Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
InterviewsJune 1 2004

Another success for the corporate healer

Intesa managing director and CEO Corrado Passera tells Karina Robinson how he plans to keep the bank on an upward path after turning it around.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Italy. Land of wine and olives. Of Lazio and Vespa motorcycles. Of strikes. Strikes at Fiat. Strikes at Alitalia – saved by a whisker from bankruptcy in May.

When this shattered correspondent, up at 4am to catch a flight on the Italian national airline that never left London, pointedly asked turnaround specialist Corrado Passera by telephone to take on Alitalia, he declined. “Let’s always keep in mind the post office and Intesa have not been the hardest challenges. In my professional life, the restructuring of Olivetti and the refocusing of TLC [the creation of telecommunications company Omnitel] was. Alitalia might be even worse,” he stated, with not even a flicker of humour.

But then humour is not necessarily a useful attribute for someone whose life is dedicated to reanimating the wounded. A degree from elite Bocconi University in Milan and an MBA from Wharton School in the US were followed by a stint at consultancy firm McKinsey. Then, having worked in top Italian companies in media, telecommunications and banking, the tall 49-year-old engineered a turnaround in technology company Olivetti in the early to mid-1990s and then repeated the feat at the notoriously inefficient Italian post office, Poste Italiane.

From May 2002, he turned his focus onto Banca Intesa, the largest bank in Italy with assets of €294bn, but one of the least profitable, due in part to its history. When Mr Passera took it over, Intesa was nominally one merged bank but in reality it consisted of three perpetually battling entities: Cariplo, Ambroveneto and Banca Commerciale Italiana.

Fixing up Intesa

“People have to accept it is a new house, not look for the corner where their friends are,” said Mr Passera in a face-to-face interview in London last year (dare I say, he had probably flown over on British Airways). He got rid of 200 top and middle managers and brought in a large number of managers who had no loyalty to any of the heritage organisations. In 2003, a total of 4600 staff were made redundant. Also, from day one and despite the cost, he began investing in technology and training – costs for the latter rose 30% in 2003 – so that “people see from the first day that there is a return for their sacrifices”, he said.

In mid-2004, the bank is a very different place. Pro-forma net income rose fivefold to €1.2bn in 2003 while the cost/income ratio dropped to 63.2% from 68.7% a year earlier. Net commission income increased 3% over 2002 and profits on financial transactions (structured bonds, corporate derivatives sold to non-corporates, securities portfolio management) increased a staggering 400%. This made up for the 6.4% fall in net interest income.

Further targets

Mr Passera, a married father of two, has been very clear about what his targets are for 2005. As of 2001, he planned to reduce operating costs by €800m, sell off what remains of the bank’s Latin American assets and raise the Tier 1 ratio from 7.8% to 8.6%. In 2005, plans are to boost profit from ordinary operations to €4bn from €1.81bn in 2003.

When it comes to the goal of reducing the bank’s risk profile, Mr Passera believes he has more than met his target. However, this seems a bit complacent when the Italian economy is slowing down. Gross domestic product is now forecast to grow 1.4% this year, the slowest rate in the EU, which is bound to lead to lower loan growth, a deterioration of asset quality and a rise in non-performing loans.

US investment bank Merrill Lynch is worried about a possible credit crunch in Italy, where small and medium-sized industries, the backbone of the economy, might have problems refinancing themselves in the bond markets. About €15bn of non-rated Italian bonds mature in the next three years, more than one-third of all EU non-rated bonds.

“There is no evidence of a credit crunch, no complaints from industry about credit availability,” says Mr Passera. However, he admits that retail customers are less willing to buy corporate bonds from the banks following the Parmalat, Cirio and Argentine debacles and says retail wariness “affects only medium-sized, non-listed companies that are not so well-known. Whenever we have placed big bonds we have had no problems”.

Interestingly, Merrill is also concerned with a €3bn Fiat convertible bond. It says the theoretical loss on it today is €1.1bn and Intesa’s rival, Unicredito, has already provided for one-third of its current loss.

Mr Passera, however, insists that if any loss arises, it can be covered by the bank’s €1.1bn general reserve. “As of today, my personal opinion is there is no reason to believe the bond will be converted,” he says. This is despite industrial turmoil and other problems at Italy’s flagship car manufacturer.

Intesa has already provisioned for 80% of its Parmalat exposure. It put aside €288m in provisions in the fourth quarter for the bankrupt food company. Mr Passera is not concerned that administrator Enrico Bondi is said to be considering legal moves against Nextra, the bank’s asset management arm, for its 2003 Parmalat bond placement. The bank paid out €50m on defaulted corporate bonds, which appears to be admission of some sort of liability.

Legal changes afoot

Similar to the US, the corporate scandals are leading to legislative change in Italy. A bill being debated in the Italian parliament seeks modifications in the regulation of financial markets, including a weakening of the Bank of Italy’s powers. Relations between the central bank and the government, which is laying part of the blame for the scandals at the bank’s door, are at a low.

“There is nothing wrong with concentrating some powers with Consob [the authority responsible for regulating securities markets] that were in the Bank of Italy. Having an authority that is fully empowered for investigating and punishing is a good idea,” says Mr Passera.

He is less enthusiastic about a proposal for intermediaries to be liable whenever they sell a bond: “If they have to bear greater responsibilities than elsewhere in the world, it would prevent [the proper functioning of] a corporate bond market.”

Meanwhile, Italian bank consolidation seems to be in a lull. Intesa’s decision to buy Turkey’s Garanti Bank suggests that it envisages no short-term opportunities at home. It is in the process of due diligence and hopes to close the deal to buy up to 50.01% of the Turkish bank by the end of September.

Turkey’s roller-coaster economy has not deterred the Italians. “Turkey has taken a lot of steps in the right direction in the last years. We bet that one day it will be part of Europe, even if the time horizon is not decided yet,” says Mr Passera, striking an optimistic note.

Intesa’s investments in central Europe have paid off, partially lessening its dependence on Italy and giving it exposure to fast-growing markets. The bank owns CIB in Hungary, PBZ in Croatia and VUB in Slovakia, the star performer whose net income rose 16% to €179m.

The bank has been exiting some of the markets it considers incidental, mainly in Latin America and Canada. It still has to sell its Peruvian operations.

Modest aims ahead

The challenge for Intesa now is to continue its cost-cutting and achieve the promised increase in revenues by cross-selling on the back of new products and a better sales force. Mr Passera’s aims in this area appear modest. “The cross-selling ratio we inherited was below 2.5 [per customer]. We want to get close to three. Given our six million customers, that would be enough,” he says. “We are confident that targets are achievable despite low economic growth.”

The upside potential has made a number of analysts place a ‘buy’ on the bank’s shares. In the longer term, though, once the restructuring benefits have been realised, it could make sense to buy SanPaolo IMI or Capitalia Gruppo Bancario, the third and fourth largest Italian banks by assets, to give Intesa some size on a European scale. Another possibility with a longer time span is a takeover by Crédit Agricole, the French giant, which has a 16.7% shareholding in its Italian counterpart. There is already strong co-operation between the two banks.

But it is doubtful that Mr Passera will still be at the bank then. Italy has other problematic institutions that need to be sorted out.

As the Prince of Salina says in Giuseppe Tomasi di Lampedusa’s classic novel, The Leopard, everything must change so that everything remains as before. He may have been referring to Italy’s unity and the privileges of the dominant class, but the phrase aptly sums up the problems at the Alitalias and the Fiats of the country.

Was this article helpful?

Thank you for your feedback!