ITALY: TAKEOVERS SHAKE-UP BANKING SECTOR

UNCLAS SECTION 01 OF 03 ROME 000943

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USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO
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E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV IT KPRP ITALIAN POLITICS
SUBJECT: ITALY: TAKEOVERS SHAKE-UP BANKING SECTOR

Ref: A. 06 ROME 449

B. 04 ROME 4149

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SUMMARY
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1. (SBU) The December 2005 resignation of Bank of
Italy (BOI) Governor Antonio Fazio, and the
appointment of reformist Mario Draghi, has raised
expectations that a wave of bank mergers will sweep
Italy in 2006. French bank BNP-Paribas made the
first move, taking over Banca Nazionale del Lavoro
(BNL),Italy's sixth largest bank. BOI approved the
tender offer March 20, and BNP is expected to take
full control of BNL by summer 2006.

2. (SBU) In early March, Governor Draghi stated a
clear preference for increased competition in
Italian credit and banking markets, to "innovate,
reduce costs, and improve services." Weeks before
national elections, Draghi's comment has let Italian
banks know they will no longer benefit, to the
extent previously, from Central Bank protection from
foreign takeovers. END SUMMARY.

French Take-Over Opens the Door.
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3. (U) French bank BNP Paribas made a surprise
announcement February 3 that it would buy 48 percent
of Banca Nazionale del Lavoro (BNL),Italy's sixth
largest bank, from the Italian insurance company
UNIPOL, and other, smaller shareholders. In
anticipation of a merger offer, BNL had cleaned up
its balance sheet by selling non-performing loans to
Morgan Stanley in December; disposed of assets in
Argentina; and restructured the bank's Iraqi debt.
Unipol and its affiliates were eager to sell their
huge stake in BNL, following the rejection of their
earlier offer to buy the bank.


4. (U) BNP plans another offer to acquire the
remaining BNL assets. If the deal goes through, the
BNL acquisition by BNP will be worth nine billion
euro, the third-largest cross-border merger in the
European banking sector. BNP received approval from
BOI, March 20, to complete the acquisition, and is
awaiting approval from Consob, the financial market
regulator, and Italy's antitrust agency.

The First of More Foreign Bank Takeovers
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5. (U) During former BOI President Fazio's tenure,
foreign banks required BOI authorization to increase
their ownership in Italian banks, if the tender
exceeded fifteen- percent of equity. The fall of
Fazio and passage of the financial market reform
bill (ref A) removed the fifteen percent foreign
ownership cap for banks, and drastically reduced the
unilateral power of the BOI governor.


6. (U) Foreign banks are quickly increasing their
stakes in Italian banks. Following the acquisitions
of BNL by BNP Paribas, and Banca Antonveneta by ABN
Amro, foreign banks now control over nineteen
percent of Italian banks' equity, or some 37 billion
euros. French banks own almost half of the foreign-
controlled assets, with stakes not only in BNL, but
also in Carifirenze, Mediobanca, Carige, SanPaolo-
IMI, Unicredit and Popolare di Milano.

Big Mergers on the Horizon?
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7. (U) Following the BNP/BNL merger, the Italian
press is bubbling with rumors that Citigroup is
eyeing a possible takeover of Unicredit, Italy's
largest bank, while Unicredit has set its sights on
German and Polish banks. Last year Unicredit merged
with Hvb, Germany's second largest banking group,
which at the time was the largest cross-border bank
merger deal in Europe, and created a bank with 780
billion euro in assets.

8. (U) Possible domestic merger rumors include
Banca Intesa, Italy's second largest bank, and Monte
dei Paschi di Siena (MPS),Italy's fifth largest
bank. Banca Intesa has confirmed it is considering
acquisitions to boost growth, but dismissed the
rumors of the ten billion euro merger with MPS.


9. (SBU) Banca Intesa is also rumored to be eyeing
a hostile take-over of Capitalia, and this news has
caused both banks' stock to rise sharply. In
defense, Capitalia purchased two percent of Banca
Intesa shares to force Banca Intesa, under Italy's
complicated and anti-competitive cross-shareholding
laws, to either make a cash offer for a 60 percent
stake, or negotiate a friendly takeover with
Capitalia.


10. (SBU) There are rumors of another big project:
the merger between Banca Intesa, Mediobanca and
Generali, Italy's largest insurance company, to
create one of Europe's largest financial services
conglomerates. If this deal went through, French
companies would further increase their already
substantial shareholdings in Italy's banking and
insurance sectors. After the French scotched Enel's
takeover attempt of Suez, however, it is doubtful
Italy's political and financial community would
approve this project, especially as it falls on the
heels of the BNP/BNL deal.


11. (U) In addition, any takeover move by Intesa
requires the approval of French-giant Credit
Agricole, an important shareholder in Intesa.
Credit Agricole's President, Rene Carron, said March
6 the bank will mobilize "considerable firepower" to
protect Banca Intesa. Credit Agricole's influential
role in Intesa's shareholder pact expires April

2008.

Stumbling Blocks
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12. (U) The Poison Pill. Italy has also played its
part in Europe's recent protectionist response to
cross-border mergers. Reacting to France's proposal
to allow "poison pill" defenses to hostile takeover
bids, Finance Minister Tremonti said February 22
that while Italy's corporate merger law is "among
the most open," poison pill defenses should be
allowed when a firm "under attack has more limited
defenses than the attacker." He did not specify
what Italian entity might use a poison pill defense.
However, he defended using this veto power by saying
that Italy was among the most "market-oriented" EU
countries, disliked protectionism, but could not
ignore France's firm line on hostile takeover bids.


13. (U) Tremonti's statement received bipartisan
support from Draghi; Prime Minister Berlusconi;
Confindustria President Montezemolo; Democratici di
Sinistra (DS),Italy's largest opposition party; and
economic expert Pierluigi Bersani (former Minister
of Productive Activities).


14. (SBU) Comment: While Tremonti supports both
Italian bank consolidation as well as tougher
Italian takeover laws to counter GOF protectionist
efforts against foreign takeovers of French firms,
his statement also reflects the current anxiety over
transborder mergers sweeping across Europe. End
Comment.


15. (U) Shareholder Pacts. Another stumbling block
to mergers may be "shareholder pacts," designed to
protect Italian banks and companies listed on Milan
stock market from hostile takeovers. These pacts
could also slow down future mergers.

Comment
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16. (SBU) Italian banks have benefited from the
country's regional banking markets, with lending
margins among the highest in Europe. However, the
banking sector lacks the sophistication found in
other European countries; and while bank revenue per
client in Italy is on par with other EU countries,
Italian banks sell far fewer products to each
client. This factor suggests room to grow. In
addition, Italy's high saving rate (eighteen percent
of GDP in 2005),and the relatively undeveloped
market of consumer credit, consumer loans, life
insurance, and mortgages, makes continued shopping
for Italian banks a likely prospect.


17. (SBU) However, the radical changes to Italy's
financial sector through further consolidations,
mergers, and acquisitions could causes unease
domestically. In fact, some earlier opponents of
Fazio's protectionist approach now seem to have
taken up his mantle. They know Italian banks have
historically helped to stabilize Italy's economy,
through political deals like that for the Fiat
convertible loan and the Alitalia bridge loan, for
example. Italian leaders worry that foreign banks
would be less inclined than Italian banks, to bail
them out of loss-making ventures. End Comment.

Spogli