The banking sector is undergoing a rapid evolution in its business models to counter the decreased profitability of the core business, which is under pressure following the economic and financial crisis, the changes in demand for products, the increase in competitive offerings and technological development.
by Giuseppe Castagna, CEO Banco BPM
The importance of adjusting to this context is further underlined by the decision of the Supervisory Authorities to include the analysis of the business model in the Supervisory Review and Evaluation Process (SREP), aimed at establishing the ability of banks to make sustainable profits in the medium term.
The forecast for Italian GDP growth in 2019 is 0.5%, compared to an average figure in the EMU of 1.2%.
In addition, the structure of banking costs is decidedly high, and the strengthening of prudential legislation, together with compliance requirements, have increased the regulatory expenses booked to the income statements of banks. In the meantime, it is necessary to invest significant resources in order to cope with the impacts of the digital revolution that is in progress.
The average cost-income figure of the Italian banking system in 2017 came out at 71%, compared to 59% in 2007.
With Fintech and Tech Giants entering the market, this revolution has forced financial operators to rethink their business models. On the one hand, new technologies offer organizational, relational and economic opportunities, while on the other hand, they can quickly change the balance of the complex financial system.
In this context, it is clear that banks have to tackle a series of challenges and critical issues, requiring resources, investments and skills that only large structured and organized groups can afford.
For this reason, our bank chose to take the road of consolidation.
This choice has proved to be farsighted, considering that in Italy, at the start of 2018, one year after the establishment of Banco BPM, there were 113 banks which were part of 60 banking groups, 347 banks which did not belong to a group and 78 branches of foreign banks. Out of over 27,300 branches, 43% belong to the five largest groups (UniCredit, Intesa Sanpaolo, Banco BPM, Banca Monte dei Paschi di Siena and UBI Banca) and are concentrated in the Northern regions, which represent 57% of the national total.
Banco BPM, which was founded in January 2017, represents the only merger project to be implemented in Italy since the transition to Supervision by the European Central Bank, an operation that has made it possible to give greater certainty and security to customers, employees and all stakeholders.
Our larger size has allowed us to acquire greater capital strength, enabling us to make major investments (including in technology), to reach an optimal cost level and, most importantly, to build an effective structure to respond more quickly to customers’ needs. We have increased in size, yet we still continue to be a bank that knows how to respond to the requests of families and businesses. This is because Banco BPM lives in, understands, remains present in and is an integral part of the community.
We have worked on our offer model, carrying out a major restructuring of our bancassurance, asset management, private and investment banking and consumer lending segments, as well as working on organizing our commercial network, strengthening the monitoring and coordination of local areas, thus guaranteeing effective action and efficiency in operations and decision making.
Conscious that the growth of the productive fabric is very significant in Italy, we have paid particular attention to serving businesses, for which industry specialists have been placed alongside finance specialists to support financial growth and development projects. We have also strengthened the Group in the corporate context, with professionals and new structures. With Banca Akros, our investment bank, we aim to become the representative for Italian mid-caps, assisting their growth abroad, on the capital market, and supporting them in merger and acquisition transactions. Through Banca Aletti, we are among the leaders in private banking and wealth management, and we provide our customers with highly specialized and personalized advice, with an approach that focuses on the construction of portfolios rather than the product.
Another fundamental theme for the banking sector is impaired loans, which represent an obstacle to business productivity. Our strategy has been to continuously improve asset quality. Impaired loans have decreased by around €18 billion since the foundation of Banco BPM, thanks to disposal and recovery operations, including the latest major operation which was signed in December 2018.
As regards Digital Transformation, we have created the right mix between branch offers and digital offers. We want to operate with an integrated multichannel distribution model in a world that is seeing the affirmation of new business models which are characterized by specialized offers and the search for excellence. We are working on an effective business model, supported by an advanced digital platform, which will enable us to overcome the limits of the traditional models. We are doing this with the help of all of our colleagues, through an internal process of diffusing digital culture, with the objective of accompanying customers in the process of digital transformation.
In addition to Banco BPM, the Italian banking sector is also implementing actions to face the changes described above in order to recover profitability. The year that has just ended showed some signs of growth. In fact, in November 2018 the stock of loans to customers provided by Italian banks amounted to €1,727 billion (+1.25% y/y), while the total amount of deposits (resident customer deposits and bonds) amounted to €1,702 billion.
Loans to households and businesses grew by +1.5% on an annual basis. The growth of household loans is driven by the liveliness of the mortgage market: in fact, the relative stock increases, by +2.3% on an annual basis.
At the end of June 2018, the best-quality capital (common equity tier 1, CET1) of the major banks that are supervised by the ECB represented 12.7% of the risk-weighted assets. On a yearly basis, the ratio between CET1 and risk-weighted assets (CET1 ratio) increased by one basis point. The ratio of net non-performing loans to total loans stood at 2.26% in October 2018.
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