Tomorrow's ABI meeting - with the intervention of President Giuseppe Mussari but also of the Governor of the Bank of Italy and the Treasury - will certainly be an opportunity to take stock and indicate solutions for one of the most difficult banks Italian. But on the real state of health of our banks there is a document that already sheds light and it is Table a17.11 of the Annual Report of the Bank of Italy on the "Income statements of Italian banks: formation of profit" which offers a representation of the results, compared to the value of intermediated funds, of the last closed financial year of the entire banking system according to the income statement format which every intermediary is obliged to comply with the publication of the annual budget. The Bank of Italy Table shows other significant data, again at system level, such as total volumes traded, number of employees, roe, banking product per employee, average unit cost of labour, making a comparison over time with the two financial years preceding the one in question.
Although synthetic, it is, therefore, extremely effective for displaying the performance of the main technical profiles of Italian banks, to which, in the opinion of the writer, experts and commentators of the Italian central bank's annual report do not devote sufficient attention. This year it is indeed difficult to escape a more careful analysis, also due to the references, more critical than in the past, to the situation of Italian banks made by the new Governor in the Final Considerations with particular regard to their conditions of efficiency.
Indeed, they read of the need that can no longer be postponed for the system to "significantly increase the efficiency of production and distribution processes, enhancing the contribution of new technologies".
Returning to the Table of the Bank of Italy we have the opportunity to focus even more on the elements of criticalities mentioned by the Governor in terms of profitability and factor productivity employed in banking production.
To an extremely low result for some years now of the interest margin (1,1% of intermediated funds) and to a stable contribution of around one percent of revenues from services and trading (so that the intermediation margin is stationary at 2,1%), contrasted by a high and growing structure of operating costs (1,35% in 2010, 1,43% in 2011); which determines the decrease in the operating result, which is reduced to a modest 0,69%. Negative adjustments for non-performing loans and other write-downs, equal to 1,02%, ie 2,5 times those of the previous year, were then discharged onto it.
Of this portion, the adjustments to loans, although slightly increased (0,40%), are equal to the write-downs that can no longer be postponed of the goodwill resulting from the business combinations carried out in recent years. The pre-tax result is negative by 0,73%, which brings the roe of the system to a negative value equal to 6,6% of intermediated funds.
Even if the extraordinary charge of the impairment of goodwill is the factor responsible for the 2011 losses, the weaknesses in the income generation process are evident and destined to continue also in the current year. In particular, the cost of labor per unit of product is growing, as a combined effect of the increase in nominal wages (+1,9%) and the decrease in labor productivity (-3%). In 2011, the first value went from 75,6 thousand euros to 76,5 thousand euros per capita, the second from 10,9 million to 10,6 million, again per employee. The total number of employees decreased by only 1,9% compared to the previous year, settling at 316.000 units.
These elements are now structural factors of system rigidity, whose production processes, in addition to being highly labor intensive, are based on an extremely expensive distribution network, if we consider the approximately 33.000 bank branches (55 per 100.000 inhabitants, against 36 of the European average and the 20 most developed countries) and external distribution networks (financial advisors, credit brokers, financial agents).
Lastly, the cost of risk appears underestimated, if one takes into account both the dynamics and the coverage ratio of non-performing loans. Gross non-performing loans, exceeding 124 billion, amount to 7,1% of total loans. If other doubtful loans are added to non-performing loans, we arrive at 220 billion in non-performing loans, equal to 13% of loans. The coverage rate of these same credits is among the lowest among the European banking systems being equal to 41% of the total, so that alignment with the European average would cost, according to some estimates, approximately 23 billion, already marking the result 2012, which would still be negative.
Lending activity drops significantly given that lending in monetary terms showed a zero increase last March compared to the previous twelve months. The only relief to profitability is expected from the spread that was artificially generated by the LTRO operations put in place by the ECB. In short, the condition of the system does not lead to favorable evaluations.
The reversal that we all hope for (but the recovery forecasts have been postponed to the end of 2013) cannot be sufficient to resolve the critical issues highlighted, above all by avoiding considering them as contingent rather than as structural deficits of the national banking industry. On the other hand, the capital strengthening that has recently become undeferrable for all the large banks has also required operations of an extraordinary nature that cannot be repeated. The medium-term sustainability of the capital increase can only be entrusted to the growth of the business and the improvement of efficiency conditions. This second aspect has to do with a real industrial reconversion of the system to achieve a different mix between capital and labour, a decisive impulse towards automation, a drastic downsizing of the distribution network, a rapid transition to effective management tools of the enterprise. The work processes of the Italian banking company will finally have to become less physical and more virtual. Relations with customers will have to take place above all remotely, integrating the benefits of digital platforms and multimedia channels with the legal certainties of digital signatures, certified e-mail, certified methods of electronic storage, IT security. Companies will be encouraged to switch immediately to the SEPA standard in carrying out mass payments (wire transfers and direct debits), using broadband data transmission infrastructures for the real-time processing of the instructions given. Credit granting phases, such as the disbursement of operations, will be automated through the use of tools such as cards and payment accounts.
For a good part of the system, resorting to the provision of services using outsourcing methods can represent a response to the need to improve the operating machine provided that these organizations are truly efficient and willing to invest in technical improvements, according to clear and sustainable plans , expanding and integrating its offer.
To date, the response to these unavoidable industrial reconversion needs of Italian banks is of such magnitude that the system does not seem capable of generating them on its own. The question is who should promote it. When in other historical periods this dilemma has been reached, the support interventions in favor of the major intermediaries have always been exogenous to the system and of a public nature. Is it really out of place to think that this is the only possible solution, when the new President of the third largest Italian bank has stated that it is de facto already under the aegis of the State?
Attachments: Bank of Italy Table.pdf
