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 told CNBC on Tuesday.
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.
BMP has a market capitalization of 2.08 billion euros ($2.16 billion) and is currently Italy's third-largest lender.
The merger was one of the measures supported by former Prime Minister Matteo Renzi to improve the weak position of the country's banking system. Such step was believed to boost the bank's profitability and lending.
More broadly, O'Daly added that the "huge drop" seen in Italian banking stocks throughout 2016, have put them now at "bargain prices."
The vulnerabilities of the Italian banking system are well-known and recently the oldest lender in the world – Monte dei Paschi failed to attract enough private capital to restore its finances.
As a result, the Italian government has been forced to intervene and competition authorities in Europe have yet to decide whether the state intervention does not infringe state aid rules.
"If they can get European approval for this plan then it is likely that bank shares will rally across Italy," Erik Jones, professor of European Studies and International Political economy Johns Hopkins University told CNBC on Tuesday.
The FTSE Italia All-Share Index went up by 1.96 percent on Tuesday, putting it in a position to reach its highest close since May of last year.
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.
Howard Goldring, managing director at Delmore Asset Management told CNBC on Monday that non-performing loans have not been addressed across Europe "because of refusal to face reality."
"I am just worried that there's going to be more of this over the next year or two, not just in Italy but in other places across Europe," he added.