Italian Banks

[Guest hellsten]

Italian banks look cheap, so I'm creating a new thread where I hope we can find the cheapest ones :)

 

The Italian Banking Industry: Key Figures, Trends, State Of Health:

http://www.ubibanca.it/contenuti/RigAlle/ID_UBI_130613_IBF_Mr_GAGGI.pdf

 

Italy is Europe’s second-largest manufacturing and industrial country, after Germany

 

Economic growth, even if poor, is not “bubble driven”, as it has

been in other European countries (such as Spain and Ireland) …

 

A country characterized by a very high level of financial wealth

 

A country of prudent savers

 

Italian private debt on GDP ratio is among the lowest in Europe

 

Italy is among the eleven Member States which had deficits lower than 3% of

GDP, in line with the European request

 

Loans’ slowdown was mainly due to the reduced ability of the Italian banks to

access the international capital market and to a contraction in the quality and

amount of the demand

 

Typical loan to value (LTV) ratio for a first time house buyer

 

Strong correlation between Italian bank performance and

domestic economic growth

 

How to restore profitability:

1) through various strategies including the

reorganisation of distribution models

 

2) by leveraging on revenues upside potential (in Italy there is plenty of room for growth in a number of markets

 

3) by supporting a radical transformation of Italian non financial firms to increase their competitiveness

 

 

The gap in capitalisation with Italian banks' EU peers has been closed.

Remaining differences are at least partially due to a lack of harmonisation

between countries in the methods for calculating RWAs for IRB banks

[indythinker85]

I couldnt evaluate these banks (or US ones) but iv been looking and invested in Europe (mostly Greece for two years already) anyone have list of some Italian banks with stronger balance sheets at cheap valuations? Id consider some as a basket. Thanks!

[peter buffet]

I would say Banca Intesa.

[phil_Buffett]

@ Peter buffett

 

did you mean intesa sanpaolo?

[ourkid8]

Gio, care to provide your feedback on Italian banks?  We would appreciate it...

 

Tks,

S

[giofranchi]

Gio, care to provide your feedback on Italian banks?  We would appreciate it...

 

Tks,

S

 

Sorry, never looked at any Italian bank… I invest the same way I do business:

1) I must have deep respect for the people I partner with and for the skills they have proven to possess,

2) I must like the business and understand why it should be predictable,

3) I must be offered a very good price.

Italian banks right now might comply with 3), but they are as far from 1) and 2) as any investment idea could be. (As an aside, how anyone could be sure about 3), without 1) and 2), is still beyond me…). Therefore, I never bothered to look at them… This doesn’t mean there is no money to be made… There might very well be! It simply means unfortunately I can be of no help… :(

 

Christopher1 on the other hand knows banks very well, and maybe he could offer us his own perspective on the industry in Italy! ;)

 

giofranchi

 

[Christopher1]

I don't have any clue from a valuation perspective, I prefer to study and invest in US banks, but I can provide some context based on the experience accumulated working in the Italian Banking practice of a Consulting firm:

- In Italy we are living the third recession in the last decade, the economic outcome is worst than the WW2 period. So revenues are extremely difficult to grow both NIM (due to loan volume contraction) and Fee; adding a growing cost of risk and acceptable levels of profitability are still very difficult to achieve;

- Starting from 2008/2009 banks have invested predominantly in projects with a focus on cost and RWA reduction. Unions are very strong in the Italian banking sector and changes are very slow and diffcult to implement. BNL the Italian subsidary of BNPP seems to be the best one from an efficiency point of view (C/I in the low 50s);

- It's prudent to avoid the "regional" banks (Banche Popolari), too many uncertainties and management heavily involved with politics. For such banks shareloders come last, behind unions and management personal interest. The lastest example of value destroyed by incompetent management is Banca Carige, but you can add to the list: Banca Popolare di Lodi, Banca Popolare di Milano and some other smaller banks.

- What happened to Monte dei Paschi is really sad, the old management was exetrmely incompetent because selected by politics for local interest. From first hand experience I can say that new management is a better one, I had some interactions with the current chairman and the COO was my former boss I know him pretty well. Anyway they have been left with a very bad hand.

- UCG and ISP seems to be the best managed public banks, but they too are involved in support to dubious local capitalism iniatives for interest different than shareholders value creation (i.e. Alitalia, Fondiaria and Ligresti familiy, Zalesky, etc.).   

Hope it can helps.

[giofranchi]

I don't have any clue from a valuation perspective, I prefer to study and invest in US banks, but I can provide some context based on the experience accumulated working in the Italian Banking practice of a Consulting firm:

- In Italy we are living the third recession in the last decade, the economic outcome is worst than the WW2 period. So revenues are extremely difficult to grow both NIM (due to loan volume contraction) and Fee; adding a growing cost of risk and acceptable levels of profitability are still very difficult to achieve;

- Starting from 2008/2009 banks have invested predominantly in projects with a focus on cost and RWA reduction. Unions are very strong in the Italian banking sector and changes are very slow and diffcult to implement. BNL the Italian subsidary of BNPP seems to be the best one from an efficiency point of view (C/I in the low 50s);

- It's prudent to avoid the "regional" banks (Banche Popolari), too many uncertainties and management heavily involved with politics. For such banks shareloders come last, behind unions and management personal interest. The lastest example of value destroyed by incompetent management is Banca Carige, but you can add to the list: Banca Popolare di Lodi, Banca Popolare di Milano and some other smaller banks.

- What happened to Monte dei Paschi is really sad, the old management was exetrmely incompetent because selected by politics for local interest. From first hand experience I can say that new management is a better one, I had some interactions with the current chairman and the COO was my former boss I know him pretty well. Anyway they have been left with a very bad hand.

- UCG and ISP seems to be the best managed public banks, but they too are involved in support to dubious local capitalism iniatives for interest different than shareholders value creation (i.e. Alitalia, Fondiaria and Ligresti familiy, Zalesky, etc.).   

Hope it can helps.

 

I can see foreign capital pouring in!!

 

Ahahahahahahahahahahah!!!!!!

 

giofranchi

[LongTerm]

Ha! OK I'll weigh in on this too, and my comments, I'm afraid, will be a bit more caustic.

 

First, I'd say that Italy has a very weak regulatory apparatus. This is doubly so in the financial sector. Banks are often controlled by opaque foundations whose primary goals are not necessarily monetary returns, i.e. shareholders that care more about control than shareholder returns. (I'm seconding and bolding Christopher1's statement about where shareholders fall in the pecking order of importance... dead last, or even below). In addition the Italian version of the US Securities and Exchange Commission is basically non-existent, or even worse; sometimes it appears they are in collusion with fraudsters.

 

Secondly, despite the fact Italy is in its third recession since the 2008/9 financial crisis basically nothing has been done in the political arena to address this; youth unemployment at 40%, etc. It might look like a political deadlock... except that its not! It's more like incompetence or even worse, collusion. Over the past half century the political class has awarded itself increasing power and wealth, financed by an ever-growing public debt. Now, faced with an overtaxed, inefficient economy the politicians are having a hard time accepting that the current system of privileges might have to be changed. And when I talk about politicians I'm talking about the majority of politicians, those in the two major parties, generally known here as the center-right and the center-left (guess everybody wants to claim the center but needs to differentiate themselves somehow); they all seem to want to maintain the status quo at almost any cost. Right now it appears to my untrained eye that the economic platforms of both the major parties are based on a hope and a prayer that the world economy will turn around and somehow come to the rescue of Italy's decimated manufacturing sector. In other words.. "can't we get the export sector to pull us out of this mess?" Unfortunately the answer is no because Italy no longer wields the sovereign power of devaluation with its adhesion to the euro. A year and a half ago we had one of those "let them eat cake' moments that so characterize this when Berlusconi announced that we must not be in a recession because all the restaurants were full, or something of that sort.

 

Third, (as if the first two points aren't enough to dissuade you) there is an Italian penchant for stretching facts. Remember the Greeks and their padding of accounts? I would say the Italians are a bit more mature, but, still, Italy is a Mediterranean country. After all, where did Mr. Ponzi come from?

 

Fourth, though this may enthuse you, the Italian banking system remains relatively closed to outside competition. No, not like it once was, but I can assure you that the cost of maintaining a bank account in Italy is far more than it is in the US. on that note, it should also be remembered that Mr. Fazio, the former Governor of the Bank of Italy, was not too long ago found guilty of fraud relating to the takeover of an Italian bank; the Bank of Italy piloted the takeover so that an Italian bank was the acquirer rather than a Dutch bank which had made the original bid. And if you think this kind of nationalistic stuff doesn't happen anymore... think again, just think Alitalia (another show of incompetence by both politicians and businessmen).

 

So what am I saying? Caveat emptor. You are forewarned.

[Guest hellsten]

I don't have any clue from a valuation perspective, I prefer to study and invest in US banks, but I can provide some context based on the experience accumulated working in the Italian Banking practice of a Consulting firm:

- In Italy we are living the third recession in the last decade, the economic outcome is worst than the WW2 period. So revenues are extremely difficult to grow both NIM (due to loan volume contraction) and Fee; adding a growing cost of risk and acceptable levels of profitability are still very difficult to achieve;

- Starting from 2008/2009 banks have invested predominantly in projects with a focus on cost and RWA reduction. Unions are very strong in the Italian banking sector and changes are very slow and diffcult to implement. BNL the Italian subsidary of BNPP seems to be the best one from an efficiency point of view (C/I in the low 50s);

- It's prudent to avoid the "regional" banks (Banche Popolari), too many uncertainties and management heavily involved with politics. For such banks shareloders come last, behind unions and management personal interest. The lastest example of value destroyed by incompetent management is Banca Carige, but you can add to the list: Banca Popolare di Lodi, Banca Popolare di Milano and some other smaller banks.

- What happened to Monte dei Paschi is really sad, the old management was exetrmely incompetent because selected by politics for local interest. From first hand experience I can say that new management is a better one, I had some interactions with the current chairman and the COO was my former boss I know him pretty well. Anyway they have been left with a very bad hand.

- UCG and ISP seems to be the best managed public banks, but they too are involved in support to dubious local capitalism iniatives for interest different than shareholders value creation (i.e. Alitalia, Fondiaria and Ligresti familiy, Zalesky, etc.).   

Hope it can helps.

 

Thank you Christopher1 and LongTerm. Italy sounds a lot like Japan where the shareholder comes last (AFAIK).

 

Monte dei Paschi might have competent management, but I wonder what will be left for shareholders after their restructuring:

http://english.mps.it/NR/rdonlyres/122CF347-7189-4093-932E-5EA73C73042C/69627/BMPSrestructuringplan1.pdf

 

Pro forma net income 2017 target of ~1,200€ million sounds great, but what happens before 2017:

- Capital increase execution in 2014.

- NFI reimbursement.

- Reduction of Italian govies portfolio (approx -EUR 6bn).

- LTRO reimbursement.

 

UCG and ISP are probably worth investigating further. David Herro likes ISP and has owned the company for years.

 

I was thinking about investigating the regional banks, but it sounds like it would be a worthless exercise.