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February 17, 2014updated 05 Jun 2017 11:21am

Exclusive: Italy faces structural crisis

The private banking industry in Italy, as in many other European countries, has to face the challenge of finding a new strategic identity. With less new wealth produced and a high number of players in the market, the industry is close to reaching an inflection point. Valentina Romeo investigates the current trends.

By Valentina Romeo

The private banking industry in Italy, as in many other European countries, has to face the challenge of finding a new strategic identity. With less new wealth produced and a high number of players in the market, the industry is close to reaching an inflection point. Valentina Romeo investigates the current trends.

Since 2008, the private banking industry in Italy has been experiencing a phase of structural crisis. Following the economic and financial downturn, the industry saw a decrease of AuM (-3% in 2011), stagnant profitability (-30% below pre-crisis levels), volatile portfolio management performances and new regulatory rules.

Private banks had to face this challenging market by strategically shifting from existing and more traditional business models, to a new approach which fits the domestic clients’ needs through segmentation and, as many banks say, a new and holistic advisory model.

Accordingly, the cost containment efforts has held back new investment opportunities to increase scale and profitability in many of these financial institutions.

Recently, some banks in Italy tried to create new ‘business synergies’ in their models by integrating part of their banking divisions. Foreign bank UBS, for example, combined its private bank with the investment division, and Italian UBI Banca unified the private with the corporate.

Despite the crisis and the necessity of building a new business strategy, the Italian private banking market is still the 4th largest in Europe, with total wealth in the country amounting to €3.3 trillion in 2012, according to the latest Wealth Report from the Boston Consulting Group (BCG).

This is due to the extraordinary economic growth since the sixties and a unique attitude in Italian families to save. "We are a country with a highly elevated savings capacity, even if this has slightly changed in the last few years. Compared to other countries, this capacity positively rebalances our position towards the public debt," says Monica Regazzi, partner and managing director at the BCG.

According to Regazzi, Italian private banks have always had lower returns historically, especially if compared to the European average.

However, as many big players in the industry indicate, 2013 has been a positive year overall. The mass of private clients has increased, especially due to the inflow of new capitals and improving market performance, which saw 15% growth since the beginning of 2013.

Though the numbers might seem encouraging "the market growth has been mainly moved by the financial performance in itself, not by new external fluxes. Effectively, the market is steady," explains Francesco Fanti, director of private banking, Monte Dei Paschi di Siena (MPS), one of the top 5 players of the peninsula.

"I wish challenges would be welcomed so that we could see a change. The industry can experience far more growth than the one already registered," Regazzi adds.

Regazzi says the industry needs to be revisited also on the offers, and should aim at improving effectiveness, with a focus on people and new technologies.

She says: "Private banking could represent a business with a great growth potential. It is a capital light business, with positive evaluations and doesn’t need much capital investment. However, the industry has been blocked through the years, not just after the financial crisis."

As wealth in Italy is expected to grow at 1.7% annually until 2017, the advisory demand should eventually rise. Furthermore, PBI’s sister company WealthInsight expects a strong growth in wealth held by Italian multi-millionaires: their combined wealth is projected to increase 19% to reach $1.36trn by 2017, with HNWIs to increase by 10%, to reach 3,992.

"The wealth band which saw the strongest growth in 2012 include clients holding $5 to 100 million," Regazzi says. As for these results, Italy remains among the top 10 countries for HNW households in the world, BCG reports.

"As for industries for HNWIs, excluding the ones most hit by the crisis like real estate and textile, exports make the big difference. Apart from that, specialised technologies and technical manufacturing will always represent an excellence for Italy," Regazzi says.Indeed, WealthInsight reports that the biggest sector growth in 2012 was manufacturing, even if it saw an increase of only 7%, while the financial sector shrunk by 18%. One of the reasons for this dramatic decline was the government’s strict austerity measures and increases in tax across the country.

The Italian gap

Despite the slight recovery of the market, Italian private banking is clearly facing another issue. Apart from improving marginally, around 50% of the wealthy, holding a total of €930bn ($1.2 trn), are still not yet served by private banks. The other half mainly refers to retail banks and other institutions.

"This gap is due to the fact that most clients’ needs are not very sophisticated, so they opt for a more traditional service. Another reason could be the geographical dispersion of wealth," Regazzi explains.

Italy is made of many small-medium urban centres, so entrepreneurial and HNWIs wealth is not always concentrated in the major cities. From this point of view, having local divisions of private banking from big groups will help them to build a certain dimension.Italian wealth is, in fact, widely distributed with a higher concentration in the Northern regions (56, 8%), namely Lombardy. The distribution of wealth in the country (Italy’s 259,030 millionaires hold 55.8% of total individual wealth), is above the worldwide average of 29%, pointing towards a relatively uneven distribution, according to WealthInsight.

This distribution is also mixed with a highly fragmented and diversified cultural environment: both regionally and provincially, with remarkable differences in terms of social structure, culture, financial education and behaviour.

For these reasons, Italian entrepreneurs show a diversified attitude when choosing their wealth managers. On one hand they want a local presence; on the other hand they recognise the higher competencies in partners found in the larger cities, mainly Milan and Rome.

Regazzi adds: "Smaller boutiques, rather than foreign wealth managers, are not strong enough to cover smaller provinces. The only way for them to cover these Italian ‘localisms’ would be with bankers moving up and down, through the so-called ‘fly-in- fly-out’ method among the largest centres."

Potential or effectual?

Italian investors have changed since the crisis, though the average client is still very conservative and prefer products with lower fees.Indeed, Italian HNWIs have a prevailing investment goal to preserve capital including de-correlation through financial investments from the industrial risk of their corporate assets.

So far these goals have been pursued through an investment behaviour which prefers domestic and fixed income products, perceived as the most appropriate solutions to optimise their ‘risk free approach’, a recent report from private bank Esperia says.

However, Italian clients need to be driven towards a new approach, one more oriented to long-term equity investment and a more globally diversified asset allocation. This is due to a new market environment, characterised by growing globalisation, with Italian and European financial markets less strategic than in the past.

Fanti says: "The financial culture of the country has extremely evolved so, today, all kinds of banking clients request advice. Limiting the knowledge to the Italian market means precluding potential investments outside the country and in more profitable and dynamic sectors.

"Having ‘self-service-only’ investment behaviour is not sustainable anymore," he concludes.

MPS private bank, holding over $20bn in AuM, has more than 370 private bankers in 89 specialised private centres in the country, including 6 private top networks for clients with investable assets of $5m and above. Fanti tells PBI that within three years the bank will be hiring more than 100 new bankers to be embedded in the network.

"From the overly discussed wealth advisory with clients, you could acquire significant growth and data. However, a lot has been said on how to improve it, but nothing has actually changed yet," Fanti says.

Putting conversations and effective advice at the heart of their business model is also the primary focus of the top Italian brokerage firm, FinecoBank, part of UniCredit group.

The private division of the bank, which has gone from €10bn to €13bn AuM in only two years, has recently boosted the number of its financial planners to 2,400, becoming the third biggest private banking network in Italy. "We read this trend in advance, already opting for an innovative and independent advisory model since the critical year of 2008," says Carlo Giausa, investment services director, FinecoBank.

Understanding the need for a strategic shift in the business model, which also needs to adapt to new international standards, Fineco has the uniqueness of being both a direct bank and a brokerage firm. It offers more than 60 different funding houses and over 5,000 investment funds.

Giausa stresses that in the last 10 years the role of the financial advisor has become extremely important both professionally and socially in the country, choosing to follow the example of US financial planners.

As for its current strategy, Fineco is ambitiously planning to add more than 900 personal financial advisors by 2015. "We focused on both traditional and fee-based models with a high transparency and wide diversification of the offer," Giausa concludes.

What clients want

One of the most critical trends emerging in the Italian private banking industry is the growing lack of client trust. Due the increasing volatility of their portfolio performance, many clients are questioning the role of private banks, generally perceived as suppliers of tailor made asset management services.

Many observers believe this trend is cyclical and will eventually be reversed. Some of the bankers have welcomed the challenge, and have started to implement a more client-focused approach to their models.

"We have always made our clients’ relationship the critical focus to guarantee success. Since the crisis’ blowup and after the summer of 2011, we have reinforced our advisory model making it a true alliance between clients, with the bank focusing on transparency and trust," says Fineco’s Giausa.

At MPS, technology is becoming the staple of the business as the bank invests heavily in helping clients communicate with bankers. Fanti says: "The themes of services and opportunities are extremely important in terms of trust. We are trying to upgrade our channels, especially the Internet, and that is something I truly believe in."

However, Fanti says the banks’ multi-channelling approach won’t substitute the physical contact client-advisor, but it will enrich the conversations making the communication exclusive.

Markets like Italy are characterised by entrepreneurs with holdings mainly composed of illiquid assets. The most relevant trait of the Italian market is the high percentage of entrepreneur owners of ‘family companies’ mainly represented by small-medium enterprises (SMEs). 71% of Italian companies are family businesses and more than 20% of all European SMEs are in Italy. Given the absence of an Italian capital market for SMEs, these entrepreneurial companies are entirely capitalised by private wealth.

Moreover, Italian entrepreneurs are not only the main shareholders, but are deeply involved in management activity due to a strong industrial and commercial background.

Regazzi says: "Italian investors have always moved from equities to bonds, and since 2007-2008, this phenomenon has deeply sharpened. The current equity allocation used to be at 13%, after the crisis it decreased to 9%." Regazzi predicts that by 2017 investments in equities will remain steady at 10%, as will bonds, with cash and deposit benefitting from the change.

Fanti adds: "Another aspect to consider post-crisis is the portfolio inflation, with Italian clients opting for at least 3 different wealth managers. Usually, there is the tendency to believe that diversifying the portfolio means to have less risk. I’ll see more diversification on the way."

"Private clients want to be served very closely and not with standard solutions, but with tailor-made options reflecting their life objectives and risk tolerance. For HNWIs the advisory service goes from asset protection to family governance, and, considering that more than 60% of their assets are in real estate, the focus is on the long term attention to this asset class," Giausa adds.

Looking elsewhere

Approximately 41.5% of Italian wealth is reported to be held outside the country, much higher than the worldwide average of 20-30%, according to WealthInsight.

With public debt increasing since 2007 to 126% of GDP by 2012, Italy has struggled to remain dominant within Europe and keep its balance sheet at a comfortable level.

"The strict measures that have been agreed by the Italian government and the European Union has stifled Italy of up and coming HNWI’s, while the ones they have, continue to take their money and invest elsewhere", says Tom Carlisle, analyst at WealthInsight.

In 2012, Europe accounted for 51.9% of the foreign assets of Italian millionaires. It was followed by Asia Pacific with 19.0%, North America with 13.4% and the Middle East with 6.7%.

"In 2014, our sentiment is positive, especially regarding the US. There’s also a good outlook towards Europe, especially for equity. "We keep being very selective on emerging markets though, especially since Brazil and Turkey’s currencies have lost a lot, despite higher interest rates. We’ll see an outflow of capitals from these markets," Fanti says.

Although Italy has gone through its worst financial crisis since World War II, many Italian millionaires are seeking investments abroad, with figures showing offshore foreign investment at $445bn in 2012. WealthInsight expects offshore foreign asset holdings to reach $551bn by 2017.

According to Carlisle many Italian millionaires prefer to invest outside of their home country, due to high levels of tax and opportunities to keep capital in tax free funds in countries such as Switzerland.

By 2017, WealthInsight expects millionaires to decrease their assets in Europe by 6.4%, preferring to invest in America, which WealthInsight predicts will increase by 9.1%.

However, Regazzi says: "Many clients won’t welcome this challenge to move their assets abroad, mainly because they are not knowledgeable enough. There’ll be a tendency to foreign markets, but that wouldn’t be relevant enough to move large masses."

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