Carlo Messina

Carlo Messina, CEO of Intesa Sanpaolo, Italy’s biggest bank by assets following the merger with UBI Banca, talks to The Banker about Italy’s economic rally, the bank’s job in supporting the recovery and the role ESG will play in its new strategic plan.

Q: What toll has the Covid-19 pandemic taken on Italy beyond the headline 8.9% drop in gross domestic product (GDP) in 2020?

A: Because Intesa Sanpaolo holds more than €1.2tn of Italian families’ wealth and €500bn of loans to Italian families and companies, we are in a unique position to understand the real situation – and the economic dynamics were not as negative as perceived outside the country. While GDP fell and there were some short-term cash flow issues, we saw a significant increase in deposits from both corporates and families.

In recent years, much effort was put into changing the corporate sector’s finance structure, such as shifting to more equity and medium- and long-term funding, so it was in a strong position going into the pandemic. The combination of this strong structural foundation and the government’s economic stimulus measures, such as loan guarantees and a moratorium on debt repayments, means the corporate sector will exit from the pandemic in good shape. This is mirrored in the strong third quarter results of Intesa Sanpaolo.

Due to great uncertainty during this period, we saw a significant increase in Italian families’ deposits, which is another point of strength that will help accelerate the country’s recovery. However, like other European countries, Italy faces issues of poverty and inequality, which increased during the pandemic. The country needs to focus on the social situation and rising poverty, not only from an ethical point of view but also to avoid social tensions.

We have the right business model and we are the rock-solid place for Italian families’ savings

While today there is an extraordinary focus on climate and sustainability, it’s critical not to lose sight of the fact that many people face difficulties finding food to eat or a place to live. As a community, we have a responsibility to look at what could happen from a political and economic point of view.

Q: Italy is set to receive €191.5bn in grants and loans from the ‘Next Generation EU’ (NGEU) fund. How will this money contribute to Italy’s recovery and where can it be used most effectively?

A: The Italian economy was already on the road to recovery, but the rebound will be much stronger due to the NGEU funds. With the first tranche of NGEU funding, large corporates now have the confidence to increase investments, which will trickle down to their small and medium-sized suppliers. In addition, corporates see that NGEU funding is devoted to key areas for the future: digital, green and infrastructure. In an export-led market like Italy, companies want to be at the forefront of innovation.

At the same time, family consumption is increasing. So, these two elements – corporates and families – will drive the growth story, not only in 2021 but also 2022. We expect GDP to grow between 4.5% and 5% in 2022.

However, the real challenge will be growth after 2022. While the current forecast is 0.5-1%, I think growth needs to be between 1.5 and 2%. If we can achieve this, it will also remove the country’s fundamental weakness: the public debt level. We need to accelerate growth to reduce public debt and make it more sustainable.

Such growth will allow Italy to play an important role in Europe. The largest economies in the region need to grow together so that Europe can be a player on the world stage. Otherwise, Europe is only the sum of individual countries, without the power to compete with giants like the US and China.

Q: What are the high-level takeaways from Intesa Sanpaolo’s impressive third quarter results?

A: A bank like Intesa Sanpaolo, a pillar in Italy but also an important European player in terms of market capitalisation and reputation with international investors, has to always think about maintaining its leading position. The first way we do this is to continue to deliver results and best practice in our operations. For example, in nine months we have already delivered all the net income that we promised for the full year [€4bn], demonstrating that the bank is in extraordinarily good shape. We have the right business model – wealth management and protection – and we are the rock-solid place for Italian families’ savings. Importantly, this model is not dependent on net interest income; we also have a strong fee and commission revenue stream. And thanks to the strength of this model, we have been able to pay our shareholders more than €18bn in cash dividends since 2014.

We also realised the best-ever operating income in the first nine months of 2021, and demonstrate best practice in managing costs; our cost/income ratio was one of the best in Europe at 50.1%. But while we remain focused on cost reduction, we are also making significant investments to be ready for the future.

Q: How will you go about further cleaning up your balance sheet and reducing provisions for bad loans?

A: We have the best risk profile in Europe when considering non-performing loans (NPLs), and Level 2 and Level 3 assets. But we want to improve our position and reduce NPLs even further. We started with €75bn in NPLs after the 2008-2011 crisis and now we are at €18bn gross NPLs and €9bn net NPLs, which is in line with other European peers.

We believe that reducing NPLs is fundamental to lessening provisions in the future. Our aim is to eliminate the impact that the stock of NPLs has on the bank’s future profitability. Bringing NPL provisions down to zero for the existing stock would be ideal, so that any provisions are related exclusively to new NPL inflows, which we expect to be very low considering projected GDP growth. This way, net income really is a matter of revenues-minus-costs, with no economic impact from NPLs.

Q: What are you focused on today?

A: Top of mind is sustainability and environmental, social and governance (ESG) considerations. Today we are a leader in social responsibility and are investing heavily in social support programmes. We are also in a good position as to governance. While we are not yet a leader in the environmental arena, we plan to demonstrate our leadership credentials in the coming years. Recent steps in this direction have been: committing to net-zero emissions by 2050, joining the UN’s Net Zero Banking Alliance and the Net Zero Asset Managers Initiative, as well as phasing out coal exposure by 2025.

We are also focused on digital transformation. But digital has to be assessed in the right way. My job is to understand the opportunities and threats coming from digital and new competition. In a bank like Intesa Sanpaolo, the possibility of being attacked by competitors, fintech or otherwise, is limited for the wealth management and protection areas because our clients need to have trust in the institution. They will not hand over their money to a new entrant just because they have a slick mobile app. The majority of our revenues come from our reputation and the bank’s strength is our relationship managers who build trust with clients.

The real challenge will be growth after 2022… I think growth needs to be between 1.5 and 2%

At the same time, we have a “mass market” segment that today is marginal in terms of net income contribution but is where you can defend and increase revenues through significant digital investments. Here, you need a clear solution for managing costs since these clients don’t want to come into your branches.

Additionally, we need to manage the social implications of moving to digital and redeploying human capital. As CEO of an almost 100,000-employee organisation, I need to support their move to digital and create new jobs, such as in the online branch, working on ESG solutions, etc. In February, we will present our 2022-2025 plan and reveal what we are doing in this area.

Q: How important is sustainability and the bank’s social role in your new four-year plan?

A: It is clear that banks are fundamental to driving economic growth and there’s no doubt that we can be a growth accelerator. We need to be in a position to help companies make investments, not only by providing loans but also giving advice to manage the transformation from the current situation to a future state. If Italian businesses are growing, then they will be in the best position to take full advantage of the opportunities presented by the NGEU funds.

At the same time, we have to ensure that our loan book investments are climate-oriented, in line with stakeholders’ expectations. We will need to pay great attention to the sectors for which we provide funds and advisory to transition from brown to green operations.

And an important part of our job is to continue to support people in need. I believe a portion of net income should be devoted to reinforcing the sustainability of the country and the reputation of the banks, which will translate into shareholder value. This should be part of a new corporate social responsibility trend that embeds ESG for today and the future.


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