UniCredit’s bid for Banco BPM sparked an M&A rush among Italian banks. Mid-sized players are rushing to secure deals not just to expand their operations but also to defend their market positions. Most of the major Italian players are involved: UniCredit, Banco BPM, MPS, BPER and Mediobanca. Crédit Agricole, which considers Italy its second home market, is not sitting on the fence either: the group increased its stake in Banco BPM to protect its ability to distribute its products in the country through partnerships.

The M&A wave looks set to accelerate the consolidation trend in the Italian banking sector, which remains one of the most fragmented in Europe, with 428 banks as of YE 2023 and the top five controlling less than half of the country's total assets. This is much less than markets like France, Netherlands, Spain, Portugal and Greece.

“Consolidation is supportive of banks’ credit profiles as it leads to greater economies of scale, market power, and better medium-term financial performance,” said Alessandro Boratti, Scope’s lead analyst for Italian banks. “But while consolidation can improve efficiency and scale, competitive deal-chasing raises risks of overpaying or entering sub-optimal mergers as competitive positioning, market share considerations and fear of missing out become the main consolidation drivers,” Boratti warned.

In the longer term, we consider growth in scale and a decline in the number of banks inevitable along with the commoditisation of banking products and the de-materialisation of customer interactions. Incumbents will face increasing competition from digitally advanced players, including fintech firms that can offer seamless, data-driven services.

“At the same time, the lack of credit growth opportunities will continue to force banks to further differentiate their offerings, including in wealth management and insurance. These activities, in turn, require scale amid strong competition, especially from foreign players, and narrowing margins,” Boratti noted.

On profitability, Italian banks had another record year in 2024 thanks to higher average interest rates, low funding pressure, rebounding fees and rock-solid asset quality. “We expect resilient bank performance in 2025, but caution is needed. Replicating last year’s results has become more challenging amid falling margins, weak loan growth, and cost pressures. While banks have guided to equally strong results in 2025, faster or deeper-than-expected ECB rate cuts represent a key risk,” Boratti said.

Beyond 2025, we deem Banco BPM, UniCredit and BPER’s projected double-digit returns on tangible equity of above 16% to be overly optimistic and subject to downside risks given uncertain economic and monetary conditions.

Italian banks’ capital positions continue to be strong despite record pay-outs and higher capital requirements. At the end of 2024, the average fully loaded CET1 ratio was 15.5%, up almost 40bp YoY. Resilient operating performance, a lack of opportunities for organic growth and the need to defend share prices have induced Italian banks to increase future pay-out ratios. Although SREP requirements are increasing, strong capital generation keeps this manageable.

Asset quality further improved in 2024: the average gross NPL ratio hit a record low of 2.7% at the end of 2024 on the back of further NPL sales. In 2025, we expect stable asset quality thanks to supportive conditions for both retail and corporate credit.

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