As a rising star at Mediobanca, the powerbroker behind much of Italy’s postwar corporate machinations, Matteo Arpe learned all about the art of the deal. A protégé of the legendary Enrico Cuccia, he became head of the investment bank’s capital markets activities at the tender age of 33, directed a string of major privatizations and played a pivotal role in the country’s biggest-ever takeover, Olivetti’s $35 billion leveraged buyout of Telecom Italia. Along the way he became a trusted adviser of executives like former Olivetti CEO Roberto Colaninno and Fiat chairman Paolo Fresco.
These days, Arpe, now 38, is focusing his deal-making skills on a matter closer to home -- his own survival. As the freshly minted general manager of Capitalia, the new holding company of Banca di Roma, Arpe has spent the past year trying to turn Italy’s most troubled banking group around. Capitalia has a dud-loan book twice as large as its rivals’ and the worst cost-income ratio in the industry. Its repeated failures to address those weaknesses have left its reputation among investors in tatters. With its shares trading at less than half book value, Capitalia owes its independence mainly to the protective oversight of Antonio Fazio, the governor of Italy’s central bank.
Arpe has relied upon his deal-making talent to acquire Brescia-based Bipop-Carire, which has given Capitalia a retail base in the economically vibrant north of Italy and a platform for selling higher-value investment products. He also has kept a hand in his old trade by building up Capitalia’s investment banking arm, Mediocredito Centrale, or MCC, selling a 19 percent stake to a handful of industrial partners, including Telecom Italia, Fiat’s Toro Assicurazioni insurance subsidiary and Fininvest, the holding company of Italian Prime Minister Silvio Berlusconi. But his biggest challenge -- working out Capitalia’s huge nonperforming-loan portfolio and restoring profitability to the group’s core banking business -- lies ahead. His success or failure will determine whether Capitalia is predator or prey in its next big deal.
“The Italian banking system is changing shape and weight dramatically,” says Arpe. “I hope that this institution will be part of that evolution, as a subject and not an object.”
The stakes are high because the consolidation of Italy’s banking industry is nearing the endgame. The central bank’s Fazio has stage-managed that process for most of the past decade, keeping potential foreign predators at bay while encouraging mergers at home. To date, however, only two of Italy’s big banks, UniCredito Italiano and Sanpaolo IMI, have achieved both the critical mass and consistent profitability to survive. IntesaBCI profits have been hit by bad loans and a costly exit from Latin America, but as Italy’s largest bank, it is an unlikely takeover target. Banca Nazionale del Lavoro is expected to seek rescue from its own bad-loan problems through a merger with Monte dei Pasche di Siena, after Fazio expressed his desire for a deal last June.
That leaves Capitalia as the wild card among Italy’s big banks. Fazio and many Italian politicians want at least one of the big banks to be based in Rome, which may work in its favor, but Arpe must produce real returns, or the bank will become vulnerable. Capitalia’s supportive shareholder pact between the Fondazione Cassa di Risparmio di Roma, ABN Amro and Toro Assicurazione, which together own 24.2 percent of the bank, ended in December because of legislation that aims to restructure all of Italy’s banking foundations. It’s not clear at present how -- or if -- these shareholders will rearrange themselves. Some analysts, in fact, are already speculating about a potential bid from UniCredito. “There are going to be four or five banks allowed to become bigger,” says Ruggero Magnoni, vice chairman of Lehman Brothers, Europe. “If Matteo does a good job, Capitalia can buy somebody rather than be bought.”
Arpe’s strategy for success is straightforward, if hardly novel. Armed with a business plan approved by Capitalia’s board in October, he aims to reduce low-margin lending and boost fee income in areas like asset management and insurance. He is tightening lending procedures to improve asset quality and intends to securitize up to E1 billion ($1.03 billion) of the bank’s E9.1 billion in nonperforming loans. He is also moving to sell or close underperforming branches and reduce the head count by 12 percent to cut Capitalia’s notorious cost base, which at 78 percent of income is far above UniCredito’s 53 percent.
This all looks good on paper, but can Arpe, who lacks commercial banking experience, make it work? Outsiders have their doubts. After all, Banca di Roma has produced no fewer than five business plans over the past five years. Each one promised to get a grip on bad loans and boost the bank’s miserable return on equity to the low double digits, and each one failed to deliver. The bank expects to post a loss for 2002 after making bad-loan provisions of as much as E1.7 billion, and projects a return on equity of just 1.3 percent in 2003, rising to 9.3 percent in 2005.
Many analysts question the prospects for change at Capitalia as long as the ultimate power remains in the hands of Cesare Geronzi, the bank’s chairman and éminence grise of Rome’s economic and political scene. Geronzi has dominated the bank, as general manager and then chairman, for the past decade, a period of persistently poor performance. Five years ago he brought in as general manager Giorgio Brambilla, a former top executive at Credito Bergamasco, a small, Bergamo-based bank; Brambilla promised to leave if he did not overhaul management and boost return on equity to 10 percent within three years. Neither happened. Although subordinate to Arpe, today Brambilla holds the title of chief executive of Capitalia. Geronzi recruited Carlo Salvatori, who built IntesaBCI into Italy’s largest bank, to lead another supposed turnaround in January 2001, but Salvatori left abruptly five months later, frustrated, insiders say, by his inability to drive change. Today he is chairman of UniCredito, the country’s most profitable bank.
“It is still Geronzi’s bank,” says one senior Italian official who knows Capitalia well. “If anyone wants to turn the bank upside down, he will fail. Geronzi aims for a gradual improvement without rocking the boat.”
The legacy of broken promises and poor performance has exhausted Capitalia’s goodwill among investors, even those who regard Arpe and his team with esteem. “They are cleverer than the old management, but the situation is not easy,” says Luigi Degrada, who manages Italian equities at Fideuram Capital, the fund management arm of Sanpaolo IMI’s private bank. “Banca di Roma in the past often didn’t achieve what they said. This time I want to see before I buy.”
Arpe knows that it will take action, not words, to restore the group’s good name. So he stresses successes already achieved -- the Bipop deal, a tougher credit approval process, a big reduction in risk-weighted assets -- rather than making promises of future profitability. “I am dramatically changing the shape of the group and have already taken actions to improve the management,” he says. “My measures will be done in a matter of months, not three or six years.”
He dismisses any suggestion of a conflict over strategy with Geronzi, whom he describes as a kind of father figure. “There isn’t a bank without the two of us,” he says. “I would never have done the achievements I have already done without his complete support.” He also appears to enjoy the backing of Banca d’Italia’s Fazio, who gave Arpe’s business plan his personal endorsement in comments before Parliament’s Finance Committee in October (see box, page 27).
The three men have certainly worked together in the developing drama at Fiat. Capitalia, IntesaBCI and Sanpaolo IMI arranged a E3 billion convertible loan for Fiat’s holding company last May to ease a liquidity crisis at the firm. The loan was designed to tide the company over until 2004, when Fiat was expected to exercise a put option to sell the remaining 80 percent of its auto subsidiary to General Motors Corp. But as results deteriorated rapidly at Fiat Auto, Prime Minister Berlusconi gave his support to a rival rescue effort by Mediobanca that would keep Fiat in Italian hands. Mediobanca’s plan would entail a big haircut for the banks, which would be asked to swap their holding company loans for equity in the automaker. Acting with the public support of Fazio, Capitalia and the other banks in December blocked an attempt by Mediobanca to replace Arpe’s ally, Fresco, as Fiat’s chairman. But the struggle over Fiat’s future, and the ability of banks to take commercial decisions free from excessive influence from politicians like Berlusconi, remains uncertain. The stakes are higher still for Capitalia. Fiat’s insurance subsidiary, Toro Assicurazione, is the bank’s second-largest shareholder with a stake of 6.64 percent.
Undeniably, Capitalia has some strengths. The holding company is Italy’s fourth-largest banking group, with E157 billion in assets. Its three banking divisions -- Banca di Roma, Banco di Sicilia and Bipop-Carire -- together have 5 million customers and nearly 8 percent of Italy’s retail and commercial banking markets. Capitalia also owns 44 percent of FinecoGroup, which is the country’s fourth-largest asset manager and is No. 2 in insurance premiums.
But Arpe must also grapple with a host of problems -- the legacy of the troubled acquisitions that comprised Capitalia’s growth. The old Banco di Roma enjoyed a solid franchise as a lender to big Italian companies and as the country’s premier player in the international capital markets in the 1980s. But it changed shape dramatically after 1990, when Italy’s Amato law paved the way for the consolidation and eventual privatization of the country’s banks. Banco di Roma merged in 1992 with Banco di Santo Spirito and Cassa di Risparmio di Roma, the capital’s leading savings bank, run by Geronzi as general manager. Banco di Roma’s more dynamic, international culture clashed with the parochial and bureaucratic savings bank, which enjoyed a rich deposit base and faced little pressure to boost profitability. The new entity, Banca di Roma, was controlled by the Fondazione Cassa di Risparmio di Roma, a uniquely Italian construct aptly known as a noncommercial public entity. Such foundations, which control most big banks, are ostensibly charitable organizations, with roots going back to the Renaissance, but their control by business and political leaders has made the banks a rich source of patronage and easy credit.
As Arpe himself puts it, for the past decade, “Banca di Roma was perceived to be a sort of ministry.” The bank developed a reputation for politically influenced lending during the ‘90s. It was widely reported to have lent to all of the country’s main political parties. Its exposure to property developers in the Lazio region around Rome mushroomed -- an astonishing 60 percent of nonperforming loans are in the Lazio area, while the five regions of central Italy account for just 41 percent of all group loans. Lacking a central database for loans to small and midsize enterprises, the bank couldn’t even tell if it was overexposed to certain regions or industrial sectors.
Banca di Roma also developed increasingly close ties with the Banca d’Italia. Geronzi, who has controlled the bank as general manager since 1992 and as chairman since 1997, had run the foreign exchange department at the central bank in the 1970s and is a close friend of governor Fazio. Former central bank officials are in charge of auditing and reorganizing the bank’s distribution channels; others are scattered through its middle management. These connections to the central bank have done little to sharpen Banca di Roma’s commercial edge.
They also pose a potential conflict of interest, given that the Banca d’Italia is both supervisor and industrial regulator to the banking sector, holding veto power over the transfer of anything larger than a 5 percent stake in a bank. “This worries me seriously,” says Giorgio La Malfa, head of the finance committee in the Chamber of Deputies, the lower house of the Italian Parliament. “I would like the Banca d’Italia to be totally independent, distant, from the banks. Unfortunately, I cannot say that about Banca di Roma.” Both Geronzi and Fazio declined requests for interviews for this article.
The central bank connection proved critical in 1999 when Fazio effectively blocked a takeover bid for Roma by Sanpaolo IMI, claiming that hostile bids could destabilize the industry. Yet later that year the central bank encouraged Roma to take over Banco di Sicilia, which was trying to work out its own problems of nonperforming loans and a weak capital base resulting from its rescue of a Sicilian savings bank, Sicilcassa, two years earlier. In a two-step transaction, Roma acquired a majority of Sicilia and all of Mediocredito Centrale, a small, Rome-based bank that specialized in project finance. The deal did nothing, however, to solve the underlying problems of weak management and poor asset quality at Roma or Sicilia. As one Italian investment banker sees it, “Banca di Roma is what it is: a mish-mash of assets put together in the hope that two wrongs make a right.”
Arpe acknowledges that the bank needs nothing less than a “cultural revolution.” He promises to replace the old corporate clientelism with transparency, accountability and rigorous risk assessment. Crucially, he has recruited a cadre of highly regarded young executives from banks, investment banks and fund management companies to fill senior positions in the group. “I want to do a philosophy and culture which is not Roman,” he says. “I do not know if I will be successful, but let us try.”
SO FAR ARPE HAS KNOWN LITTLE BUT SUCCESS IN his young career. He grew up in Milan and attended Italy’s premier business school, Milan’s Università Bocconi, graduating summa cum laude. He went straight from school to Mediobanca, the powerful and secretive Milan investment bank that has pulled the strings behind most of corporate Italy in the postwar era. There he enjoyed a meteoric rise under the tutelage of Cuccia and Gerardo Braggiotti, the corporate financier who today heads Lazard’s European operations.
Mediobanca’s salotto buono, the figurative drawing room where the bank arranges deals with its corporate clients, is full of intrigue, and Arpe certainly needed political wiles to thrive there. But he also has been at the forefront of a gradual shift to a more transparent, market-based style of corporate finance in Italy. He worked on most of the 1990s’ big privatizations, including the 1997 flotation of Banca di Roma by its controlling banking foundation and the state-owned conglomerate IRI, a deal that sealed his relationship with Geronzi. Arpe also played a key role in the 1999 takeover of Telecom Italia, the landmark buyout that signaled that any European company could be put in play. “He is a very talented relationship banker,” says Vittorio Pignatti, head of mergers and acquisitions at Lehman Brothers International, Olivetti’s lead adviser on the deal. “He has a real sense of the market.”
Despite that success, Arpe soon left the bank, after losing a power struggle with CEO Vicenzo Maranghi, who blocked Arpe’s efforts to give the bank’s deal makers more autonomy. The dispute with Maranghi remains a powerful motivator at Capitalia: One of Arpe’s primary goals is to wrest investment banking business away from his old employer. And Geronzi, who is vice chairman at Mediobanca by virtue of Capitalia’s 9 percent stake in the bank, teamed up with UniCredito in October in a failed attempt to force a management change at Mediobanca. The casus belli: Maranghi poached Fiat’s sale of a 34 percent stake in Ferrari from UniCredito.
For an Italian banker, it’s hard to imagine a better apprenticeship than learning the trade from the likes of Cuccia and Braggiotti. “I am privileged to say I am a Mediobanca creature,” Arpe says. Cuccia taught him to concentrate on relationships rather than fees to make the bank a trusted partner in developing its clients’ strategies. “The most important thing is to focus on building a relationship of trust,” Arpe says. “Make sure your behavior is such that your client will always trust you.”
He also learned the value of discretion. Cuccia, for 50 years the country’s preeminent financier, famously never gave an interview. Arpe is slightly less reticent, but he keeps his private life strictly private. He spends weekends in Monza, outside Milan, with his wife, Roseanne, and two young children, and even close associates profess to know little about his family or upbringing. Finance does seem to run in the genes, though: Arpe’s older brother, Fabio, headed the global markets division at Caboto, IntesaBCI’s securities arm, before launching his own boutique investment bank, Abaxbank, in Milan in 2001.
By the time Arpe arrived at Banca di Roma in October 2001, the bank was in a sorry state. Return on equity was just 1.8 percent that year and had averaged an anemic 4.9 percent over the preceding three years, a far cry from the double-digit returns promised by Brambilla and others. Nonperforming assets amounted to a whopping 6.7 percent of customer loans, and a weak tier-1 capital ratio of 5.3 percent limited the bank’s ability to write off those bad loans. Although most big European banks wrote off their loans to the bankrupt Enron Corp. and Swissair, Banca di Roma could make provision for only 60 percent of its E141 million exposure. As Arpe puts it, “When you try to transform a bank with a higher cost-income ratio than all banks’, when you have nonperforming assets that are greater than all other banks’, when you are in Rome with a management that has not changed in ten years, the problem is where to begin.”
He started by adopting a time-honored Banca di Roma technique -- he bought a weaker bank. Bipop-Carire, which began as a savings bank in Brescia, had expanded aggressively in the late 1990s by catering to Italians’ surging demand for mutual funds. Bipop built a nationwide network of financial advisers, developed Italy’s leading online banking and trading platform and acquired direct banks (where transactions are conducted online or by phone) in Germany and France. At the height of the dot-com craze, it boasted the largest market capitalization of any bank in Italy, despite ranking outside the top 15 in assets and capital. Bipop’s stock faded along with the Internet euphoria, though, and fell precipitously in 2001, when the bank restated earnings and disclosed that it had guaranteed returns to hundreds of mutual fund investors. The sudden decline threatened a mini-meltdown: One of Bipop’s biggest shareholders, the Garfin holding company of real estate investor Mauro Ardesi, had financed Ardesi’s 10.2 percent stake with bank credits, including a huge E510 million loan from Banca Popolare di Milano.
Arpe’s solution was a nifty piece of financial wizardry. Using a special-purpose vehicle and two convertible bond issues, he effectively transformed Garfin’s bank debt into Banca di Roma convertible bonds underwritten by Milano and Garfin’s other bank creditors. The transaction ensured that Arpe could count on the votes of the 10.2 percent stake, which he used to press successfully for a merger with Bipop-Carire last March. “It was really a financial engineering idea” that drove the merger, says Piergiorgio Peluso, the former head of Credit Suisse First Boston’s Italian M&A team who was recruited by Arpe to run corporate finance at MCC. “Arpe really understands these complex transactions.”
The merger involved an exchange of shares and assets that left Capitalia with Bipop’s traditional banking activity and branch network, which still operates under the Bipop-Carire name. Capitalia combined Roma’s asset management business with Bipop’s remaining investment and insurance business in a new entity, FinecoGroup. Capitalia owns 44 percent of it, and its shareholders in turn own 33 percent of Capitalia.
The deal did nothing for Capitalia’s underlying asset-quality problem, but it transformed the group from a predominantly regional institution focused on the weaker central and southern parts of Italy into a national bank. With E157 billion in assets, Capitalia is the fourth-largest bank behind Intesa BCI, UniCredito Italiano and Sanpaolo IMI.
Generating synergies from this new structure is the task of Massimo Ferrari, the Fineco chief executive who used to run Romagest, Banca di Roma’s asset management arm. His first priority is to put Fineco’s advisers to work. Fineco’s network may be the third largest in Italy, but it is the least productive, with each adviser generating slightly more than E2.1 million of assets from mass-market clients. Ferrari believes that he can double that amount by linking advisers’ pay more directly to fee income, granting them stock options and moving upmarket. He also plans to put advisers in 400 of Capitalia’s bank branches, to work on the group’s so-called dormant clients and wants to steer Banca di Roma’s more conservative investors to higher-margin products. Roma clients have invested most of their assets in money market funds and insurance and only 10 percent in equities, generating an average of 80 basis points in management fees; by comparison, Bipop investors have 40 percent of their money in equities and generate more than 200 basis points in fees.
By working his network harder and pushing higher-margin products, Ferrari hopes to increase assets under management by 11 percent a year over the next three years. That growth, combined with cost-cutting measures, should generate profits of E192 million by 2005, he says, compared with an expected loss in 2002. Those are aggressive targets in today’s depressed market conditions, and Fineco will face tough competition as it pursues its share of Italian wealth.
Arpe also is using his skills to transform Mediocredito Centrale, a profitable niche player specializing in project finance, into a full-fledged investment bank. He has recruited a team -- “my guys,” he calls them -- that includes Peluso, who worked with Arpe at Mediobanca in the ‘90s, and Carmine Mancini, a former head of equities at Banca IMI. The strategy to build MCC and clean up Capitalia is simple: Turn Capitalia’s liabilities -- its corporate borrowers in need of restructuring -- into fee-generating assets. MCC is handling the disposal of Capitalia’s noncore assets, including Banca delle Rete and Entrium Direct Bankers in Germany. In December it arranged the sale of 145 surplus branches from Capitalia’s network, generating a capital gain of nearly E380 million. MCC advised on the E3 billion convertible loan made last summer by Capitalia, IntesaBCI and San Paolo IMI to Fiat. It also advised Capitalia on its sale of the E800 million stake in power consortium Italenergia. “We have thousands of M&A opportunities that we have not exploited,” says Peluso.
The combination of talented bankers, Capitalia’s E157 billion balance sheet and the close relationships that Arpe and Geronzi enjoy with the captains of Italian industry should, Arpe believes, make MCC a powerful rival to Mediobanca. Those relationships proved instrumental last summer, when Capitalia sold a 19 percent stake in MCC for E228 million, generating a much-needed capital gain of E100 million for Capitalia. The buyers included a number of leading industrial groups -- among them, Telecom Italia, Fininvest, Toro Assicurazioni, holding company Hopa and dairy concern Parmalat. This coterie is a microcosm of the dense web of cross-holdings that defines Italian capitalism, and provides a lucrative environment for operators like Arpe and Geronzi.
Yet Arpe will face a tough challenge in realizing his ambitions at MCC. Most Italian banks are building up their investment banking capabilities in anticipation of a surge in restructurings and corporate activity in coming years. IntesaBCI recently paid $300 million for a 40 percent stake in Lazard’s Italian business, aiming to combine its midsize Italian corporate clients with Lazard’s deal-making skills. But Arpe is confident he has already outmaneuvered Corrado Passera, IntesaBCI’s chairman. “I told Passera, ‘There’s a big difference between the two of us. You paid to have a minority. I got money to have a majority,’” he boasts.
The real test for Arpe will be turning around Capitalia’s core banking business. One of his first moves was to recruit Fabio Gallia, a former managing director of Ersel Asset Management in Milan, to become chief financial officer, with a mandate to centralize the group’s finance department and reduce risk-weighted assets. Before the holding company was formed last July, each banking division in the group ran its own money-market operations. By creating one corporate finance center and using Banco di Sicilia’s rich deposit base to fund Banca di Roma’s loan book, Gallia was able at the end of September to reduce the group’s interbank borrowings by E7.5 billion, or 32 percent, compared with a year earlier. By trimming assets and raising capital from the MCC sale, Arpe and Gallia hoped to boost Capitalia’s tier-1 capital to 5.9 percent of assets at the end of 2002.
Arpe has tightened lending procedures by creating a new credit committee -- of which he is chairman -- that includes members of all of the group’s main departments. Instead of branch managers and executives issuing orders to the credit department, now any loan exceeding E50 million must be approved by consensus among departmental heads and Arpe. “If someone votes no, I vote no. Therefore, it’s blocked,” he says. Since the process started in June, the committee has rejected 50 percent of credit requests from small and medium-size companies, says Antonio Muto, head of Capitalia’s credit unit.
The bank has released details of its own credit default model, developed last year with D&B and Moody’s KMV, to give investors a clear assessment of its loan book. Corporate lending makes up half of Capitalia’s loan portfolio, small business and consumer lending constitute a third, with institutional and foreign borrowers making up the remainder. The bank rates 30 percent of its nonconsumer loans as below investment grade.
Analysts applaud the new transparency, as few Italian banks have developed similar internal rating systems. But the numbers themselves aren’t completely reassuring. Loan-loss provisions and write-downs jumped 33 percent in the first nine months of 2002, to E748 million, and the bank has indicated that it will make an extraordinary provision of up to E650 million in the fourth quarter to prepare for a big NPL securitization. “I have to believe they’re not expecting a big improvement” in asset quality, says Manuela Meroni, an analyst at Caboto, IntesaBCI’s securities arm. “Asset quality is very low, and it will remain a problem for 2003 and 2004.”
Even if Arpe improves credit quality, he faces the challenge of working down the group’s mountain of bad debt. Net nonperforming loans amounted to E5 billion, or 6.1 percent of customer loans, at the end of September. Under Italy’s relatively lax regulatory formula, corporate loans don’t become nonperforming until they’re at least 18 months overdue. An additional E2.7 billion are on watch list, which means they are more than 12 months overdue. The bank assumes that two thirds of the watch-listed credits will become nonperformers.
Arpe wants to tackle that legacy problem by securitizing bad loans, but this tactic hasn’t been a simple remedy in the past. Banca di Roma has securitized some E5 billion worth of nonperforming loans over the past three years but has been forced to keep the most-subordinated tranches -- roughly one third of the total amount -- on its books because no one else would buy them. That means the bank remains exposed to further losses if it can’t make adequate recoveries on the underlying debts, and Capitalia’s recovery record is much worse than its competitors’. In the first half of 2002, the bank took a fresh write-down of E162 million on its E1.6 billion holdings of NPL securities.
In an effort to avoid such never-ending losses, Capitalia changed tack in December and announced it was considering a smaller securitization without a subordinated tranche, or an outright sale of bad loans. The amount would be only E500 million to E1 billion, well below the E2.6 billion that Arpe promised to analysts as recently as October, but bank executives say they hope that getting bad debts off the books for good will signal that Capitalia is truly changing its ways. Most fund managers will believe it when they see it. “We trust him, but good luck,” says Alessandro Gaudio, a fund manager at Fidagest.
Can Arpe succeed where others have failed? If he did, it would be the turnaround story of the decade in Italian finance; and Arpe’s ability to attract dozens of well-regarded young bankers augurs well. “They have the right people to do it now. There’s a recovery story to enjoy here,” says Andrea Nascè, head of equities at Ersel and a former colleague of Gallia’s.
But Arpe needs to show results, and fast. The persistent rumor in Milan is that Capitalia will be taken over, most likely by UniCredito Italiano, if the bank doesn’t reduce bad loans and restore profits quickly. Indeed, the alliance between Geronzi and UniCredito’s CEO, Alessandro Profumo, in their battle with Mediobanca merely intensified the speculation.
Such talk clearly annoys Arpe, who’d prefer to buy a northern competitor rather than be acquired. “Why can’t Capitalia go to Milan? Why do we only have to be bought?” he protests when asked about merger possibilities. He knows that ultimately he will be judged by whether he can compete on an even footing with his Milanese rivals. And that’s a fitting test for a deal maker like Arpe.
Close supervision In a country where public institutions tend to be regarded with mistrust, the Banca d’Italia has long enjoyed a reputation for integrity and competence. The guardian of the lowly lira has attracted the country’s brightest economists and gained renown for its monetary expertise. And when the tangentopoli, or “dirty hands,” scandals tarnished the country’s entire political class in the early 1990s, the central bank provided leadership: Bank governor Carlo Azeglio Ciampi and director general Lamberto Dini served stints as prime minister.
Lately, however, some bankers and politicians have begun to criticize the bank’s current governor, Antonio Fazio, asserting that he has overstepped his authority.
As governor since 1993, Fazio has used the central bank’s power -- it must approve any change in ownership exceeding 5 percent of a bank’s shares -- to keep potential foreign predators at bay and encourage the consolidation of Italian banking as a purely domestic affair. “If we had opened up the Italian sector in the early ‘90s, we wouldn’t have a single Italian bank left,” says Vittorio Pignatti, head of mergers and acquisitions at Lehman Brothers International. “They would have been bought at book value or below.”
But since 1999, when Fazio blocked takeover bids by Sanpaolo IMI for Banca di Roma and Unicredito Italiano for BCI, bankers have increasingly chafed against his authority. After all, consolidation and privatization had produced a handful of big Italian banks capable of standing on their own and responding increasingly to shareholder, rather than political, pressure. Fazio’s support of Banca di Roma’s acquisition of Bipop-Carire last year -- a deal the governor said made industrial sense -- prompted complaints that he was abusing his power.
“It shouldn’t be the role of the governor to say whether a move by a bank does or does not make sense,” says Francesco Giavazzi, economics professor at Milan’s Università Bocconi and a former director general of the Italian Treasury. “That is a decision for the banks, not the central bank.”
Some bankers are especially critical about the lack of a public auction for Bipop-Carire; they say that Banca di Roma appears to have benefited from favoritism. A senior executive at one Milan-based bank, who spoke on condition of anonymity, said his bank and others would have liked to bid for Bipop but were subtly dissuaded the central bank. “Nobody ever said a word, but everybody knew that the Bank of Italy liked [the Roma-Bipop merger] and would not have liked this option to disappear.” Matteo Arpe, general manager of Capitalia, the new holding company of Banca di Roma, dismisses this as sour grapes, though. He asserts that other banks were interested only in cherry picking Bipop’s best assets, not in saving the troubled bank or its largest shareholder’s creditors, who were threatened with huge losses because of Bipop’s collapsing share price."Nobody was able to solve the problem,” he says.
Fazio, who declined to comment, told a parliamentary committee in October that two other banks had made bids for Bipop but that their smaller size would have made a merger more complex and time-consuming.
Cries of favoritism were heard again last fall when Fazio endorsed Capitalia’s new strategic plan as “appropriate.” Giorgio La Malfa, chairman of the finance committee of the Chamber of Deputies, the lower house of Parliament, says it was unprecedented -- and unwise -- for the central bank to support a specific business plan. What happens if the plan fails? For La Malfa, who believes that the Banca d’Italia’s control over bank mergers conflicts with its role of bank supervisor, the answer could be to strip the bank of its supervisory duties, a proposal already suggested by one deputy. La Malfa also hints that Fazio could face calls to resign if Capitalia doesn’t make a success of the Bipop deal.
“The governor joins Capitalia in both its success and its failure,” La Malfa says. “If the central bank misjudges, it would have to take the consequences.” -- T.B.
