Those who have seen Billy Wilder’s comedy Some Like It Hot may remember the scene where Mafia bosses gathered as “friends of Italian opera”.
As the public learned earlier this year, 13 big banks had been getting together in Italy as Gruppo degli Amici della Banca (group of friends of the bank). Nothing to do with organised crime, just friendly encounters to exchange information on volumes of business, interest rates, commissions and the like.
Friends of the bank, perhaps, but enemies of competition according to the regulators at the Bank of Italy, who had come across incriminating documents while inspecting Cariplo. “It emerged that the Gruppo degli Amici della Banca had met systematically since 1988, increasing the number of its members over time,” commented the central bank, fixing a fine of 3 per cent of revenues from those services where it had found evidence of collusion.
According to the Bank of Italy, the guilty friends included all the country’s largest banks plus Deutsche Bank, which has substantial operations in Italy. They have not met since the evidence was uncovered, said a banker.
Despite what this case might suggest, Italian banking is far more open to competition now than it was five or so years ago. And the competition is increasing. “Foreign banks have encroached significantly in some areas,” warned Antonio Fazio when he gave his governor’s address to the central bank’s annual meeting at the end of May.
He noted that competition, combined with concentration, had caused “intense mobility” of market shares. An analysis by the Bank of Italy shows concentration has led to a large shift. Italy’s five biggest banking groups accounted for 50 per cent of total managed funds last year, against 35 per cent three years previously, while the top 10 groups held 63 per cent.
Despite the regulator’s refusal to authorise non-friendly bids, mergers and acquisitions have not left Italian banking untouched. At the beginning of the 1990s, Italy had 1156 banks. By the end of the decade the number had fallen to 876 thanks to 324 mergers. Many of these operations (192) involved small single or two/three-branch co-operative credit banks, whose number fell from 715 in 1990 to 531 at the end of last year.
An indication of the increased competition comes from the size of the country’s banking network: the number of branches has risen from 17,720 at year-end 1990 to 27,130 at year-end 1999. “The restructuring process of the banking system is not complete. It must also interest medium-sized institutions,” said Mr Fazio.
One such mid-sized bank has anticipated his recommendation: Sicily’s Banca Popolare Sant’Angelo, with its network of just over 80 branches. “We are trying a strategy that is really innovative,” says Antonio Pennisi, the Sant’Angelo’s general manager. “We are spinning off 61 of our branches into a joint venture with Credito Valtellinese, which is putting in its Sicilian network to create Banca Regionale Sant’Angelo.”
His bank will have a 45 per cent interest in the new venture. Credito Valtellinese, from the Alpine area northeast of Milan but also a “banca popolare”, operates in eastern Sicily. Banca Popolare Sant’Angelo is present in the south and west of the island. “The project will allow us to benefit from Credito Valtellinese’s products, centralised organisation and financial muscle,” says Mr Pennisi.
But his bank is not selling out. It is keeping its network of 21 branches in its heartland Agrigento province. “We expect great results from focusing our efforts on Agrigento, where we already have a 10 per cent market share. Both this and the joint venture should grow strongly,” he forecasts. He says the Bank of Italy’s supervisory organisation is interested in the novel way that Banca Popolare Sant’Angelo is tackling the challenges of a increasingly competitive banking market.
Competition is driving changes and the search for greater efficiency that is evident among Italian banks. “The turning point happened in the mid-1990s with privatisations. This was a fundamental driver. Private shareholders want results,” says Davide Croff, managing director of Banca Nazionale del Lavoro (BNL).
He says that BNL, which was privatised at the end of 1998, has been handicapped by being the last of the major banks to move from public to private ownership. Mr Fazio presented figures at the end of May that highlighted the sharp shift in ownership.
Since 1993, the share of funds managed by banks controlled by the state and local government foundations had fallen from 70 per cent to 12 per cent. “Market constraints and demands mean managers must either deliver or quit,” says Mr Croff. “Shareholders hold us to what we promised during our roadshow. This has led to management renewal and management empowerment.”
Change at BNL started at the top. In the past two years the number of top level managers has been slashed from 18 to nine. Moreover, seven of today’s top managers are new. The number of second tier managers has been cut from 105 to 52. “We promised investors substantial changes and we have made them,” says Mr Croff. After Standard & Poor’s raised its rating from BBB/A-3 to BBB+/A-2 at the end of June, BNL said the improvement “reflected continuing improvement in internal organisation”.
When Giubergia UBS Warburg, a leading securities house, published its Italian Banks Analyser in May, BNL was one of a handful whose shares won a “buy” recommendation. Giubergia UBS Warburg is favourably impressed by the bank’s shareholder-focused management, asset quality turnaround and stakes in telecommunications and internet companies.
“BNL remains our favourite restructuring play, with stronger than expected earning growth,” was the verdict. Another bank that gets a “buy” recommendation from Giubergia UBS Warburg is SanPaolo IMI which has “become an attacker in the digital delivery of products with IMIWeb”.
The securities house also likes SanPaolo IMI’s strong track record in cross-selling savings products and its highest market share of funds under management in Italy. “Our Branch 2000 multi-channel banking project is coming on-stream this autumn. This will bring an enormous boost to efficiency in the traditional bank branch,” says Rainer Masera, SanPaolo IMI’s managing director.
Staff are an important factor in the drive for efficiency. Overall the number of employees on the books of Italian banks has been falling. From a peak of 335,500 in 1993 the number fell to 318,100 in 1997 and 312,400 in 1998.
At the end of last year the figure was 306,800. BNL group reduced its payroll from 24,700 at year-end 1997 to 22,800 at the end of last year, and the numbers are destined to fall further. BNL is one of many. “We have reduced our staff by 2400 over the past three years,” says Mr Masera, who expects that SanPaolo IMI will be able to cut staff by 15 per cent at Banco di Napoli, its new acquisition. Such reductions are clearly having a substantial impact on profit and loss accounts. So also will a new staff contract, signed a year ago.
“It was ratified in December and the first results will be seen in the accounts for 2000,” says Giuseppe Zadra, director-general of Associazione Bancaria Italiana (ABI, the Italian banking association). “The new contract has brought large changes to the lives of bank staff. Nowadays they have much more stress. Bank employment is no longer reckoned a soft option.”
As well as tackling the question of automatic seniority increases in salaries and flattening the salary curve, the contract deals with the matter of flexibility. For many senior but non-managerial employees this has meant the introduction of a working week with no contractual limit on hours worked. “The number of such employees has been doubled to around 45,000, none of whom are entitled to payment for overtime,” says Mr Zadra.
However, the new contract also introduces a scheme that even employees, who can expect a meagre 2.5 per cent more in their salaries over the four years 1998 to 2001, are enthusiastic about. This is the “banca delle ore” (hour-bank or time credit). “The first 50 hours of overtime are unpaid but employees can take time off in reimbursement,” says Mr Zadra. “Staff like the ‘banca delle ore’. And so do banks, which now find it easier to cover peak periods, like those when Italians make their tax returns.”
This was the first time ABI was engaged in negotiating the banking system’s staff contract. The employers’ side had previously involved different bank associations. “There were seven trade unions with around 30 delegates. Being united with just 10 delegates was an advantage,” says Mr Zadra.
He says average costs of counter staff in Italy in 1998 was L69m ($33,300), higher than in other European countries and more than 50 per cent higher than in Britain. Lowering staff costs is crucial for competitiveness. Important beneficiaries of the contract will be the former savings banks whose staff enjoyed better conditions than their counterparts in other banks.
One such is Cassa di Risparmio di Verona Vicenza Belluno e Ancona (CRVVBA), now a member of UniCredito Italiano. “The average cost per employee of savings banks’ staff is about L10m higher than other banks. Although all new employees are being hired on the general banking contract, we will need several years to get down to the average level,” says Massimo Bianconi, the bank’s general manager.
“We are extremely careful about all costs, not just staff costs. All the bank’s costs, from cleaning to legal fees, come under the microscope.” Mr Bianconi says the cost-to-income ratio of the CRVVBA will be below 50 per cent this year. “This puts us among the best performers in Europe,” he says proudly. His bank is helped by operating in a wealthy area, the northeast of Italy.
Few Italian banks can boast non-performing loans of less than 1.4 per cent as Mr Bianconi’s bank can, against a national average of 10 per cent. Mr Bianconi says efficiency and good results require attention to all aspects of bank work. “Our information systems are particularly efficient and most are being used for integrating systems in the UniCredito group.”
Mr Croff at BNL and Mr Masera at SanPaolo IMI also emphasise that cost-cutting is not the only ingredient for improving efficiency. “You can only reduce staff numbers to a certain level and push them harder to a certain point. Structures and systems must also be changed,” says Mr Croff. Boosting income is crucial, says Mr Masera. This means offering attractive products and training staff to sell them. He claims SanPaolo IMI sells the best product in the market, a claim supported by the 40 per cent share the group has of Italian mutual funds. With the acquisition of Banco di Napoli, SanPaolo IMI sees great opportunities for developing its mutual funds sales.
“Over one half of households’ financial assets in southern Italy are in old-fashioned instruments like cash and bank or postal deposits, against a quarter in the rest of the country,” says Mr Masera. New products, new economy, new organisational structures, new shareholder-focused management: Italian banking is unrecognisable in many respects compared with 10 years ago.
“Cost/income ratio is the most important statistic in the group,” says Mr Masera,. The figure at SanPaolo IMI in the first half of this year was 50 per cent. He expects the bank will be able to cut the dismal 81 per cent at Banco di Napoli to 53 per cent in three years. BNL has slashed its cost-income ratio from 75 per cent to around 62 per cent and expects to reach 50 per cent in 2003. Another key statistic on which Italy’s market-conscious managers focus is return-on-equity (ROE). Even the Bank of Italy, not the most market-oriented institution, regards ROE as worthy of attention.
At the end of May, governor Fazio noted that, with an average of 7.4 per cent, Italy lagged its European neighbours in 1998 by 3.4 percentage points. That average ROE had improved to 9.3 per cent last year owed something to extraordinary items. Giubergia UBS Warburg expects BNL to reach an ROE of 17 per cent in 2002, while Mr Masera forecasts that SanPaolo IMI will show an ROE of 20 per cent that year. Such respectable figures should keep shareholders happy.
They could be even better. Italian banks are handicapped by disadvantages that other European banks do not face. Mr Zadra explains: “Our members face large external diseconomies. The justice system is slow and inefficient, leading to credit recovery times of around eight years. Crime and bank robberies are a huge problem: placing armed guards outside branches costs banks around L1500bn annually. But above all banks have an enormous tax burden.”
The Bank of Italy reckons that the higher taxes in Italy cut a whole point off banks’ ROE. “If the government wants Italian banks to perform at European levels, then it needs to reduce the taxes that banks pay to European levels,” says Mr Masera.
The message is that the banks are doing their part to boost efficiency. Now it is up to the politicians.
