Hard times for Italian Banks

In the mid-1990s Bill Gates declared

“banking is necessary, banks are not”

Today disruption process promoted by fintech companies can be seen as the coup de grace to weakened traditional banks that over the years have struggled to compete with non-banking financial intermediaries specialized in specific products , such as companies that grant personal loans and/or issue credit cards.

Most recently European banks have been unable to repay their cost of capital, hit by tougher rules after the global financial crisis and the European Central Bank’s ultra-loose monetary policy which makes lending unprofitable.

Bankers in the euro zone say they need to bulk up to compete with U.S. rivals but diverging regulation across different countries hamper cross-border mergers.  A softer stance toward tie-ups could be one the response coming from regulatory authorities as the sector struggles to make money against backdrop of low rates.


Intesa Sanpaolo and Unicredit the 2 largest italian banks (the second one is the only Global Systemically Important Institution) have chosen two very different approach to face this situation.

Unicredit has planned to continue the consolidation process started with the Transform 2019 with the new Team 2023 business plan based on:

  • Growth of the franchise by reinforcing leadership as the “go-to” bank for European SMEs, leveraging growth engines in CEE and CIB, and expanding the client base of individuals through improved distribution and service models, while enhancing customer experience
  • Further strengthen monitoring and management of credit and financial risk, and targeted actions on compliance and operational risk with Non Core rundown by end 2021 confirmed, with Non Core NPEs below €9bn by end 2019 and below €5bn by end 2020
  • Proactive capital allocation, gradual alignment of domestic sovereign bond portfolios and evolution of Group structure, including working on a project to create a subholding, incorporated in Italy and not listed, for international operations

Intesa Sanpaolo recently launched a Voluntary Public Exchange Offer for all UBI Banca Ordinary Shares aimed at building a a European Leader to Enhance Value Creation through a Stronger Italian Footprint

Apart from the abstract speeches about amazing synergies and similar company cultures, the plan is based on 3 pillars :

  • Exploit the difference between “strong” Intesa stock value (price/tangible asset ratio close to 1) and UBI Weak one (price/tangible asset ratio below 50%) offering 1.7 newly issued shares for every UBI share
  • Sell in cash about 400 / 500 branches of the aggregated entity to BPER and some insurance activities to the UnipolSai Group
  • Use the negative Goodwill to cover integration costs and increase loan loss provisions to accelerate de-risking.

Although Intesa Sanpaolo may be strengthened by the acquisition of UBI, critical issues arising from the structural decline in profitability and the progressive reduction in workers’ need in traditional banking remain on the horizon and will necessarily have to be addressed in near future.

In addition to general issues faced by global and European banks Italian ones need to deal with:

  • hypertrophy of the workforce derived from the historical role of social safety net that banks played in Italy not to mention political party interference
  • technological gap and structural inefficiency resulting from a status as a semi-public entities and from prolonged protection from international competition granted by a vigilance that has favoured stability over efficiency
  • credit quality worse than the European average despite significant efforts in recent years to reduce the stock of non-performing loans
  • little or no economic growth and stagnant productivity of the home country system and poorly meritocratic corporate culture that privileges loyalty over merit

The future of Italian Banks will see fewer administrative employees, whose duties will be limited to the supervision and monitoring of activities carried out by IT procedures. fewer front office operators and more consultants and customer relationship managers that will deal with clients through through different communication channels such as email, telephone, videoconferencing in addition to the traditional physical presence. In this scenario it is quite plausible an increase in the relative number of independent and flexible workers (free lance, contractors, agents), compared to full-time employees.

Provided that it is easy to support a over the phone, but while is much more complicated to make a remote surgery (but also haircut) , this underlying trend will probably affect some sectors (education, publishing, communication, financial services, consulting) more than others (medicine, personal care, construction, logistics). We can face the wave by trying to ride it and prepare in time to face the changes that we cannot affect, or we can ignore it and pay the consequences in the future.

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About Massimo Famularo

Investment Manager and Blogger Focus on Distressed Assets and Non Performing Loans Interested in Politics, Economics,
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