Banco Popolare CEO doesn't rule out capital increase in M&A deal

Banco Popolare SC Chief Executive Officer Pier Francesco Saviotti is studying options including a potential capital increase to meet the European Central Bank's requests to back its planned merger with Banca Popolare di Milano Scarl. "Our capital is sound, but considering that we want to do the deal and that the ECB insists in taking actions to improve it, we are reviewing a variety of initiatives," Saviotti said at a press conference in Lodi, Italy, after the bank's annual meeting. "We cannot rule out 100 percent a capital increase."

Executives at Banco Popolare and Banca Popolare di Milano are racing to reach a merger accord that meets the ECB's demands after a month of talks failed to assuage the central bank's concerns over capital and governance. The ECB sent a letter urging the firms to form a company with a strong capital position and a transparent and efficient governance. Banco Popolare has "changed our mood" following the ECB's letter and will work to meet the central bank's requirements, Saviotti said. The CEO hopes to finalize a merger agreement soon and expects "important synergies" from it.

The Italian Treasury also said Friday that the banks' top executives are determined to fulfill the ECB's demands, adding that the transaction is backed by all stakeholders and investors.

Banco Popolare is considering selling bad loans and non-core assets to boost capital, the CEO said, ruling out the divestment of holdings in Agos Ducato SpA, Anima Holding SpA and Aletti Gestielle SGR SpA since they'll produce synergies and income in a merger. The ECB also asked the banks to submit a multiyear business plan for the combined company within a month. The lenders said Friday they'll hold board meetings by March 22 to discuss the latest developments.

The ECB is pushing Italian banks to tackle an estimated 360 billion euros ($406 billion) of troubled and defaulted loans that are undermining new lending and weighing on the economy. Their shares have tumbled amid the intensified scrutiny. Banca Carige SpA, told by the central bank last month to submit a new funding plan after losses widened, has sunk more than 50 percent this year. Banco Popolare has lost more than 40 percent. A failure of the merger would set back a long-awaited round of consolidation that both the Italian government and the ECB are seeking to spur lending, strengthen banks and help the economy recover from a three-year recession. Italy approved a law last year forcing the biggest cooperative lenders to become joint-stock companies, as restrictions on ownership and voting rights for these community-oriented banks have stood in the way of consolidation.

"The conditions imposed by the ECB will have to be met at any cost," said Francesco Confuorti, CEO of Advantage Financial SA, a Milan-based investment firm. "If the deal is not signed, this will be a very bad signal that would highlight the persisting weakness of the country's banking industry."