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Intesa Sanpaolo invests in Eastern promise: Looking East

Intesa Sanpaolo rose to prominence as Italy's largest bank after a series of domestic mergers and takeovers, and has improved its status further with a raft of selective acquisitions in central and eastern Europe, writes David Lane in Rome.Corrado Passera, Intesa Sanpaolo's managing director
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Intesa Sanpaolo invests in Eastern promise: Looking East

With its 33 foreign branches and representative offices, Banca Commerciale Italiana was arguably the most international Italian bank when the 20th century ended. This Milanese bank had a global reach. On the western side of the Atlantic, it had a presence in New York, Chicago, Los Angeles and Latin America, while on the other side of the world it reached to cities such as Beijing, Hong Kong, Seoul, Singapore, Taipei and Tokyo. Banca Commerciale Italiana was at the centre of banking for the industries and firms that for many decades looked to Milan as Italy's industrial and financial capital.

From the south of Italy, Banco di Napoli had accompanied another kind of enterprise abroad. Between 1881 and 1900, poverty forced 1.5 million penniless rural labourers, mostly from the Mezzogiorno, to seek fortunes far from home, mainly in the Americas. A further 4 million followed in the next 15 years and Naples became Europe's busiest passenger port. Banco di Napoli opened an office in New York in 1901 and eight years later, when it decided that a branch was needed to handle the remittances that Italians sent home, the Italian population of New York amounted to about 600,000 people.

Names from the past, Banca Commerciale Italiana and Banco di Napoli no longer exist, absorbed into Intesa Sanpaolo, Italy's biggest bank following the series of mergers and takeovers that has marked Italian banking over recent years. But the international calling of those two banks lives on. If anything, it is probably stronger, although the focus is different from the past. Central and eastern Europe (CEE) is where Intesa Sanpaolo has come to nurture foreign ambitions.

"There was a firm historical framework for the decision about seven years ago. The market was pressing the bank to recognise the Latin American risk, and at about the time that we decided to reduce our presence there we decided to increase it in central and eastern Europe," says Corrado Passera, Intesa Sanpaolo's managing director.

As with Banca Commerciale Italiana and Banco di Napoli a century ago, the decision to look east in Europe was based on business logic. "Expansion abroad is quite simply a way to support our customers. We have followed - accompanied fits better - Italian firms whose business in central and eastern Europe has grown. Trade with Italy has increased and the magnet of lower costs and higher flexibility has led many Italian manufacturers to establish production facilities in countries there," says Mr Passera.

"Bank support is more relevant in central and eastern Europe than in countries such as France and Germany, where there is little need for us to have a direct presence and where we have cut back," he adds. However, a major geo-political trend also helped convince Mr Passera and his colleagues to venture east in Europe. "The integration of countries there into the EU or the prospects of such integration in the future has been a crucial factor. It turned them into markets and production platforms that were far more interesting than they would otherwise have been," he says

Where to target?

But CEE is a big region, and just how the bank should tackle it kept Intesa Sanpaolo's top management busy. "There was considerable discussion over strategy and over the choice of the countries where the bank should be," recalls Giovanni Boccolini, head of Intesa Sanpaolo's international subsidiary banks division. Given the vast, far-reaching changes that had occurred and were still occurring in countries that once belonged to the Warsaw Pact, the lengthy discussions in which Mr Boccolini and his colleagues engaged and the caution in taking decisions are understandable. Where those discussions and decisions eventually led is the substantial portfolio of banks for which Mr Boccolini is now responsible, from Intesa Sanpaolo Bank in Albania to Banka Koper in Slovenia: eight banks in eight different countries of CEE, together with a bank in both the Russian Federation and Ukraine, a little further east.

Deciding on how to enter the different target countries was in effect a decision on which local banks should be acquired. "In most cases we looked at countries and succeeded in finding the right banks. But real life can be planned only to a certain extent and for the rest it is a question of opportunity. Some opportunities arose and we took them, although we did give up in a number of auctions where we considered that prices were too high," says Mr Passera. And prudence was fundamental in how Intesa Sanpaolo developed its CEE operations. "Underpinning our strategy was the rule that whatever happens in a local subsidiary, however badly it performs, no single country should be in a position to create a problem for the group," he says.

As last year's figures show, the international subsidiary banks division contributed 12.4% of operating income, against 68.3% from Italian retail banking, important but far from critical for the bank. "Only 7.1% of the bank's loans are in central and eastern Europe," says Mr Passera. Loans in Ukraine, widely considered the riskiest place to be, amounted to only 0.1% of the total at the end of last year. And the total assets of Intesa Sanpaolo in CEE, including the Russian Federation and Ukraine, were only €42.1bn, equivalent to just 6.6% of the bank's total.

On three key measures - operating income (€560m), customer loans (€9.4bn) and total assets (€11.4bn) - the CIB Bank in Hungary is Intesa Sanpaolo's biggest subsidiary in CEE. Its total assets place it second in Hungarian bank rankings and it has more than 150 branches and 700,000 customers. That CIB Bank is part of Intesa Sanpaolo's portfolio of subsidiaries is due to a farsighted participation of Banca Commerciale Italiana almost 30 years ago in setting up an offshore-like dollar-based bank with other foreign institutions and the Hungarian national bank.

Hungary's CIB Bank is one of a trio of banks at the head of the international subsidiary banks division. The others are in Croatia and Slovakia. Like CIB Bank, the Croatian Privredna Banka Zagreb (PBZ) was also once part of Banca Commerciale Italiana. Last year it posted €473m of operating income, and had €6.3bn of customer loans and €9.7bn of total assets. PBZ is Croatia's second largest bank and has 230 branches and 1.6 million customers. VUB Banka, ranked second among Slovakia's banks with €11.3bn-worth of assets, is of a similar size with more than 250 branches and 1.6 million customers and is the third of the trio. It contributed €467m of operating income last year and had customer loans of €5.7bn on its books.

Intesa Sanpaolo owns important banks elsewhere in CEE. For example, Banca Intesa is Serbia's biggest bank with €2.8bn in total assets, and serves almost 1.4 million customers through its 230 branches. And the Italian bank has a substantial presence in Albania and Ukraine as well as firm footholds in Bosnia-Herzegovina, Romania and Slovenia. But CIB Bank, PBZ and VUB Banka are the big three, together accounting for 68.6% of the total operating income last year from CEE (including the Russian Federation and Ukraine), 80.1% of customer deposits there, 75.9% of customer loans and 77% of total assets in the region.

Managing diversity

Integrating such a diverse portfolio of operations has presented considerable challenges to management at the Italian bank. "The problems we found depended a lot on background. Some subsidiaries were originally in the public sector and it is easy to imagine what they were like. While cleaning up assets was reasonably straightforward, dealing with the banking culture and restructuring branches was harder and it was even more difficult to find senior staff for management. Dealing with banks from the private sector was much easier," says Mr Boccolini.

A nuclear engineer by training, Mr Boccolini has headed the international subsidiary banks division since January 2007, and had already acquired experience of international banking with Société Générale and Barclays when he joined the Ambroveneto Group, one of the original component banks of Banca Intesa, in 1986. That he had headed organisation and systems in the group helped in getting to grips with the international subsidiary banks division.

Selecting managers is a crucial issue, particularly the risk and chief financial off­icers, who stand in the front line of any bank. "Recruiting international staff, the top seven to 10 executives in the subsidiaries, is done in Milan and boards of directors are clearly an expression of Intesa Sanpaolo," says Mr ­Boccolini. And the working language in such a polyglot empire? "Board meetings are in English, documentation is in English," he says.

Corporate governance is a priority for the Italian bank, which applied its own structure to ensure homogeneity within the group, although obviously while respecting national laws and central bank rules and regulations of the countries where the subsidiaries are located. Audit and credit committees are central to how the banks work, with each bank having credit autonomy, albeit subject to limits in matters such as single client exposure that are set by management in Milan.

Intesa Sanpaolo has a single system for front office, middle office, treasury and financial control, and there is a daily feed-in for risk management. With such tight control, it is hard to imagine the Italian bank being caught out by mishaps in its CEE network.

"Financial accounts clearly vary from one country to another and the subsidiaries must follow local rules. But they must also draw up their accounts in accordance with IFSR [International Financial Reporting Standards] and in Milan we need to satisfy the requirements of the Bank of Italy in making monthly returns," says Mr Boccolini.

Now a partner in charge of banking and finance in the Milan offices of the law firm Latham & Watkins, Andrea Novarese served as in-house counsel for Banca Commerciale Italiana on foreign activities and cross-border operations in the mid-1990s before working for the European Bank for Reconstruction and Development. "Adoption of EU legislation has created a fairly level ground and accounting is an area that has been heavily influenced by the efforts to have a common platform of rules," he says. However, Mr Novarese adds, the financial and banking sector has been more resistant than other sectors in implementing European regulation.

Moving into countries that were part of the EU or were about to join it provided some guarantees and eased the way. Even so, like Banca Commerciale Italiana before it, Intesa Sanpaolo has faced challenges in making its investments pay. Establishing a suitable governance framework and installing efficient systems is only a small part of getting the best out of subsidiaries.

Synergies are possible in other areas, and the different stages of development and financial sophistication in the various countries where the banks operate offer scope for exploitation. Asset management, an important business in developed and wealthy countries, is more a matter for the future in Mr Boccolini's division, however.

Mortgages, consumer credit and credit cards are the typical growth lines in emerging financial markets and Intesa Sanpaolo has set up centres of competence to develop them: consumer credit at VUB Banka in Slovakia where a credit scoring system has been developed; credit cards in Croatia, at PBZ which alone has issued 2 million cards, in a population of 4.5 million; and leasing at CIB Bank in Hungary.

Managing the crisis

Inevitably, with financial crisis and economic recession around the world, questions are asked about Intesa Sanpaolo's network in CEE, about how deeply and for how long the difficulties might affect economies there and the businesses and banks that operate in them.

However, Gianluca Salsecci, senior economist in Intesa Sanpaolo's research department in Milan, says that the past does not help in answering these questions. "Of course those countries and their economies have been affected but they have shown resilience," he says, "and that they are open systems is a positive factor."

While currency depreciations throughout the region will affect the parent bank's euro profit and loss account, the most worrying impact concerns customers who have borrowed in currencies other than their own. "To lessen the difficulties, we are lengthening the terms of mortgages and loans that were taken out by Hungarian customers in currencies such as the Swiss franc and the euro," says Mr Salsecci.

While many of those borrowers were house-buyers, some were firms and they have other problems to tackle as well. "Manufacturing and exports of goods have slumped and tourism, which is important in Croatia, has also been hit," he adds. The concern of ratings agencies about the exposure of Italian banks in CEE seems quite reasonable.

Yet the countries of CEE continue to offer good prospects for the future, for firms and for banks. Mr Salsecci points to the financial deepening, with credit growth in recent years double that of the euro area, which made the region attractive to Intesa Sanpaolo. There are powerful drivers for economic convergence and these will be strong again when the crisis has passed.

Mr Passera plays down the possibility of economic or financial meltdown in the region. "The countries there are suffering but the EU will not let them down," he says. While highlighting that it is impossible to say how the region will look 10 years from now, Intesa Sanpaolo's managing director expects that countries in CEE will continue to enjoy a significantly higher rate of growth than the euro area and that private wealth and financial services will follow that trend. "More and more, they will be integrated into the community and we will keep investing there," says Mr Passera.

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Read more about:  Central & Eastern Europe , Western Europe , Italy