Recent events in Italy's banking industry - an alliance of two big banks, a sell-off of another and hints that staff cuts are in the wind - may appear revolutionary in a country where, traditionally, shareholder value has not been a prime consideration. But analysts argue that much greater rationalization is needed if the banks are to compete effectively in Europe.
The first ripple came in May when Banco Ambrosiano Veneto (Ambroveneto) and Cassa di Risparmio delle Provincie Lombarde (Cariplo) - Italy's largest savings bank - agreed a strategic alliance to establish the country's second largest banking group. At end-1996, the banks had combined assets of just over L250 billion ($148 billion). Moody's and other analysts responded positively to this symbolic message; the US ratings agency noted the alliance had "the potential for significant commercial and cost benefits in the longer term [and] represents an important step in the ongoing consolidation taking place in the Italian banking sector." Longer term, analysts agree the alliance represents the first step towards the privatization of Cariplo. It also represents a blow to the expansionary ambitions of Banca Commerciale Italiana (BCI), which had bid aggressively for a holding in Cariplo which it was "desperate to acquire", according to one Italian banker.
The second ripple, a week later, was the successful sell-off of about 30% of the capital of Italy's largest commercial banking group, Istituto San Paolo di Torino, in a secondary share offering with $1.4 billion led by San Paolo itself and Morgan Stanley, which was more than three times oversubscribed. This was the second stage of a $2.7 billion sale, making the overall transaction the largest bank privatization in Italy. The first stage, completed in April, involved the sale of L1,915 billion (or 22% of the bank's share capital) to a group of six core shareholders - including foreign banks such as Banco Santander and Kredietbank.
The San Paolo privatization reduced the stake held by the charitable foundation, its former majority shareholder, from 66% to 20%, and its share of the bank's voting shares to around 5%. One banker close to the deal says the sale "at last breaks the chain to the foundation and gives the bank the freedom it needs to say no to bad loans".
The public offering, in which some 40% of the shares ended up with retail investors and a further 8% with the bank's employees, owed much of its success to the earlier sale to core shareholders which, say the deal's lead managers, gave the transaction the credibility it needed to ensure the subsequent over-subscription in the public sale.
A Morgan Stanley case study on the sale published in June shows it also reflected a change of strategic focus at San Paolo. "Despite an historic return on equity (ROE) of 6.2% the management of San Paolo [was] able to convince investors during the roadshow that its profitability would increase significantly over the next two to three years," it said. Morgan Stanley expects the bank's ROE to "exceed the management's own medium-term 9% target by 1999".
The backdrop to the sale was investor frustration. "The success of the privatization has to be viewed against the background of the share price underperformance post the IPO in 1992, a limited appetite for Italian bank stocks due to poor profitability and concern over corporate governance in Italy," notes Morgan Stanley.
Labour pains
Another stir was caused by a recent agreement - or National Contract - between the Association of Italian Banks (ABI) and the banking unions which appears to pave the way for staff cuts within an industry notorious for overstaffing. Monica Kapoor, a banking analyst at Fox, Pitt, Kelton in London notes that overstaffing is officially estimated at 10%, although she puts the figure at closer to 20%; a London analyst suggests it is as high as 30%. With labour costs in the industry among the highest in Europe - equating to 1.5% of total assets, according to a recent Moody's analysis - reducing this expenditure is a prerequisite if Italian banks are to compete in Europe.
"The unions fully understand that Italian banks can't live with such high levels of overstaffing," says Stefano Alberti, head of research at Intermobiliare Securities in Milan. He adds that the agreement between the banks and the unions will probably take the form of a pooled fund, to which the banks - rather than the cash-strapped government - contribute the funding for lay-offs. The expected benefit led Inigo Lecubarri, southern European banking analyst at Salomon Brothers in London, to predict overall cost increases in the banking sector of "markedly below inflation - a real and definite step forward".
There have been other developments in recent months. These include a long-awaited solution to the Banco di Napoli conundrum - the bank, with the insurer, INA, is being absorbed by the Rome-based Banca Nazionale del Lavoro - and an upbeat analysts' meeting at which Credito Italiano announced it was shooting for an ROE of 11% by 1998. The average ROE is well below 5% in Italy and Credito's was an abysmal 1.8% in 1994.
But these events do little more than scratch the surface in an industry bedevilled by fragmentation, high loan-loss provisions, penal domestic tax rates and increasingly stiff competition from overseas. Analysts say they do not go far enough.
Some are mystified about the rationale of the Ambroveneto/Cariplo alliance in which the two banks will remain separate entities under a holding company controlled by the current shareholders. For example, the charitable foundation, which historically held 100% of Cariplo, is expected to retain an influential 30% stake in the new holding company. There will be little, if any, scope for cost cutting through staff reductions; Intermobiliare's Alberti predicts it will be at least five to 10 years before tangible gains arise from the agreement. This may explain the stock market's lukewarm response. But Italian banks do not have a decade in which to restructure their operations if they are to deal with competition in an increasingly integrated Europe. For the time being, Kapoor at Fox, Pitt Kelton appears unconcerned about this: "Even though we've seen a relaxation of barriers to entry in the Italian banking sector, the actual penetration of foreign banks has tended to be quite low - because people in Italy are reluctant to bank with foreigners."