European Cooperative Banks &
Italian
Banche di Credito Cooperativo (BCCs) vs
Banche Popolari (BPs)
Research & IR Area
European Co-operative banks
European Co-operative banks represent numerically the most important segment of
the European banking sector. They operate through 4,000 local banks and 71,000
outlets, they serve more than 215 million customers, mainly consumers, SMEs and
communities. Banche Popolari (BPs) and Banche di Credito Cooperativo (BCCs)
represents the Italian members of the European Co-operative banks with a significant
relevance (19% of total branches). Their distinctive characteristics are a “participatory
democracy”, based on a “one head, one vote” system, and proximity to customers.
 We compared and analyzed the performance of BPs and BCCs in the period 20062012, identifying the most important balance sheet and P&L trends. Supported by
better pricing on customer loans and more stringent regulations requiring 70% of
profits to be allocated to legal reserves, against the 10% of profits expected of the BPs,
BCCs managed to outperform Banche Popolari in profitability and capital generation
in the period analyzed.
 In terms of z-score analysis (the inverse of the probability of default) BCCs
performed better than BPs in the period concerned, highlighting a better capital ratio
average. The variance was analyzed using Fisher’s F-Test that indicates statistical
significance in the comparison of samples analyzed.
pag. 2
Agenda
1) European Cooperative Banking Sector.
2) Italian Cooperative Banks and the Italian Banking Sector.
3) BCC vs Banche Popolari
- Comparing recent Balance Sheet and Profit & Loss trends
- Matrix correlation
- Z-score analysis
pag. 3
Italian Cooperative Banks and EU Cooperative Banking Sector (1/2)
 Cooperative Banks were founded in the 19th century by two German social entrepreneurs (SchulzeDelitzsch and F. Raiffeisen) as a way to allow lenders to protect themselves from the credit risk of customers
for whom credit information was not available, and in particular the rural poor.
 Key principles of their Statutes : one person=one vote1; owners are customers.
 Cooperatives account for a high proportion of the European banking market in many countries. Although the
UK has one large cooperative bank, this differs from most cooperatives because it is not directly owned by its
members and has no local accountability or governance.
Major European Cooperative Banking Institutions
 Co-operative banks today operate
through 4,000 local banks and 71,000
outlets, they serve more than 215 million
customers, mainly consumers, SMEs and
communities.
 Europe’s co-operative banks represent
56 million members and 850,000
employees.
 Cooperative banks’ market shares in
terms of number of branches varies from
60% in France, 50% in Austria, 40% in
Germany and the Netherlands, 30% in
Italy and 10% in Spain and Portugal.
Source: European Association of Co-operative Banks. Banche Popolari includes controlled SPA. MPS Research.
1. “The legal framework of the cooperative banks in the leading European countries evolved: in Spain there are extensive limits on holdings of capital, including by persons other than cooperative
members; in Germany derogations are allowed, in certain circumstances, from the one-person-one-vote rule; in France multiple votes are permitted in proportion to the size of the contribution of capital,
albeit within limits laid down in the bylaws.” See also Tarantola . Cooperative Banks and Competition
pag. 4
EU Cooperative Banking Sector (2/3)
Loan & deposits Market Share
Local Market Share Deposits %
40
Average 20% market share
35
30
 €7.3 trillion total assets
25
 €4.04 trillion loans
20
15
€ 4.07 trillion deposits
10
5
0
0
10
20
30
40
50
Branches & Employees
Local Market Share Loans %
14000
12000
 847,024 Employees
214 million customers
10000
Branches
 70,970 European branches
8000
6000
4000
2000
 Av. 4,000 customers per branch
0
0
50000
100000
150000
200000
Employees
Source: 2012 data. European Association of Co-operative Banks. Banche Popolari includes controlled SPA. MPS Research.
pag. 5
EU Cooperative Banking Sector (3/3)
Loan/Deposit ratio & Loans % Assets
250%
 Average 96% loan/deposits ratio*
Loan/Deposits ratio
200%
Average 60% Loans on Assets
150%
SMEs representing on average 30% of
total loans
100%
50%
0%
40%
50%
60%
70%
Loans % Assets
80%
90%
100%
Cost/Income % & RoA %
95
90
 Average 0.3% RoA
Average 4.8% RoE
Cost/Income %
85
80
75
70
65
Cost/income 67%
60
55
Tier 1 at 12%
50
-0,4
-0,2
0
0,2
0,4
0,6
0,8
1
RoA %
Source: 2012 data. European Association of Co-operative Banks. Banche Popolari includes controlled SPA. MPS Research.
*Ex Volsbank
pag. 6
Italian Cooperative Banks and EU Cooperative Banking Sector
Italian Cooperative relative to EU Cooperative
% Share vs EU Cooperative
19,67%
13,86%
13,15%
13,75%
9,32%
Total
Assets
Banche Popolari, (BPs) and Banche di Credito
Cooperativo (BCCs) are the Italian constituents
of the European Cooperative Banks representing
a major components with a share of ca20% in
terms of total branches and 7% of total European
Cooperative customers.
7,26%
Total
Deposits
Total
Loans
N.
N. Clients Branches
Employees
 In the past few years (2006-2012) the share of
Italian Cooperative assets vs European
Cooperative ones decreased by 170bps while
increased the share on total branches by 110bps
Italian Cooperative relative to EU Cooperative
Italian Cooperative relative to EU Cooperative
% Total Assets Share vs EU Cooperative
% Branches Share vs EU Cooperative
11,8%
11,0%
19,67%
9,3%
2002
2006
2012
18,51%
2006
2012
pag. 7
Banche di Credito Cooperativo (BCCs) & Banche Popolari (BPs)
BCCs-Banche di Credito Cooperativo
Banche Popolari-(BPs)
(includes controlled SPA) -2013
Number of Institutions: 391
Number of Institutions: 70
56% of total Italian Banks
10% of total Italian Banks
Employees: 31,505
10% of total banking employees
Branches: 4,435
Market share: loans 13.5%
Loans: €138 bn
Market share : loans 7.1%
Deposits: €155 bn
Market share : deposits 7.4%
Total Assets: €229 bn
Total Assets % GDP: 14%
Employees: 82,900
26.3% of total banking employees
Branches: 9,278
Market share :loans 28.4%
Loans: €387 bn
Market share :loans 24.5%
Deposits: €464 bn
Market share: deposits 26.3%
Total Assets: €480 bn
Total Assets % GDP: 29.3%
Source: FDIC - Statistics on Depository Institutions Report; Bank of Italy matrix, MPS Research
pag. 8
Brief history and structure of “Italian cooperative banks”
BPs-Banche Popolari
 The origins of Banche Popolari can be traced back to the 19th century, when they represented a response to the difficulties of small urban and
rural businesses in obtaining credit. In Italy, “People’s Banks” (“Banche Popolari”) were first established in the second half of the 19th century,
with Tiziano Zalli founding the first Banca Popolare in Lodi in 1864, today the Banca Popolare di Lodi.
 The public credit model is based on two fundamental pillars: participatory democracy through a per capita or per head voting system (“one
head, one vote) and proximity to customers, resulting from its vocation to serve the local community.
 The Associazione Nazionale fra le Banche Popolari represents the interests of BPs, providing research and analysis as well as advice on
strategic issues.
BCC-Banche di Credito Cooperativo
The BCCs (called Casse Rurali e Artigiane until 1993) were founded in the late 19th century as a new form of credit system in the same
vein as the model developed by Friedrich Wilhelm Raiffeisen in Germany, based on localism and inspired by Christian ethics. The first
Italian cooperative bank, Cassa Rurale di Loreggia, was opened in 1883 by Leone Wollemborg, in the province of Padua. In 1890 a
young priest named don Luigi Cerutti founded the first Catholic Rural Bank in the province of Venice.
The Credito Cooperativo is composed of a membership structure and a corporate system:
-The membership structure is divided into three levels: local (BCCs), regional (Local Federations) and national (Federcasse). BCCs are
fully autonomous in their decisions but cooperate intensively through network institutions. The individual BCCs are associated with the
Local Federations (representing one or more regions) which in turn are members of Federcasse, the Italian Federation of BCCs.
-BCC Gestioni Crediti manages nonperforming loans, Ceseoop and Incra provide back-office services and Iccrea acts as the BCCs’ own
bank, managing the system’s liquidity and operating in the securities market.
Source: Bank of Italy matrix, MPS
pag. 9
Major differences among the “Italian cooperative banks”
Banche Popolari (BPs)
Banche di Credito Cooperativo (BCCs)
No
According to the Banking law (Art. 35), they shall grant credit primarily to
their members. Credit operations with members need to account for at
least half of the risk weighted assets of the bank. For stability reasons
Bank of Italy (BoI) can establish exceptions.
Regional limits to
expansion
No
The Banking Law (Art. 35) establishes that the bylaws shall contain
provisions governing their geographical operating limits, established on
the basis of the criteria laid down by the BoI. According to these criteria,
banks can expand to an adjacent region if they have more than 200
members in that region.
Tradability of
shares
Yes
No
Voting rule
One man, one vote (Banking Law, Art. 30).
One man, one vote (Banking Law, Art. 34).
Limits to
shareholder
participations
0.5 percent of capital for individuals. Undertaking of
collective investment in transferable securities may hold
percentage of capital up to the limit provided for in their
bylaws (Banking Law, art. 30), which cannot exceed 10
percent (BoI regulations).
Euro 50,000 per member (Banking Law, Art. 33). No distinction between
individuals or legal entities.
Limits to
collection of
proxies
The Civil Code requires the maximum number of proxy votes
to be 10 (Art. 2539).
The Civil Code requires the maximum number of proxy votes to be 10 (Art.
2539); the BCCs association recommends a maximum of three proxy votes
for each member.
Membership
requires board
approval
Yes. Nonmembers may still hold shares but only enjoy
property rights and cannot vote or exert other member
rights (Banking Law, Art. 30)
Yes
Profit allocation
BPs must allocate at least 10 percent of net profits to the
legal reserve. Profits not allocated to the legal reserve, other
reserves, as per bylaws or distributed among members must
be distributed to charity (Banking Law, Art. 32).
The Banking Law (Art. 37) requires BCCs to allocate at least 70 percent of
annual net profit to reserves. In addition, a total of 3 percent of the net
profit shall be paid into a special mutual aid fund (Fondo Sviluppo SpA, set
up by Federcasse and Conf cooperative) for the promotion and
development of cooperation.
Conversion to
joint stock
company
They can convert into joint stock companies if the members
decide so. For stability reasons BoI can authorize conversion
or merger with another entity resulting in conversion to
public company. In this case, the smaller quorum required
by the bylaws for any of these actions shall apply (Banking
Law, Art. 31).
To change status the bank has to be liquidated and what would be left
after liquidation of a BCC should also be paid into Fondo Sviluppo. BoI, in
the interest of creditors and where considerations of stability are
involved, shall authorize mergers between banche di credito cooperativo
and banks of different nature, which result in the formation of banche
popolari or banks having the form of joint stock company (Banking
Law,Art. 36 ).
Mutualistic
features
Source: IMF Eva Gutiérrez, MPS Research
 BCCs and Banche
Popolari are both part of the
Italian Cooperative Banking
sector.
 There are however some
key difference among which:
1)
Restriction on
geographical expansion
for BCCs.
2)
BCCs grant credit
primarily to their
members (no restriction
for BPs).
3)
BCC shares are nontradable while BPs are
listed.
pag. 10
BCC vs Banche Popolari
- Comparing recent Balance Sheet and Profit &Loss trends
- Matrix correlation
- Z-score analysis
pag. 11
Comparing BCCs vs Banche Popolari: main results (1/2):
 BCCs have recently been able to outperform Banche Popolari in terms of both RoE and RoA thanks to a better
pricing on customer loans (50bps gap among the two samples), a significant contribution from trading income for
BCCs (in particular in 2012) and a better cost of credit (10bps gaps). BCCs and BPs have both increased
significantly the contribution of carry trade (Italian Govies) that represents 22% of total revenues for BCCs (from
13% in 2011) and 27% for BPs (from 20%).
During the period 2006-2012 BCCs and Banche Popolari experienced a significant structural change in the
composition of their balance sheet. The significant increase in the financial asset portfolio (mainly in Italian
Government Bonds) was financed for the most part by an expansion of inter-banking exposure of which a significant
portion through the ECB.
 The asset expansion and the low capital generation led to an increase of leverage. Tier 1 remained at a healthy
14% range for BCCs while increased close to 10% for Banche Popolari on the back of lower RWA density (reached
the historical minimum of 59% in 2012) and capital increases.
Banche Popolari top line has been much less reliant on net interest income versus the BCCs. Commission income
has been a growing revenue contributor for Banche Popolari reaching ca30% of total revenue. In the past few years
the contribution of trading and other revenues for BCCs has been important and crucial in sustaining the bottom line.
 BCC enjoys a structural advantage on customer yield vs Banche Popolari quantifiable in ca50bps while they lost
the historical funding costs advantage.
 We ran a statistical analysis highlighting, through a matrix correlation, which is the most important macro variable
for BCCs and BPs profitability and we found Net Profits and NII for BCCs were highly correlated (R2 ca 0.9 in both
cases) while less correlated for Banche Popolari.
Source: Bank of Italy matrix, MPS Research
pag. 12
Comparing BCC vs Banche Popolari - main results (2/2):
 A valid indicator to measure the stability of banks is the z-score: identified as the inverse of the probability
of default.
The ROAA represents the average return on assets, K the equity, A the assets, and
deviation of the ROAA in the time period analyzed.
is the standard
 Breakdown of the z-score of BCCs and Banche Popolari with the overall averages from 2006 to 2012 for
each component,
Z-SCORE
ROAA
K/A
BCC
29,18
0,0055
0,1108
Dev.
ROAA
0,0040
BP
16,55
0,0021
0,1233
0,0076
Stand.
Among the reasons for the BCCs better performance on the z-score vs the Banche Popolari, we can highlight:
BCCs have a higher profitability and a variance (standard deviation) of ROAA significantly lower during
the period, due to the better asset quality and higher margins.
BCCs have a mutualistic purpose, so they have the obligation to allocate more than 50% of investments in
financing to shareholders and risk-free assets. Moreover, in terms of financial structure, the BCCs have
higher capital ratios resulting from the fact that they are required to allocate 70%* of profits to legal reserves,
against the 10%** of profits expected of the non-cooperative banks.
*Source: TUB, Art.37
** Source: TUB, Art.32
Source: Bank of Italy matrix, MPS Research
pag. 13
BCC vs Banche Popolari
- Balance Sheet trends
pag. 14
Italian Cooperative Banks and the Italian Banking Sector
Banche Popolari (BPs) figures in our analysis do not include controlled SPA in line with Bankit
classification.
Main Numbers
N.Institutions
Branches
Financial Advisor
ATM
Employees
Loans to customers
Equity
Roe
Market Share
Balance Sheet
Customer Loans
Total Assets
Bonds Issued
Capital and reserves
P&L
Revenues
Costs
Personnel costs
Operating Profits
LLP
Structure
Employees
Branches
Financial advisors
ATM
394
4435
201
5349
31391
138569
23519
1.85%
37
5469
862
4503
51965
276709
53073
-3.51%
7.50%
7.80%
10.50%
11.70%
15%
19%
30.90%
25.20%
8.90%
8.80%
9.30%
9.20%
7.50%
14.20%
14.80%
15.40%
13.10%
15.90%
10.10%
13.50%
0.80%
12,2%
16.65%
16.60%
3.30%
10.30%
Source: Bank of Italy matrix; Banche Popolari data do not include controlled SPA in line with Bankit classification; MPS Research
*2012, for loans ncludes only Italian customer loans
Banche Popolari, (BPs) and
Banche di Credito Cooperativo
(BCCs) constitute an important
segment among Italy’s financial
intermediaries and account for
about 23% of loans and 30% of
branches within the Italian
banking system.
Following the significant
consolidation that has taken
place among Italian Cooperative
Banks since 1998, respective
market shares have decreased
significantly (at that time there
were 563 BCCs vs 395 in 2012
and 56 BPs vs 37 in 2012).
pag. 15
BCCs-Banche di Credito Cooperativo franchise
BCC distribution. Number of BCCs
by Region and Local branches (2013 data)
Number of Institutions: 391
56% of total Italian Banks
Branches: 4,435
Market share: loans 13.5%
Number of provinces: 101
Number of cities: 2,714
Number of members: 1,141,226
Number of associates with loans:
457,678
Percentage of associates with loans:
40%
Source: Federcasse. Matrice Bank of Italy, MPS Research
pag. 16
BCCs-evolution
Average branches per BCCs
12
Average employees per BCCs
90
Average associates per BCCs
3500
80
3000
10
70
8
2500
60
50
2000
40
1500
6
4
30
1000
20
2
500
10
0
0
2000
2007
2012
0
2000
2007
2012
2000
2007
2012
 A growing complexity: less than 10% are now mono branch while average dimension increased
significantly
Source: Federcasse. Matrice Bank of Italy, MPS Research
pag. 17
Banche Popolari (BPs) franchise
Number of Banche Popolari by Region
Banche Popolari market share by province
(includes controlled SPA) -2013
(includes controlled SPA) -2013
No BPs
6% to 15%
1 to 2 BPs
6% to 20%
3 to 5 BPs
20% to 30%
6 to 30 BPs
>30%
Source: Assopopolari. Matrice Bank of Italy, MPS Research
pag. 18
Profitability
Return on Assets (%)
0,9%
0,9%
0,7%
0,8%
0,7%
0,5%
0,4%
0,1%
2006
2007
2008
0,2%
0,2%
0,2%
0,4%
2009
2010
2011
2012
-0,4%
-1,0%
BCC
Banche Popolari
Return on Equity (%)
8,8%
7,3%
9,7%
7,1%
4,1%
7,0%
3,2%
3,7%
0,5%
2006
2007
2008
2009
1,4%
1,8%
2010
2011
1,8%
2012
 BCCs were able to outperform
Banche Popolari in 2011 and 2012
in terms of both RoE and RoA
thanks to a better pricing on
customer loans (50bps gap among
the two samples), a significant
contribution
from
trading
income/FVO for BCCs (in particular
in 2012) and a better cost of credit
(10bps gaps).
 Two significant idiosyncratic
events, large goodwill impairment
charges in 2011 and significant LLP
clean up in 2012 (partially driven by
the audit of the Bank of Italy,
conducted in Q4)
impacted in
particular
Banche
Popolari
performances.
-3,5%
-8,2%
BCC
Source: Matrice Bank of Italy, MPS Research
Banche Popolari
pag. 19
Balance sheet structural changes (1/3)
Financial Assets/Total Assets
Italian Govies/Total Assets
50%
25%
40%
20%
30%
15%
20%
10%
10%
5%
0%
0%
2005
2006
2007
2008
BCC
2009
2010
2011
2012
2005 2006 2007 2008 2009 2010 2011 2012
BCC
Banche Popolari
Banche Popolari
Inter-banking exposure (€mln)
10000
0
-10000
2005
2006
2007
2008
2009
-20000
-30000
-40000
-50000
-60000
BCC
Banche Popolari
Source: Matrice Bank of Italy, MPS Research
2010
2011
2012
In the past two years BCC and Banche
Popolari
experienced
a
significant
structural change in the composition of
their balance sheet.
The significant increase in the financial
asset portfolio (mainly in Italian
Government Bonds) was financed for the
most part by an expansion of inter-banking
exposure of which a significant portion
through the ECB.
pag. 20
Balance sheet structural changes (2/3)
Loans/Total Assets
100%
90%
80%
70%
60%
50%
40%
30%
20%
 The percentage of customer
loans on total assets decreased
significantly in the case of BCCs and
Banche Popolari mainly due to the
increase of financial assets.
2005
2006
2007
2008
BCC
2009
2010
2011
2012
Banche Popolari
Loans market Share
 Loans market share for Banche
Popolari increased during the period
2006-2012 (also thanks to a number
of
M&As)
while
remained
substantially flat for the BCCs (at
6.94% in 2012).
Majority of customer loans for
BCCs are corporate/SMEs where
the BCCs have a market share in
Italy of ca 10%, up to ca30% for the
artisans.
100%
80%
60%
40%
20%
0%
SPA
Banche Popolari
2006
Source: Matrice Bank of Italy, MPS Research
BCC
Foreing banks
2012
pag. 21
Balance sheet structural changes (3/3)
Short Term funding/Total Liability
 On the funding side for both
samples the short term funding
component
(current
accounts)
decreased significantly on the back of
the exponential increase of much
more expensive time deposits.
60%
50%
40%
30%
20%
10%
0%
2005
2006
2007
2008
BCC
2009
2010
2011
2012
Banche Popolari
Own Bonds/Total liability
 Loan/deposit ratio remained well
below national average for BCCs at
82% and BPs at 70%.
Time deposits/Direct Funding
60%
40%
50%
30%
40%
20%
30%
10%
20%
0%
10%
0%
2005
2006
2007
2008
BCC
Source: Matrice Bank of Italy, MPS Research
2009
2010
2011
2012
BCC
Banche Popolari
Banche Popolari
pag. 22
Leverage and Capital ratios
Leverage (Total Assets/Capital)
12
 Asset expansion and low capital
generation led to an increase of
leverage.
10
8
6
4
2
0
2005
2006
2007
2008
BCC
2009
2010
2011
2012
Banche Popolari
Tier 1
Worth remembering that BCCs are
required to allocate 70% of profits to
legal reserves.
16
14
12
10
8
6
4
2
0
2006
 Tier 1 remained at a healthy 14%
range for BCCs while increased
close to 10% for Banche Popolari on
the back of lower RWA density
(reached an all-time low of 59% in
2012) and capital increases.
2007
2008
2009
BCC
Source: Matrice Bank of Italy, MPS Research
2010
2011
2012
Banche Popolari
pag. 23
BCC vs Banche Popolari
- Profit and Loss trends
pag. 24
Revenue breakdown
BCC-revenue breakdown
100%
 Banche Popolari top line have
been much less reliant on net interest
income versus the BCCs.
80%
60%
40%
20%
0%
-20%
2006
2007
NII
2008
2009
Commission
2010
2011
2012
Trading/others
Commission income has been a
growing revenue contributor for
Banche Popolari reaching ca30% of
total revenue.
Banche Popolari-revenue breakdown
60%
50%
40%
30%
20%
10%
0%
-10%
2006
2007
2008
2009
 Contribution
from
Italian
Gov.Bond coupons on total revenues
increased from 13% in 2011 to 22%
for BCCs and from 20% to 27% for
BPs.
2010
2011
2012
 In the past few years the
contribution of trading/FVO and
other revenue for BCCs has been
important and crucial in sustaining
the bottom line.
-20%
NII
Commission
Source: Matrice Bank of Italy, MPS Research
Trading/Other revenue
pag. 25
Return on Assets and Equity
Revenue on Assets (%)
4,0%
3,7%
4,1%
3,8%
3,2%
4,0%
2,5%
2006
2007
2008
2,9%
2,9%
2,0%
2,1%
2,9%
2,5%
2009
BCC
2010
2011
1,9%
2012
Banche Popolari
 Higher customer spread and
higher contribution from financial
assets mainly explains the difference
in revenue on assets.
 Worth remembering that in the
case of BCCs NII contribution
from Italian Gov. Bonds increased
by 91% in 2012 vs 2011 and by 41%
in the case of BPs.
Costs on Assets (%)
2,5%
2,2%
2,4%
2,5%
2,2%
2,1%
2,3%
1,8%
1,6%
2006
2,3%
2007
2008
1,4%
2009
BCC
Source: Matrice Bank of Italy, MPS Research
1,3%
2010
1,4%
2011
1,2%
2012
 Economies of scale partially
explain the difference in cost
structure between BCCs and BPs.
 Since 2007 several mergers
among the Popolari were driven by
the search for cost synergies.
Banche Popolari
pag. 26
Customer yield
Yield on customer Loans (%)
6,9%
6,3%
5,2%
5,9%
6,0%
4,5%
4,4%
3,7%
3,6%
2,9%
2006
2007
2008
2009
BCC
2010
3,9%
3,9%
3,5%
3,4%
2011
2012
Banche Popolari
Customer spread over 3M Euribor
3,38%
3,20%
2,63%
2,77%
2,08%
1,68%
1,42%
2006
1,61%
1,38%
2007
2008
BCC
Source: Matrice Bank of Italy, MPS Research
 For much of the sample
period, BCCs enjoyed a
significant advantage over
BPs, which has remained in the
range of 30-70bps over the last
five years.
2,50%
2,85%
2,51%
2009
 A large part of the net
interest income difference
between BCCs and Banche
Popolari can be explained by
differences in these institutions’
asset yield, in particular on
customer loans.
2,10%
2,06%
2010
2011
2012
Banche Popolari
pag. 27
Cost of funding
Costs of customer deposits over 3M Euribor
0,46%
2006
-1,73%
2007
2008
-0,27%
2009
-0,32%
-1,56%
-0,19%
2010
-0,24%
-0,36%
2011
0,45%
2012
-0,58%
 A key difference between
BCCs and Banche Popolari
interest
income
can
be
explained by differences in
these institutions’ cost of funds.
-2,35%
-1,90%
-2,52%
For much of the sample
period, BCCs enjoyed a funding
cost advantage over BPs,
although in the last period the
advantage on cost of customer
deposits
decreased
significantly.
-2,49%
BCC
Banche Popolari
Costs of own bonds over 3M Euribor
1,68%
2,04%
1,79%
1,06%
1,66%
1,87%
1,33%
0,46%
1,02%
0,31%
-0,20%
2006
-0,08%
2007
2008
-0,62%
-0,42%
2009
BCC
Source: Matrice Bank of Italy, MPS Research
2010
2011
2012
Banche Popolari
pag. 28
Other revenues
Financial Assets revenues over Assets (%)
0,3%
0,2%
0,1%
2006
0,2%
0,1%
0,0%
2007
0,2%
-0,1%
2008
0,1%
0,0%
2009
2010
0,1%
0,1%
0,0%
2011
2012
 The contribution for the Banche
Popolari was more steady at 6% of
total revenues .
-0,3%
BCC
Banche Popolari
Commission/Assets %
0,8%
0,9%
0,6%
0,6%
0,6%
0,6%
0,6%
2006
2007
 In 2012 BCCs experienced a
significant jump in trading income
thanks also to the increase of
financial instruments on the asset
side.
0,5%
0,5%
0,6%
2008
2009
2010
BCC
Source: Matrice Bank of Italy, MPS Research
0,6%
0,6%
0,6%
0,5%
2011
 There is no significant difference
on commission asset yield between
BCCs and BPs in the past few years.
The 2012 vs 2011 total commissions
trend however was different for BPs,
which experienced a growth of 2%
vs a reduction for BCCs of ca1%.
2012
Banche Popolari
pag. 29
Cost structure
Costs per employee (€.000)
80
70
60
50
40
30
20
10
0
 Cost control does not seem to be
a strategic focus for both BCCs and
BPs.
 The weight of personnel costs on
total costs increased for the BCCs,
exceeding that of BPs.
2006
2007
2008
BCC
2009
2010
2011
2012
Banche Popolari
Costs of personnel on total costs (%)
Costs/Income ratio (%)
63,9%
59,0%
60,3%
64,7%
66,2%
57,8%
70,2%
55,9%
74,2%
71,1%
65,6%
67,4%
62,0%
56,4%
63,7%
54,6%
54,9%
53,6%
2007
2008
2009
BCC
Source: Matrice Bank of Italy, MPS Research
2010
Banche Popolari
2011
2012
55,0%
55,2%
53,4%
2006
56,2%
54,3%
53,0%
53,3%
2006
2007
53,6%
2008
BCC
53,2%
52,9%
2009
2010
2011
2012
Banche Popolari
pag. 30
Cost of credit
Loan Loss Provisions (LLP/Loans %)
1,4%
1,3%
0,7%
0,4%
0,4%
0,3%
0,3%
2006
2007
0,5%
0,6%
0,6%
0,5%
0,5%
0,5%
2008
2009
2010
BCC
0,4%
2011
2012
Banche Popolari
NPL Ratio (NPL/Loans %)
 Cost of credit in 2012 increased
by 79% for BCCs vs 2011 and by
280% for BPs.
Cost of credit has jumped over the
past few years on the back of the
difficult
macroeconomic
trend
experienced in the home country
(Italy) with NPL ratios reaching a
record level close to 7% of total
loans for BCCs and BPs.
 New impaired loans picked up
materially in 2012 approaching (and
in many cases surpassing) the
previous peak level in 2009.
10%
8%
6%
4%
2%
0%
2005
2006
2007
2008
BCC
Source: Matrice Bank of Italy, MPS Research
2009
2010
2011
2012
 The default rate rose mostly
among the smaller and mediumsized Banche Popolari and those
located in the South.
Banche Popolari
pag. 31
Major macro correlation and z-score analysis
pag. 32
Macroeconomic variables and impact on performance:
Results obtained:
 The table shows the correlation between macroeconomic variables and profitability measures for these two
types of banks. To do this, a Coefficient of determination was used. This is a measure of the proportion of
variability in a data set that is accounted for by a statistical model; often called R2; equal in a single-variable
linear regression to the square of Pearson's product-moment correlation coefficient:
Euribor vs NII
Euribor vs Roe
GDP vs NII
GDP vs Roe
GDP vs LLP
BCC
0,967438
0,888586
0,198716
0,244908
-0,58731
BP
0,771795
0,43836
0,389054
0,409242
-0,5831
Summary of results obtained:
 Euribor vs. NII: significant for both banks, but with a greater NII impact on Euribor in the BCCs, due to generation of profits
mostly from NIIs, as compared to the BPs.
 Euribor vs. ROE: more significant for BCC s.
 GDP vs NII: lower correlation between GDP variable and Euribor in profit generation. This is shown by the more moderate
values for both banks.
 GDP vs. ROE: performance is aligned with respect to NII, confirming the weak correlation between GDP and profitability
measures for both types of banks.
 GDP vs. adjustments: inverse correlation for both banks, confirming that a decrease in GDP sees an increase in LLP.
Source: MPS research
pag. 33
The z-score analysis 1/3
The z-score increases with the rise in ROAA and K/A ratio, and decreases in relation to an increase in volatility of
returns. Within this logic, the index provides a measure of the degree of financial stability of the bank: the higher the zscore, the greater the financial stability of the bank and vice-versa.
Z-score components for BCCs
2006
2007
2008
2009
2010
2011
2012
ROAA
0,0098
0,0109
0,0079
0,0040
0,0020
0,0016
0,0020
K/A
0,1087
0,1076
0,1095
0,1061
0,1198
0,1187
0,1049
Dev. Stand. ROAA
0,0040
0,0040
0,0040
0,0040
0,0040
0,0040
0,0040
Z-SCORE
29,7585
29,7471
29,4851
27,6363
30,5686
30,2169
26,8577
The variables begin to decline from 2008. In fact, the crisis of 2007 had an impact on the balance sheets of the banks.
The ROAA has taken a downward trend since 2007 because of lower profits recorded in the financial statements. The
Equity/Total Assets ratio decreases from 2006 onwards, reaching a value of less than 4 percentage points in 2012. The
banks have a lower capital base in the face of increased capital, but the allocation of 70% of profits to the legal reserve
has meant that the value of equity has not fallen, despite the lower index.
Source: MPS research
pag. 34
The z-score analysis 2/3
Z-score components for Banche Popolari
2006
2007
2008
2009
2010
2011
2012
ROAA
0,0087
0,0104
0,0008
0,0054
0,0043
-0,0114
-0,0036
K/A
0,1111
0,1518
0,1405
0,1307
0,1269
0,1088
0,0929
Dev. Stand. ROAA
0,0076
0,0076
0,0076
0,0076
0,0076
0,0076
0,0076
Z-SCORE
15,8249
21,4272
18,6617
17,9860
17,3199
12,8720
11,8008
ROAA for the Banche Popolari decreased significantly in 2008, continuing with a brief period of recovery up to the
negative values ​of 2011 and 2012. This shows that the banks did not generate profit with their investments. The collapse
of Lehman Brothers bank in September 2008 had the knock-on effect of creating substantial losses for all banks with
high interbank exposures. All of these losses, however, were not sufficiently covered by reserves. In fact, while the
BCCs, for regulatory reasons, had set aside provisions from the positive results of previous periods, the Banche
Popolari ,and the large banking groups in general , were characterized by a lower level of capitalization.
Source: MPS research
pag. 35
The z-score analysis 3/3
 Breakdown of the z-score of BCCs and Banche Popolari with the overall averages from 2006 to 2012 for each component
Z-SCORE
ROAA
K/A
BCC
29,18
0,0055
Dev. Stand.
ROAA
0,1108
0,0040
BP
16,55
0,0021
0,1233
0,0076
 To analyze the results obtained from the z-score formula we used the Fisher's F-test.
Mean
Variance
Observations
df
F
P(F<=f) onetail
F Critical onetail
Z-Score
Z-Score
BCC
BP
29,18146 16,55607
1,921432 11,2515
7
7
6
6
0,170771
0,02464
0,233434
ROAA BCC
Mean
0,005466
0,002101
Variance
Observations
df
F
P(F<=f) onetail
F Critical onetail
1,59E-05
7
6
0,276775
0,071616
5,73E-05
7
6
0,32738
K/A BCC
K/A BP
Mean
0,110776
Variance
Observations
df
F
P(F<=f) one-tail
3,59E-05
7
6
0,087756
0,004636
0,12325
7
0,00041
7
6
F Critical onetail
0,233434
ROAA BP
 The variance was analyzed using Fisher’s F-Test, which is used statistically to compare the average values of two samples
in order to verify whether they originate from the same homogeneous subset and can thus be compared. The results from
Fisher’s F-test reveal a P-value below the fixed threshold of α=0.05 (except for the ROAA for which the difference is
however not meaningful), indicating statistical significance in the comparison of samples analyzed using the Z-score, ROAA
(Return on Average Assets) and K/A (capital on assets) parameters.
Source: MPS research
pag. 36
Contacts
Head of Research & Investor Relations
Alessandro Santoni, PhD
Email: [email protected]
Tel:+39 0577-296477
Authors
Alessandro Santoni, Paolo Ceccherini
Email: [email protected]
We would like to thank Dott.ssa Gattola Silvia and Dott. Giurni Amodio Valerio for their support and collaboration
Disclaimer
This analysis has been prepared solely for information purposes. This document does not constitute an offer or invitation for the sale or purchase of securities or any assets,
business or undertaking described herein and shall not form the basis of any contract. The information set out above should not be relied upon for any purpose. Banca Monte
dei Paschi has not independently verified any of the information and does not make any representation or warranty, express or implied, as to the accuracy or completeness of
the information contained herein and it (including any of its respective directors, partners, employees or advisers or any other person) shall not have, to the extent permitted
by law, any liability for the information contained herein or any omissions therefrom or for any reliance that any party may seek to place upon such information. Banca Monte
dei Paschi undertakes no obligation to provide the recipient with access to any additional information or to update or correct the information. This information may not be
excerpted from, summarized, distributed, reproduced or used without the consent of Banca Monte dei Paschi. Neither the receipt of this information by any person, nor any
information contained herein constitutes, or shall be relied upon as constituting, the giving of investment advice by Banca Monte dei Paschi to any such person. Under no
circumstances should Banca Monte dei Paschi and their shareholders and subsidiaries or any of their employees be directly contacted in connection with this information
pag. 37