MILAN (Reuters) – Intesa Sanpaolo’s (ISP.MI) victorious battle for rival UBI (UBI.MI) has sent shockwaves through Italy’s fragile banking sector as financiers try and work out who will be next in an industry ripe for consolidation.

The unsolicited bid, Europe’s largest banking deal in a decade, has set the stage for further mergers in the fragmented sector as pandemic-induced losses mount, adding to lenders’ existing struggles with negative interest rates and the need to adapt to a fast-changing digital world.

Analysts say the European Central Bank’s support for the UBI bid and Intesa’s use of “badwill” – buying UBI at a discount to its net book value and pocketing the gap as profit – could encourage more banks to pursue tie-ups as a way to cut costs.

“The Intesa deal has ushered in a new phase,” an Italian banker said. “We now know that hostile banking takeovers aren’t just possible but can succeed.”

What is not clear is who will be doing the buying. By snapping up the healthiest second-tier lender, Intesa has removed the candidate slated to lead long-awaited deals between the handful of mid-market players which are most at risk from the threats facing the sector.

However, Alberto Nagel, the head of Intesa’s chief adviser Mediobanca, said on Thursday talks were already intensifying as CEOs tried to position their banks for potential M&A scenarios.

Citi analysts have forecast an adjusted return on tangible equity of just 2% for Italian banks this year, with only “some signs of recovery” in 2021-2022.

“The Italian banking system has to move on from the sub-par profitability of the last decade,” Scope Ratings Executive Director Marco Troiano said.

TAKE THE PLUNGE

The most obvious candidate to take the plunge on a future deal is Banco BPM, Italy’s third-largest bank formed three years ago when Banca Popolare di Milano and Banco Popolare merged. Operating in Northern Italy where the combined Intesa-UBI will be increasingly dominant, sources with knowledge of the matter have told Reuters that it has come under pressure from Italy’s treasury to buy Monte dei Paschi di Siena, the problem child of Italian banking now 68% owned by the state.

Banco BPM has repeatedly denied any interest. Bankers say it could instead become a target for France’s Credit Agricole (CAGR.PA) or BNP Paribas (BNPP.PA), which are both present in Italy and could cut costs through a merger.

A source familiar with the matter said the possibility of a French bid for Banco BPM has raised alarm among some of the Milanese bank’s domestic investors, who would favourably view a tie-up with Italy’s biggest lender UniCredit (CRDI.MI) that replicated the Intesa-UBI deal.

A second source confirmed such a combination would please Banco BPM’s banking foundation shareholders.

But UniCredit, under CEO Jean Pierre Mustier, has in recent years distanced itself from its home turf by shedding domestic assets and reducing exposure to Italy’s 2.5 trillion euro ($2.9 trillion) public debt pile.

Mustier has ruled out any M&A activity but the first source said the bank’s strategy could change if the French banker, who earlier this year turned down the top job at HSBC, were to leave after overseeing a successful restructuring.

The Intesa-UBI deal is also set to boost the role of BPER Banca (EMII.MI), which is buying 532 branches from the combined group to allow Intesa to win antitrust approval.

BPER, whose top shareholder is insurer UnipolSAI (US.MI), had been discussing a merger with UBI only weeks before Intesa unveiled its bid.

CEO Alessandro Vandelli has said BPER will look to play an active role in banking consolidation once it integrates the branches bought from Intesa.

Representatives for Banco BPM, UniCredit, Credit Agricole and BNP Paribas declined to comment for this story.

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