BNP Paribas Could Make a Merger With Monte dei Paschi Work

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Monte dei Paschi di Siena has undertaken efforts to solidify its balance sheet.Credit Stefano Rellandini/Reuters
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BNP Paribas should be thinking seriously about Monte dei Paschi di Siena. After this year’s $8.9 billion fine from American regulators, BNP’s shareholders probably feel they’ve had enough excitement. But looking past the risks, there would be logic to swooping on the Italian lender.

Such a tie-up has been suggested before. Buying Monte dei Paschi would give BNP scale in Italy, turning its BNL division from that country’s sixth-largest bank into its third.

But the risks always outweighed the potential rewards. The charitable Sienese foundation that controlled half of Monte dei Paschi could block a deal that meant cuts in its hometown. Other issues: Monte dei Paschi’s big exposure to Italian sovereign debt could hit capital, and already high non-performing loan issues could be underestimated.

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 plan to sell new shares to raise as much as 2.5 billion euros are solidifying Monte dei Paschi’s balance sheet.

And there’s potential to take out costs. BNP and Monte dei Paschi’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 heft could lower Monte dei Paschi’s funding costs: recent travails have left these 40 basis points (0.4 percentage points) higher than the Italian average. A 20 basis point decrease in funding costs would be worth 260 million euros. Taxed and capitalized, these combined synergies would be worth 3.4 billion euros – Monte dei Paschi’s current market capitalization.

BNP investors would still fret. Unless the deal is carefully managed, buying Monte dei Paschi could push their bank into a higher bracket of globally systemically important financial institutions. That would increase 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 Monte dei Paschi shareholders a modest premium: The Tuscan lender’s investors know their group could struggle after the 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.

Neil Unmack is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

Troubled Bank Monte dei Paschi di Siena Approves Plan to Raise $3.1 Billion

Troubled Bank Monte dei Paschi di Siena Approves Plan to Raise $3.1 Billion

The bank is seeking satisfy demands that it bolster its capital cushion after the results of a review by the European Central Bank.