The unprecedented number of bank M&A announcements in recent months will reshape the Italian banking landscape if the bids succeed. We consider consolidation to be credit positive as it typically leads to greater economies of scale, increased market power, and better medium-term financial performance.

“But competitive and purely strategic dynamics could result in higher execution risk, such as overpaying for targets or entering into sub-optimal combinations,” warned Alessandro Boratti, lead analyst for Italian banks. “These risks are becoming more prominent, particularly as takeover defences, competitive positioning, and market-share considerations increasingly influence strategies.”

Political involvement is adding further burden to some deals. The government has long expressed a desire to establish a large third banking group to rival Intesa and UniCredit, so its support for an MPS–Mediobanca tie-up came as no surprise. But it imposed several demands on UniCredit's offer for Banco BPM, adding to unfavourable rulings from the EBA and ECB regarding the application of the Danish compromise to the acquisition of Anima by BPM’s insurance subsidiary.

“We do not expect the government’s conditions to be final as they are likely to be subject to negotiation. The government may also need to seek approval from the European Commission, which will assess whether the 'public interest' rationale on the deal aligns with the general principles of EU law,” Boratti said.

Given UniCredit’s "disciplined approach" to M&A – focusing on risk-adjusted value for shareholders – these obstacles could lead it to withdraw its offer for BPM. UniCredit’s CEO has downplayed the importance of M&A, though, emphasising that organic growth drivers will sustain performance over the next three to four years.

Strong profitability
Italian banks are among the most profitable in Europe thanks to high interest margins and improvements in efficiency and asset quality in recent years. Our sample of eight Italian banks – Intesa Sanpaolo, UniCredit, Banco BPM, Banca Monte dei Paschi di Siena, BPER Banca, Mediobanca, Credito Emiliano and Banca Popolare di Sondrio – posted record Q1 results, achieving a return on average equity of 15.7%, compared to 14.5% in Q1 2024 and 11.2% in Q4 2024.

Several factors backed performance, more than compensating for lower net interest income. Fee and commission income grew by 7.5% YoY, while cost of risk reached a new low of 26bp, down 7bp from Q1 2024. Contained default rates, stronger balance sheets, and management overlays accumulated in previous years provide key support for banks' provisioning. Results were also boosted by unusually high trading income, although we do not expect these to be sustained.

“We expect a softer performance ahead as net interest income declines amid falling margins and loan losses normalise. Deteriorating geopolitical tensions, including a trade war with the US, would have several ramifications for Italian banks through lower economic growth, an increase in insolvencies, and financial market volatility,” Boratti cautioned.

Adverse economic developments could affect asset quality but likely not before 2026. The average gross NPL ratio was stable at the record low of 2.8% at the end of March, while first quarter default rates remained very low at around 1%.

The first-time application of final Basel III rules had a mixed but limited impact on banks’ capital ratios, which continue to be supported by earnings. As of March 2025, the eight banks in our sample reported an average CET1 ratio of 15.6%, 10bp higher than December 2024 and just 30bp lower than the peak reached in Q3 2024.

Download the Italian bank quarterly here.