Italian banks dodge crisis bullet

Italian bankers could be excused for patting themselves on their well-tailored backs after the worst of the financial crisis.

In many ways Italian banks look good compared with other crisis-hit lenders in Europe. With their focus on retail lending, they took little government aid, capital ratios have climbed from the sector cellar, costs are falling and lending from the European Central Bank is low.

But Italian lenders, including two of the euro zone's biggest - UniCredit SpA (CRDI.MI) and Intesa Sanpaolo SpA (ISP.MI) - now face a tough task.

How to grow with nothing to give them a shove?

The Italian economy is stagnant, with the government expecting growth of 1 percent this year and weighed by Europe's biggest sovereign debt.

Non-performing loans are nearly twice the European average ratio. Low rates are crushing net interest income, the main source of revenues.

Until rates rise, probably in the middle of next year, analysts are expecting slow profit growth given banks' focus on lending to small and mid-sized businesses and to Italy's traditionally thrifty families.

"Unless there is an increase in rates, Italian banks won't make any money. It's dull (economic) growth -- that's D-U-L-L," one analyst said.

Another said: "The only thing they can do is look at their cost base, see if there are any more efficiencies they can find. That's about it."

Net Interest Income

Net interest income is a key number for Italian banks, since it generates about 60 percent of their revenues versus a European average of about 53 percent.

A turnaround may come as soon as the second quarter.

The first-quarter downturn was an average 8 percent year-on-year for the five biggest banks -- UniCredit, Intesa Sanpaolo, Banca Monte dei Paschi di Siena (BMPS.MI), Banco Popolare (BAPO.MI) and UBI Banca (UBI.MI).

With the exception of UniCredit, which has grown through acquisitions to become to the biggest lender in eastern Europe, banks' key business is lending in the slow-growth Italian market.

"The advantage of a retail focus is that it's safe," said one analyst. "The disadvantage is that when interest rates are low they earn less."

The ratio of net non-performing loans is about 5.7 percent, almost twice the average for the European sector. Analysts put the blame on Italy's small and mid-sized companies, the backbone of the export-oriented economy but under stress in the recovery.

"We expect a slight and gradual worsening of new non-performing loans and of provisioning in 2010 with consequent pressure on profits," said Henry MacNevin, Moody's team leader for Italian banks.

Italian banks have underperformed the STOXX Europe 600 banking index .SX7P this year. The gauge is down about 7 percent, while UniCredit has dropped 11 percent, Intesa Sanpaolo 20 percent and BMPS 20 percent.

Cut Those Costs

With interest margins squeezed, growth is being underpinned by cost cutting, commissions and fees from overdrafts, recovering stock markets and insurance. First-quarter commissions were up an average 11 percent year-on-year for the five biggest banks.

Costs at the biggest half-dozen banks are seen falling about almost 3 percent on average this year by Credit Suisse as lenders continue to reap synergies from roughly $170 billion (111 billion pounds) in mergers in the last seven years.

"What they are trying to do is to keep the cost basis flat, which is a good result," said an analyst.

UniCredit and Intesa Sanpaolo are roughly in the middle of the pack among big European lenders for cost-to-income, a measure of efficiency, with ratios this year at 56 and 49 percent, according to Standard & Poors research.

Among cost-cutting programmes, UBI Banca agreed with unions in May to cut 895 jobs, a move that will save about 70 million euros once finished. UniCredit also is merging its seven domestic banking subsidiaries into one.


The UniCredit move was carried out with resistance from politically connected shareholder foundations, a feature of Italian banking and one that can influence executives' decision-making, at least indirectly, analysts said.

To ease concerns from foundations holding almost 12 percent of shares that the merger would lessen their local clout, UniCredit created a new post -- chairman for Italy.

"For strategic decisions, they (foundations) have to be onboard," said one analyst. He added that the foundations were more amenable to cost-cutting moves to assure dividends would keep coming.

"We are in a crisis situation right now, so the power that these institutions have is less than they would have if everything is going right."

Italian banks also are increasingly looking to split off their asset managers to boost capital and under pressure from Bank of Italy Governor Mario Draghi, who wants more U.S.-style competition in the sector.

Intesa Sanpaolo, which wants to boost its Core Tier 1 ratio, is looking to float its Fideuram asset manager, Italy's biggest and valued at about 3 billion euros. However, the bank put the listing on hold in June, citing market volatility.

UniCredit also is exploring options for its Pioneer asset manager.

[Source: By Ian Simpson, Reuters, 15Jul10]

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