In Search of Lost Profitability

The lead articles in the Financial Times from last February 25 and 26[1] show that European banks are having increasing difficulty finding top managers, since such figures are strongly attracted by the lavish salaries received by their counterparts in the United States. Such managers have become rare on the market in Europe, and almost non-existent within individual banks, that are said not to have adequately prepared for the substitution of those human resources. It is difficult to say if the problem exists for Italian banks as well, but the fact that when a choice must be made they always end up choosing from a limited group of names, in which not all have a great past and very likely won’t have a great future either, demonstrates that perhaps this is a question that regards us closely. In Italy as well, it is very difficult to find successors for the managers who leave our banks.

Situations similar to those affecting top management are beginning to arise with lower level resources and new acquisitions as well. The fact is that, while until not long ago a bank job was one of the maximum ambitions of young people, including the smartest college graduates, both because it ensured a very respectable social status and because it guaranteed a stable job with a good salary, everything has changed now. None of these three elements of attraction are still valid.

The situation has been influenced by the mass layoffs by Italian banks, following the example of their foreign competitors who with increasing frequency announce the reduction of personnel.

That reduction is in fact indispensable, as is the cut in the number of traditional branches: the cost of labor and of bank branches represent very important items in a bank’s income statement, and productive technology influences distribution channels, continuously reducing the number of employees needed.

Banks are becoming less labor-intensive and are adopting distribution channels that no longer require the physical presence of workers. This all happens in a system which remains strongly, or even solely, concentrated on traditional retail activities. Most of these activities are seeing a constant reduction of profitability, and limiting their costs through the reduction of human resources and branches is indispensable but not sufficient, neither at the level of the single banks, nor for the system as a whole in order to allow for an increase in profitability. To reach the goal, actions are required on revenues, but this is much more difficult, in particular due to interest rates being close to or even below zero. In truth, in this field something interesting has already been done, regarding a change in the asset portfolio of many banks. They have been involved more in the management of customers’ assets and as a result have increased the incidence of fees compared to that of interest, although the latter continues to be decisive.

Greater concentration of the system could help, and on this point there is no question that in Italy much remains to be done, as the Governor of our central bank recently stressed. The operation announced by Banca Intesa to acquire control of UBI could provide a contribution in this direction; and the reorganizations of Carige, MPS, and Banca Popolare di Bari could also be useful, as well as the restructuring of the cooperative credit banks (BCC) and the small popular banks.

However, we need to observe that these operations, provided that they take place, would not resolve the underlying problem of profitability for our banks, because they would continue to have a structure and business model that overall would not be much different from the current one, which is known not to be very competitive. Furthermore, all of the cited mergers and the others that could accompany them would regard only Italian banks, confirming the domestic nature of our system, that is increasingly closed to international operations.

In this scenario, it is no coincidence that American banks, which have also returned to operating principally at home, giving up their historical international presence and having had the courage to radically change their business model, have resumed producing very satisfactory results, exceeding those of European banks, and even more so of Italian banks. They have also concentrated on retail activities, but changing their shareholding structure, methods of corporate governance, products, distribution channels, organizational systems, the professional qualifications of human resources, and so on. The banks in question are thus very different than they were prior to the 2007-2008 crisis, and the results are before our eyes. In Italy, on the other hand, “everything has changed so that everything stays the same,” to use the maxim of Giuseppe Tomasi di Lampedusa in the book Il Gattopardo. The concentration implemented to this point has taken place from this standpoint, although some results - despite being insufficient - have been achieved and will be achieved in the near future especially in terms of cost containment thanks the economies of scale realized.

Perhaps this underlying skepticism regarding the future our banks, despite the official declarations regarding their solidity, is what leads the Governor to be increasingly worried about the way crises are managed. This is very important, but it would be better to prevent crises from occurring. This is the only path to avoid additional catastrophes and to aim for profitability goals that can only be obtained with strong determination and an ability to change which at the moment do not exist.