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Western EuropeOctober 2 2017

Intesa Sanpaolo CEO’s strategy for growth

Carlo Messina, CEO of Italy’s biggest bank, Intesa Sanpaolo, talks to Brian Caplen about moving beyond restructuring into a new era of prioritising growth.
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Carlo Messina

Interviews with European bank CEOs often focus on post-financial crisis restructuring and cost reduction. These are equally significant issues for Intesa Sanpaolo CEO Carlo Messina, but there is another key topic of conversation: growth.

With the hard work of restructuring now showing in the bank's financial results, Mr Messina is able to identify and concentrate on where future growth will come from: wealth management, insurance and online banking. These will be key features of Intesa Sanpaolo's new business plan to be launched in 2018.

In an interview with The Banker in London in August, Mr Messina discussed the bank’s growth strategy, its approach to non-performing loan reduction and risk, and the implications of Intesa’s acquisition of the good assets of two of Italy’s troubled banks, Veneto Banca and Banca Popolare di Vicenza.

Family ties

Growth for Intesa Sanpaolo is set to come from wealth management and insurance, and in the first half of 2017 the bank recorded its best ever first-half net fee and commission income at €3.75bn, a 5.8% increase on the first half of 2016. Fee income accounts for 44% of total income and may increase still further as the 2018 business plan rolls out.

Mr Messina says the bank handles wealth from Italian families in terms of deposits, assets under management and assets under administration worth €920bn, or about 50% of Italy’s gross domestic product. “We have €326bn of assets under management,” he says. “So we want to move a minimum of €100bn from assets under administration [mostly Italian government bonds] and deposits into assets under management, and that would be the main driver of growth in wealth management.”

Indeed, Intesa Sanpaolo's better-than-expected first-half performance overall, with €5.2bn of net income – including a €3.5bn government cash contribution in relation to the two Veneto banks – was driven by wealth management. “We increased commissions in this [third] quarter, we delivered a growth of €10bn of net inflows and we were the number three asset management company [in Europe] after BlackRock and Pimco in terms of net inflows,” says Mr Messina. Assets under management have increased €83bn or 34% since the end of 2013.

Then there is insurance. Unlike some European banks, Intesa has not abandoned the bancassurance model and, for a period earlier in 2017, was reportedly in pursuit of Italy’s biggest insurance company Assicurazioni Generali. This line of attack may no longer be active, but Intesa has not given up its insurance ambitions.

Mr Messina explains that Intesa is the number one life insurer in Italy, having risen from number five in the past four years. “Now we want to move into property and casualty [insurance], in which we have a market share of 1.4%,” he says. “We want to become the leader also in property and casualty, and that would be the other very important strategy that we want to achieve during the next business plan.”

Numbers game

Branch number reduction and the development of online banking are potential revenue enhancers for Intesa. The aim is to bring the bank's cost-to-income ratio down even further from the already strong position of 49.2%.

“The next phase would be based on the closure of branches, so a reduction of branches would be strategic,” says Mr Messina. “We are opening a new online bank called Banca 5 based on tobacconists and a lot of [other] shops within the country – 22,000. Based on this we want to reduce branches devoted to the mass market. This would be one of the levers to reduce costs, and another would be the reduction of [the number of] legal entities within the group. So I think for a bank wanting to be a leader in the market, absolutely the target could be [a cost-to-income ratio of] 45% in the future.”

This switch to a growth strategy is possible only because a lot of the hard work in guiding the bank through the Italian crisis is starting to pay off. In explaining the first-half performance for 2017, Mr Messina also mentions the bank’s progress in reducing non-performing loans (NPLs). He is particularly proud of having done this with in-house resources rather than selling the bad loans to a third party.

“We have done a very good job in the past 21 months, because we reduced by €10bn the amount of NPLs at zero cost to shareholders,” he says. “We decided not to make disposals in order to give a 20% deal to private equity funds. But we decided to do it in house using the collateral, and the experience of our people, giving people incentive schemes, in order to increase the recovery rate. We were able to reduce [NPLs] by €10bn, reducing the ratio by 3 percentage points.”

Gross NPL:loand IS

Ratio changes

Italy uses a more strict definition of NPLs than many European countries, which artificially pushes up the ratio. Mr Messina also thinks it makes more sense to use the net rather than the gross figure, thereby taking provisions into account. In any case, the peak gross NPL figure at Intesa was 17.2% in 2015 and is now down to 12.9%, including bad loans from the two troubled banks. The net figure has fallen from 10% to 7.1%, towards a target of 6% for the end of 2019. Coverage has increased from 47.3% in mid-2016 to 49.1%, and the first half included the lowest inflow of NPLs since Intesa was created 10 years ago.

Mr Messina says that a reduction in the cost of risk is a strategic priority. “We want to achieve a cost of risk that is based only on inflows and not on stock. It is my expectation that we can get back to our pre-crisis level of between 40 and 50 basis points,” he says.

The acquisition of Veneto Banca and Banca Popolare di Vicenza in June has attracted allegations of being in contravention of the EU’s new bail-in rules, designed to make bondholders take the hit ahead of putting public funds into a failing bank.

Under the terms of the agreement, senior bondholders were protected while the Italian government provided €5bn in support to Intesa to take on the good assets and set aside €12bn to cover losses arising from the bad assets.

“I’m not an expert on European law, but I’m used to relying on the formal position of the authorities,” says Mr Messina. “The formal position of the European Commission is that the transaction is OK and the formal position of the European Central Bank is that the transaction is OK. So, to the best of my knowledge, the transaction is respecting the rules. But in the end, what I consider really important is achieving results in the interests of Europe and that is, by definition, what we did with this transaction.”

Unknown quantity

But even so, how can Intesa be sure that the good assets of the two troubled banks really are good?

Mr Messina says that under the deal Intesa has the right to return €4bn of high-risk loans should they deteriorate. “Then you have to consider that the ECB made, in the past two years, a lot of inspections of these banks. So I think that in the end, [with this and] having a reserve of €4bn against high-risk loans that we can give back, we will have a very good portfolio remaining in Intesa Sanpaolo.”

This deal, together with the rescue plan for the country’s fifth largest bank, Monte dei Paschi di Siena, definitely leaves Italian banking in a better place than it has been for some time. Mr Messina believes there will be further consolidation in the sector, but when asked if Intesa will be involved his answer is an emphatic "no". 

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