Q. What is the economic and political outlook for Italy?
A. [Italy's GDP growth] has finally become positive. It is in the [low] range, but it is a clear change. The macroeconomics of Italy are quite robust, with the only exception being the debt-to-GDP ratio. But if you look at total debt, formed by sovereign debt plus corporate debt and personal debt, this is very low. It is aligned with the average for the eurozone, far lower than in the US and a fraction of the Japanese level.
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The budget deficit in Italy has been small throughout the crisis, far below the European average, and with Germany we are the only two countries with primary surpluses. We have a positive balance of trade, and on top of that the fabric of Italian industry is quite robust, similar to that in Germany.
The government has expressed its ambition of achieving a positive balance between austerity and growth. It seems to be committed to more privatisations, which is positive, and to reducing spending. I think another reform that will have to be implemented is electoral, which is an enabler for stability and better governance.
If we want to see an agenda of aggressive structural reforms that is pushed through in six months, we will likely be disappointed. But I think we will see some steady progress.
Q. Where will growth come from for Italy’s many small and medium-sized enterprises [SMEs]?
A. There is a large proportion of Italian companies that export a lot, [and many of these] are highly successful. [At Intesa Sanpaolo, our research shows that] the top tier [of these SMEs] export more than German companies, earn more than German companies, and are based in regions where the average per-capita income is higher than the average in Germany. This segment is going to continue to do very well. Along with the second tier [of Italian SMEs], we are talking about one-third of our industrial sector. The problem is the bottom layer. They are the ones that have a purely domestic focus and work with public administrations. These are the ones that have had the toughest time.
[A problem for Italy and its companies is that] people tend to bundle together the [struggling] euro periphery, when each country is completely different.
When you talk to Western or Anglo-Saxon investors, there is a tendency to generalise and talk in terms of averages. When you talk to Chinese [investors], they’re much more specific. They will come and ask us about that company in a region, which makes that particular component. They ask us to put them in touch, and if the owners won’t sell, those investors are prepared to just provide them with financing. Right now, I see strong interest among major groups from the Far East, and not only from Chinese investors.
Q. Does Intesa Sanpaolo’s balance sheet also reflect this? Are loans advanced to these exporting companies, whereas non-performing loans are more associated with those companies that used to supply the public sector or have failed to transform themselves?
A. Of course, we’re a proxy of the Italian economy. There is a part [of the business] that is not growing. There’s a depressed demand for credit, which is fine because what matters is the demand for healthy credit. However, parts of Intesa’s business are growing healthily. When it comes to wealth management, we’ve grown 15% in the first half [of 2013], and Intesa has been the fastest growing bank in Europe in this sector.
With our large client base, our presence across Italy and the large market share that we enjoy, we are a good bank for white-collar workers who save a certain amount every month. We’re a good bank for the upper-middle class and we’re a good bank for the entrepreneurs that we serve, providing advice on mergers and acquisitions or lending.
Q. After the shock of the crisis, Intesa Sanpaolo has reduced its loans-to-deposits ratio, it has a good coverage for non-performing loans [NPLs] and the bank's capital ratio is quite high. What is the strategy behind the different ratios?
A. Let me start with some basic principles. When you look at a financial institution that is in the business of underwriting risk, be it a bank or an insurance company, what matters the most is the balance sheet, rather than the profit-and-loss statement. In difficult times, when you go through turbulence or discontinuity, the relative importance of the balance sheet is magnified.
In comparative terms, we have the third highest common equity level among large European banks. Over the past 12 months, we have increased it by 60 basis points – which would be equivalent to a capital increase of €2.2bn. We place a very strong emphasis on liquidity. We’re one of the very few banks that publish liquidity ratios. We’re way ahead of Basel III requirements for 2018 and 2019. Intesa is one of the few banks that has both high common equity and low leverage.
Furthermore, when it comes to risk-weighted assets, the weights in Italy are extremely conservative. There are problems with the definition and interpretation of NPLs, and the same goes for coverage ratios. One thing that is highly desirable for Europe is to get to a point where we have normalised, standardised definitions of key parameters, ratios and so on, and we also have a mathematical key to adjust for local specificities. Hopefully we’ll come to a more normalised view of this with the asset quality review [that the European Central Bank plans to carry out later this year].
Q. Will we see Intesa involved in any further acquisitions, particularly abroad? Is it conceivable that you could buy a weaker European bank?
A. I think that eventually we’re going to face a phase of pan-European consolidation. Clients' needs for financing and advice go beyond their domestic border.
On the other side, the European banking system is highly fragmented and profitability is too low. You have all the prerequisites for consolidation in the industry. It is not a matter of if but when. The [ECB] asset quality review may trigger acceleration in this process. The important thing is to be prepared.
In the end, candidates for consolidation would be divided in two groups: the lame ducks, the ones with the weak balance sheet and in need of capital injection; and the ones that have a strong balance sheet, are efficient and have reliable management. I see the job of a chief executive as that of running an efficient, tight ship, but also to be prepared ahead of time. Combinations can be formed in many ways; it will be a matter of finding a strategic fit, an organisational fit, a cultural fit and a people fit.
Q. How do you feel about the development of the European banking union?
A. The banking union is very positive and very courageous; it’s the most tangible development within the EU. The head of the ECB deserves credit for having done something that few people would have expected; it took vision and guts and ability to broker it. Of course, there’s always resistance to change, but I think the progress is irreversible and the speed it is being done at is also reasonable.
More integration is a prerequisite but it’s not enough. I think that the issue of competitiveness should become much more central to the European agenda. Unfortunately, it is seldom mentioned. [German chancellor] Angela Merkel always quotes the three magic figures: seven, 25 and 50 [Europe has 7% of the world’s population, 25% of its GDP and 50% of its social spending]. Ms Merkel is a force within Europe, and that’s why Germany should take on the leadership. Germany also pushed through structural reforms ahead of the others in 2003. The benefits are clear and evident to everyone, and the cost of not embracing these opportunities could be huge. In the end, people have to decide whether to go on in the same way and end up in two generations without jobs and without welfare, or whether to provide a better world for our future generations.
