Italian banks' cut plans too modest despite strike call

Reuters

By Lisa Jucca

MILAN, Oct 31 (Reuters) - With Italy mired in its longestrecession since the Second World War, the country's hard-pressedbanks are cutting jobs, closing branches and infuriating unions,but the cuts are far too modest to achieve the profitabilitygains they need.

So far, lenders including Banca Monte dei Paschi di Siena, IntesaSanpaolo and UBI Banca haveannounced that they will close or merge nearly 3,000 branchesand cull 19,000 jobs by 2015, prompting unions to call onThursday the first national bank strike in 13years.

But the cuts represent a retrenchment of less than 10percent in the branch network and roughly 6 percent of staffnumbers based on employment levels at the end of 2011, smallchange in a sector offering some of the weakest investor returnsin European banking.

"To regain a satisfactory profitability, the Italian bankingsystem should cut its branch network by at least 30 percent andrationalise costs, personnel and size at remaining offices,"said Roberta Berlinghieri, a partner at Bain & Company in Italy.

Even with the current plans, Italy's operating costs are toomuch of a burden in a sector that barely offered any return onequity last year, analysts said, compared with a 7.97 percentreturn for the top 30 European banks in the first half of thisyear, according to figures compiled by Reuters.

With banks under pressure to shore up their balance sheetsin the face of rising bad debts and Europe-wide stress testsnext year, the country's central bank this week called for moreaction on costs.

"In order to regain profitability in the short-term, banksmust decisively act on costs, including labour costs thatcurrently represent more than half of overall costs," Bank ofItaly governor Ignazio Visco said this week.

"The traditional retail network must be rethought, with afocus on the offering of more complex products."

FAILED MODEL?

Italian lenders, which largely avoided the risky bets thatled to the subprime debt crisis of 2007-2008, blame the currentdomestic economic crisis for their woes.

But much of their current problems are rooted in theirinability to adapt their retail-oriented banking model to theInternet revolution.

Even as the global financial crisis loomed large in 2008,Italian banks continued hiring and opening new branches.

Italy's banking sector was privatised in the 1990s butremained protected for more than a decade, allowing banks tocharge high fees for their services. When the sector finallyopened up to foreign competition in mid-2005, rivals such asCredit Agricole, BNP Paribas and Barclays battled to buy local branches.

The number of Italy-based bank branches doubled in the twodecades that followed privatisation, according to data fromthink-tank Fondazione Rossetti.

By contrast, Germany cut the number of its bank branches by6 percent over the same two decades. In Spain, the number ofbranches grew by a quarter and by 46 percent in France.

"The progressive drop in profitability of Italian banks isnot the result of the current crisis. The problem has moredistant roots," said Bocconi economist Donato Masciandaro. "Thesharp fall in revenues was not accompanied by lower costs."

Indeed, the branch expansion has left the sector with anaverage cost-to-income ratio of around 70 percent, largelyunchanged from the mid-1970s and above the average of nearly 60percent generated by Europe's top 30 listed banks in the firsthalf of this year, according to figures compiled by Reuters.

Analysts say the Italian ratio needs to get close to 50percent to offer lasting returns.

Pushing through job cuts and branch closures will bedifficult in a country where unemployment is 12.5 percent - thehighest since records began in 1977 - and in an industry wherecompulsory redundancies are unheard of.

Of the 19,000 job cuts planned, 8,000 will be shed atloss-making Banca Monte dei Paschi, meaning a big blow to thecity of Siena, where it is the largest employer.

"I am concerned," said 50-year-old Lucia Elsa Peveri, a bankclerk with Deutsche Bank in Italy. "(Banking lobby group) ABItold us that bank employees are on average too old, paid toomuch and not flexible. But we are just clerks, not executives."

Aware of the need of deeper cuts in the sector's workforce,ABI unilaterally annulled in September a collective workcontract for bank employees, considered one of the most generousin Italy's already generous employment system.

The decision was firmly opposed by main union FABI, whichhas threatened more strikes unless ABI agrees to work withunions on exit packages.

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