Fitch: Italy Mutual Banks - Slow Consolidation Despite New Law
OREANDA-NEWS. The long-awaited consolidation of Italy's mutual banks may still be a long way off, even though appropriate laws were passed on 10 February, says Fitch Ratings. The banche di credito cooperativo (BCC) control an 8% deposit share but operate loosely as a group under a common brand name and lack a well-structured mutual support scheme.
Improving the structure has long been on the cards but second-stage regulations still need to be published by the Bank of Italy and even once these are in place, there will be an 18 month lag before the initial consolidation stage kicks off. We think meaningful progress in the BCC sector might not be made until late 2017.
The new law says that the BCC must be headed by a joint-stock company whose minimum paid-in capital should be at least EUR1bn. The law does not explicitly appoint any of the three existing central institutions (ICCREA Holding SpA, Cassa Centrale Banca and Cassa Centrale Raiffeisen) to fulfil the holding company role. However, the only company currently meeting the EUR1bn capital threshold requirement is ICCREA, suggesting it is the most likely candidate.
Under the new law, the BCC will delegate powers to the holding company through a 'contract of cohesion'. Acceptance of the contract means the banks will be part of a formal cross-support mechanism. We think such a scheme would strengthen cohesion among the 370 BCC and help prevent crisis situations and failures because support could flow through from the stronger banks to the weaker ones. Greater integration and the introduction of a group support scheme would also enable us to assign ratings to the entire BCC group.
Individual BCC can continue to operate as independent entities. To do so, however, they must have at least EUR200m of paid-in capital and reserves, pay a 20% tax on this capital and transform themselves into limited companies, thus giving up their mutual status. This should force smaller banks to opt into the new structure. Less than 20 BCC currently meet the EUR200m threshold.
We think the proposed, more transparent and conventional BCC group structure should boost investor confidence and facilitate market access for the BCC. Efficiency ratios might also improve because centralised management will probably ensure that all banks, and not only some as is the current case, share common platforms and operating systems. Risk management functions are also likely to become more harmonised over time. This should eliminate some of the disparities in credit fundamentals which currently characterise the individual banks.
However, there will be a long wait before the changes become effective. Once the Bank of Italy regulations are in place, candidates for the holding company position have 18 months to prepare their regulatory submissions. Selection of the holding company is only the first step in the BCC restructuring process, suggesting a long, drawn-out process until completion. During this period, the ability of the BCC to tap the markets for funding and capital will be limited, highlighting their vulnerabilities.
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