Italy’s Mediobanca has been undergoing a transformation for the past two years and the results are starting to show. Famous for its historical role as a dealmaker at the centre of Italian commerce, the new bank that is emerging looks quite different.
The final aim is to have a specialised bank with two-thirds of its revenue coming from investment and consumer banking and only one-third from principal investments. This is radically different from the old Mediobanca, in which a chief source of earnings was the shareholdings the bank held in all the various heavyweights of Italian business.
But then in the eurozone crisis, the limitations of this approach became clear with many of these shareholdings falling sharply in value. In 2013 a new strategy was unveiled by Alberto Nagel, who has spent his entire career with the bank, and in 2008 became Mediobanca’s CEO.
A new Mediobanca
The aim was to be more international, to be more returns-focused, and to have a more broad-based banking business. There would be new acquisitions and new professional managers joining from outside the group. Two years on, considerable progress has been made in building this new institution.
Mr Nagel says: “What we have done in our three-year plan is reshape Mediobanca to be more competitive in a new landscape – post-Lehman, post-crisis, post-new regulations and in a low-interest-rate environment. We have re-engineered the group to take account of this. The end result is a small, specialised bank with a careful approach to risk and good asset quality.”
Many of the shares in leading Italian companies such as Gemina, Pirelli and Telecom Italia have been disposed of. Apart from small stakes in RCS Mediagroup and Italmobiliare this leaves as the main principal holding a 13.24% share in insurance giant Generali, which had a book value of €3.06bn as of September 2015. Mediobanca has announced to the market that it plans to sell 3% of the Generali stake and analysts speculate that the holding could be sold down even further in future.
An assessment of the bank’s outlook now needs to focus more on analysing the outlook for its businesses, such as consumer credit company Compass, and digital and retail banking operation CheBanca!, and less time on the dividends paid by principal investments (although the Generali stake is still significant).
In Mediobanca’s financial results for the year ending June 30, 2015, out of total pre-tax profits of €757m, corporate and private banking made €316m, principal investing €345m and retail and consumer banking €116m.
Casting its net
In August, Mediobanca completed its first foreign acquisition since its founding in 1946 when it purchased 51% of UK asset manager Cairn Capital from the Royal Bank of Scotland with an option to buy the rest from the bank's management in three years' time. Building up the asset management side of the business is another key plank in the new strategy, bringing with it as it does the attraction of a steady fee income.
On the talent side, a major hire came just after the announcement of the new strategy when Stefano Marsaglia came on board from Barclays as co-head of global corporate and investment banking. In May 2014, Francesco Canzonieri, another former Barclays executive, joined as head of the financial institutions group for Europe, the Middle East and Africa.
Mr Nagel says: “Our business model is a conservative one based on advisory, capital markets and lending. We don’t have a big trading operation and we don’t sell structured products. We are particularly focused on the financial sector in Europe where there is a lot restructuring and capital raising going on. We already reached the target of having 45% of this business outside of Italy.”
But the consumer and retail side of the business for which Mediobanca is far less well known could be as important in terms of future profits. Compass is Italy's first ranked consumer credit company with a 12% market share and, according to a Citibank research note, could account for 30% of group profit by 2018. “This is a growth machine. It contributes two-thirds of our interest income,” says Mr Nagel.
The original thinking behind establishing CheBanca!, the digital and retail operation, back in 2008 was to diversify funding sources. It was the first home-grown Italian multi-channel bank and has expanded its services from standard retail services to asset management. “Two years ago we assigned a second goal to CheBanca! of not only securing funding but also of becoming a retail asset manager. We are well on track to capture important flows of net new money.”
While Mediobanca’s transformation is not yet complete, analysts are broadly positive about the progress made so far. A research report from Italian broker Equita says that while Mediobanca faces the same cost and market pressures as other banks, it “has better asset quality and a better cost-to-income ratio”.
