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Gallic hug

11 November 2014 By Neil Unmack

BNP Paribas should be thinking seriously about Banca Monte dei Paschi. After this year’s $8.9 billion fine from U.S regulators, the French bank’s shareholders probably feel they’ve had enough excitement. But looking past the risks, there would be logic to swooping on the Tuscan lender.

Such a tie-up has been mooted before. Buying MPS would give BNP scale in Italy, turning its BNL division from the country’s sixth-largest bank into its third. But the risks always outweighed the potential rewards. The charitable Sienese foundation that controlled half of MPS could block a deal that meant cuts in its home town, MPS’s nastily big exposure to Italian sovereign debt could hit capital, and an already high non-performing loan exposure could prove an underestimate.

These barriers are fading. The foundation is now a minority shareholder, and the Italian establishment, particularly the Bank of Italy, would welcome a foreign buyer. Last month’s asset quality review, and a 2.5 billion euro rights issue, is giving MPS balance sheet solidity.

And there’s potential to take out costs. BNP and MPS’s branch networks don’t overlap much, so achieving synergies worth 20 percent of the target’s costs, as seen in some Italian bank mergers, might be tough. But a conservative 10 percent synergy target would deliver 260 million euros before tax. Meanwhile, BNP’s global bulk could lower MPS’s funding costs: recent travails have left these 40 basis points higher than the Italian average. A 20 basis point lower funding cost would be worth 260 million euros. Taxed and capitalised, these combined synergies would be worth 3.4 billion euros – MPS’s current market capitalisation.

BNP investors would still fret. Unless carefully managed, buying MPS could push their bank into a higher bracket of globally systemically important financial institution, increasing its capital requirement by 0.5 percentage points. Bulking up in deflation-hit Italy, where loan growth is stagnant and bad debts high, carries risks.

Yet the French bank could reflect this in its terms. It could push for an all-share merger that gave MPS shareholders a modest premium: the Tuscan lender’s investors know their group could struggle post-rights issue, and might look positively on a small stake in a bigger bank if they got a tangible share of the synergies. BNP could then use its greater muscle to either play an eventual Italian recovery, or spin off some of its bigger business. It could be a risk worth taking.

 

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