Macroeconomic, social and regulatory conditions have contributed to substantial changes in the European banking industry. Since the implementation of the ultra expansionary monetary policy from 2008, the Net interest Rate Margin (NIM), which is the core driver of a bank profitability, has recorded a significant decrease, nearly 33% (Cecioni 2019), forcing banks to seek alternative sources of income.
The Italian banking market industry, seemed to focus on M&As to recover from the negative interest rates, since in the last five years the latter experienced a high rate of M&A transactions, concentrating further in the industry.
Like with any industry, Banks can merge for several reasons such as to gain economies of scale, to cut costs, to spread risk, and to expand into growth markets. Additionally, it must be noted that the reasons for Banks merging are also heavily dependent upon whether the deal is to be domestic or cross border. As with any deal, there are barriers that can prevent M&A deals or make them significantly harder to navigate. For example, regulatory issues, uncertainty within the economy, and business issues such as structural and cultural differences. Likewise with reasons for a deal happening, these obstacles vary according to the geographical nature of the deal. This is the primary reason that explains the decreasing trend of cross border merger and acquisition deals in Banks.
It should be noted, that there is a difference between the fundamentals and motivation behind domestic and cross border deals. Cross border deals seem to reflect the outcome as growth opportunities and profitability. Comparatively, domestic deals appear to focus on what synergies the firms can harness to streamline existing domestic processes such as cutting costs, streamlining potentially overlapping distribution channels and likewise for central functions. (Emter, Schmitz and Tirpak, 2018).
When putting Italy in comparison to other countries and their banking industries, it is visible that Italian banks tend to be more exposed to emerging market and derivatives risk. Especially the high derivative risk exposure was noticeable during the Sovereignty crisis in 2011. Cities and municipalities in Italy bought highly sophisticated financial products and then struggled to re-pay their debt. To hedge or lower their interest payments, they entered swap deals, which in some cases even added more borrowings (more debt) that they were unable to pay back.On the other hand, compared to other European countries, Italy faces less real estate risk exposure. For example, in Spain, at some point more than half of deposit-taking institutions lending was for the construction and real estate sector (2007). In Italy, the real-estate sector is more contained and thus a sudden sharp decline in real estate prices (as we saw in the US in 2007/8) is rather unlikely.
If we look at the Italian Banking market in recent times, the M&A sector has been keeping busy. In 2015, the value of cross border M&A deals in Italy reached a new high at over $50bn (Romei, 2016). Additionally, analyzing data from (Statista, 2022), in 2016 there were 471 domestic M&A deals and 425 cross border deals. Compared to the most recent data in 2019, with the number of domestic and cross border deals sitting at 493 and 372 respectively (Statista, 2022). The trend, seems to have exploded last year, during the pandemic the M&A sector for Italy was particularly strong, with figures representing a YOY deal value increase by 144%, deal volume increase by 30%, and transactions up by 60%. This comes after a strong start in the first 9 months of 2021, showcasing Italy’s M&A sector’s strongest start in a decade. (Robustelli, 2022).
Two good examples of this trend are the UBI-Intesa case and the MPS-Unicredit one. The former happened on the 12th April of the last year, seeing two of the bigger banks in the Italian market merging. Intesa San Paolo, in fact, launched to all the clients, after the permission of the CONSOB, a very advantageous public exchange offer on UBI’ stocks, 10 UBI stocks for 17 of Intesa, which recollect a tremendous success amongst the targeted shareholders. However, the merger of UBI banca was split between Intesa San Paola and BPER BANCA which acquired 630 branches out of the more than 1000, involving more than 2.4 millions of clients.
In December, rumors started of a possible merger between UniCredit and MPS, two Italian banking giants, due to an urgent need for recapitalization by one of the few banks with public participation. With Mustier's resignation on the horizon, which would take place in April, UniCredit was grappling with the choice of a new CEO while MPS reverted back to 2013 with expected losses by the end of the first quarter of that year amounting to approximately one third of the total equity. The situation worsened further to reach one and a half billion by the beginning of next year.
While the Ministry of Economy, holder of 68.28% of the shares of MPS, was inclined to acquire the 14 billion NPLs by Unicredit. Bisoni, the president of Unicredit, underlined that the board would not approve a transaction that would not be advantageous for shareholders and for the UniCredit group. In fact, the most important shareholders seem to have the same idea as the president, Del Vecchio, who sided against the merger of the longest-running bank in Italy. The acquisition deal is still on the table, since MPS is under the Government of Italy, which makes the negotiation further complicated.
With the new year, another acquisition agreement is on the table: the one between BPER and Carige. The agreement was approved last January by the Italian banking authorities, whose size is around 880 million euros, 530 of which would be used to recapitalize Banca Carige. With this new agreement, a third banking center would be created, that of BPER alongside Intesa San Paolo and Unicredit.
On the whole, it is not known how the banking market will evolve in the next five to ten years. What seems certain is that the key players in the sector are increasingly counting on the fingers of one hand, accentuating a phenomenon of concentration.