By Andrea Mandala
MILAN (Reuters) - Italy's UBI is set to extend an insurance partnership with Cattolica (MI:CASS) for a limited time, sources familiar with the matter said, delaying longer-term decisions while it waits to see how consolidation among mid-sized banks plays out.
Italy's fifth-largest bank is seen playing a leading role in a new round of M&A between second-tier lenders grappling with negative rates, a stagnating economy and a digital revolution in the industry.
UBI had been planning to reorganise its insurance operations, valued at 1 billion euros, under a three-year program it will unveil next month and had been looking for a new partner.
But the sources said it would likely opt for a short-term extension of its bancassurance joint-venture with Cattolica (MI:CASS), which expires in December.
It could also extend a life insurance joint-venture with Britain's Aviva (L:AV) beyond December, they added
Aviva and Cattolica, Italy's fifth-biggest insurer whose top investor is Warren Buffett's Berkshire Hathaway (N:BRKa), declined to comment.
Asked about the possible extension of the Cattolica partnership on the sidelines of an event on Tuesday, UBI CEO Victor Massiah said multiple discussions were ongoing and the bank would inform the market in due course.
Italian lenders are increasingly betting on insurance to buttress weakening banking revenues.
Following Intesa Sanpaolo's (MI:ISP) lead, UBI had also mulled bringing in-house its insurance business, which accounted for 15% of net profit between January and September and comprises of the stakes in the two joint-ventures as well as small insurer BAP Assicurazioni.
Bancassurance deals -- which allow an insurance company to sell its products to a bank's clients -- could also play a role in potential tie-ups, which are expected to involve UBI and rivals Banco BPM (MI:BAMI) and BPER Banca (MI:BAMI) as well as state-owned Monte dei Paschi di Siena (MI:BMPS).
Large scale bad loan disposals, a more stable political environment and limited room for further cost cuts are set to make consolidation among Italian banks easier, according to Goldman Sachs (NYSE:GS).
"I believe UBI could start thinking about M&A in 2020", Giandomenico Genta, chairman of UBI's top investor Fondazione Cassa di Risparmio di Cuneo (CRC), told Reuters.
With its 6% stake, CRC leads a consultation pact among shareholders holding in aggregate 18% of UBI.
Shareholder support could smooth the path for a tie-up between UBI and BPER, whose insurance partner UnipolSai (MI:US) is also its top investor with a 20% stake, one banker said.
"They're the best fit," broker Equita said, noting that BPER and UBI could sell part of their insurance, asset management or debt collection businesses to cover the restructuring costs of any merger.
Genta said the deciding factors for a tie-up would be the size of a capital increase that regulators would likely require and how many branches may need closing due to overlapping business.
Goldman Sachs recently flagged UBI's "strong position" as a consolidator, saying it had a better risk profile than its peers.
UBI is widely regarded as the best candidate to take on Monte dei Paschi, which the state must re-privatise by the end of next year.
Genta said BPER would a good option as would Monte dei Paschi after a planned bad loan clean-up, while a business overlap and a cash call estimated by analysts at 2 billion euros made Banco BPM a less palatable choice.