Italian Banks: Basta Already

Drastic reforms are needed to head off European rivals

The Medicis of 15th century Florence founded Europe's first international financial empire, but today's Italy presents a sorry picture when it comes to banking. Banco Ambrosiano, once the country's largest bank, collapsed in the early 1980s in the wake of a huge money-laundering scandal. In the early 1990s, state-owned Banca Nazionale del Lavoro (BNL) had to swallow $1.3 billion in losses related to shady loans made to Saddam Hussein's Iraq. And just last January, Banco di Napoli, Southern Italy's largest lender, was rescued at the last minute in a $1.4 billion government bailout.

Basta, says Bank of Italy Governor Antonio Fazio. In an urgent, eight-page appeal addressed to the center-left government of Romano Prodi in late February, Fazio darkly warns that Italy's 970 banks are in no condition to go head to head with their European competitors. He wants them to shape up by drastically slashing staffs, reducing costs, and introducing new technology. At minimum, says Fazio, more than 30,000 jobs will have to be cut, around 10% of the industry workforce. But privately, top Italian bankers say more like 60,000 jobs will have to go.

TAKEOVERS. Although the central bank probably bears some responsibility for not having exercised firmer supervision in the first place, Fazio's call to arms is better late than never. German and French banks are already hungrily eyeing Italy's 13.4% savings rate as well as profit margins on lending that are often twice as high as those in Germany and Britain. Deutsche Bank, for example, has a growing network of branches in the rich northern part of Italy, where it plunked down $480 million in late 1993 to acquire Banca Popolare di Lecco. And Spain's Banco Santander along with the Franco-Belgian financial group Dexia are looking to deepen their strategic ties with Istituto Bancario San Paolo di Torino. San Paolo announced on Feb. 24 that the foundation controlling the Italian lender planned to sell a 25% stake to the public, making the bank a possible takeover candidate.

Big European banks have set their sights on Italy for more than its current business. If Europe launches its single currency as planned in 1999, weaker Italian lenders could be at a grave disadvantage. "German banks are going to start offering their Euro products here in Italy," worries Mario Sarcinelli, the chairman of BNL. "We can't meet that competition without a major shakeout of our workforce and our costs."

Sarcinelli is not crying wolf. Dominated by the government since the 1930s and long protected from almost any international competition, Italian banks became fat, lazy, and, in some cases, susceptible to pressure from politicians and even organized crime. As a result, they have been left with the highest cost structure and lowest profitability in Europe.

Average annual employee costs at Banco di Napoli, for example, had topped $80,000. Just before its January bailout, fully 20% of Napoli's workforce were executives. Throw in the fierce recession that has convulsed Southern Italy since 1992, and Napoli's $4 billion in accumulated losses since 1994 becomes understandable. Moody's Investors Service Inc. estimates that all told, overhead eats up nearly 74% of major Italian banks' revenues, against 64% in Britain and 61% in the U.S. So it's no wonder that Italian banks recorded a return on equity of only 5.5% in the first half of 1996. Lenders in Britain earned close to 22%, while American banks returned 15% in the period.

NEW BLOOD. But even without Fazio demanding reforms, there are signs of change. New, younger managers are starting to replace the old guard, especially among the northern banks. Milan's Banco Ambrosiano Veneto, for one, recently signed on 43-year-old former Olivetti CEO Corrado Passera, who plans to link up the bank with another strong player in Italy's north.

These new managers are helping to speed consolidation among banks, which will inevitably lead to greater efficiencies. The takeover of Banco di Napoli by BNL and insurance giant INA will result in the shutting of the bank's sprawling Naples headquarters and the cutting of 1,200 jobs by next year. Mergers involving other big financial institutions, including San Paolo, Banca Commerciale Italiana, and Ambroveneto should further reduce the fragmentation of the Italian banking market. By the end of the decade, Italy may be left with only three or four banking groups.

One danger: A trade union backlash over job cuts could force the Prodi government and the banks to go slow on downsizing and privatization. But Giuliano Amato, the former Prime Minister and Treasury Minister who engineered the first moves to deregulate banking in 1990, argues that Prodi needs to move quickly. "It has to start immediately," he says. Otherwise, the banks calling the shots in 21st century Florence will be Deutsche Bank, Commerzbank, and a host of other foreign names.

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