Banca Marche and the importance of a local bank: now it's up to local entrepreneurs to move

Responding to the invitation of the president of the Marche Region, Spacca, I recently had the opportunity to illustrate some of my reflections on the case of the Banca Marche but as an economist who has been dealing with the banking system for many years and certainly not as a director of the same bank which I am. These are therefore the opinions and analyzes of an economist from the Marche Polytechnic University who wants to help clarify the case of Banca Marche in the context of the national banking context and with an eye to three aspects of the Marche institution:

1. The operating profitability (or rather the losses…)
2. The capitalisation
3. The perspectives

1. 1.    PER YIELD

The crisis and the raising of the stability criteria of the banks to prepare them for the introduction of the Basel III parameters strongly contributed to the reduction of profitability.

If we consider the 16 largest Italian banks, a group that includes Banca Marche (BM), some significant data stand out:

• At June 30, 2012 the half-yearly financial statements recorded 1,4 billion of total net profits
• As at 31 December 2012, the annual financial statements closed with 3 billion in overall net losses

In this context, in which 75% of the banks considered worsens their profitability, the situation of Banca Marche must be inserted, which surprised public opinion in a negative way:

• Closing half year 2012: profits of 43 million
• Year-end 2012: losses of 526 million

The trend is in line with the banking system, even if the amount of losses is certainly exorbitant. It is even more so because it is the first budget deficit recorded by BM. The negative results are due to heavy losses on non-performing loans, which led to write-downs of guarantees and higher provisions. Let's compare the data of the reference group with those of BM:

            Credit losses December 2011 June 2012 December 2012

• 16 major banks -14,8 billion -7,8 billion -23,8 billion
• Banca Marche -136 million -79 million -1,039 billion

 

This means that BM is in good company. The losses of the first half of 2012, doubled to bring them on an annual basis, are still in line with those of the previous year, just above. However, the actual closing result for 2012 is much worse. Worsening in which the BM stands out to an exorbitant extent: it exceeds the six-monthly projection by 6,5 times against 1,5 times that of the group considered (in which the BM value also affects).

This is what characterizes the situation of BM, as a result of several concomitant factors. In part, the Marches are among the regions that have been most affected by the crisis. In this context, the real estate sector in the Marche region was penalized by the greatest devaluations. To these external factors are added internal management factors of BM, well known to the renewed Board of Directors and highly "advertised" to public opinion. In summary:

• the need to review credit ratings and guarantees,
• the excessive concentration on real estate and, within it, on a few onerous projects, launched in periods prior to the crisis and with very different prospects
• the need to review the selection, redistribution and control process of the entire loan portfolio, resulting in the need for greater provisions,
• provisions also requested by the inspection team of the Bank of Italy.

The exorbitant credit losses should be interpreted as a profound restructuring action, which created the conditions for the safety and consistent and sustainable relaunch of BM.

The slogan that comes to mind is “Don't throw the baby out with the bathwater”.

This action of cleaning and sorting between what hasn't worked and what has worked must be seen in perspective with the trust and support of all the bank's stakeholders. Responsibilities for what did not work must be suitably examined, but knowing how to circumscribe them within the precise boundaries of what can be identified, possibly leaving this task to the competent bodies.

However, let it be clear that the BM has paid an exorbitant reputational damage, which must be remedied immediately with concrete recovery and revitalization actions that must be correctly and transparently communicated to public opinion. The history of crises teaches that, if they cannot be avoided, the damage is serious, but also that they offer the opportunity to correct past mistakes. Whoever succeeds can start again stronger than before. The crisis requires us to make a virtue of necessity to restart. This is true at all levels: Europe, Italy, governments, banks and the WB.

It is also necessary to remember that all the major Italian banks, including the BM, have been subjected to stress tests, requested by international bodies, in particular by the International Monetary Fund.

In the Bank of Italy report of 31 May 2013, Governor Visco acknowledges that:

• “The banking channel is the main source of financing for our economy. At the end of 2012, bank loans accounted for 94% of GDP”.
• Among the various factors that tightened credit must be included "the weakness of the real estate market"
• “There are no immediate liquidity risks for Italian banks”

These three considerations also apply to the specific case of BM: which operates in contexts of small businesses that live on bank credit, which has suffered the real estate crisis, which does not have immediate liquidity risks (thanks above all to the three-year loan obtained from the ECB ).

Visco adds that banks must reduce operating costs and decide to sell non-strategic assets. These solicitations are in line with the provisions of BM's new strategic plan.

 

1. 2.    ASSETS

To secure the banks in the face of the jolts of a crisis without equal in terms of gravity and duration, it is necessary to strengthen the capital base, also to adapt to the prudential criteria of Basel III (there would be much to discuss about these criteria, but this is not the place ).

How much has savers been asked to support the assets of Italian banks so far? Let's look at some data referring to the capital increases completed by 2012:

• Unicredit 9 billion
• Banca Intesa 5 billion
• Monte dei Paschi 2 billion
• Banco Popolare 2 billion
• UBI 1 billion
• Charges 1 billion
• Banca Marche 180 million

The contribution of new capital that BM asked its subscribers was very small in comparison and, with hindsight, more could have been asked for. If this was not done, it was also due to the non-dilution constraint of the property set by the reference foundations. Constraint that in the current situation of 2013 was no longer placed, due to inadequacy of resources. The need for a new capital contribution must be placed on two evaluation levels:

1. Over the two-year period 300-2012, the request for 2013 million brings the contribution of new capital to 480 million, still less than half of the amount requested is obtained from UBI and Carige, not to mention the other banks. The addition of another 100 million keeps the need for a capital injection for BM still below the figures requested and obtained from the other banks.
2. In 2013 many other banks, like BM, approved new capital increases: Etruria 100 million, Banca Popolare di Vicenza 600 million, Carige 800 million (in addition to the billion of the previous period), Popolare di Milano 500 million, MPS 1 billion . Without considering all convertible bond conversions.

This is the right placement of the problem of the new capital needs that the BM Board of Directors has expressed:

• we are not the only ones who need capital coverage,
• we share the problem with many other Italian and European banks
• everywhere the crisis has highlighted errors of assessment and consequent need for intervention.

It is necessary to convince public opinion of this, with transparency and a sense of responsibility. The common problem does not mean "half joy", but it certainly serves to reduce the tabloid alarmism towards BM that has been proffered to public opinion. 

Several banks requesting capital increases have in the meantime benefited from the use of internal rating systems, approved by the Bank of Italy, which allow for a reduction in capital needs.

BM has developed an internal rating model which, if approved by the Bank of Italy, will allow for the reduction of the capital constraint, with the benefit of greater credit spaces for customers.

The need for discussion to better focus on individual situations was also expressed by Governor Visco in the last annual report. I quote verbatim:

“The negative capitalization gap of our intermediaries compared to the European average, which has fallen to around 2 percentage points, largely reflects the massive bank recapitalizations carried out with public funds in other countries. Last December, state support for banks amounted to 1,8% of GDP in Germany, 4,3% in Belgium, 5,1% in the Netherlands, 5,5% in Spain, 40% in Ireland. In Italy the analogous share is equal to 0,3% including interventions for the MPS”

The governor also cites the European Banking Authority which recommends the intervention of extraordinary and temporary public capital resources!

Two considerations in this regard:

1. Here too, "temporary and extraordinary" public intervention would be necessary. I'll make a simple calculation: it would be enough to add 1% of GDP to rise to 1,3% (therefore less than Germany), contributing 17-18 billion to restore the assets of Italian banks in crisis and relaunch the economy with more loans . The State would recover the money invested within three years, even with a yield (the subordinated loan to MPS pays 9%, if I remember correctly). But it is an unpopular action, because a campaign against "speculating" banks has been fueled in a short-sighted way. When instead it is demonstrated that apart from cases of embezzlement (MPS docet) the Italian banks are certainly not responsible for the current crisis. Where banks have been held accountable (see USA and UK) governments have intervened heavily, even with temporary nationalisations!
2. In the absence of capital, we have to resort to German or French banks which, after having been rehabilitated with public funds, now have the resources to go shopping, teaching our "disaster" banks lessons in good management.

This confirms that those who know how to manage crises well and who know how to seize their opportunities, without prejudice, come out on top. USA, UK and, I add, Sweden, champion countries of liberalism, have been able to resort to temporary nationalization of their main banks in case of extreme necessity. They bail out the banks to save the economy in which they operate.

In Italy we are asking the banks to save themselves by tightening credit and asking for the support of private capital. Result: the economic crisis worsens, private savings dwindle, with consequent difficulties in supporting the banks, and our dependence on foreign banks (rehabilitated with public capital) increases.

 

1. 3.    PERSPECTIVES

Our banks, therefore also the BM, must count on the trust of savers and where it is not enough on the acquisition of "virtuous" foreign banks.

The relationship of trust expressed by the territory is obviously a priority. Visco attributes a crucial role to shareholders in financially supporting banks:

“they will be rewarded by profitability in the longer run.”

This is what the WB is asking of its territory.

Visco again:

"Banking foundations, like any other shareholder, must promote the selection of directors on the basis of competence and professionalism, with transparent criteria".

This is what has been done again since May 2012 with the renewal of BM's board of directors and top management.

This renewal was completed with the appointment of Professor Rainer Masera, an economist-banker of high national and international reputation, to the top of the bank. But now it's up to the territory and the ruling class of the Marches to do their part by contributing to the recapitalization necessary for the bank to relaunch it and to defend its autonomy.

In conclusion, I would just like to mention why the autonomy of BM is important. Few synthetic points:

• Like any bank, BM is a company, a large company that operates in the Marche and neighboring regions. A company with 3200 employees, mostly qualified (graduates and diplomas) and young. As a company, BM needs entrepreneurship. The contribution of entrepreneurs in this sense is fundamental: they ask for and offer an entrepreneurial contribution to support the restructuring action of the new top management.
• As businesses and entrepreneurs do, the bank and its managers must know how to choose, in particular they must know how to say yes, but also no, when granting credit: in the past, BM misinterpreted its role as a local bank saying too many yeses and few nos where it was necessary. But that's part of hindsight.
• An articulated and efficient network of local banks is essential for the Italian economy where small and medium enterprises predominate. This importance is recognized, for example, in Germany, where alongside the big banks there is a belt of many small and medium-sized banks, well protected by public capital when necessary. It is at least singular and counterproductive that precisely in Italy, where there is more need for it, this importance is overlooked.
• BM is a large local bank. As such it is a typical commercial bank, oriented towards a business model based on credit to businesses and households. Not surprisingly, its problems come from impaired credit. But they don't come from speculative financial investments.
• Having a competitive and efficient local bank, as BM can and should be, offers two great advantages, as we have demonstrated in numerous studies carried out with my research group (see our MoFiR website):
  • It attracts competition from other banks, especially outside the region, on local development problems: for example, anyone who wants to steal market shares in the footwear or furniture makers area must be able to compete with the contextual knowledge of BM operators and not just collect savings and invest it elsewhere
  • It is a large company that offers important functional synergies, because it maintains the management center in the area, helps to create a managerial class of banking operators who have to face strategic management problems, in short: it raises the quality of the work carried out in the region, unlike what happens for a network bank, whose decisions are taken elsewhere.
• An inefficient and unprofitable local bank, which does not deserve the trust of local operators, should be acquired by other national or international banks. Rescue takes priority over autonomy, if autonomy is mismanaged.
• In the perspective of an acquisition from the outside, one has to ask oneself what comes and what is lost. Of course, new strategies and new organizational methods are arriving. It is equally certain that it is lost in functional proximity, in the quality and quantity of jobs. In the list of stakeholders revolving around a bank, a priority role will be played by the interest of those who invest their own capital. Interest outside the region if the capital comes from outside. As indeed it is right. A "saving" bank will do so in its own interest and on the basis of its own strategic plan which may not entirely coincide with our needs

The hope is that the people of the Marches will be able to look ahead with confidence and commit themselves with full sense of responsibility to bring our economy and, consequently, also our BM, out of the crisis.

We must show the same ability to react and the same pride that led our fathers to get the economic development of the Marches off the ground: an endogenous development, rooted in the territory.

Development to which the banks that gave rise to Banca delle Marche have historically contributed.

We must look to the future and believe in it.

The alternative is to increase the peripheralization of our region and, more generally, of Italy.

To avoid this risk, we must continue to be the architects of our own development.

It is a further maturity exam that we are called to take and pass.