Breakingviews – Italy finds tax trick to prettify risky bank M&A

The entrance of Monte dei Paschi bank headquarters is pictured in downtown Siena, Italy, June 30, 2017.

MILAN (Reuters Breakingviews) – Italian Finance Minister Roberto Gualtieri has found a backdoor way to smooth tricky bank mergers. Proposed tax changes would render state-controlled Banca Monte dei Paschi di Siena a little bit more appealing to suitors, while still complying with state aid rules.

Rome’s plan, enshrined in its 2021 budget law, envisages letting companies turn past tax losses into ready-to-use fiscal credits if they carry out a merger in 2021. Years of economic crisis mean lenders have accumulated large amounts of so-called tax loss carry forwards, which can be used to offset future income tax payments. But profitability is so low that many won’t be able to claim the benefits for years. Loss-making Monte Paschi, which will barely break even in 2022 according to Refinitiv estimates, would need decades to use up its 5 billion euros of deferred tax assets.

The fiscal tweaks will give merging banks’ capital ratios an immediate boost. Tax assets are either held off balance sheet, or deducted from capital, because of the uncertainty of future utilisation. But once they are turned into a certain cash flow, they can count towards a lender’s common equity Tier 1 capital.

The plan isn’t a free-for-all. Rome will limit the amount of new credits to 2% of the total assets of the smaller entity and ask banks to pay a chunky fee of 25% of the credits for the privilege of accelerating their use. That should ensure that the scheme doesn’t fall foul of Brussels’ state aid rules.

The measure looks designed to help Rome finally offload Monte Paschi. A buyer, say UniCredit, would get a dowry of about 2 billion euros in tax credits, net of fees, according to Breakingviews calculations. That should easily cover integration charges of perhaps 1.3 billion euros. Yet suitors may still want state help to clean up the Tuscan bank’s balance sheet and cover potential legal claims.

The benefits will however spread more widely. Banco BPM might get tax credits worth at least 1 billion euros if it combined with BPER Banca, while Credit Agricole might get 400 million euros if its bid for Credito Valtellinese goes through, analysts reckon. The law change may provide a little help to Monte Paschi, but the real winners could be healthier banks.


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