October 14, 2016 / 3:17 PM / 10 months ago

BPM, Banco Popolare shares rally ahead of merger vote

* Shareholders meet on Saturday to vote on merger

* Deal would create Italy's No.3 bank

* First merger in landmark reform of cooperative banks

MILAN, Oct 14 (Reuters) - Shares in Banca Popolare di Milano (BPM) and Banco Popolare rallied on Friday as investors bet shareholders would approve a merger to create Italy's third-largest lender when they meet on Saturday.

The merger would be the first prompted by reforms the government introduced early last year to promote tie-ups and boost bank profitability.

Shares in Banco Popolare and BPM rose more than 6 percent, outperforming a 3.6 percent rise in the Italian banking sector

"It's not a done deal but it's very likely to go through," a Milan-based trader said.

The deal, which needs a two-thirds majority to be approved, faces opposition from a group of BPM's retired employee-shareholders.

BPM's Chief Executive Giuseppe Castagna said in a newspaper interview on Thursday there was a 20 to 30 percent chance the merger would fall through, sending "a really bad message" for Italy.

The government of Prime Minister Matteo Renzi has thrown its weight behind the deal.

Italy's banking system has been weakened by a deep recession that pushed problem loans to nearly one fifth of total lending.

Chronic low growth in the euro zone's third-biggest economy adds to banks' difficulties in making money when interest rates are negative. Mergers are seen as a way to beef up profits.

After months of haggling over top jobs and tense discussions with European Central Bank supervisors about capital raising, BPM and Banco Popolare in March agreed to create a group with 173 billion euros in assets and 4 million clients.

The new bank expects to cut costs by 320 million euros by 2019, or 10 percent of the combined total, partly through 1,800 voluntary redundancies out of a total of 25,000 employees.

Banco Popolare shareholders are widely expected to approve the merger after backing a 1 billion euro share sale the bank was forced to carry out this year to meet ECB demands to boost its bad loan provisions.

BPM and Banco Popolare on Saturday will also vote to shed their cooperative status, which granted shareholders one vote each regardless of the size of their stake, becoming joint-stock companies as imposed by the government reform.

BPM's union shareholders, which have traditionally enjoyed considerable clout thanks to the voting system, backed the deal after winning concessions on corporate welfare and layoffs. (Reporting by Valentina Za; Editing by Ruth Pitchford)

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