A Loosening of Legal Bonds Stimulates Italian Banking

The Italian banking sector is experiencing a singularly dynamic moment. After years of being tied down by out-of-date restrictions, banks have begun to take advantage of new freedoms outlined in the so-called Amato law, as well as in deregulation measures adopted by Italy's central bank.

"The world of banking and finance is going through a restructuring that will alter its conformation," predicted Lamberto Dini, the Bank of Italy's general director, in a speech this month. Indeed, each day, there is news of a merger, an acquisition, an incorporation, or a privatization plan.

As a result, the sector's rankings have been dramatically shaken up. Banco Nazionale del Lavoro's traditional position as leader, with assets of $124 billion, has been challenged by the new "Rome Group" - formed by the merger of the three Rome-based public-sector banks - and by Istituto San Paolo de Torino, considered Italy's largest commercial bank, with assets of $125 billion.

The Rome Group - Banco di Roma, Banco di Santo Spirito, and Cassa di Risparmio di Roma - has combined assets of about $113.6 billion. And Istituto San Paolo de Torino recently acquired a controlling stake in the long-term-credit institution Crediop.

Italy's largest savings bank, with assets of $125 billion, Cassa di Risparmio delle Province Lombarde, or Cariplo, just completed a merger with its commercial banking subsidiary, Istituto Bancario Italiano, and is seeking to acquire Istituto Mobiliare Italiano, an investment banking and financial services firm. This would make it potentially another contender for first place.

Branch Openings Burgeon

Furthermore, since the Bank of Italy liberalized procedures for authorizing new branches in March 1990, branch openings have increased by more than 20%.

Banks, both large and small, say that opening new branches will remain a top priority for 1922.

"The Italian banking system was a different world 10 years ago," said Paolo Gnes, general director of the Italian savings bank association. The improvements and restructuring being seen today "are largely due to the Bank of Italy's efforts to stimulate internal competition through a general deregulation of the entire banking system," he said.

"When you look at what is happening in the Italian banking sector today, it is hard to believe that, up until a few years ago, competition was a dirty word among bankers here," Mr. Gnes said.

The Bank of Italy is also promoting concentration within the highly fragmented and regionalized banking sector, made up of about 1,085 institutions, twice as many as the European average. The central bank would like to see five or six national, multiservice banks emerge that would be able to compete in a unified European market.

The 1990 Amato law was also designed to make the Italian banking sector more competitive. The legislation allows Italy's state-owned banks, which account for about 80% of the banking sector, to become joint stock companies, clearing the way for their partial privatization.

Another clause grants tax credits for mergers, a provision extended to privately held banks as well. The tax incentives, twinned with the intense competitive climate, are sparking aggressive domestic expansion.

"Before the reforms, mergers were almost impossible," said Pier Carlo Marengo, managing director of Credito Italiano. "Banking institutions were divided into six separate categories," he explained. "We were like rhinos, elephants, and giraffes; we couldn't be combined."

Credito Italiano is taking a cautious approach to expansion in Italy.

"We did acquire the Sicilian bank, Banca Mediterranea di Credito, based in Marsala, extending our presence in that region," Mr. Marengo said, "and we are in talks with several other local banks. But we are looking for small, profitable banks located in areas where we are weak - and they just are not that easy to find."

Building Italian Network

"Our main strategic decision in this period is to really cover the Italian territory, building a thicker network with more selling points closer to our potential customers," Mr. Marengo said. He said the bank is doing this by opening up to 15 small branches per month, with staffs of three to four.

"We have also decided to rent facilities for the new branches to give us extra flexibility," Mr. Marengo said, adding, "The objective of the new branches is to become profitable within 12 to 18 months."

"Credito Italiano has traditionally been a quality bank," said Mr. Marengo. "We are not interested in merging with a group that is too big or too far away from our own banking concepts. We will certainly take advantage of the Amato law, but first, we must identify the optimum point between benefits and costs."

At Banco Ambrosiano Veneto, Gigliola Zecchi, director of the bank's foreign department, said the Amato legislation has "allowed us to solidify our position as Italy's leading private-sector bank."

BAV is expanding and becoming a more national bank by acquiring local banks outside its traditional home market in northern Italy. The purchase in October of Citibank Italia from Citicorp steeply increased BAV's presence in southern Italy, giving it 46 branches concentrated around Naples and Bari. Southern Italy now accounts for 20% of BAV's domestic network.

However, BAV's new branch opening policy is aimed at maintaining and reinforcing its strong market position in the north, fending off competition from outsiders. Three-quarters of the new branches, now being opened at a rate of one per week, are in northern Italy.

Along with the IBI merger, Cariplo has been steadily acquiring stakes in smaller savings banks, including 33.3% of Casa di Risparmio di Fermo. Equity participations in these banks are flanked by franchising agreements for Cariplo's financial products to be marketed in that bank's region.

"This strategy is giving excellent results," remarked general manager Sandro Molinari.

Its domestic network increased to almost 600 branches this year, "placing Cariplo among Italy's biggest banks and giving us a valid presence in 12 regions in Italy," Mr. Molinari said.

In November, Cariplo's board of directors agreed to acquire a minority stake in IMI, the Rome-based investment bank, on condition that it gain control of IMI's future financial holding company. But despite strong backing from the Bank of Italy, the Cariplo-IMI merger has been stalled at every stage of negotiations by political interference.

Cariplo-IMI Link in Jeopardy

After the failure of Cariplo's most recent proposal - to form a consortium of banks to buy IMI - it appears that the political spoils system risks jeopardizing the match.

Although Mr. Molinari would not discuss the bank's negotiations to acquire IMI, he did assert that Cariplo "is ready to achieve new horizons and has the means and the men to do so."

While Banco di Sicilia said it has no merger plan, the Palermo-based banking group does expect to absorb credit institutes, especially in the Mezzogiorno area of southern Italy, once it gets cash injections from the Italian Treasury.

Over the next three years, state-owned BdS is to get $500 million from the treasury, appropriated under a special clause of the Amato law, and an equal amount from the Region of Sicily.

BdS, the second-largest bank in southern Italy, with 270 branches in that region alone, said it plans to open 60 branches during 1992, bringing its national total to 412.

Joint-Stock Structure

Domestic expansion aside, one of the most obvious effects of the Amato law is the transformation of public-sector banks into joint-stock companies. According to the Bank of Italy, 80 banks have already converted into societas per azionie, or S.p.A.'s, and the number is growing daily.

Banks have until August to transform their juridical structures into this type of corporation.

The S.p.A. denomination should become a bank's passport to significant internal restructuring, but banking officials said that, with a few exceptions - namely, the Rome Group, Cariplo, and Istituto San Paolo di Torino - this is not yet happening.

"For the most part, banks are just donning a new set of clothes," Mr. Gnes of the savings bank association complained. "True reorganization, rationalization, and corporate strategy development [are] limited."

"We had hoped that the Amato law would promote a deeper restructuring," said an official at the Bank of Italy. "But we are on the right path."

San Paolo's brilliantly orchestrated expansion and restructuring are soliciting as much envy as praise.

Acquiring Crediop Control

First, its acquisition of the long-term-credit institution Crediop was successfully completed last October, when the Italian Treasury agreed to sell its 50% stake for an estimated $1.6 billion, raising San Paolo's stake to 90%.

Although the Crediop acquisition does not enhance San Paolo's network in terms of branches or retail activity, the institute, which specializes in financing public works, is considered to have a great deal of political influence, not to mention assets of $30 billion.

Second, in mid-November, San Paolo got government approval to restructure, including a partial privatization through a public share flotation. As of Jan. 1, San Paolo will be organized on three levels.

On the top, Compagnia di San Paolo, a public-law institution, while not operating directly in banking, will control 100% of San Paolo Bank Holding S.p.A.

This soon-to-be-created holding will be the second level and will have an initial share capital of $5 billion and capital reserves of $1.75 billion. It will control the group's banks, Istituto San Paolo di Torino S.p.A., Crediop, foreign bank holdings, and insurance company interests.

Raising Capital

The third level will be the group's principal bank - Istituto San Paolo di Torino S.p.A., with an initial share capital of $4.08 billion.

Later in November, San Paolo announced a $1.12 billion capital increase, of which $1.04 billion (or about 20% of the new S.p.A.'s capital) will be raised through a public share offering on major international stock markets. The bank has also said it plans to transform Crediop into a joint stock company and seek its listing on the Milan Stock Exchange.

"There are several restructuring projects underway, creating hope that there will be a snowball effect, getting other banks involved as they develop," concluded the central bank official.

Equally important is that transformation into an S.p.A. should also help banks to privatize. But reorganizing ownership has proven complicated.

Banco di Napoli S.p.A., southern Italy's largest bank, was the first to take advantage of the Amato legislation, offering 100 million shares to raise $333 million. Banco di Napoli is seeking capital to finance its aggressive expansion scheme in southern Italy, increasing its branch total from 650 to 1,000 by the end of 1994.

Credito Italiano and Banca Commerciale Italiano, both controlled by the state industrial holding company, Istituto per la Ricostruzione Industriale, are listed on the Milan Stock Exchange. In October, IRI sold more than 100 million savings shares in Credito Italiano, raising an estimated $100 million.

"Since the Amato law stipulates that the state can reduce its holding in public banks to 51%, there is room for further reduction in Credito Italiano from the state's present 65% stake," said Mr. Marengo, the managing director. "But IRI is probably waiting for a better time. The Milan Stock Exchange's poor performance lately would make a share offering look like an off-season sale."

Under special circumstances, the Amato law lets the state cut its holding in public banks to less than 51%, provided that no single outside shareholder gains majority control. Financial analysts say that Banca Commerciale Italiano would be a good candidate for a more wholesale privatization, considering the bank's high profitability and international standing.

But so far, IRI has given no indication of any further privatization plan for the bank.

However, the system of political patronage, bank privatization's major foe, is beginning to irritate public opinion and economists alike. "With a public debt of $1.16 trillion, the Italian state is no longer a plausible capitalist," said one Italian economist.

Political Obstructionism

"There is a general feeling, not of optimism but that something must give in the system," said a Milan-based merchant banker. "The modernization of the Italian banking system can no longer be blocked by political parties who refuse to give up their position as board members."

Furthermore, economists pointed out, as European unification becomes a reality, Italy is being increasingly pressured to cut its enormous deficit and move into line with European Community guidelines on monetary and fiscal policies. And most European and Italian economists strongly recommend privatization as an essential measure toward reducing Italy's enormous debt.

Italian banks have also gained new freedoms to operate in the financial-services sector, letting them become multifunctional and better integrate their medium- and long-term credit operations. Together with the Amato legislation, new laws on stock market intermediaries, the relationship between banks and insurance companies, and factoring and leasing built a basis for multifunctional banking and for banks to develop new products.

Italian bankers are quick to stress the importance of being able to offer clients more competitive services; they say they have bolstered their market research departments to analyze customer needs.

Some bankers, however, would like to see an even greater liberalization in this area.

The German Model

Giacomo Perticone, newly appointed general manager and chief executive of Banco di Sicilia, said he would like Italian banks "to be able to participate in the future united European market as universal banks, along the German model, operating directly as finance companies and in the insurance sector."

Mr. Perticone is not alone in wishing for the walls that divide short- and medium-term financing, banks and industry, to be lowered.

Rainer Masera, general director of IMI, the Roman investment bank, also criticized, as too restrictive, the new legislation limiting cross-ownership between banks and private industry. He said a mixed banking system - used in Germany and Japan - is able to "correct stock market insufficiencies."

Using the example of a company that wants to make a large investment to develop a project using highly innovative technology, Mr. Rainer said that this company cannot go to the market for funds, revealing its intentions to competitors. The company "needs the confidentiality of an intermediary," he said, concluding: "A bank can do a job that capital markets can't."

The shortcomings of a tightly regulated system separating banks and industry are very apparent in the United States, said Mr. Rainer. There, he said, industry, despite being the world's strongest, is in fact weak because the financial structure is weak, due to excessive restrictions.

In October, the Bank of Italy's reform of the reserve requirement took effect, letting banks mobilize part of their compulsory reserves - the equivalent of 5% - provided that the monthly average reserve be maintained at a level at least equal to that owed.

By increasing the level of available resources, banks have been able to improve the effectiveness of daily liquidity management and allow their treasuries greater operational flexibility.

Most Italian banks say they have suspended international expansion temporarily to refocus on domestic restructuring now that they have the long-awaited reforms.

Others have never aimed at raising their international profile.

"There are very few Italian banks that have an international approach or the structure to finance a real foreign network," commented Guido Rosa, chairman of Italy's foreign bank association. "I would be very surprised to see many banks here expand their market share abroad."

But there are some exceptions.

"Up until the end of last year, our strategy was to reinforce our position in Italy, improving productivity and eliminating an excess of personnel," said Ms. Zecchi at Banco Ambrosiano Veneto's foreign department. "Now, with 1993 at the door, our strategy is to reinforce our presence in Europe."

Ms. Zecchi explained that, in view of the substantial capital investment needed to build up a banking network abroad, BAV has decided to make special accords for its clients with major banks in each of the principal European markets. The accords include direct credit lines and access to all customer services for BAV clients at each bank, she said.

Such agreements have been reached so far with Credit Agricole (also a BAV shareholder) of France, Lloyds Bank in Britain, and Banesto in Spain.

"We are set to sign an agreement with a German bank as well, while an agreement with Promstroyban of the Soviet Union has gone astray and never became official," Ms. Zecchi said. "It is not the number of agreements that is important. What is important is making each agreement perform on a high operative level."

BAV Plans London Office

An exception to this strategy of reciprocal service agreements is BAV's plan to open a full-service branch in London "because it is such an important financial center," Ms. Zecchi said. The London branch is to open next fall. BAV has had representative offices in New York and Hong Kong since 1980.

Of course, San Paolo has long been one of Italy's most internationally oriented banks, setting up branches during the 1980s in Frankfurt, London, Amsterdam, New York, Tokyo, and Singapore. In 1982, San Paolo bought First Bank of Los Angeles, and in 1984, Austrian Bank.

Like BAV, the Turin-based San Paolo said it is now concentrating on Europe, particularly France and Spain.

While enlarging its home base, Banco di Sicilia said it will boost its foreign network as well. The bank has branches in London, New York, Paris, Los Angeles, Frankfurt, Munich, Germany, and Lyon, France; a subsidiary in Luxembourg; and four representative offices.

"We plan to expand our presence in several markets in the future, particularly in France and the U.S., where our customers have increased their trading activities," said Mr. Perticone of Banco di Sicilia. "We do not believe that alliances with foreign banks, in light of the past and present experience of others, are a valid means of expanding abroad."

Cariplo's Expansion Model

"At Cariplo, our international expansion strategy has always been modeled on gradualness, inspired by the needs of our clients and their trading activity," explained Mr. Molinari.

In the United States, where Cariplo opened its first representative office in 1968, "we have new goals," said Mr. Molinari. He would not elaborate, except to say that Cariplo has begun consolidating in the U.S. market.

"We have recently intensified our expansion in Europe, preferring to acquire small banks," said Cariplo's general director, explaining that "it is the quickest way."

Cariplo has an 82.7% stake in the German bank Bankhaus Lobbecke & Co. and 99.9% of Compagnie Internationale de Banque in France. Mr. Molinari added that Cariplo is close to taking over a bank in Spain.

"We are also considering increasing our presence in some countries through alliances," he said. "In Austria, we are taking a minority share in ZetaLander-bank and will be announcing another minority-stake acquisition in Portugal soon."

Hungarian Stake

Cariplo has also taken a 25% stake in the new Europai Kereskedelmi Bank in Budapest, a joint venture between two Hungarian banks and Zentralsparkasse und Commerzialbank of Vienna. The venture aims to facilitate trade relations among Hungary and Western European countries.

In further preparation for the challenge of a united Europe, Cariplo has set up a leasing operation in France together with Casse France and UFB Locabail of Britain.

Finally, along with its four full-service branches abroad, Cariplo established a subsidiary in Luxembourg, "an important step toward our insertion into European capital markets, currency swaps, futures, and international mutual fund management," said Mr. Molinari.

In fact, many Italian bankers said, they are interested in playing a more active role in European capital markets since the free flow of capital took effect in European Community countries.

Carlo Salvatori, general manager of Banco Ambrosiano Veneto, explained that the "cosmopolitan outlook of the Italian banking system was severely limited by past foreign currency exchange controls and curbs on capital movements and, thus, [the Italian banking system's] integration process with foreign markets is only beginning."

Rising Presence Abroad

BAV has designated its soon-to-be-opened London branch as the nucleus for international placements and consultancy services.

"Italy has long lived in isolation, but by operating in the Eurolira market over the last few years, the Italian banking system has started to internationalize - from Eurobonds to Euroloans, swaps, and now futures," said Carlo Gilardi, director of the association of Italian brokers in foreign stocks. He said the weight of Italian banks in international placements and in organizing Euroloans has grown significantly.

During 1990, Italian bank participation in Euroloans soared to $4.8 billion, from $2.4 billion the year earlier, according to a study by Banco di Roma.

"Operating in Italy has been difficult for foreign banks," admitted Mr. Rosa, the Italian foreign bank association chairman and general manager of Societe Generale's Italian subsidiary. "The market share of foreign banks in Italy is probably the smallest in Western Europe."

Mr. Rosa said the foreign bank market share in Italy has recently dropped from 2% to only 1.5%, compared to 15% in France and 10% in Spain.

Foreign-Bank Cutback

"The restructuring of the Italian banking system is not likely to affect foreign banks operating here for the next few years," Mr. Rosa said. This is largely due to the poor interbank market, he said, although some improvements have occurred in the interbank market recently.

Foreign banks are generally pulling out of Italy as classical commercial bank operators. They are developing their presence by specializing in particular sectors, such as merchant banking or swaps, options, and futures markets. Mr. Rosa said this was particularly true of the strategy of U.S. banks in Italy, "and, at least in the short run, it is successful."

"In fact, in the area of new, highly sophisticated services, foreign banks are leading innovation in Italy," Mr. Rosa emphasized.

Foreign banks that have recently pulled out of commercial banking in Italy - Barclays and Citibank both sold their retail operations, and First Chicago, Standard Chartered, Midland, and Lloyds have reduced their activities, as well - "found that their operations were not as profitable as they had hoped," explained Ms. Zecchi of Banco Ambrosiano Veneto.

"It is no longer enough to keep a high-profile operation going because it's prestigious," she added. "The investments required are just too large."

Foreigners' interest

"We appreciate foreign banking interest in Italy," said Mr. Molinari at Cariplo. "We can compare our own efficiency levels, while the competition works as an incentive to renew our products and services."

"First, the U.S. banks arrived, later followed by the European banks; now, it is the turn for Japanese banks. Their interest shows the growing importance of the Italian financial market," Mr. Molinari said.

Expressing his satisfaction with the reforms in the Italian banking and financial systems, Mr. Salvatori of Banco Ambrosiano Veneto commented, "The fundamental structures are in place, and they appear to function well enough so as to attract good players, even from other European countries."

"The recent number of new laws and provisions governing the financial services sector is being referred to as a real flood," said an official of the Bank of Italy.

"But the essential change is that the vision is different and the Bank of Italy's monitoring style is different," the official said. "From the 1930s, the vision has been institutional. Today, it is oriented toward the market."

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