“Worried by the increase in inflation?” So ran the heading of recent advertisements in Italy's daily newspapers. The product on offer: Mediobanca Inflazione Italiana 2013/2019, bonds issued by Italy's leading investment bank aimed to entice the country's small savers. The times are gone that Mediobanca was an exclusive and secretive Milanese institution that dealt only with Italy's industrial and financial elite.
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Three years ago, Mediobanca employed a leading advertising agency to help a retail sale of fixed-interest bonds. It later spoke proudly about how the campaign had boosted brand awareness, a notion that would have puzzled the business leaders who once stepped through the gates of the discreet palazzo alongside La Scala theatre. And they might have turned their noses up at the idea that such an institution should become involved in retail banking.
Yet involved it is. Launched in 2008, CheBanca!, whose corporate colours are an unmissable bright yellow, now operates a network of 45 branches. “Five years ago it was optional, now it's a must have that provides revenue stability,” says Alberto Nagel, Mediobanca's chief executive, a position he has held since 2008 after spending his whole career with the bank.
Profits see-saw
Under Enrico Cuccia, the bank's head and driving force from its foundation in 1946 until 1982, Mediobanca won a name as the investment bank that provided financial muscle for Italy's post-war economic miracle. Then, as now, times were challenging. Against today's uncertain political backdrop, with lurking euro crises, declining gross domestic product, climbing unemployment and heavy taxes combining with rising public debt, price increases are only one of the worries tormenting Italians. It is easy to imagine that Mr Cuccia would have adopted mold-breaking measures to meet the current challenges.
Over recent years, Mediobanca's fortunes have soared, plummeted, recovered and plunged yet again. From €1.01bn in the year to June 30, 2008, its net profit collapsed to €2m in 2009, recovered to €401m in 2010 and €369m in the following year, only to dive steeply to €81m in the year to June 30, 2012. Mediobanca – which in 2010 had an A+ rating from Standard & Poor's – is now rated BBB with negative outlook.
Heavily reliant on its domestic market, the investment bank hopes its new three-year plan will bring better things. Certainly the plan shows how far Mediobanca has travelled. CheBanca! is only part of the story. Probably the aspect of the plan that attracts most attention is Mediobanca's decision that it no longer considers its substantial equity portfolio, through which it holds large stakes in several major Italian companies, to be strategic.
Its 13.5% interest in Assicurazioni Generali makes Mediobanca the largest single shareholder in Italy's biggest insurer and also accounts for about three-quarters of the bank's market capitalisation. “The decision that equity stakes are not strategic is a landmark shift for the bank driven by the aim of better capital allocation,” says Mr Nagel. Its substantial shareholdings in tyre manufacturer Pirelli, RCS Mediagroup, the publisher that owns newspaper Corriere della Sera, and Telecom Italia – which place Mediobanca at the centre of Italy's financial and industrial web – are also under threat.
Shifting focus
Not for nothing was the investment bank said to be home of the salotto buono, the good drawing room where the country's powerful and privileged met to make deals. Even if it is not yet finally shut, the door to the drawing room is finally closing.
All of the bank's equity stakes are now available for sale and have been marked to market in a move that has involved a balance sheet clean-up estimated to be worth €400m. On the one side, the plan's target is to reduce equity exposure by €2bn, on the other it aims to increase capital in banking operations where Mediobanca is now fully focused, as much on retail and consumer credit as on corporate and investment.
As Mr Nagel notes, the equity holdings absorb a huge amount of capital – the stake in Assicurazioni Generali alone represents more than €3bn – and are excessively weighted towards insurance and the domestic market. “We looked at the various options, including spinning off the portfolio, but decided that selling would be best,” he says. Getting rid of 13.5% of Assicurazioni Generali is not going to be quick; the aim is to reduce the shareholding to 10% by 2016. “With such a large asset we must be careful how we sell,” says Mr Nagel. Selling down the stake too quickly risks knocking the insurer's share price. In any case, those shares provide Mediobanca with a useful flow of dividends.
Breaking pacts?
Alongside Mediobanca's decision that its equity portfolio is no longer strategic is the logical and consequential decision that the bank should no longer tie up its stakes in shareholders' pacts. Together with chains of nested stakes, cross-shareholdings and friendly board appointments, such pacts have been at the heart of Italy's particular and closed brand of capitalism. Assicurazioni Generali, itself a party to such pacts in some equity investments, will not renew them as they expire.
Thanks to external forces and to fresh ideas as to how business should be conducted – Mr Nagel's work is just one example of the impact of young blood at Mediobanca – the relationships on which conservative and change-resistant Italian finance and industry have depended for decades are being reshaped. Mr Nagel admits that Mediobanca was late in deciding that shareholders' pacts should be abandoned but notes that it was important to have the bank's key shareholders on-side in order to take the decision.
Indeed, one of the criticisms levelled at Mediobanca and its plan is that it has moved and still moves too slowly. The bank seems to be following a trend rather than being out front. “Mr Cuccia and Vincenzo Maranghi would have been leaders, not followers,” muses one Milan investment banker. (Mr Maranghi was general manager and managing director from 1988 to 2003.) According to many observers, the chairmanship from 2007 to 2010 of Cesare Geronzi, an influential Rome banker, put a brake on change.
Some critics say that Mediobanca's foreign expansion of its investment banking into London, Frankfurt, Paris and Madrid has been disappointing and not produced what was expected, though Mr Nagel says that these operations are now profitable. Indeed, the market's reaction to the bank's new plan was a firm thumbs down. Even so, in beginning its coverage of Mediobanca in July, Citi put a buy recommendation on shares in the Milanese bank, noting that execution of the plan would be the key and pointing to such risks as weaker Italian macro, renewed sovereign fears, a softening of the bank's leadership in Italian investment banking and slower than expected sales of its equity stakes.
A question of ownership
With 8.7%, UniCredit is Mediobanca's largest shareholder. France's Bollore and Groupama have 5% and 4.9%, respectively, and the Benetton family's financial holding company Edizioni owns 2.2%. Silvio Berlusconi, the legally entangled former Italian prime minister, is a looming presence with 2.1% through his own Fininvest group and 3.4% through Mediolanum, where he is the biggest shareholder. Alone, Mr Berlusconi, on whom Italy's supreme court last month confirmed a sentence of four years imprisonment for tax fraud, has a large say at the investment bank, allied with the French shareholders, a dominant voice.
So who controls Mediobanca? Currently it is controlled through a shareholders' pact whose members have yet to decide that the pact's days are over – Mr Nagel does not, of course, choose the shareholders and he says, diplomatically, that abolishing the pact is a matter for the members themselves. But in future? Certainly, despite the problems and uncertainties, Mediobanca's franchise remains a tasty one. Mr Nagel hopes that his plan will make it even tastier.
