July 25, 2018 / 6:00 AM / in a month

RPT-EXPLAINER-Italian bank Carige's bickering investors complicate merger plan

(Repeats July 24 item with no changes to text)

By Valentina Za

MILAN, July 24 (Reuters) - The European Central Bank has given Italian mid-sized bank Carige a tall order by demanding it boosts its capital by the end of the year or embark on a merger with a healthier rival.

Shareholder infighting, a still-high bad debt burden and poor profitability make the bank - Italy’s 10th largest - a tough sell.

No obvious buyer has emerged. Any potential merger partner would face significant charges to restructure Genoa-based Carige, which is heavily exposed to the local economy of the northwestern Liguria region.

The bank has managed to reduce its cost-to-income ratio to 87 percent from 98.5 percent but CEO Paolo Fiorentino told Italian daily Il Sole 24 Ore this month that shrinking annual revenues made it hard to improve the ratio further.

Carige’s soured loans still account for 27 percent of total lending at a time when all major Italian banks are working to push the ratio below 10 percent.

Carige is Italy’s last remaining large problem bank after Rome bailed out Monte dei Paschi di Siena and bankrolled the rescue of two smaller lenders based in the Veneto region by Intesa Sanpaolo last year.

Carige has 23.7 billion euros ($28 billion) in assets. That compares in size to the smallest of the two Veneto banks that Italy was allowed to wind down under domestic rules because the bank was not deemed to have systemic importance.

It would be up to European banking authorities to decide whether Carige qualified as having systemic importance and there are no clear-cut criteria for the decision.

SPEEDING UP

After seeing through a challenging capital raising in December to shore up the bank, Fiorentino has been working to whip it into shape for a future merger.

He must now speed up the process as Carige has failed to place a hybrid bond needed to rebuild its second-tier capital and must fill a 135 million euro gap by the end of the year unless it seeks a merger.

Investment bankers say the prospect of securing approval for any tie-up from Carige’s bickering shareholders is daunting.

The largest investor in the bank is local businessman Vittorio Malacalza who owns a 20.6 percent stake after backing three successive cash calls by Carige since 2014. Another local entrepreneur, Gabriele Volpi, owns 9 percent.

A third businessman, Raffaele Mincione, has emerged this year as a leading investor with a 5.4 percent stake, which a source familiar with the matter says has since risen. The source says Mincione aims to raise his holding above 10 percent.

Malacalza and Mincione will face off at a shareholder meeting the bank will hold in September to name a new chairman after the current one, who had been appointed by Malacalza, resigned in protest against the way CEO Fiorentino ran the bank.

Both Malacalza and Mincione have asked for the Carige’s board to be removed at that meeting.

But Malacalza has lost confidence in the current CEO, after pushing out his two predecessors, prompting the ECB to complain of too many management changes.

Mincione backs Fiorentino and wants a new board to steer Carige towards a merger that would preserve its local roots.

Mincione is campaigning to win over other investors, sources say, but it is still unclear who will back his slate of board nominees at the upcoming meeting.

In the meantime, Italian prosecutors have opened an investigation into possible market manipulation in connection with the bank. No individuals are under investigation for the time being, a source familiar with the matter said.

MARKET SHUT

Carige’s total capital ratio of 12.2 percent lags a 13.1 percent threshold recommended by the ECB.

Carige in March pulled a planned sale of a hybrid bond needed to fill the gap and said it would wait for better market conditions. Since then, rising political risk as an anti-establishment coalition took power in Italy have effectively shut weaker issuers such as Carige out of the funding market.

If Carige does not manage to raise the money, it would not be at imminent risk of failing, sources familiar with the matter say. Its core capital is above minimum requirements and the breach concerns a non-legally binding capital threshold.

The ECB, however, can keep pressing the bank to meet its demands.

$1 = 0.8563 euros Reporting by Valentina Za Editing by Edmund Blair

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