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UBI's 'free meal' acquisition bears execution risk, analysts say

Unione di Banche Italiane SpA looks to have won favorable terms for the acquisition of the good assets of three bailed-out Italian lenders, but analysts cautioned that risks still lie ahead in integrating the banks.

Italy's bank resolution fund agreed Jan. 18 to sell Nuova Banca delle Marche SpA, Nuova Banca dell'Etruria e del Lazio SpA and Nuova Cassa di Risparmio di Chieti SpA to UBI, the country's fifth-biggest bank by assets, for €1. Before the sale completes, the trio will be cleaned up and recapitalized, their predecessor institutions having been bailed out in late 2015 alongside a fourth small bank.

UBI expects the acquisition to increase its market share by 20% and its return on tangible equity to 12.7% by 2020, compared to an ROTE target under its existing business plan of 10.6%. The acquired banks had 547 branches, more than 900,000 customers and about 5,000 employees at the end of September 2016. UBI had 1,532 branches at the same point.

The acquired banks will bring gross customer loans of €14.2 billion, of which €1.8 billion are expected to be classed as nonperforming.

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Despite the ambitious post-acquisition targets, fully absorbing the three banks could pose problems in the time frame UBI has set out, said a Milan-based analyst who asked not to be named. That risk is particularly acute given that the lender is already in the process of merging a number of subsidiaries with the parent company, the analyst added in an interview.

"There is an integration risk," the analyst said. "Merging three banks is not easy, and it is especially more difficult given UBI is already doing internal M&A. The new acquisitions have to go on top of that."

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The wider Italian banking sector will benefit from the consolidation in the long run, the analyst said, thanks to lower systemic risks from the three failed lenders. But he added that the resolution fund should have pushed for more than the "not particularly compelling" €1 sale price.

In addition to the nominal price tag, UBI applied a series of conditions to the deal, including the removal of €2.2 billion in bad loans from the trio's balance sheet. That will be accomplished through the sale of the loans to Italy's privately funded bank rescue vehicle, known as Atlante.

The resolution fund will also provide €450 million of fresh capital for the three banks, boost coverage of bad and doubtful assets and make provisions for restructuring and other costs. All told, the fund will have to chip in about €1.5 billion to close the transaction, on top of the €3.6 billion it spent in the original rescue, an Italian central bank official said in mid-January.

Calling the UBI deal "a free meal," analysts from Exane BNP Paribas said in a research report that "the acquisition of the Banca Marche, Banca Etruria and Carichieti greatly enhances the value of UBI."

"Eventually the full €1 billion of badwill should be recognized as regulatory capital," they added, referring to the difference between tangible equity and the €1 price. UBI will also be able to use €600 million of deferred tax assets built up by the acquired banks against prior-year losses, they noted.

The analysts cautioned that an expected profit contribution from the three banks of €100 million by 2020 "looks ambitious" and "potentially too optimistic," but they added that "the deal generates value for UBI's shareholders even with no earnings contribution."

For the first nine months of 2016, UBI Banca reported a net loss of €754.5 million. Net impairment losses on loans more than doubled over the period to €1.37 billion from €557.6 million in 2015. The bank's toxic loan ratio for the first nine months of 2016 was 15.16%, roughly flat on 2015.

Even with the accommodating terms, Moody's analysts believe that "UBI Banca's plans to generate revenue benefits following the acquisition of the three banks could be challenged by the weak creditworthiness of these entities," according to a recent report. The rating agency urged caution over what it sees as a "weak operating environment for Italian banks."

The three banks UBI is acquiring are the successor institutions to Banca delle Marche SpA, Banca Popolare dell'Etruria e del Lazio SC and Cassa di Risparmio della Provincia di Chieti SpA. The fourth lender to be rescued was CARIFE SpA, now Nuova Cassa di Risparmio di Ferrara SpA.

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