MILAN Italy's banking industry rescue fund Atlante expects the European Central Bank to approve a merger between ailing Popolare di Vicenza and Veneto Banca, likely requesting state support to ensure the plan's success.
State-sponsored Atlante was hastily set up last year to take over the two banks when they failed to raise 2.5 billion euros ($2.7 billion) in capital and risked being wound down, further destabilizing Italy's battered banking sector.
The two loss-making lenders need more capital to cover losses from expected fresh loan writedowns. They must also cut costs that currently eat up all their income, and shore up their customer bases after scandals led to deposit flights.
"The ECB is already telling us, and it hasn't been easy, to consider the two banks as one. If things work out, and I have reason to believe they will ... we can close it (the merger deal) by early September," said Alessandro Penati, chairman of the Quaestio asset manager that runs Atlante.
Penati told reporters on the sidelines of a conference that Atlante may use its remaining 1.7 billion euros to invest further in the two banks after pumping in another 938 million euros in capital at the end of last year.
However, the ECB is likely to request the support of the Italian state to lower the risk that the restructuring fails, he said.
"The ECB would put much of its credibility at stake in authorizing the first such merger in Europe," he said.
"They want to have a guarantee the plan would be fully funded from the start and have very high chances of success ... a precautionary recapitalization (by the state} is the way, but done in the right way," he added.
The Rome government created a 20 billion euro fund in December to help struggling banks, starting with Monte dei Paschi di Siena (BMPS.MI), the country's third-largest lender for years at the forefront of Italy's banking troubles.
The state is set to inject 6.6 billion euros into Monte dei Paschi in a precautionary recapitalisation that will entail converting into shares the bank's junior debt held by institutional investors at a discount.
Junior bonds issued by Banca Popolare di Vicenza and Veneto Banca were hit by sales last week as investors priced in the risk of a forced conversion into shares.
Atlante, which was financed by Italian banks and insurers, has brought in former Monte dei Paschi CEO Fabrizio Viola to oversee the merger between Veneto Banca and Banca Popolare di Vicenza.
Penati said the two banks were still in "disastrous" condition, with a combined cost-income ratio of 95 percent and a loan-to-deposit ratio of 150 percent. Problem loans are 38 percent of the total, he said.
(Editing by Mark Potter)