Italy Bank Mergers May Lead to Bigger, Not Better Lenders

Investors are snapping up stock in Italy’s largest cooperative banks, betting the biggest reorganization in a generation will break open the market and prompt mergers. Whether it will lead to more profitable banks is another matter.

A law approved in March forces 10 popolari, or people’s banks, to convert to joint-stock companies. That means an end to restrictions on ownership and voting rights that have allowed their shareholders, who consist mainly of employees and local business clients, to block unwanted change. Eager to pre-empt foreign predators, the lenders have in recent months been trumpeting the benefits of teaming up. More details of possible combinations may emerge this week, when the popolari release quarterly results.

The cooperatives are struggling with loan losses, high costs and low profit. To pay off as a long-term investment, they need to develop new sources of revenue, improve returns on existing services, close some of their thousands of branches, reduce headcount, also by the thousands, and streamline operations, analysts say. It’s a tall order for banks long shielded from competitive pressures.

“Mergers of these community-oriented banks may not produce better banks,” said Marco Elser, a partner at Lonsin Capital Ltd., a London-based investment firm. “The sum of problems can only lead to a bigger problem.”

[“source-bloomberg.com”]