Banco BPM May Deepen Cost Cutting 

(Bloomberg) -- Banco BPM SpA may deepen cost cuts and branch closures and slow planned investments as the coronavirus pandemic weighs on profitability, Chief Executive Officer Giuseppe Castagna said.

Italy’s third-largest bank unveiled its four-year strategic plan just days before the country entered a nationwide lockdown, with a 0.1% contraction as its worst-case scenario for the economy. Bloomberg Economics now expects output to shrink by more than 13% over the full year.

“The world has changed and the underlying macroeconomic picture makes the plan’s goals more difficult to be reached,” Castagna said in a phone interview this week. “Working on new numbers now doesn’t make sense given the future uncertainty, so we have to wait until this crisis will end.”

The coming recession may undo years of painful restructuring to cut bad debts across Italy’s financial industry. The eventual economic damage to banks and their clients depends on still-unknown factors such as the duration of the virus crisis and the effectiveness of government assistance.

Banco BPM had targeted 600 million euros ($650 million) of investments in technology through its plan period and profit up to about 770 million euros in 2023, even accounting for the possibility of an economic shock this year.

“What we can do is to use what we are learning from this crisis to adjust our strategy,” the CEO said. “Smart-working functions, so branch closures may be much more than the 200 we expected in the business plan.”

With lower expectations of profitability, some planned investments will be delayed or implemented more slowly “because they are not supported by sufficient revenue growth at this time or they are no longer a priority in the current environment,” he said.

NPLs Under Control

Castagna said he doesn’t expect a “big impact” on the bank’s asset quality and credit risk in the short term, thanks to measures taken by regulators. The longer term will depend on the duration of the lockdown and the effectiveness of measures adopted at national and European level.

Prime Minister Giuseppe Conte said this week that Italy will begin to relax its controls starting on March 4 though he cautioned that the changes will be phased in gradually.

Regulators are encouraging banks to be flexible applying rules to avoid a spike in provisions, while massive government guarantees also make it easier for lenders to assume lower default risks. Banco BPM’s non-performing loans accounted for 9.1% of the total at the end of last year, down from a peak of more than 24% at the end of 2016.

“Fortunately, the quality of our loan portfolio has improved a lot over the last three years,” he said “But it will be crucial that phase 2 will start soon, as the country cannot afford to stand still.”

Banco BPM has committed at least 5 billion euros in additional financing beyond the new lending granted by state and has approved more than 50,000 moratoriums on repayments of mortgages and other debts involving almost 10 billion euros of loans.

Other Highlights

  • After the eruption of the crisis Banco BPM adopted a flexible, project-based set-up aimed at ensuring a coordinated approach throughout all our daily managerial choices, said Castagna. “Dedicated working groups have been established governing revenue, cost and balance sheet implications of the crisis, under the coordination of a steering committee composed by the top management”
  • Banco BPM has more than enough capital to face the crisis; the bank’s capital buffers are double what regulators require
  • Bank focused on core business, no M&A in horizon
  • Measures taken by regulators and government go in the right direction, even if some procedures are complex
  • Bank has received 20,000 requests for state-backed loans of up to EU25,000 totalling ~EU320m in less than 3 days, first loans already delivered

©2020 Bloomberg L.P.

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