Italian Banks Look to Their Competitive Status in Europe

When Italian banks called together their investors for this year's shareholders meetings, many detected a change in the annual spring ritual. The traditionally single-minded focus on financial results of the last 12 months was countered by an equally strong interest in plans for the future.

The shareholders' desire to look ahead was understandable. Since they had met a year earlier, a series of reforms had swept the Italian banking system, changing not only the way banks do business but also, in some cases, altering the very structure of the banks themselves.

And with the deadline for the 1992 common stock market looming ever closer, the question on everyone's mind was: How will Italian banks stand up to the stiff international competition that is sure to follow the falling barriers between countries?

One way Italy is preparing to fight the heavyweights of international banking is by promoting new domestic alliances. Last November, new rules took effect, offering attractive tax incentives to banks that seek out merger partners.

None in Europe's Top 10

The reason for the government's foray into the matchmaking business is clear. No Italian bank is in Europe's top 10, and even the biggest in Italy tend to be regional, not national.

But thanks to the legislative reforms, that may be about to change.

The first merger officially announced was Banco di Roma's link with the Cassa di Risparmio di Roma-Banco di Santo Spirito group.

Once the merger has secured final approval from the authorities, it will create Italy's biggest bank, with more than 800 branches and 6% of the domestic market. It also will be the country's first major attempt to enter the big league of international banking. The new group will rank 11th in Europe and 31st in the world.

Other possible mergers are open to speculation at this point.

Italy's most courted bank is undoubtedly Banca Commerciale Italiana, or BCI. The Milan-based bank has been linked with Banca Nazionale del Lavoro, or BNL, among others, but the strongest speculation has surrounded BCI's possible merger with Credito Italiano. Combined, the two would far outrank the Cassa di Risparmio-Banco di Roma group.

Government's Controlling Stake

The banks' future lies in the hands of the government. Both BCI and Credito Italiano are majority-owned by IRI, the state holding company that controls more than 400 companies, including several of Italy's largest banks.

IRI has denied any plan for a full-fledged merger between the two banks, saying it has commissioned a study to examine creation of a holding company that would exploit synergies between the two distinct banking institutions.

One argument against a BCI-Credito Italiano merger is that the two are too similar. Both are considered strong in the corporate sector and big business.

For that reason, Banca Nazionale dell'Agricoltura, or BNA, may merge with Credito Italiano. BNA is strong where Credito is not and is especially adept at luring the savings of farming families.

But Italian banks are not just looking to the domestic market for expansion plans.

Bancario San Paolo Leads Way

Istituto Bancario San Pablo di Torino, the most international of the country's banks, is leading the way beyond Italian frontiers. It has taken an interest in France's Suez group, Credit Commerciale de France, and Hambros, a British merchant bank. It has also agreed to an alliance with the American investment bank Salomon.

Banca Commerciale Italiana has also found time to shop abroad, even while mulling over offers for domestic alliances.

In February, BCI acquired 100% control of Banque Sudameris France and subsequently changed its name to Banca Commerciale Italiana (France). It also has taken over Luxembourg-based Societe Europenne de Banque, with the aim of increasing its presence in European financial markets.

BCI's managing director, Mario Arcari, says nonresident relationships now account for about half of BCI's total volume of deposits and loans.

"BCI's actions are mainly focused on the [European Community] member countries where the bank's operations will be strengthened selectively in accordance with the opportunities arising in each item," Mr. Arcari said.

Topic at Annual Meeting

The internationalization of Italian banks was also a hot topic at Banca Nazionale del Lavoro's annual meeting in April.

BNL chairman Giampiero Cantoni told reporters that his institution is searching for outside partners to bolster its international standing.

"I believe that the path to follow is that of alliances with big European institutions," Mr. Cantonio said. "No specific negotiations are under way, but we're touching bases with institutions that are interested in operating inside Italy and becoming - along with us - a global competitor."

In addition to forging international alliances, Italian banks are also moving to open their own branches abroad.

Banco di Napoli recently opened two new branches in Luxembourg, primarily aimed at serving the Italian community there. It also plans to open a new branch in Barcelona at the end of this month.

The bank's plans call for penetrating the Belgian, French, German, and British markets soon.

Cultivating Expatriates' Roots

"Those are all countries with a large number of Italians. And even if they are third- or fourth-generation Italians, they still have their roots in Italy and want to maintain ties with their native country," said Ferdinando Ventriglia, general manager of Banco di Napoli.

Now that laws limiting geographical expansion have been liberalized, Italian banks are also free to open new branches in areas of the country that were previously off-limits.

Before the liberalization, there were just 2.4 branches per 10,000 inhabitants in Italy, as compared to 6.5 in France and the former West Germany, and 4.3 in Britain.

But now, Italian banks are scrambling to catch up with their European neighbors. The Bank of Italy reported that the total number of branches in the banking system grew by 6% last year, with 800 branches opened and 2,100 more authorized.

An institutions leading the way in regional expansion is Banco di Napoli. Using the catchy slogan "the bank next door," the Naples-based bank plans to have 1,000 branches in its network by December 1994.

Moving Toward a Goal

It is already more than half-way there. The recent opening of 69 branches brings the total in its network to 617.

Banca Commerciale Italiana began expanding its branch network in 1989, with the aim of opening 350 branches by 1993. That will give it a total of 875.

And Palermo-based Banco di Sicilia plans to add 60 branches to its current network of 352.

But opening branches is only part of an overall strategy aimed at providing better service to customers.

Banco di Sicilia is among those taking steps to expand the array of financial services it can offer clients. In one of its most recent initiatives, the bank reached an accord with the Italian insurance giant Riunione Adriatio di Sicurta (RAS) to form a new life insurance company called Basiras Vita.

Under terms of the agreement, Banco di Sicilia will sell life insurance through its branch offices, while RAS agents will promote the bank's financial services to their customers across the country.

|Profit from Synergies'

Banco di Sicilia's acting general manager, Salvatore La Francesca, summed up the reasons for the bank's latest moves this way: "In view of the 1993 European market, it's become essential to move toward a process of diversification within each single bank. In this way, the Italian banking system can profit from synergies that have often been unattainable in the past."

Banco di Napoli is also expanding the array of services offered within each branch. It has recently introduced new products and services especially designed for families, women, and senior citizens.

Analysis believe, however, that the key to ultimate success for Italian banks will be not only providing good service but also doing so at low cost. Currently, Italian banks' costs are among the highest in Europe, primarily because of overstaffing.

One of the most notable exceptions is CREDIOP, a Rome-based credit institution that specializes in funding public works and other large projects.

In last year's Euromoney magazine survey of the world's best banks, CREDIOP ranked No. 1 in the category of "Italian top five."

Reaping Cost Cuts' Benefits

CREDIOP's general manager, Luigi Mazzoni, said his institution embarked on a cost-cutting campaign two years ago and is still reaping the benefits. "1991 will be an improvement over 1990 because we are growing in terms of efficiency," he said.

While the consensus is that most Italian banks are overstaffed, CREDIOP has a staff of only 400 people managing more than 32 trillion lire ($25 billion) in assets.

Mr. Mazzoni says CREDIOP's strategy is based on increasing automation and a staff focused on the client, not the product. It also gets a helping hand from its alliance with San Paolo di Torino, which took a 40% stake in CREDIOP in 1989.

One theory as to why most other Italian banks have lagged in launching similar cost-cutting measures is that they have not had enough exposure to outside competition, operating instead in a climate of monetary protectionism.

The president of the Italian Association of Savings Banks, Roberto Mazzotta, said now that the way is being cleared for the entry of foreign competitors, Italian banks are furiously trying to make up for lost time by updating their methods of operation.

Doing Something Right

"This process must be encouraged ...and should be considered an important test for the general interests of the nation's economy," Mr. Mazzotta said last month in a speech at the Bank of Italy's annual meeting.

But though everyone agrees there is plenty of room for improvement, last year's financial results show that banks have been doing something right.

According to the Bank of Italy, banks' average net profits were 0.55% of total resources in 1990, or 6.837 trillion lire, up 36% from the previous year. Bank deposits were up 11.6% in the same period, according to the central banks' annual report.

As Italian banks look ahead to 1991, they expect another good year.

Carlo Cattaneo, director of foreign operations for Banca Popolare di Milano, one of the world's largest cooperative banks, said the swift and decisive resolution of the Persian Gulf crisis bodes well for the future.

Rate Cut to Aid Investment

"Italian companies should benefit from the diminished economic uncertainty," Mr. Cattaneo said, "and will therefore be less reluctant to make new investments."

Mr. Cattaneo added that last month's 1% drop in the prime rate, to 11.5%, will also help promote investment.

"As for Banca Popolare di Milano," Mr. Cattaneo continued, "we plan to keep expanding our presence on the national territory, while introducing new products and improving the quality and quantity of the services we offer."

That's a formula that most other Italian banks are sure to follow, as well, as they count down the days to 1993.

Piero Barucci, chairman of the Italian Banking Association summed up the strategy this way.

"The construction of a single European market is today the central objective of Italian banks; the problems that derive from this must be resolved rapidly."

Just how rapidly those problems are resolved could shape the face of Italian banking for years to come.

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