Most of Italy's major banks had already committed to deep cuts to their branch network before the coronavirus outbreak. But under increasing pressure to slash costs, another cull could be imminent, industry experts say.
The pandemic may also catalyze Italy's biggest banks to speed up digitalization, a move that will diminish the importance of the bank branch in a country that has one of the highest densities of branches in Europe.
Italy is widely considered over-branched, with 40.8 per 100,000 adults as of 2018, according to the IMF. This compares with 11.10 per 100,000 in Germany, and 34.85 per 100,000 in France, the data shows. This is a long-standing structural issue, and a consequence of banking liberalization laws passed in the 1990s that resulted in an explosion in the number of bank branches. Following the global financial crisis, banks were forced to rethink their networks. Now they face new pressures on costs, which could lead to another wave of branch closures, according to Arnaud Journois, vice president, Global Financial Institutions, DBRS Morningstar.
Italy's five largest banks have already made significant cuts to their branch networks, with UniCredit SpA, Intesa Sanpaolo SpA, Unione di Banche Italiane SpA, Banco BPM SpA and Banca Monte dei Paschi di Siena SpA axing around 25% of their networks between 2014 and 2019, Journois said. "We expect the COVID-19 pandemic to negatively impact Italian banks' profitability, mainly as a result of higher asset quality costs as well as weaker revenues. This will add pressure to further reduce costs," he said in an interview.
UniCredit was already preparing for further branch cuts before the pandemic bit, confirming in February that it planned to close 450 branches by 2023.
Intesa has shuttered over 1,000 branches since 2018, and is not ruling out further cuts given the number of customers that had successfully shifted to digital channels during lockdown, it said in its first-quarter results.
"In our view, the experience with COVID-19 will accelerate banking digitalization, allowing for further simplification of the branch networks. We believe that large banks have more flexibility to accelerate their current reduction targets, although it's unlikely that the reduction will continue at the same pace that they have in the past five years," Journois said.
Although Italy's lockdown, which began on March 9 and is now unwinding, was strict, many of the country's banks did maintain a limited service throughout. Monte dei Paschi, for example, kept branches open three mornings per week by appointment only. UniCredit said mid-March that it had shut down 70% of its branch network in Italy, leaving a handful of branches open by appointment only in each region, a decision that was welcomed by unions.
The branch has not been consigned to history yet, but over the coming years Italian banks will focus heavily on digitalization, according to Paola Musile Tanzi, full professor, financial markets and institutions at the University of Perugia.
Banks are already starting to commit more money to fintech and digitalization, she said in an email, pointing to a December 2019 paper published by Banca d'Italia, the Italian central bank.
According to the paper, a sample of 165 banks and other financial intermediaries said they planned to invest almost €624 million in fintech between 2017 and 2019. Lenders participating in the survey spent €233 million on fintech investments between 2017 and 2018, while a further €391 million of investment is anticipated.
Technology is a "winner" for low value-add services, but there is still a role for the branch to play in higher value business, she added.
"This does not mean that all the banks will become online banks, but most of them will have a 'blended' business model, able to combine branches and digital services. The 'hybrid' model could be an opportunity in order to maximize the banks' productivity," she said.
Roberto Mancone, CEO and founder of Milan-based financial technology and blockchain consultancy WhatIf, agrees that there is still a role for the bank branch, especially for lines of business that are heavily paper-based and require in-person signatures, such as mortgages. Banks may decide to cut their branch networks further following the pandemic, but they will need to negotiate with unions to push through further job cuts on top of those already announced, he said in an interview.
Federazione Autonoma Bancari Italiani, the Italian bank workers union, did not respond to a request for comment.
Branches are a key point of discussion in Intesa's ongoing negotiations to buy rival UBI. To satisfy the requirements of the Italian Competition Authority, Intesa plans to offload branches to BPER Banca SpA. Intesa initially expected to include between 400 and 500 branches in the deal, but now wants to increase that number to 532 in order to satisfy antitrust requirements.