MILAN, Oct 27 — Banca Monte dei Paschi di Siena SpA, the Italian lender with the biggest hole from Europe’s bank health check, may need to find a buyer to help plug a capital shortfall, a move that may prompt a round of consolidation in the industry.

The world’s oldest bank, twice bailed out in the past five years, must replenish €2.1 billion (RM8.74b) within nine months to meet European Central Bank requirements for capital buffers. The Siena-based bank, which raised €5 billion from shareholders this year to prepare for the test and repay some state aid, said it hired UBS AG and Citigroup Inc. to explore all strategic options, without elaborating.

Monte Paschi hasn’t overcome the financial strain wrought on the lender when it bought a rival in 2008 and later used derivatives to cover losses, transactions that have since backfired and are being criminally probed. A combination of Paschi with a competitor now may lead smaller banks that are also burdened by bad loans and have struggled to boost profit after the financial crisis to follow its lead.

“The easiest option for Monte Paschi would be a merger with another European lender interested in boosting its presence in Italy,” said Carlo Alberto Carnevale Maffe, professor of business strategy at Milan’s Bocconi University. “This could be the beginning of the European banking consolidation sought by Mario Draghi to cut the link between banks and their states.”

Yearlong review

Twenty-five lenders failed a stress test led by the ECB, which found the biggest capital hole in the region’s banking system lurking in Italy. Of the nine Italian banks that failed the test, four still showed holes after measures they took this year, according to the ECB’s report.

Draghi, the ECB’s president, is using the yearlong review to restore confidence in the financial system before taking over banking supervision in November. The health check revealed Italian lenders are lagging behind competitors, posting the highest fail rate in the region even after some of the country’s biggest banks cleaned up their balance sheets in preparation for the review.

“Banks often retrenched to their core markets during the crisis and now, with balance sheets that are more or less cleaned, we may see a consolidation movement,” said Francois Chaulet, who helps manage €350 million at Montsegur Finance.

BNP Paribas SA, Credit Agricole SA and Banco Santander SA may be potential candidates to take over Paschi, said Stefano Girola, who helps manage US$40 billion (RM131.2b) at Banque Syz & Co. SA in Lugano.

Santander, BNP

“The two French banks already have a strong presence in Italy, so a combination with Paschi would create synergies, while for Santander a Paschi takeover would be the trigger to enter in the Italian market,” said Girola.

BNP Paribas owns the Rome-based Banca Nazionale del Lavoro SpA, while Credit Agricole controls Cassa di Risparmio di Parma e Piacenza SpA. A spokeswoman for BNP declined to comment while an official for Credit Agricole didn’t immediately return a call seeking a comment.

Santander in 2008 sold Banca Antonveneta SpA to Monte Paschi for €9 billion, a transaction that stretched Paschi’s capital just as Europe’s sovereign-debt crisis ensued. A spokesman for Santander declined to comment on a Paschi tie- up.

The Bank of Italy would support a potential merger of Monte Paschi, Fabio Panetta, deputy director general at the central bank told reporters in Rome yesterday.

“We’d be extremely happy” if this type of transaction is a market operation, makes the bank stronger, and adds credit to the system, Panetta said. “This is how we feel about any operation that helps finance the economy.”

Rights offer

Banca Carige SpA is the only other Italian lender that needs additional funds, according to the Bank of Italy, which includes further capital measures in its own calculations. The Genoa-based lender must replenish about 810 million euros of capital after taking into account funds raised this year, the ECB said in a statement yesterday.

Carige plans to raise €500 million in a rights offer that’s already guaranteed by Mediobanca SpA, to fill the gap, the lender said. The bank, which must submit the plan to the ECB within two weeks, also counts on selling an insurance business and assets in private banking and consumer lending.

Most of the 15 Italian banks in the review have reinforced their capital from private sources by about €11 billion since Dec. 31, the Italian Finance Ministry said in a statement yesterday. “Other mitigating actions have been put in place for more than €4 billion,” it said.

“Italian banks need to address their capital shortfalls by forgoing dividend payouts, selling assets and cutting costs even considering some consolidation across the sector,” Raj Badiani, an economist at IHS Global Insight, wrote in a note yesterday. — Bloomberg