By Giuseppe Fonte, Andrea Mandala and Elvira Pollina
MILAN (Reuters) - Italy is considering merging troubled banks Monte dei Paschi (MI:BMPS) and Banca Carige (MI:CRGI) with healthier rivals such as UBI Banca (MI:UBI) as it scrambles to avert a new banking crisis, sources familiar with the matter said.
Monte dei Paschi, rescued by the state in 2017, and Carige, recently put into special administration by the European Central Bank (ECB), are struggling with bad debts and the prospect of asset writedowns that would eat into their capital.
Their problems threaten to reignite a banking crisis that Rome thought it had ended two years ago and could further damage an economy already at risk of slipping back into recession.
According to one of the sources, the options being considered even include the possibility of a three-way merger that would bring together Monte dei Paschi, Carige and UBI.
The banks and the Italian treasury declined to comment.
Discussions are at a very early stage and no final plan has been drawn up by the anti-establishment government, which has criticised past bank bailouts and wants to avoid spending taxpayer money to rescue lenders.
Several government officials have publicly voiced support for mergers that would strengthen the banking industry.
Stefano Buffagni, cabinet undersecretary and a prominent member of the ruling 5-Star Movement, said this week the government should play a leading role in engineering such tie-ups.
However, healthier banks are reluctant to step in to salvage weaker peers, and any merger would need a green light from the ECB, which would likely require a capital increase to ensure a new entity is financially stable.
"For Monte dei Paschi the main option is a tie-up with UBI," one government source said.
Another political source said a merger was the only way to fix the Tuscan bank's problems "with one or more private banks taking care of it", and also mentioning UBI as a possible buyer.
The government owns 68 percent of Monte dei Paschi as a result of the 2017 bailout but under a deal with the European Commission needs to say this year how it plans to exit the bank.
UBI Chief Executive Victor Massiah has repeatedly denied any interest in Monte dei Paschi, even though sources have said it explored the idea in the past.
UBI's core shareholders, mostly wealthy businessmen in the northern Lombardy region which control a fifth of the bank, oppose such an option, fearing it would involve a sizable capital increase, the sources added.
Mid-sized BPER Banca (MI:EMII) is seen as another possible white knight for Monte dei Paschi, three separate banking sources added, especially given the Modena-based bank's less fragmented shareholder base. Insurer Unipol Group (MI:UNPI) owns 15 percent of BPER.
However, the prospect of a large cash call would again be a deterrent, the banking sources added.
BPER declined to comment.
LONG-RUNNING WOES
Monte dei Paschi is still battling with high bad loan ratios and faces legal claims for over 1.5 billion euros (£1.3 billion), making it risky to take over without any support from the state, which also bankrolled the rescue of two smaller lenders based in the Veneto region by Intesa Sanpaolo (MI:ISP) in 2017.
Italian banks have long been plagued by a mountain of soured loans, weak profitability and too many branches.
"If you want Monte dei Paschi, you need to pay for it and almost nobody has got the funds available or wants to tap the market to find them," one of the sources said.
Any state aid would attract the scrutiny of European authorities and mark a U-turn for the ruling coalition, which is also grappling with a funding crunch at smaller Carige.
So far the government has stepped in to support Carige with a 1.3 billion euro fund, which includes the possibility for the state to inject up to 1 billion euros in the bank, but is looking for a longer-term solution.
Among the options being considered are combining Carige, Monte dei Paschi and UBI, or alternatively, a merger of Carige with another lender, helped by government support if needed, according to one of the political sources.
However, a three-way merger would be complex to pull off as it would likely face many obstacles, including managers fighting for leadership positions, capital requirements, and the integration of different IT platforms.