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Italian banks' cut plans too modest despite strike call

Lisa Jucca
Thursday, 31 Oct 2013 | 10:55 AM ET

MILAN, Oct 31 (Reuters) - With Italy mired in its longest recession since the Second World War, the country's hard-pressed banks are cutting jobs, closing branches and infuriating unions, but the cuts are far too modest to achieve the profitability gains they need.

So far, lenders including Banca Monte dei Paschi di Siena , IntesaSanpaolo and UBI Banca have announced that they will close or merge nearly 3,000 branches and cull 19,000 jobs by 2015, prompting unions to call on Thursday the first national bank strike in 13 years.

But the cuts represent a retrenchment of less than 10 percent in the branch network and roughly 6 percent of staff numbers based on employment levels at the end of 2011, small change in a sector offering some of the weakest investor returns in European banking.

"To regain a satisfactory profitability, the Italian banking system should cut its branch network by at least 30 percent and rationalise costs, personnel and size at remaining offices," said Roberta Berlinghieri, a partner at Bain & Company in Italy.

Even with the current plans, Italy's operating costs are too much of a burden in a sector that barely offered any return on equity last year, analysts said, compared with a 7.97 percent return for the top 30 European banks in the first half of this year, according to figures compiled by Reuters.

With banks under pressure to shore up their balance sheets in the face of rising bad debts and Europe-wide stress tests next year, the country's central bank this week called for more action on costs.

"In order to regain profitability in the short-term, banks must decisively act on costs, including labour costs that currently represent more than half of overall costs," Bank of Italy governor Ignazio Visco said this week.

"The traditional retail network must be rethought, with a focus on the offering of more complex products."

FAILED MODEL?

Italian lenders, which largely avoided the risky bets that led to the subprime debt crisis of 2007-2008, blame the current domestic economic crisis for their woes.

But much of their current problems are rooted in their inability to adapt their retail-oriented banking model to the Internet revolution.

Even as the global financial crisis loomed large in 2008, Italian banks continued hiring and opening new branches.

Italy's banking sector was privatised in the 1990s but remained protected for more than a decade, allowing banks to charge high fees for their services. When the sector finally opened up to foreign competition in mid-2005, rivals such as Credit Agricole, BNP Paribas and Barclays battled to buy local branches.

The number of Italy-based bank branches doubled in the two decades that followed privatisation, according to data from think-tank Fondazione Rossetti.

By contrast, Germany cut the number of its bank branches by 6 percent over the same two decades. In Spain, the number of branches grew by a quarter and by 46 percent in France.

"The progressive drop in profitability of Italian banks is not the result of the current crisis. The problem has more distant roots," said Bocconi economist Donato Masciandaro. "The sharp fall in revenues was not accompanied by lower costs."

Indeed, the branch expansion has left the sector with an average cost-to-income ratio of around 70 percent, largely unchanged from the mid-1970s and above the average of nearly 60 percent generated by Europe's top 30 listed banks in the first half of this year, according to figures compiled by Reuters.

Analysts say the Italian ratio needs to get close to 50 percent to offer lasting returns.

Pushing through job cuts and branch closures will be difficult in a country where unemployment is 12.5 percent - the highest since records began in 1977 - and in an industry where compulsory redundancies are unheard of.

Of the 19,000 job cuts planned, 8,000 will be shed at loss-making Banca Monte dei Paschi, meaning a big blow to the city of Siena, where it is the largest employer.

"I am concerned," said 50-year-old Lucia Elsa Peveri, a bank clerk with Deutsche Bank in Italy. "(Banking lobby group) ABI told us that bank employees are on average too old, paid too much and not flexible. But we are just clerks, not executives."

Aware of the need of deeper cuts in the sector's workforce, ABI unilaterally annulled in September a collective work contract for bank employees, considered one of the most generous in Italy's already generous employment system.

The decision was firmly opposed by main union FABI, which has threatened more strikes unless ABI agrees to work with unions on exit packages.

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