Appetite for Italian bank shares could be on the rise

In spite of the cloud hanging over the Italian banking industry, shares in newly merged Banco BPM have started 2017 surging up the stock markets.

The bank, the result of a merger between Banco Popolare di Milano (BPM) and Banco Popolare, has topped the pan-European Stoxx 600, with shares up by more than 10 percent on Tuesday.

However, experts believe that investor appetite could soon spread to the entire Italian banking system, despite recognized vulnerabilities in the sector.

Robert O'Daly, regional manager at the Economist Intelligence Unit, told CNBC over the phone that he would not be surprised if there was a surge in investor appetite for Italian banking shares.

"The merger of these two banks is seen as getting the house in order," O'Daly said.

Investors believe that this is a first step to restructure the Italian banking industry, which has been weighed down by toxic loans, and the successful emergence of BMP should attract foreign investment, he added.

However, such appetite can only be supported if Italy proceeds with its banking restructuring process, experts warn. Italian banks continue to have a high level of bad loans on their balance sheets since the 2008 crisis. If they continue postponing addressing such issues, a new banking crisis could emerge.

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