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Categorized | Banks

Once-thriving Veneto quietly becomes heart of Italy’s bank crisis

Posted on November 24, 2016

Paolo de Bortoli, a prosecco producer, inherited Veneto Banca shares from his grandparents. “My grandfather was one of the first members,” he says while looking out on fields of vines, their leaves turning golden in the low autumn light.

For Mr de Bortoli, born and raised in the foothills of the Dolomite mountains in Italy’s wealthy northeastern Veneto region, investing all his savings in the bank seemed to be “safer than a chest”.

“It had the crème of the Veneto so it could not fail,” he says.

But Veneto Banca has failed — at least in the eyes of its thousands of shareholders like Mr de Bortoli, who have seen the value of their shares plunge from €40.75 in 2014 to 10 cents.

A Veneto Banca logo at one of its Milan branches © Bloomberg

In August, Atlante — a private vehicle sponsored by the Italian government to backstop the troubled banks — took control of Veneto Banca and its larger neighbour, Banca Popolare di Vicenza. It was in effect a bailout, an attempt to stop contagion from the banks hitting larger lenders, and the latest instalment of Italy’s slow-motion banking crisis.

Both banks — linchpins of lending in an industrial heartland — suffered from bad loans and weak capital, and neither could attract investment. At Banca Popolare di Vicenza, the share price crashed from €62.50 in 2014 to 10 cents.

For Mr de Bortoli, the devastation wreaked by the collapse of the two banks recalls another tragedy in the Veneto region: the bursting of a dam in the nearby valley of Vajont in 1963 that swept away entire villages.

Like tens of thousands of other investors in the two unlisted banks, Mr de Bortoli has not just lost money as a shareholder. He had also taken out loans that were secured by shares in the bank — a scheme known as “self placement” whereby financial products are sold to customers that the lenders themselves had issued to meet tougher supervisory regulations. They now threaten to set off a cascade of defaults.

It would be difficult to overstate the impact on the Veneto region, still one of Europe’s richest. More than 100,000 retail investors in the two mutual banks have had at least €5bn wiped out this year. Italian industry lobby Unioncamere del Veneto estimates at least a 3.4 per cent fall in regional gross domestic product for 2016.

But the story behind the region’s banking crisis is more than just another tale of bad loans in Italy, a country suffering under the weight of €360bn of soured bank debt, of which €200bn is the worst kind, non-performing loans.

Just like developments at Monte dei Paschi di Siena, Europe’s most distressed bank, whose shareholders will vote today on a recapitalisation and restructuring plan, the drama in the Veneto raises questions about alleged corruption and lax supervision. The banks’ close relationships with customers led to cosy banking practices, such as the award of azione baciate, or kissing shares, which backfired as business failures mounted and the money ran out.

Experts say the problems point to a failure of governance that requires a system-wide clean-up, one that demands more than the efforts of the Atlante fund. Many fear that the legacy of the crisis here will cast a shadow over the region for the next generation.

“This is a social disaster,” says Pierre-Henri Conac, a professor of commercial law at Luxembourg University, who sat on the board of the European Securities and Markets Authority’s securities and markets stakeholder group, which has been concerned about mis-selling since 2011. “The people who will get hurt are the small guys.”

Miraculous growth

In the 1960s and 1970s the two big Veneto banks were at the forefront of major development in a region that includes Venice and the cities of Vicenza, Treviso and Verona. Tens of thousands of small industrial companies were established and, backed by bank loans, grew at speed.

They created what is known as an economic miracle in Italy’s north-east. A rural region gave birth to global businesses including fashion brands Benetton and Stefanel, eyewear makers Luxottica and Safilo and footwear group Geox.

Companies’ reliance on bank loans was crucial, says Guido Corbetta, an expert in family business at Milan’s Bocconi University. In some instances, these were provided on the basis of personal relationships and trust rather than objective criteria, say entrepreneurs, former board directors and officials. Crucially, the lenders were popolari — unlisted mutual banks, which had a one-shareholder-one-vote governance structure, allowing them to remain in locals’ hands. It was a tight-knit club.

Neither Veneto Banca nor Banca Popolare di Vicenza became publicly listed concerns. Instead, the price for the private market in the banks’ shares was determined on an annual basis by their management with the assistance of auditors and submitted to the shareholders’ meeting for approval.

Those who bought shares became not just shareholders but soci, the Italian word for members or partners. Being a socio brought social status and apparently excellent returns from the annual revaluation of the banks’ shares. It also brought member benefits, among them the “kissing shares” — though with today’s share prices recipients argue it was an uneven embrace.

Dino de Longhi, owner of a water treatment company, says he went to Veneto Banca in 2010 for a €200,000 home loan. The bank offered €260,000 at 5 per cent on the basis that €60,000 was used to buy bank shares.

“In the first place, they said why don’t we make it a €400,000 loan so you can buy €200,000 in shares. I said to them: ‘You are crazy’,” says Mr de Longhi, slumped in a chair in his office near Montebelluna, the small home town of Veneto Banca, where restored frescoes on buildings in the central square are a nod to the bank’s local largesse.

“The problem for me is that these banks were not listed,” says Giuseppe Castagna, the chief executive-designate of Banco BPM, a merger of two listed popolari which became joint stock companies after a 2015 reform forced them to convert by the end of this year.

According to insider accounts, Vicenza and Veneto Banca’s private market worked until Italy’s sovereign debt crisis began to ravage the region’s industrial fabric in 2012. Widening spreads on shares, collapsing demand and even the suicides of entrepreneurs reflected the damage done to the north-east.

At Veneto Banca the numbers tell the story. In 2011, it made a profit of €160m. In June 2012, it had 54,000 shareholders. But its losses began to mount — and so did its number of shareholders. In 2014, Veneto Banca had 88,000 shareholders and made €2.4bn of new loans. It also made a €650m loss for the year, the worst in its history. That year Luca Zaia, governor of the Veneto region, urged shareholders to support the bank to keep it independent and “keep decision-making in the Veneto region”.

‘A nice scheme’

Raffaello Baratto, who owns a maker of sunglasses parts, wanted to sell some shares in Veneto Banca in 2014 to buy an apartment for his daughter.

“They said leave the shares in the bank, they are doing well. We’ll do you a favour and put the money you need in your bank account by tomorrow,” he says. With all savings tied up in bank shares, Mr Baratto fears he will default on his loan.

“It was a nice scheme until the music stopped,” says the former chief executive of one of Italy’s largest banks, who says the situation was widely known among the country’s financial elite.

Pedestrians walk past a Banca Popolare di Vicenza bank branch in Milan © Bloomberg

By the time the music stopped at Banca Popolare di Vicenza, Italy’s eighth-largest bank by assets, loans outstripped the bank’s capital and deposits by 30 per cent according to some estimates. At Veneto Banca, requests by investors to sell about 12.5m shares had been unsatisfied by July 2015, according to a draft European Central Bank supervisory report from August 2015 seen by the Financial Times. The report says the bank’s liquidity position was “critical”.

An internal audit to evaluate the use of loans to pay for the shares estimated that €2.9m had been financed by Veneto Banca, it says. The board did not ask to deduct this amount from the supervisory capital, it adds.

The report also reveals extravagant remuneration for directors and sweet financing deals for some on the board.

There was high finance in there too. In February 2015, the board approved the purchase from JPMorgan of a pool of reverse mortgage loans. In return, the US bank committed to buy 900,000 Veneto Banca shares sold by retail shareholders but still not executed due to a lack of buy orders. JPMorgan declined to comment.

Vincenzo Consoli, Veneto Banca’s former chief executive, has been under house arrest since August. Antitrust authorities are investigating the sale of Veneto Banca’s mutuo soci product. The boards of Veneto Banca and Popolare di Vicenza, both now run by Atlante, have voted to take legal action against former managers.

But the broader question asked in the Veneto — and in Rome and Brussels — is why markets regulator Consob and the Bank of Italy failed to step in sooner. In 2014, the Bank of Italy fined Veneto Banca’s managers and auditors €2.8m. Both banks passed 2014 European stress tests, albeit with caveats. The central bank says it did not have power over their share prices and has been collaborating with prosecutors for months.

Mr Conac says Italy’s banks need a system-wide clean up and that tricked retail investors should be indemnified. Pier Carlo Padoan, Italy’s finance minister, has denied that the country’s banks have a systemic problem, but he agrees retail investors who were mis-sold investments should be protected.

Regional despair

In the Veneto there is a palpable rage towards politicians and institutions. A general loss of confidence is reflected in the banks’ eroding deposit base.

Veneto Banca tapped Europe’s emergency liquidity assistance over the summer, say people with direct knowledge of the decision. A mooted plan to merge Veneto and Vicenza and lay off 3,000 employees risks a social crisis on top of a lending crunch, locals fear.

Italian premier Matteo Renzi faces a constitutional referendum on December 4 © EPA

It also has potential political consequences as Italians prepare to vote in a constitutional referendum on December 4, which threatens to unseat Matteo Renzi, the prime minister.

Loris Gallina, owner of a consultancy, says he lost life savings of €800,000 in Veneto Banca. Mr Gallina failed in his efforts to speak to Mr Renzi when the prime minister visited a Geox factory in Montebelluna last month. Mr Renzi has been in the Veneto frequently ahead of the vote but has made no public comment on the bank crisis.

“If I go to a plumber I trust he will fix my plumbing. If I go to a doctor I trust he will cure my health. If I go to a bank to invest my savings I trust it will look after them,” Mr Gallina says. “So who do I trust now?” he asks. “Who can I trust?”

The Italian government passed a reform of the popolari mutual banks in January 2015, forcing them to turn into joint stock companies by the end of this year.

The new law forced the 10 largest popolari to end their governance structure of one vote for each shareholder. The aim was to encourage consolidation, boost profitability and credit flows. It also proved the trigger for exposing deeper governance failings.

The law delivered a victory for Rome this year when a deal was struck between two former popolari that have become joint stock companies — Banca Popolare di Milano and Banco Popolare. The deal, due to close next year, will create Banco BPM, which will be Italy’s third-largest lender behind UniCredit and Intesa Sanpaolo.

But shareholders at several popolari still need to vote to agree to end their mutual status. These include Banca Popolare dell’Emilia Romagna, Banca Popolare di Bari and Banca Popolare di Sondrio.

Bankers warn the conversion of the remaining mutual banks could reveal other cases of mis-selling. About 70,000 shareholders (soci) at Popolare di Bari are up in arms about the chance they will face the same fate as those in Vicenza and Veneto Banca by seeing the value of their stakes in the lender slashed.

Retail investors also risk being hit if Monte dei Paschi di Siena decides to undertake a mandatory conversion of its €5bn of subordinated debt to shore up its capital, say bankers. About €2bn of this debt is held by retail investors.

Last year, Italy was shaken when a retiree committed suicide after he lost €100,000 of savings held in a subordinated bond that was bailed in as part of a state rescue of Banca Popolare dell’ Etruria e del Lazio.