MILAN--Banco Popolare SC Chief executive Pier Francesco Saviotti said Friday he hopes to close a merger agreement with Banca Popolare di Milano in a little more than a week's time, clinching a deal that would create Italy's third largest banking group by assets.

Popolare di Milano had been in parallel merger talks with Banco Popolare and UBI Banca in the past months, after the Italian government introduced changes to the governance rules of large cooperative banks last year, known as "popolari," to induce mergers in the sector.

The Italian government's reform is aimed at pushing small mutual banks, to consolidate under holding companies with at least €1 billion in equity to try strengthen the country's fragmented local banking sector.

It comes amid growing investor worries about the scale of bad loans on the books of Italian lenders, concerns which have sent banks stocks sharply lower this year.

Around 400 tiny mutual banks, many with few branches and serving small communities, will be affected by Rome's latest reform. Prime Minister Matteo Renzi has said he hopes this will create a single group in the next 18 months, the deadline for mutual banks to implement the reform.

"Our banking system is solid," Mr. Renzi said on Wednesday. "But it needs larger banks. Now mutual banks need to stay within a stronger system."

Latest figures from the Bank of Italy showed bad loans at Italian banks are persistently high, including those net of banks' provisions.

A deal struck last month between the Italian government and the European Commission, allowing government guarantees for bundles of bad loans, has failed to reassure financial markets.

Write to Giovanni Legorano at giovanni.legorano@wsj.com

 

(END) Dow Jones Newswires

February 12, 2016 05:45 ET (10:45 GMT)

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