Italian banks face long, uphill road to modernisation
Bailed-out Monte dei Paschi, the world’s oldest bank and a bastion of tradition dating back to 1472, has entered the realms of virtual reality. It’s an unlikely sign of the times. After surviving the worst of a bad loans crisis, Italian banks face another daunting mission: modernising centuries-old businesses and finding new ways to make money.
They are looking to catch up with European rivals in digital banking, and are reducing their dependence on lending by selling insurance and other financial products.
How this overhaul plays out could shape the sector for years to come, with those who adapt most swiftly sweeping up a larger slice of new business, say bankers and industry experts.
Monte dei Paschi’s online arm last week launched virtual reality (VR) branches, accessed via phone app and VR headset, and said 3,500 customers had signed up in the first few hours.
But other banks are moving far more aggressively in revamping their businesses.
Italy’s biggest bank, UniCredit, set a template for lenders in need of restructuring by raising 13 billion euros from shareholders this year.
As well as investing 1.6 billion euros in its IT systems, it is re-training 1,500 Italian staff and moving them from administrative jobs to client-facing roles.
Mediobanca has meanwhile acquired a “robo-advisory” service, an algorithm that proposes investments to customers of its digital arm who can access it directly.
It is also hiring 100 financial consultants a year to reach more than 300 by 2019 to boost assets under management.
But modernisation will not be easy for an industry that has focused on lending to Italy’s myriad small businesses for centuries.
Banks must contend with employees who are resistant to changing roles, rigid labour laws, and a lack of funds to invest in technology.
Varying rates of progress among Italy’s 600 lenders are likely to further widen the gap between large players and their smaller peers, which are still grappling with the loans crisis and lack the scale for the necessary investments.
Banca Carige, for example, is raising capital to avoid collapse. Executives say mergers are inevitable in coming years.
“Innovation and digitalisation have become a priority for all large lenders which are dedicating people and money to them. The problem is the industry is very fragmented and small banks find it hard to embrace the challenge,” said Roberto Ferrari, Mediobanca’s Chief Digital and Innovation Officer.
Heavyweight Intesa Sanpaolo, which has led the shift towards fee-earning businesses and has 230 of its 4,800 branches dedicated solely to advisory services, is launching a pilot project which will see some staff having two contracts.
They will work part-time as a bank employee with set salary, and for the rest of the time as a consultant with pay based on the number of products they sell.
Changes are necessary for an industry which has shrinking revenues and is not repaying its cost of capital — meaning companies could struggle to raise cash from investors if they run into trouble.
Italian banks’ return on equity — a key measure of profitability — was 2.3 per cent in the first half of 2017 excluding one-off transactions, less than half the European average and a fraction of their 12.8 per cent cost of equity, according to calculations by consultancy Oliver Wyman.
There is a long road ahead for lenders in Italy, where only about 30 per cent of bank customers use online services, against 45 per cent in Spain and more than 80 per cent in Nordic countries.
At the end of last year, Italy had a bank branch for every 2,000 residents, against an EU average of one every 3,800.
Italian banks were freed from the threat of a systemic collapse after Rome committed billions of euros of public money to buttress the industry by rescuing Monte dei Paschi and two smaller banks over the summer.
But thousands of jobs are yet to be axed in a sector that has already shed 40,000 since 2008.
Banks will need to cut 25-30 per cent of their 29,000 branches over the next five years, consultancy Accenture estimates, following a 15 per cent reduction in 200816.