Distribution: Counting on convergence
Special report: Focus on Italy
The Italian banking system has long been regarded as one of the most segmented in Europe. So the news that Turin's Sanpaolo IMI and Milan's Banca Intesa plan to merge this month was a welcome development. As Structured Products went to press the name of the combined entity was still a secret.
The merger is particularly significant for the structured products market. According to several market participants, the new bank will have a share of around 30% of the Italian retail structured products market, which is valued at EUR25 billion by BNP Paribas. Overnight, the merger will create the largest distributor of derivatives-based investments in Italy. Only rival bank Unicredit is deemed to be a real threat, with an estimated market share of almost 30%.
But despite the merger's importance, it is merely the tip of an iceberg, says Mario Spreafico, director of investments with Citigroup Italy in Milan. "This is just the first step in a process of convergence across Italy," he says, adding that the market is buzzing with talk of takeovers and mergers at all tiers.
The impetus for all this comes from the Bank of Italy's governor, Mario Draghi, whose active encouragement of consolidation means that the Sanpaolo and Banca Intesa merger is unlikely to be the last. Reports in Italy suggest Banca Popolare Italiana, a distributor of structured products through its mainly southern branch network, is looking for a strong partner in the north of the country. One source, who declined to be named, told Structured Products that Banca Popolare di Milano - the retail arm of the BPM banking group - is one of the likely takeover targets of Popolare Italiana. Banca Popolare di Milano has 480 retail branches, mostly in northern Italy, and structured products are a key part of its retail offering.
A climate of consolidation could usher in dramatic changes to the market. This can best be seen with the likely impact on the structuring of derivatives-based investments.
"In the past, Italian banks have been happy to make money out of structured products through retail distribution without taking on the risk," says Alessandro Ricci, equity derivatives manager with the European division of US investment bank Lehman Brothers in London. But this state of affairs is now changing, he says, and changing fast.
With a captive retail market and German structuring expertise (thanks to HVB), Unicredit is at the forefront of in-house structuring in Italy. But the entity that results from Sanpaolo IMI and Banca Intesa merger will also have the potential to structure, Ricci says, though "it is still too early to make concrete assertions on the implications of the merger," he adds.
There is also hope that the new entity will help the Italian market make inroads into Europe, as so far there are few examples of Italian banks achieving success outside of Italy. UniCredit stakes the claim to being the 'international champion' of the Italian structured products market, but while the bank owns a retail bank in Germany and is a leader in central and eastern Europe, it is not counted among the major players in structured products in more established European markets.
Gianfranco Venuti, director of financial services and e-marketing with Bipiemme Private Bank in Italy, says the merger is an opportunity for the Italian market to make an impact on the international stage. "The creation of an Italian-based European player will bring more opportunities for Italian structured products professionals, and therefore their skills and expertise can be retained in Italy," he adds.
Many Italian bankers maintain that the convergence is being brought about by the increasing participation of European banks.
"Both the merger and broader convergence in general are good things for Italy, because it is essential that the Italian market competes with the foreign banks that are entering the structured products space," says Citgroup's Spreafico.
German investment bank Deutsche Bank is one institution that has moved into the market in a big way. Aside from its considerable structuring weight, the retail arm of the bank has more than 240 branches across Italy, all of which actively market and sell structured products.
HSBC is another foreign bank that is strengthening its presence in Italy. Three Italian retail banks are distributing HSBC products to branch networks. HSBC structures notes linked to foreign exchange and hybrids, with equities to follow in 2007.
Bigger Italian players will present a stiffer challenge to these foreign banks. Banca Intesa is already an advanced counterparty, and with the addition of Sanpaolo it will only get stronger, Lehman Brothers' Ricci says.
If the Italian banks become very large they may stop asking for products manufactured by the big non-Italian institutions, admits Claudio Ansuinelli, head of institutional sales, derivative products with HSBC in Milan. This is because banks with large enough economies of scale will have the product-building capabilities to do it themselves.
But some Italian banks are wary of the effects that consolidation might have. Giuliano Raso, Milan-based head of structured products at Melior Banca, which sells products to private and institutional clients, says convergence will bring challenges. "The merger, and future mergers like it, could have an impact on us," he says. "We structure our own products and sell these to the banking networks, so if there are fewer networks to supply then it follows that our avenues for business will be limited."
Passing on the benefits
Investors and distributors are unconcerned about shrinking client bases and the profits of investment banks and private banks. Rather, they ask whether convergence will lead to improved product innovation, service and pricing. This is something that remains the subject of fierce debate.
"Mergers themselves aren't a road to efficiency," Raso says. Structured products are a profitable part of a bank's operation, he says, and big banks will be hoping to continue to capture margins by distributing them. "Regional banks can have a productive role in distributing structured products to small investors," he says, so absorbing those banks into bigger entities could harm the spread of structured products sales in Italy.
Previous big mergers in Italy have not resulted in lower costs for investors, says HSBC's Ansuinelli. In fact, the reverse is often true, with large banks exploiting their power and adding more costs, he says. He claims that it is foreign banks, such as HSBC, who will bring efficiency to the Italian structured products market.
These criticisms are in the minority, however. Consolidation is the way of the future, according to Maurizio Morini, Milan-based head of exotic products structuring and trading for Banca Akros. "The fractured system we have today cannot take the market forward," he says.
Another positive note is struck by Francesco Spelta, executive director at UBS Wealth Management in Milan. "Market consolidation means efficiency," he says. "This is a unique and important occasion for the Italian market." Bringing together the desks of different banks should result in better ideas and cost savings, which will be passed onto investors, he says. And many market participants tend to agree.
Natexis Banques Populaires, a French structurer of fixed-income and credit structures, offers an interesting insight into how convergence is likely to play out. "Consolidation means fewer distributor clients, so the price power will be transferred to the big retail buyers. That will drive prices down," says Maurizio Montali, head of capital markets for Natexis in Milan. The number of deals will be reduced but the size of them will increase, which will create fierce competition on the sell-side, he adds.
However, the question of whether efficiency gains will be passed on to investors will depend on the organisations involved, says Bipiemme's Venuti, as all merged entities behave differently in this regard.
Marco Pontiroli, Milan-based head of structured products sales in Italy at UniCredit, says the 'big bank' model pioneered by UniCredit will revitalise the Italian market. He argues that big institutions can stimulate investor appetite for structured products through marketing campaigns. "If you walk into any branch of the big banks you will see structured products on offer," he says. Italian banks are willing to invest in boosting the sluggish structured products market because it forms an important part of their business, he adds. But it remains to be seen whether the increased marketing muscle of bigger Italian banks can entice investors back. Figures from BNP Paribas for this year show that the market was down 38% in the first four months compared to the same period in 2005.
The concerns about regulations that currently plague the Italian market have seen it enter a period of decline. A flood of vanilla products have been released, as distributors and issuers await the outcome of all the regulatory wrangling. All market participants surveyed by Structured Products reported falling sales throughout the first half of this year.
Business as usual
Sanpaolo and Banca Intesa remain tight-lipped about their post-merger plans. For now, both banks are concentrating on their own businesses.
"We are focused on expanding the desk," says Gianluigi Fusar Poli, responsible for structured derivatives and hybrid products with Sanpaolo Asset Management in Milan. "It isn't useful to wait for the merger details to be announced."
Early this year, Sanpaolo launched a new business unit with expertise in buy- and sell-side structured products. "Complexity and innovation are the drivers of the new desk," Fusar Poli explains. The desk has been structuring products linked to actively managed funds, hybrids, and simple equity and commodity structures. The products are sold to Sanpaolo's retail banking network as well other retail banks, high-net-worth and institutional clients. "Investors in Italy are becoming more demanding, so we are improving the quality of our products," Fusar Poli says.
Milan's Banca Intesa is also pressing on with its structured products plans. The bank is a specialist in the distribution of inflation-linked products. It will distribute around EUR2.7 billion of them this year, which makes inflation the dominant underlying, says Alessandro Valdiserri, Banca Intesa's head of structured products and derivatives. The bank also distributes small volumes of equity, commodities, FX and hybrids.
Valdiserri woud not be drawn on the implications of the merger but says the existing desk plans to expand its structured products business.
As many market participants will attest, the future success of structured products in Italy will be determined by the pricing and innovation strategies of the merged banks. With Sanpaolo seemingly keen to follow the path of innovation, perhaps the post-merger future - and the future for a restructured Italian market in general - is bright.
Opportunities will present themselves as a result of consolidating market share, but banks must be ready to capitalise on them, UniCredit's Pontiroli says. With the first merger details set to be finalised early this month, structured product professionals all over Italy, and Europe for that matter, will be eagerly awaiting its impact.
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