MILAN (Reuters) - The European Central Bank has launched an inspection of how Italy's fourth-largest lender, Banco Popolare (MI:BAPO), calculates its capital strength and manages its credit risk, the bank said in a share issue prospectus published on Friday.
Banco Popolare is due to kick off on Monday a 1 billion-euro (£783.04 million) share issue, priced at a 29 percent discount, to help secure a marriage with peer Banca Popolare di Milano (MI:PMII) to create Italy's third-largest bank.
The two lenders agreed in March to a long-awaited deal which will form a bank with 171 billion euros in assets, more than 2,400 branches and around 25,000 staff, following pressure from Rome for mergers to strengthen Italy's ailing banking sector.
The reasons behind ECB's inspection were not immediately clear, and representatives of the central bank could not immediately be reached.
Banco Popolare said in the prospectus the ECB inspection, launched on May 16, was ongoing and pertained to its "management of credit risks, risk control systems and the accuracy of methods used to calculate the group's capital position".
The ECB, as part of its EU supervisory role, is also making checks on the strategy and measures adopted by Banco Popolare to manage its non-performing loans, but has yet to reveal the outcome of those tests.
In the same prospectus, Banco Popolare said the ECB was still evaluating the business plan the lender and Banca Popolare di Milano had presented for the future merged entity.
Citing potential risks ahead of the share issue, Banco Popolare said the ECB may ask for additional changes that could affect the economic and financial situation of the future merged entity or the feasibility of the planned tie-up.
The ECB granted the deal a preliminary approval in March only after Banco Popolare committed to the share issue to boost provisions to cover the value of its most problematic loans.
The bank, which has said it planned to sell some portfolios of bad loans in coming quarters to comply with the ECB requests, said in the prospectus the size of those sales ahead of the merger could be "significant" and could result in writedowns on top of those already recorded in the first quarter.