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OPTIMISTS VS. PESSIMISTS IN ITALIAN BANKING

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By David Brierley and Saad Sarfraz

There is no doubt that the Italian government under Matteo Renzi is seeking to achieve higher growth and stimulate employment and wants greater flexibility from the EU on the country’s budget deficit. The government’s struggle looks tough since its budgets are based on a 0.8% GDP growth forecast for this year. For its part, the Italian employers’ federation Confindustria is predicting that GDP will rise by 0.2% in 2014 and 1.0% in 2015.

Yet much is happening. The Rome government is seeking to undertake such a number of disparate changes.

What’s more, the ECB is helping Italy’s cause with the most loose of policies. “[ECB Chief Mario] Draghi is doing his utmost for Italy, which is too simply too big to fail and giving the impression that everything is fine,” an Italian bank analyst, who asked not to be named, told SNL. Investors have bought into this story.

“There is a disconnect between the market perception and the reality of the banking sector where is there is no sign of the growth people are expecting. People are being carried away by business plans, which do not make any sense but were used to raise some money,” the unnamed analyst said.

He further expressed skepticism about the rigor of the ECB stress test — pointing, for example, to differing stresses applied to property in France and Italy — and suggested that the regulator was being “as complacent as possible.” This, too, serves to support share prices.

Not everyone is quite as pessimistic.

David Grinsztajn, a bank analyst at AlphaValue, told SNL that the valuations of Italian banks have risen strongly in the last year, not least on the basis of bank management predictions and business plans foreseeing a recovery in 2016 or 2017. These plans, Grinsztajn said, were “optimistic but not particularly aggressive in terms of their cost of risk” reflecting mid-cycle predictions and the price-to-book ratios for the leading banks such as Intesa Sanpaolo SpAwere not especially demanding at 0.7x or 0.8x. UniCredit SpA has risen by 65% in the last year and its price-to-tangible book ratio according to SNL figures is around 0.8x.

Pre-crisis, price-to-total asset ratios were much higher than today. Moreover, the shares of the Spanish banks had clearly performed more strongly than those of their Italian peers and trade around 1x book.

“Italian banks do trade at a discount. The structural problems of the Italian economy are reflected in this way while the Spanish recovery translates into higher multiples. On my view, with the exception of Mediobanca SpA, Italian banks are fairly valued on the basis of expectations for 2016. The banks face two challenges: The asset quality review and the possibility that the recovery be disappointing,” Grinsztajn observed.

Looking at several purely domestic banks, SNL’s charts highlight the difficulties of Italian domestic banking.

Returns and asset quality, after a long recession, remain a critical issue. Nonperforming loans — in our charts, defined as gross impaired customer loans — have risen continuously and strongly since 2010, soaring in 2013.

There was some improvement in the ratio of credit costs to pre-impairment profits in the first quarter 2014 compared to full-year 2013. However, last year did see some preparation for the asset quality review with a large correction to asset values at Banca Carige SpA, for example.

OPTIMISTS VS. PESSIMISTS IN ITALIAN BANKING 9There was some improvement in the ratio of credit costs to pre-impairment profits in the first quarter 2014 compared to full-year 2013. However, last year did see some preparation for the asset quality review with a large correction to asset values at Banca Carige SpA, for example.

OPTIMISTS VS. PESSIMISTS IN ITALIAN BANKING 10Under the Italian classification system, which is generally considered stringent, gross impaired customer loans are subdivided into four categories: NPLs, doubtful, restructured and past due loans. NPLs tend to form the bulk of the gross impaired loans. Thus credit costs look high while reserves (and equity) compared to impaired loans appear rather low.

UniCredit — which is an international bank — had a 52.4% coverage ratio on gross impaired loans at the end of March. This is distinctly higher than the figures shown by the domestic banks, according to SNL.

A delayed recovery surely spells further loan losses. Thus the current outlook for profits and returns, which have been desperately weak in recent years, as our chart shows, cannot be good in 2014.

Asset quality is, however, an issue not just because of the state of the economy.

Many if not most of the banks listed are troubled, not least because of problems of governance and, in some cases, corruption and fraud.

Capital raises — including the injection of foreign capital — and international supervision together with bank mergers look to be the way forward. However, given the uncertainty over asset quality, valuing Italian banks looks a hazardous business, not least at this stage in the cycle.

Buying Banca Etruria, given the very high NPL ratios seen in our charts, would today demand considerable courage. It is perhaps no surprise that after one failed merger attempt, the bank is still openly seeking partners.

Buying Banca Etruria, given the very high NPL ratios seen in our charts, would today demand considerable courage. It is perhaps no surprise that after one failed merger attempt, the bank is still openly seeking partners.

The story of Carige alone would and doubtless will fill a book. The Italian judicial authorities have seized assets worth €46 million belonging to individuals close to ex-CEO Giovanni Berneschi of which he himself held some €21.9 million, including luxury apartments in Rome and Milan, La Repubblica revealed June 25. The intriguing relationship between the Carige foundation and the Vatican bank Istituto per le Opere di Religione is now also being investigated by the Italian authorities.

Meanwhile, Carige has declared that its €800 million capital raise might not suffice. This raises the question of who might invest given that the entire bank is valued at around €800 million and its current prospectus comes larded with risk warnings. Carige’s heavy losses seen in our tables for 2013 were largely due to goodwill write-offs and raised loan loss provisions, yet the bank’s underlying performance was not inspiring given sharply falling net interest and fee income year over year. Presumably, the situation will not change much in 2014.

Even Unione di Banche Italiane SCpA, the largest and clearly the best capitalized of the banks surveyed, has fallen foul of legal authorities with accusations of blocking regulation by the Bank of Italy and fixing the bank’s leadership. Government investigators raided UBI bankers’ homes and offices in May.

These are not, unfortunately, isolated incidents. It is no wonder that the Italian state auditor is highlighting the way that corruption is blocking Italy’s recovery.

Our figures indicate that a general and credible cleansing of Italy’s banking system is required. Ideally, the ECB asset quality review and stress test would solve the problem, but simple solutions look to be in short supply.

OPTIMISTS VS. PESSIMISTS IN ITALIAN BANKING 11

OPTIMISTS VS. PESSIMISTS IN ITALIAN BANKING 12

Banking

How open banking can drive innovation and growth in a post-COVID world

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How open banking can drive innovation and growth in a post-COVID world 13

By Billel Ridelle, CEO at Sweep

Times are pretty tough for businesses right now. For SMEs in particular, a global financial and health crisis of the sort we’re currently witnessing represents a truly existential risk. Yet there is hope of a brighter future. Digital transformation is already helping organisations in countless sectors, with everything from building supply chain resilience to rolling out potentially life-saving contact-tracing schemes. Yet it’s not just delivering transformative benefits in grand projects like this.

Thanks to open banking rules, a new wave of fintech innovation is sweeping the globe, offering business leaders a new launchpad for success. Even something as simple as corporate expenses can be transformed by the power of open data — to help firms cut costs, reduce fraud risk and become more productive.

Opening up data to innovation

It’s easy to get bogged down in the technical details of open banking, and the slew of new acronyms it has ushered in: Third Party Providers (TPPs), Account Information Service Providers (AISPs), Payment Initiation Service Providers (PISPs), and Application Programming Interfaces (APIs). Yet at the heart of the open banking revolution is a simple concept: the idea that forcing banks to open up their customers’ financial data will create more competition, and fresh opportunities for market entrants to create innovative new services.

This was at the heart of the UK government’s world-leading strategy when it was introduced back in 2016. A revised EU payment services directive (PSD2) gave it legal teeth, mandating that all payment account providers in the region provide third-party access for customers that want it. The push is also about reducing banking fees and enhancing financial inclusion, of course, but it’s in competition and innovation that the benefits really shine for businesses.

Access to real-time financial data via open APIs has already resulted in a range of new services which are helping businesses ride out the current economic storm. Whether it’s capabilities that can help freelancers prove loss of income to receive targeted loans, or services designed to streamline business processes to reduce costs and fraud — examples of innovation are endless.

What’s more, it’s already global. Aside from the PSD2, open banking rules are taking shape in Australia, New Zealand, Japan, Singapore, Hong Kong, Mexico and elsewhere. According to frequently cited Gartner predictions, regulators in around half of the G20 countries will create an open banking API regime over the coming year.

In the UK alone this is set to create a £7.2 billion revenue opportunity by 2022, with 71% of SMBs and 64% of adults expected to adopt it by then, according to PwC.

Making expenses pay

Corporate expenses and travel management might not be an area one immediately associates with high levels of innovation. But here too, open banking is having a profound impact. By combining automation, in-app approvals, integration with corporate policy and secure open banking APIs, companies like Sweep are offering new ways to solve old problems.

Part of the legacy challenge relates to productivity. Managing corporate travel costs and expenses was cited last year as the biggest concern of the UK’s small and mid-sized firms. Separate research claimed that SMBs are estimated to lose over £8.7 billion annually due to the time it takes employees and managers to complete these menial tasks. By automatically integrating real-time corporate bank account information into an easy-to-use app, we can save up to 15 hours a month on data input and travel administration per employee. That’s all time they could be spending on growing the business.

Another key area of concern is fraud. According to some estimates, fraudulent expenses claims could be costing UK firms £1.9 billion each year. In the US, the figure could be approaching $3 billion annually. Whether it’s the result of submitting expense claims for personal purchases, claiming for additional mileage on work trips, or over-claiming for other items, it all adds up. What’s more, fraud tends to spike particularly during times of recession, when normally diligent employees look for ways to supplement their income.

In this use case too, there are benefits to be had from open banking-powered solutions. Traditional manual processes offer too many gaps that can be exploited by fraudsters. Submitting paper receipts to finance departments — which must then input the information into spreadsheets or accounting software — is slow, error-prone and lacks accountability. However, with modern digital systems, transactions are automatically fed through from bank account to expense management platform. Here they are seamlessly checked according to policy and automatically approved, rejected or flagged for further investigation.

The future’s open

Thanks to the power of open banking, innovative fintech use cases like this are transforming operational challenges into opportunities to cut costs and fraud risks, improve employee productivity and become more strategic. With real-time data fed through from corporate bank accounts, finance directors can better understand spending patterns, react with greater agility and gain the insight they need to run their businesses more efficiently.

So what of the future? The good news is that open banking is only just getting started. As more sophisticated machine learning algorithms are developed, it has the potential for even greater disruption by empowering SMEs with predictive analytics and forecasting tools, or more accurate fraud checks, for example. Those in Europe may benefit most as PSD2 allows businesses to use tools that work seamlessly and securely across markets, without requiring any duplication of work.

In fact, open banking is not just good for individual SMEs, it’s important for Europe as a whole if we are ever to nurture successful digital unicorns to compete with those coming out of the US and China.

Open banking been described in the past as a quiet revolution. With the right buy-in from business and the continued innovation of digital platforms, it may soon become a full-throated roar.

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Banking

Banks take note: Customers want to pay with points

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Banks take note: Customers want to pay with points 14

By Len Covello, Chief Technology Officer of Engage People

‘Pay with Points’ – that is, integrating the ability to pay with loyalty reward points directly into the online check-out process – is a trend that is growing exponentially with big-name brands like Amazon, PayPal and American Express leading the way.

The past few months have posed an unprecedented challenge in the loyalty space, especially with the pandemic’s impact on travel. The unforeseen impacts across the board have caused institutions with premier incentive credit cards to feel increased pressure to retain their loyalty members. As such, exploring innovative ways to create a personalized loyalty experience for customers is at the forefront now more than ever.

Offering the flexibility to pay with points is certainly one option that can help transform financial institutions’ (FIs) loyalty programs. With the evolution of consumer preferences – like relying on other forms of payment outside of credit and the move towards contactless payments – viewing points as currency naturally ties into the “new ways” in which American consumers bank, pay and shop.

Personalization is a win-win for banks and loyalty program members

As the world continues to evolve in light of the pandemic, consumer habits like mobile banking and shopping online for groceries are likely to carry over long-term. As a result, consumers will expect their loyalty programs to provide new incentives to fit their ever-changing needs. By offering loyalty program members the ability to pay with points for the items they want or need during the online check-out process, FIs are creating a more personalized shopping experience. This can help increase member retention, especially compared to dated loyalty programs that offer limited options for point redemption.

As we’ve learned with iPhones, tap to pay and other technologies that reduce friction, once consumers begin using a new and convenient digital service, there’s little desire to go back to the old way of doing things. By incorporating pay with points into loyalty programs sooner rather than later, FIs will be setting themselves apart in terms of meeting their member’s needs with modern payment offerings.

Outside of providing a personalized experience to loyalty program members, pay with points as a program perk also has specific benefits when it comes to a bank’s bottom line. Currently, there are billions of dollars in liabilities in the form of unused points sitting on banks balance sheets. This is in part due to loyalty program members inability to spend their points how they want. By allowing a more personal and flexible way to spend points, banks can reduce those liabilities while creating a more engaging experience for their members.

Meeting consumer demand is easier than you think

Incorporating the infrastructure to power new digital capabilities is more often than not a cause for concern: how expensive will it be? What does down time look like? How long will it take to get up and running?

Luckily for banks, the process is actually quite simple – and inexpensive. With a lightweight integration of a few APIs, banks can tap into a pool of retailers to make their merchandise available for purchase with points by loyalty program members in no time. And as the retail network expands, there’s no need for additional IT work to add new brands into the fold. Ultimately, API integrations upfront create a frictionless and scalable solution for FIs and a preferred shopping experience for members. And based on market feedback, the personalized experience that results from giving customers the option to spend points as easily as they would cash or card, far exceeds any initial inconveniences that may arise.

According to our recent Customer Loyalty Survey, 75% of customers are more likely to spend loyalty reward points to make a purchase over other payment methods. The findings also indicated that 72% of customers are actively engaged in loyalty programs because of the available redemption options.

Long-term loyalty is not just about acquisition or promotional material, but rather the experience of redemption and viewing loyalty points through a fresh lens. Customers today are well-versed in what’s available to them online. The more redemption options offered to the consumer, the more appealing the FI becomes.

Loyalty point redemption in action

In April of 2020, when the world was mostly in lockdown, we looked at how a select group of approximately 3,000 consumers spent their loyalty reward points, comparing April 2020 to April 2019. Key findings suggest that, if given the opportunity, consumers will spend their loyalty points to buy what they want or need based on their specific circumstances. For example:

  • Significant increases in the purchase of outdoor items like BBQs and smokers (+3401%), fire pits and heaters (+2644%) and pool and patio accessories (+1297%) suggested people were making the most of the spaces around them.
  • Consumers were focusing on their personal health and well-being with the increase in points spent on fitness accessories (+1664%), bike accessories (+1453%) and fitness trackers (+536%).
  • Finally, the increase in purchases of hand-held power tools (+3076%), smart control lighting (+1750%), stick vacuums (+1096%) and specialty small appliances (+531%) suggests consumers took advantage of the opportunity to check projects off their at-home to-do lists.

We’re keeping a close eye on how loyalty point purchases evolve as more retailers and FIs get on board with viewing points as a true form of currency, especially in a post-pandemic world. Which items will rise to the top in the coming months and years as the payments ecosystem evolves? Will flight purchases or experience-based purchases regain popularity?

What’s next in the loyalty payments space?

As consumers continue to look for alternative payment methods, offering the flexibility to pay with points is the perfect opportunity for FIs looking to reinvent their loyalty programs. Engage People has always viewed loyalty points as a fiat currency, creating innovative technology that allows for easy integration that satisfies loyalty program members’ needs.

In the future, there’s a real opportunity to incorporate loyalty reward points into everyday life – extending beyond the online shopping experience. Imagine a world where you can pay for coffee, your bills, monthly subscription services like Netflix or make charitable donations with loyalty points just as you would with a credit card or cash. The future involves a mindset shift by consumers, financial institutions and the entire payments ecosystem, and that shift is viewing loyalty points as a true form of currency. Like reaching for cash, a debit or credit card, loyalty points can easily become a payment option of choice for consumers. FIs that are at the forefront of this trend now have the most to gain long term.

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Banking

The Importance of Liquidity Solutions

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The Importance of Liquidity Solutions 15

By Justin Silsbury, Lead – Product Manager at Infosys Finacle

Economic uncertainty and business complexity have made a deep impact on corporate treasury management in recent years. With regulations getting tougher, funding becoming elusive, and profits shrinking fast, the way liquidity is managed is making a real difference to companies’ survival. As corporate treasurers around the world struggle with the challenges of liquidity management, they are turning to their banks for support; it is imperative that the industry respond with digital solutions that enable clients to manage money efficiently at low cost.

Why corporates need liquidity solutions

Corporate banking customers need a liquidity structure that maximises security, liquidity and yield.  Even today, treasurers in multinational corporations lack visibility into their companies’ overall cash position across countries and currencies. Delivering returns on excess cash, although important, is not a priority for them, but making sure the money is safe and available when needed, is. Therefore, a liquidity solution should be able to consolidate a company’s cash position across all its accounts around the world, provide a unified view in real-time, as well as offer timely suggestions on maximising utilisation and yield. It should automate all these functions as far as possible to reduce both manual overheads and the risk of moving money manually on a daily basis.

Broadly, liquidity solutions are of three types – cash concentration solutions that automatically move money around the world; interest optimization solutions that reward customers based on their aggregated balances without the need to move any money; and investment sweeps that move all the consolidated funds to a money market fund or other short-term investment to earn extra returns.

And why banks should provide them

There are several reasons why banks should invest in a sound liquidity solution. The most important one is that without it, a bank can never become a customer’s principal financial institution. A large corporation will have many banking providers, each one trying to increase share of wallet; in this situation, a high involvement product such as a liquidity solution is particularly effective for building stickiness and strengthening a bank’s position vis-à-vis others. An illustration may be useful here: say a food retail chain banks with Santander in the U.K., and other banks across Europe. If the retailer chooses to consolidate its cash daily into its U.K. account using Santander’s liquidity management solution, where the excess cash can then be swept into an investment vehicle overnight, over time, Santander can cross-sell other products to the client to increase revenue and stickiness.

Technology does it

Corporate banking has historically lagged retail banking in technology adoption. It is high time that banks remedied this by digitizing their corporate solutions. Specifically, they can leverage a variety of digital technologies to provide clients instant access to liquidity, global visibility into the overall cash position, and efficient working capital management. With robotic process automation and machine learning, they can simplify and automate processes to cut cost and lead-time.  Blockchain enables banks to offer fast, secure, cross-border transactions, while open APIs ease collaboration and co-innovation with Fintechs, customers and developers.

Banks need to deliver frictionless, personalized, “retail banking-like” experiences over customer-centric corporate banking channels. Instead of channel silos – one for liquidity, another for payments and so on – customers will see data from all their accounts in one place, from where they can manage liquidity, forecast cash flows, secure trade finance etc. On their part, banks can use 360-degree customer insight to issue not just timely alerts but also contextual recommendations. For instance, being able to alert a customer that a large payment is due the following week, but also suggesting the best options for arranging those funds.

Apart from improving the customer journey, a real move in corporate banking is towards cloud adoption. Many banks have started the cloud journey, but many still have some distance to cover before they are fully cloud-enabled; mainly, they are migrating monolithic, on-premise workloads to the cloud. Early adopters, such as JP Morgan Chase, HSBC and Citibank, are setting the pace by developing their own capabilities as well as procuring certain components from Fintech partners to plug into their overall solution.

One size doesn’t fit all

In the past, corporate banking solutions were largely meant for big companies, but today they are relevant to enterprises of all sizes. Internet and mobile have enabled even small local firms to scale far and wide, creating a need for solutions to manage their money across borders. Therefore, banks need to make sure their liquidity solution can accommodate the different needs of different clients. Only a flexible, componentised solution can do that.

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