Founded in 1472, Banca Monte dei
Paschi di Siena (MPS) claims to be the oldest surviving bank in the
world. Against any merger with an Italian or European peer, the
bank, currently Italy’s fifth-largest retail player, will remain
independent for the foreseeable future and is betting an organic
growth strategy complemented with add-on, ad hoc
acquisitions will help it compete in an Italian retail banking
market that has undergone profound change over the past 12
months.

The country’s three largest banks now account for 46 percent of the
total loan market, compared with 34 percent a year ago.

MPS has revised its 2005-2009 business plan to take account of the
shifting Italian market, aiming to become the third-largest banking
group behind Intesa Sanpaolo and the acquisitive UniCredit
group.

At the bank’s first investor day, held on 3 July, MPS presented an
update of the implementation of its 2005-2009 business plan. The
bank says it is ahead of the targets set out in the plan initially,
although it is not changing a net profit target of €1.5 billion
($2.06 billion) in 2009. “In 2009, we’ll meet all our planned
targets,” said MPS’s chairman, Giuseppe Mussari.

Concentrated on two main areas

The updated plan committed the bank to reducing its cost-income
ratio from 64.8 percent in 2005 to 51 percent by 2009; in 2006, the
ratio fell to 56.4 percent. Cost control activity has concentrated
on two main areas: renegotiation of the bank’s IT contracts and a
reduction in staff numbers. For the latter, the bank’s trades
unions have agreed to layoffs which the bank expects to translate
into €40 million in cost savings.

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MPS currently has 2,000 branches, 24,000 employees and 4 million
customers. It boasts a market cap of €15.3 billion and has an
Italian retail banking market share of around 7 percent. It has set
itself a target of a 10 percent market share by 2009. New employees
to be hired by the bank – 1,500 by 2009 – will have an average age
of 27 compared to an average age of 57 of those to leave the bank
in the same period. New employees will cost the bank €45,000 less
per person on average compared with the experienced staff set to
depart.

Planning ahead. MPS - business plan 2005-2009, progress to date

Banca Monte dei Paschi di Siena is distancing itself from the
frenzy of bank mergers and acquisitions in Italy and choosing – at
least for the time being – an organic growth strategy coupled with
ad hoc, small acquisitions. Its goal is to be the third-largest
retail bank in Italy after Intesa Sanpaolo and UniCredit

While the plan envisaged an additional 200 new bank branches being
opened by 2009, the bank now plans to open 300 new branches, with
52 having opened in the past year. However, a report from
investment bank Keefe, Bruyette & Woods (KBW) stated: “MPS
should need around 700 new [branch] openings by 2009 to achieve 10
percent market share. There are around 32,000 banking branches in
Italy. We do not believe MPS could achieve such a network without a
mergers and acquisition [M&A] operation.”

Space for a third banking group

On the subject of possible M&A activity, Mussari told analysts:
“Whatever happens on the consolidation front, our presence in Italy
is always a key issue. We must complete our presence in Italy.
Following the merger of Banca Intesa and Sanpaolo IMI, and the
planned merger between UniCredit and Capitalia [currently Italy’s
third-largest bank], there is space for a third banking group which
will be bigger than the present MPS. We can do this [create Italy’s
third major bank] by growth through our current business plan and
acquisitions at reasonable prices.”

MPS recently announced it would acquire 55 percent of the
105-branch regional bank Biverbanca from Intesa Sanpaolo for €398.7
million, which will enable MPS to expand its presence in northern
Italy. The remaining 45 percent is held mainly by two banking
foundations (Vercelli with 11 percent and Biella with 33
percent).

At the end of last year, MPS had 47 branches in the wealthy
Piedmont region of north-western Italy and a market share of 1.8
percent. The addition of the Biverbanca branches, 98 of which are
located in Piedmont, will, says MPS, increase its market share in
Piedmont to 6 percent.

MPS may agree another deal with Intesa Sanpaolo that would give an
immediate boost to its branch expansion plans. Mussari said that
MPS had made a non-binding offer for 198 Intesa Sanpaolo branches,
situated mainly in the south of Italy and in the Lombardy region
around Milan in the north-east. They are being sold to comply with
antitrust conditions imposed at the time of the Intesa-Sanpaolo IMI
merger completed at the start of the year.

Earning forecast. MPS-profit and loss, 2006-2009(Ebn)

One potential obstacle to the ambitions of the bank – which may
make it difficult to find a willing merger partner – is its
ownership structure and the restrictive conditions set by its
largest shareholder, the banking foundation Fondazione Monte dei
Paschi di Siena, which currently owns 49 percent of the bank’s
shares. “The foundation must stay the leading shareholder in any
[acquisition] operation,” said Mussari, adding that MPS will not
pursue any M&A opportunity “that dilutes the value of the
group”. This policy position, if maintained, will effectively rule
out acquisition of MPS by a much larger bank.

MPS had talks with Spain’s BBVA and the Netherlands’ ABN AMRO
earlier this year about the possibility of getting together, but
conditions were not considered right for a tie-up. “There were
contacts with both BBVA and ABN AMRO but they weren’t taken forward
because the economic and strategic conditions weren’t there. In
both cases, we failed to find an accord,” Gabriello Mancini – who
heads the MPS shareholders’ foundation – told Italian newspaper
Corriere Della Sera.

Mancini also stated that MPS had rejected overtures from Capitalia,
prior to its rapid acquisition by UniCredit at the start of June.
The report followed the disclosure, confirmed by the foundation,
that it had appointed JPMorgan as a merger adviser in March, to
help it decide whether to seek a merger partner for the bank. The
foundation’s reluctance to dilute its stake in a merger may also
preclude any possibility of a merger between MPS and the insurer
Unipol, which has been the subject of rumours in the Italian press
recently.

Distribution. Italy-branch numbers by region

While the bank’s already-announced expansion plans will lead to it
investing more than €400 million in IT over the next six years,
Mussari told analysts that new agreements with IT suppliers would
help the bank to increase projected cost savings set out in the
business plan by €40 million.

A new broadband network

In particular, the business plan update revealed that MPS plans to
shift from its current telecommunications network to a new
broadband network supplied by Telecom Italia, providing the bank
with an integrated voice and data telecommunications network. A
joint project with US computer giant Microsoft called Filiale del
Futuro has been agreed, the aim being to upgrade the bank’s IT
architecture and enhance its multi-channel system.

Renegotiation of an existing IT deal with another US technology
leader, IBM, due to expire in 2012, will, said Mussari, result in a
shift from renting goods to service leasing for the bank’s IT
processing requirements, thereby lowering the bank’s IT
costs.

The business plan had set the bank a target of attracting 470,000
new customers by 2009. Mussari’s presentation reported that net
customer numbers had increased by 70,000 in the first five months
of 2007, one-quarter of the new customers being under the age of
25. The booming prepaid cards sector market accounted for
approximately one in seven new retail banking customers.

The bank expects customer numbers to be further boosted in the
second half of 2007 due to new product launches planned as a result
of its bancassurance and pensions joint venture with French insurer
Axa (see RBI 569). Axa is paying €1.15 billion to acquire
50 percent of a number of MPS’s assets, including MPS Vita (life
insurance) and MPS Danni (non-life insurance), as well as
management rights over the insurance and pension assets. The
commission structure for life insurance products represents a
balanced profit sharing of 55 percent/45 percent for the
bank/insurance company.

Cost management. MPS - targets for staff reduction and recruitment

Axa Assicurazioni, Axa’s existing business in Italy, will continue
to be managed independently, distributing life and non-life
products via its existing network of agents and brokers in Italy (3
percent market share in non life). It will also distribute, on an
exclusive basis, MPS banking products to its 1.6 million customers
in Italy.

Corporate banking earnings boost

According to investment bank KBW, MPS can also expect a boost in
earnings in the period to 2009 from its corporate banking division.
KBW analyst Marcello Zanardo said that this side of the business,
despite underperforming, “should improve its profitability due to
both higher revenues and lower costs”.

MPS is expecting to list its wholly owned asset management unit as
well as its investments in private equity and hedge funds within
the next three to five years. Mussari said that the listed unit
would be controlled by MPS and yet-to-be-selected business and
financial partners. The majority of Italian banks own asset
management arms, but the Bank of Italy has repeatedly called on
them to separate asset management businesses from their lending
operations.