The fund-raising, for which a pre-underwriting agreement has been signed by Mediobanca and Merrill Lynch, could include the issuing of financial instruments that can be converted into shares and a private placement, he said.

The new bank will have a 19-strong board of directors for three years, after which it will be cut to 15 at the ECB’s behest.

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“To the other banks which may be thinking about M&A I say: a new era has dawned. They won’t let you do mergers for your own convenience or to please local interests,” Castagna said.

The regulator gave a preliminary go-ahead to the deal and is expected to give its formal approval by August.

The two banks still need to present a business plan within a month. The deal also needs the approval of shareholders of the two lenders, including BPM’s powerful unions, with a vote due to take place by Nov. 1, 2016.

($1 = 0.8941 euros)

Additional reporting by Paola Arosio and Andrea Mandala; Editing by Greg Mahlich

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