A mega merger deal in banking seems likely to occur in Italy.

• Antonio Reale, co-head of European banks at Bank of America, stated to CNBC that it is hard not to believe that something will occur in Italian banks over the next 12 months.
• In March, Italy's Economy Minister Giancarlo Giorgetti stated that there is a specific agreement with the European Commission regarding the government's stake divestment from BMPS.
• If Italian banking M&A were to happen, there would be a high bar to overcome, according to Paola Sabbione, an analyst at Barclays.

Across Europe, there has been a desire among policymakers for larger banks.

Analysts predict that Italy may soon grant their wish with a large round of M&A activity.

Following the sovereign debt crisis and government bailout of Banca Monte dei Paschi, Italy's banking sector is being scrutinized with renewed interest.

Antonio Reale, co-head of European banks at Bank of America, stated to CNBC that it is hard not to believe that something will occur in Italian banks over the next 12 months.

The Italian government has a new industrial agenda, as UniCredit now has a "relatively large stack of excess capital." Additionally, BMPS has been rehabilitated and needs to be re-privatized, as highlighted by Reale.

Despite expectations, the company continues to exceed market expectations with impressive quarterly profit beats. Last year, it generated 8.6 billion euros in earnings, representing a 54% increase from the previous year. This pleased investors through share buybacks and dividends.

The Italian government has committed to divesting its stake in BMPS, which was acquired for 4 billion euros in 2017, under an agreement with European regulators.

"Nicola De Caro, senior vice president at Morningstar, stated in an email to CNBC that there is potential for consolidation in markets like Italy, Spain, and Germany. He explained that domestic consolidation is more probable than European cross-border mergers due to certain structural obstacles."

Although recent consolidation in Italian banking, including Intesa-Ubi, BPER-Carige, and Banco-Bpm, has reduced the number of banks, there is still significant fragmentation at the medium-sized level.

Some medium sized banks, including UniCredit and BMPS, may participate in the potential future consolidation of the banking sector in Italy, according to De Caro.

In July, UniCredit CEO Andrea Orcel stated that at current prices, he did not see any potential for deals in Italy. However, he is open to the possibility of deals if market conditions were to change.

Despite our poor performance, we continue to trade at a discount to the sector. If I were to make those acquisitions, I would have to inform my shareholders that this is a strategic move, but it would mean diluting your returns, which I am not willing to do.

"But if it changes, we are here," he added.

If Italian banking M&A were to happen, there would be a high bar to overcome, according to Paola Sabbione, an analyst at Barclays.

Several combinations could arise from the partnership search of Monte dei Paschi and UniCredit, but no bank is in urgent need, as stated by the source.

European officials have been increasingly advocating for larger banks. For example, French President Emmanuel Macron stated in May during an interview with Bloomberg that Europe's banking sector requires greater consolidation. Nevertheless, there remains some doubt about potential mergers, as seen in Spain where the government opposed BBVA's acquisition of Sabadell in May.

According to Reale from Bank of America, it is undeniable that Europe needs larger, stronger, and more profitable banks. However, there are differences between Spain and Italy in this regard.

Spain has undergone significant consolidation in its banking market following the Global Financial Crisis, with many excess capacities exiting the market. In contrast, Italy's banking market remains fragmented.