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Reference for banking consolidation bucks trends, targets further growth

Interview - August 2, 2016

BPM’s pioneering consolidation and moves such as its innovative merger with Webank, one of the best digital banks in Italy, has brought it to a unique standing in the market: it is the country’s only bank to be in an equally solid position as it was two years ago, whereas others have lost 30%-50% of their value in the same period, says CEO Giuseppe Castagna. Here he explains BPM’s strategy and tells investors of “a unique opportunity to invest in a growth story that is part of a system that will grow further through much more consolidation in the next 24-36 months.”



Brexit has taken its toll on the financial situation in Europe, at least in terms of those sudden short-term shocks. In this context, what is your perspective about Italy's financial system? Is it solid enough to overcome this market volatility?

Around the year 2000, Italy’s banking system began an important consolidation process that led to the creation of the two biggest banks in Italy that are Intesa Sanpaolo – where I worked for 33 years – and UniCredit. Unfortunately, the consolidation was not complete when the subprime crisis hit the financial system worldwide. In 2011 the government at that time, which was led by Prime Minister Monti, decided not to ask for help from the EU because banks were not in such a bad shape compared to other countries, and also because nobody could imagine that the crisis would last another five years.

So while, for instance, Spain was considerably helped by the EU and other states such as The Netherlands, the UK, and Germany injected public resources into their banks, Italy did not use any public resources or EU funds to recapitalize banks.

With the European Banking Union and the passage from the local to the European regulator at the end of 2014, some issues emerged. In particular, after the introduction of the bail-in, member states could no longer utilize public funds to rescue troubled banks.

As for BPM, we made a complete turnaround between 2013 and 2015, which helped us in coming out very solidly and profitable already in 2014. Meanwhile, other banks started to understand the problem that they had.

I hope the European agenda will also shift and facilitate the Italian agenda. EU institutions need to think of measures to foster growth and not only to respect constraints that especially in a period of fragile recovery can deteriorate the economic outlook.

I think Brexit is a first important test to see how EU institutions will react in this sense.


Many experts point out that the Italian economy is too bank-centric. How would you describe the contribution of the banking sector towards the socio-economic development of the country?

Well, if you consider the amount of NPLs, which stands at €380 billion gross, that can be an indicator of how much the banking system has contributed towards economic activities. Unfortunately, sometimes there has been a mismanagement of the resources, but certainly the bank-centric situation has been paid, first of all, by the banks.

The high number of banks meant that entrepreneurs could find, either in a small local bank or in a larger institution, somebody accessible to provide access to credit. I tried to start a private debt fund myself while I was in-between the two banks, basically when there was a credit crunch. I realized there is a cultural aspect playing a role in our financial system. Italian entrepreneurs are very cautious about taking money from private debt. In contrast, they have a different relationship with banks and they trust them more thinking that banks can always help in a way.

The European capital market union should make some steps ahead in order to allow also small companies to go through the market, but this is of course a long-term objective that will require a long time to be achieved.


The reform of the popolare banks concerns you closely. What is the future prospect with the fusion with Banco Popolare?

We have the perception going abroad that the reform agenda is very much appreciated by foreign investors. The popolare banking reform as well as the fiscal one together with the jobs act are very important because they introduced incentives to invest in innovation and young people. This is the way forward and internationally it is being well perceived.

The Italian banking system has to consolidate. Despite the fact that BPM was one of the smaller amongst the popolare banks, we were performing better so we could afford to have a merger with a bigger bank. We wanted to take advantage of the economic performance we were recording in order to have a merger to increase our size. Size is very important because you have to grow the number of your clients if you want to invest in digitalization, have a different banking proposition, and better exploit the potentiality of your product factory.

It doesn’t matter if you have 500,000 clients, 1 million clients, or 4 million clients – as it will be in our case – you have to make the same amount of investments. We have tens of banks making the same investments and offering a very basic product to their clients. If you grow, you are able to cut the necessary cost over your investment and try to make a different proposition. This is our view. We think our bank should focus more on healthcare, pension funds, and social security.

In Italy, we've always been used to having everything from the state, for instance public healthcare and pension schemes. Nowadays, the welfare state is undergoing a dramatic change. Young people, but also 40 year-old professionals, will not have the same retirement scheme that their parents enjoyed. The same is true for healthcare and the possibility to maintain the level of wealth. This transformation opens up opportunities for the banking system. We have to try to allow people to maintain their wellbeing.

People look at banks because either they give you all their savings or they ask you to develop with them their dreams, their willingness to build a family, or to own a house. In this relationship, we have to build some other ideas to allow our customers to think to the future with more serenity.


How do you think the digitalization will change the banking system?

Banks will have to digitalize their offer to their clients as much as possible. All banks in the past pursued growth in the territory by building new branches, which had an enormous cost. They only thought that the direct relationship with their client was the most important thing.

We have given a lot of space to our clever human capital that we believe can boost further our vision towards digitalization. We believe in innovation and delivering the best products for our clients. The best product doesn’t mean to have a branch every 500 meters. You have only to give them the opportunity to do banking wherever they are, for instance. Two years ago we concluded a very innovative merger with our direct banking system, called Webank – one of the best digital banks in Italy.

We decided to put it into the bank because we wanted to embed the model of Webank into BPM. We wanted to have the same intelligence, the same approach that we had for 100,000 clients for our million clients. With the new group, we will extend it to all our 4 million clients.


Considering the vision of the new group that is to become the leader in the north of Italy and also tap into the opportunities of the other richest regions of Europe, why should institutional investors and customers pick you as their financial partner?

Our project is very simple. We aim to repeat the same transformational turnaround we had in BPM. In BPM we are worth exactly as much as we were two years ago. In two years, we ended up making three times the market cap that we had before this situation of high volatility, which is eating the entire banking system. We checked a couple of days ago and we found out that we are the only Italian bank today that is worth as much as two years ago. Other banks have lost 30%, 40%, 50% of their value in the last two years.

We want to repeat the same consolidation but on a different scale. With great investment in digital products we will not only be the bank of reference for traditional customers, but we will also target entrepreneurs with innovative products. We are going to rebuild trust in the banking system by providing a new proposition and demonstrate to stand for the new growth story for the Italian banking system in the best regions of Italy with an outstanding rate of customer retention.

Speaking to the investor community, I can say that the price of our shares now is really a unique opportunity to invest in a growth story that is part of a system that will grow further through much more consolidation in the next 24-36 months.

We are taking advantage of our pioneering restructuring that led us to be the first bank that could choose the partner. Don't forget, we had opportunities to go also with other banks. We made the decision towards Banco Popolare because that is the best industrial opportunity for the future growth of the bank. I believe we will be the point of reference for other banks that will have to undergo a consolidation process.


What do you think are the key points of strength of the Italian system for American investors?

I think it is crucial for Americans to consider the European context as whole. First of all, I think that the role of Italy now is much more important than before. We have always enjoyed a privileged relationship with the US and I think that Brexit can actually make it even stronger. Moreover, from a European standpoint, it is worth considering what country can be the bridge for the US to the rest of the continent. I think Italy can play this role, so both directly for investment in Italy but also as a springboard for the entire region.

Let’s bear in mind that we are the third economy in Europe, the second manufacturing powerhouse, and the second top exporter. These aspects are crucial for investors with a global market perspective in mind.