Shock therapy to spur wave of mergers among Italy's 'popolari' banks

By Silvia Aloisi and Valentina Za

MILAN/VICENZA (Reuters) - Italy's biggest cooperative banks are bracing for a wave of mergers following a government reform that forces them to convert into joint stock companies within 18 months.

The reform aims to strengthen Italy's banking sector, which fared the worst in a Europe-wide health check of lenders last year. The government says it will also ultimately support bank lending to businesses, which has been shrinking for the past three years as Italy grappled with its longest post-war recession.

Its most immediate effect will be to spur a long-delayed consolidation by making it easier for ownership of the so-called "popolari" banks to change, bankers say.

They say the shake-up could also help find a buyer among the cooperative banks for troubled Monte dei Paschi di Siena or Carige , the two Italian lenders that emerged as the weakest in the European checks.

"The measure has had the effect of an electric shock for the popolari," Piero Giarda, chairman of the supervisory board of Banca Popolare di Milano , told a shareholder meeting on Saturday.

The bank is one of the 10 largest cooperative lenders affected by the reform, which was approved by parliament last month and scraps voting rules giving shareholders one vote each regardless of the size of their stake.

The others are UBI , Banco Popolare , Popolare dell'Emilia Romagna , Popolare di Vicenza, Veneto Banca, Popolare di Sondrio , Credito Valtellinese , Popolare di Bari, Popolare dell'Etruria e del Lazio .

Talks over possible tie-ups have already started, at least informally.

"We are talking to the cooperative bank world that has the same problems as us," Banco Popolare Chairman Carlo Fratta Pasini told shareholders.

"We're not looking to take over anyone, there are no predators and preys, we're just trying to find out whether there are travelling companions."

Critics of the "one-head, one-vote" rule say it, together with ownership restrictions and limits on proxy voting, have distorted governance at the banks by allowing minority shareholders to block unwanted change.

The rules have also long been seen as an obstacle to mergers and to attracting new investors.

The expected wave of consolidation will help banks shoulder rising costs as regulators push lenders to increase their loss-absorbing capital, popolari executives say. Some also see domestic tie-ups as a defensive move against possible foreign takeovers.

"Looking for a partner, listed or not listed, is the most logical and safest solution for our future," said Gianni Zonin, chairman of unlisted Popolare di Vicenza. He said he hoped regional rival Veneto Banca "accepts this invitation."

Both lenders have hired investment banks to advise them on strategic options. They have also written down the value of their shares by 23 percent in an unusual move that is seen as smoothing the way for a possible tie-up.

Monte dei Paschi, which is due to carry out a 3-billion euro rights issue to plug a capital shortfall laid bare by last year's review, said on Friday it had been told by the European Central Bank it also needs to find a merger partner. Bankers say UBI would be the most likely domestic candidate to take over the Tuscan bank.

Another combination under consideration is between Popolare Milano and Banco Popolare, and possibly also with Popolare Emilia Romagna, according to a source close to the matter. The CEO of Banco Popolare has said Popolare Milano would be his ideal merger candidate. The Milan-based bank declined to comment.

(additional reporting by Gianluca Semeraro in Novara, Andrea Mandala in Milan. Editing by Jane Merriman)