Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Western EuropeSeptember 28 2010

Engagement key to Italian fortunes

Italy came through the financial crisis in better shape than many of its peers for various reasons, says Intesa Sanpaolo chief executive Corrado Passera, who shares his thoughts on why Italian banks got it right and how his institution's reaction during the dip has set it up for growth. Writer Brian Caplen
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Engagement key to Italian fortunes

In Italy, banks did not become scapegoats of the crisis in the same way as in many other countries. This was partly due to them being in better shape, so allowing the government to focus on fiscal stimulus rather than bailing out the banks. But it is also due to the way they dealt with customers and in particular the very vulnerable and vocal small and medium-sized business sector (SMEs).

Corrado Passera, chief executive of Intesa Sanpaolo, says that his bank's policy of engaging with entrepreneurs went a long way towards lessening the criticism. "We did our best to provide factual evidence of our commitment to support the country. We also did our best to support companies in the economic downturn. This made the tendency to scapegoat the banks [for the crisis] much less significant in Italy than in other countries."

These initiatives consisted of allowing entrepreneurs to postpone capital repayment of loans for one year (an idea that was subsequently taken up by competitor banks); financing to cover SME customer payment delays; additional financing for entrepreneurs prepared to put more of their own money into a business; no reduction in total credit; making unused credit lines available; and enabling critics to personally e-mail Mr Passera with their complaints.

"Our reaction to the crisis was very clear. We did not run away. Instead we met with tens of thousands of entrepreneurs to discuss their situations and we put forward a number of extraordinary proposals to manage the worst of the crisis together," says Mr Passera.

Breaking bad news

In some cases, of course, the answer to credit requests has to be "no" if, for example, a company is overextended or has a poor business plan. Some small companies would not make it through the crisis because they were sub-contractors to large companies which took production back in house, or they were severely undercut by an Asian or central European supplier. This amounts to a small percentage of the total but, with 1 million SME customers, it is still quite a large number.

"The responsibility of a bank is to sometimes say 'no'," says Mr Passera. "During a crisis, this is inevitably more frequent." The bank also contributed to government funds to capitalise SMEs and for social housing.

Shareholders were asked to make some sacrifice and dividends were suspended for 2008. "We did it for only one year," says Mr Passera. "And we did it, not because we absolutely had to, but because we thought it unwise to give away reserves when the future was uncertain."

The bank has benefited from the very speedy integration of Intesa and Sanpaolo IMI following the 2006 merger, enabling the cost base to be reduced by €1.6bn and giving it a stronger capital position even after paying out more than €11bn in dividends.

"We triggered the major restructuring before the crisis when the money was there. The timing of the cost-cutting during the 'golden' economic period helped make the integration successful."

But getting back to pre-crisis profitability will take time if indeed levels of 19% return on equity (as recorded in 2007) are ever achievable given the new low-interest environment and the impact of higher capital ratios under Basel III. For the past two years, return on equity has been just above 5% while Tier 1 capital has increased to 8.9%. Net profits fell 64.8% to €2.55bn between 2007 and 2008.

First-half 2010, however, shows continued improvement with net income up 6.4% against first-half 2009, with gains in all areas except domestic retail, which has been suffering from the low-yield environment.

New growth

The challenge for Intesa as with other large European banks - Intesa ranks 25th in The Banker's 2010 Top 1000 ranking - is to find new sources of growth.

And while Italy came through the crisis in better shape than many other advanced economies such as the US, the UK and France, some analysts have expressed concern about high levels of public debt and have linked it with Greece, Ireland, Portugal and Spain as being among countries liable to have sovereign debt problems.

Mr Passera thinks that such comparisons are inaccurate and fail to take account of the low debt levels in Italy's household and corporate sectors, its diversified economy and growth potential and its lack of a property bubble.

As for the bank's own growth, he cites the corporate sector, lending for public sector infrastructure projects, asset management as well as the international operations (both the subsidiaries in countries such as Croatia, Serbia, Romania, Ukraine and Egypt as well as overseas corporate and public sector lending in many places).

Overseas operations now account for 25% of the banks income but is likely to expand to 30% in the future, while asset management will expand as the stock market settles down and more Italians are persuaded to transfer funds from government bonds and deposits into equities.

Was this article helpful?

Thank you for your feedback!

Read more about:  Western Europe , Italy