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Breakingviews: Italian Bank Recap Requires M & A Faith

Italy’s latest bank recap requires faith in M&A. Mid-sized lender Creval, the country’s tenth-largest by assets, is raising 700 million euros from shareholders to repair its balance sheet. Pruning bad loans will require even more capital. And projected returns are slim. The hope is that the cleaned-up bank will become a takeover target once domestic consolidation kicks off.

Creval’s share issue, launched on Monday, is a severe test of investors’ appetite for Italian banking shares. The loss-making lender, which has seen its market value nearly wiped out by concerns about its capital position, is the latest domestic player to seek help from shareholders to put its house in order. Under pressure from the Bank of Italy, the lender has embarked on a massive restructuring plan that envisages getting rid of large chunks of non-performing loans as well as cutting bank branches and personnel. It is offering investors a staggering 631 new shares for each share they own, at a price of just 0.1 euro.

However, raising capital will be just the beginning of the road to recovery. The bank’s offer document estimates that it will need 743 million euros to absorb planned writedowns on its bad loans. Expected layoffs will cost a further 61 million euros. The payback is hardly enticing. Creval is targeting a return on equity of 5.8 percent in 2020, well below the banking industry’s estimated cost of capital of around 10 percent.

At least shareholders are getting a discount. The capital increase values the bank at just over 0.4 times its estimated 2018 book value of nearly 1.7 billion euros, including a forecast net profit for this year of about 80 million euros. If Creval achieves its ROE target, that will look attractive. The expected consolidation of Italy’s banks sector offers further promise. The need for greater efficiency and better returns will likely encourage a burst of merger activity once balance sheets have been cleaned up. A leaner Creval, with its base in Italy’s wealthy Lombardy region, could then become an enticing target for a larger rival.


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