By Alessandro Boratti, Financial Institutions

UniCredit's bid for Banco BPM has triggered a chain reaction in the Italian banking sector. Mid-sized players are now rushing to secure deals not just to expand their operations but also to defend their market positions.

A merger between BPER, Italy's fourth largest bank by customer loans with a market share of around 5%, and Banca Popolare di Sondrio (BPSO) has long been rumoured and the bid has a good chance of succeeding for several reasons.

First, both banks have a common shareholder in Unipol, which holds almost 25% of BPER and 20% of BPSO. This will facilitate discussions. Second, their business models are complementary as both operate similar commercial banking models and share a common past as co-operative banks. Third, BPSO is three times smaller than BPER, which makes it more manageable for BPER to execute the deal.

BPER’s offer of 1.45 newly issued shares for each existing BPSO share (a 6% premium to BPSO's closing price on 5 February and a 10.3% premium to its three-month weighted average) is in line with recent Italian banking deal announcements in both structure and premium. To gain control of BPSO, BPER only needs the acceptance of 35% of BPSO's share capital on top of Unipol’s stake.

The merger could bring several strategic advantages to BPER.

1. It would double its branch market share in Lombardy, Italy's economic powerhouse, to 14%.
2. According to management projections, the combination will bring EUR 100m of revenue synergies annually, thanks mainly to BPER's stronger network productivity and commercial practices, and cross-selling opportunities.
3. BPER anticipates EUR 190m in annual cost savings driven by a reduction in central costs and investments, as well as the optimisation of the branch network.

If successful, this transaction would be positive for BPSO (BBB/Stable) creditors, as the group would become part of a more resilient organisation, partly thanks to higher revenue diversification and a broader regional footprint in Italy. The new group would hold total assets of almost EUR 200bn, revenues above EUR 7bn, a cost/income ratio below 50% and net income in excess of EUR 2bn. BPER is expected to maintain adequate capital buffers, with a pro-forma CET1% ratio of 15.3%, and a solid liquidity position: a pro-forma Liquidity Coverage Ratio of 169% and a Net Stable Funding Ratio of 134%.

Meanwhile, BPER's proven acquisition track record, including acquisitions of Unipol Banca (2019), 620 Intesa branches and points of sale (2020), and Banca Carige (2022), should help mitigate integration risks. BPER and BPSO share the same partners in asset management, bancassurance, and leasing, which should also help the integration process. Finally, the limited overlap of the two branch networks should reduce closures and redundancies, reducing the risk of confrontation with labour unions.

But while we believe domestic consolidation is generally supportive of banks’ credit profiles as it allows greater economies of scale, market power, and financial performance in the medium term, it also carries risks. Overpaying for a target or entering into sub-optimal tie-ups becomes more likely when competitive positioning and market share considerations are the main consolidation drivers. The acceleration in M&A activity in Italy has partly been triggered by a fear of missing out in the ongoing wave of consolidation.

By its own admission, BPER had to accelerate on the M&A front to "protect its positioning in Italy". However, by February 10, BPER shares were trading 10% lower, possibly reflecting investor doubts about the bid’s value-creation potential.

Separately, we have flagged that MPS’s hostile all-share bid for Mediobanca faces high execution risk, underscoring broader concerns about the complexity of the deal given their different business models and challenges in achieving sustainable synergies.