* Tax relief is seen as the key to bank consolidation in Italy
* The draft bill was extended in size by six months, increasing the size
* Tax relief for bad loan sales can also be extended (Added analyst calculations, stock reaction)
ROME, May 4 (Reuters) – Italy is considering extending to mid-2022 a tax break that is expected to spur mergers in the fragmented banking sector, while increasing incentives for any ties, a draft decree shows.
The draft bill seen by Reuters reintroduces current-year tax benefits for companies releasing damaged loans that expired in December.
Both measures, if confirmed, will help Italian banks cope with the impact of the pandemic, which will spark bad credit and further hit bank profits once the government releases support measures for the economy.
In this regard, the government is considering providing state guarantees for bank loans to companies and a debt holiday scheme, with only interest payments continuing after June.
The tax breaks for corporate mergers, which expire in December, are a key part of the incentive package that the previous Italian government has put in place to convince the country’s number two bank, UniCredit, to take over losers Monte dei Paschi (MPS).
Negotiations for the state-owned MPS hit a dead end due to a change of CEO at UniCredit, which Andrea Orcel last month took over from French banker Jean Pierre Mustier.
The proposed changes extend the timeframe for a possible merger and give banks greater incentives to join forces and shore up profits through cutting costs.
The draft decree proposes to increase the tax relief limit to 3% of the assets of the small companies involved from the current 2%.
The Bailed MPS said in March the current move, which allows companies to join forces to turn past losses into tax credits, would require a profit of 2.2 billion euros ($ 2.6 billion) for buyers.
Equita analyst Andrea Lisi estimates the new scheme will mean a 3.4 billion euro increase for UniCredit if it takes over MPS.
Lisi said the bounty would increase to 3.6 billion euros in a bond between UniCredit and Banco BPM, Italy’s third-largest bank which is widely seen as a potential alternative takeover target for UniCredit.
MPS shares rose 5.8% on Tuesday outperforming a 0.8% gain in the Italian banking index.
The cost to the state treasury will be up to 1.05 billion euros spread over three years, the draft decree said.
This would cost the country another 1 billion euros over the same period to extend the tax incentives for the release of bad loans for another year, which the bill says could generate sales of 17 billion euros this year, with 10 billion euros from banks.
The Bank of Italy said the tax breaks helped banks issue 33 billion euros in non-performing loans last year.
Ministers in Mario Draghi’s government are expected to discuss the decision, which is subject to change, at a cabinet meeting on Friday, government sources said.
Lawmaker Giovanni Curro told Reuters his ruling party with the 5-Star Party would ask parliament to change the measures, if approved, to curb incentives.
$ 1 = 0.8333 euros Reported by Giuseppe Fonte in Rome and Valentina Za in Milan; Edited by Gavin Jones, Alexander Smith and Edmund Blair