Milan ripe for a private banking renaissance

Over the past few years, Milan, Italy’s financial and economic capital, has gone through a lively renaissance.

High rise buildings funded by foreign investments have gone up, transforming the city’s skyline. The business district seems to have shifted from the historic buildings in the cobbled streets around La Scala opera house and the Duomo to the modern shining towers of Porta Nuova, including the 231-metre skyscraper with the glinting pinnacle housing heavyweight bank UniCredit.

Last year’s expo, a food-focused event, attracted 21m visitors, of which 7m were from abroad, with the government now planning to make the area an international centre of life sciences and technology/big data, which has already attracted $150m investment by IBM.

Attracting young people and entrepreneurs from all over the country, the 4m-strong metropolis is known for design, fashion and food, but still has a very strong backbone of added value manufacturing and mechanics. 

At the heart of one of the richest areas of Europe, in a country with a high level of household wealth and savings, Milan is the city both domestic and international private banks select for their headquarters in Italy. 

“This is an area with formidable concentration of wealth,” says Fabio Innocenzi, CEO, UBS Italy. 

Lombardia, the region of which Milan is the capital, together with neighbouring Piedmont, Veneto and Emilia-Romagna, accounts for more than 70 per cent of the total €1tn ($1.12tn) of private banking wealth in the country. “The Italian wealth management sector is very interesting and will continue to attract foreign banks,” predicts Mr Innocenzi.

But half of the total private banking wealth is still held by retail banks, according to the Italian Private Banking association. 

Capturing wealth still held by non-specialised banks is one the key targets of Fideuram Intesa Sanpaolo Private Banking, the largest private bank in Italy with €190bn in total assets, having emerged from the acquisition of Intesa Sanpaolo PB by Banca Fideuram.

“This is a good time for Italian private banking,” says Paolo Molesini, CEO of the combined bank. In an environment of low interest rates and market volatility, clients need to invest in riskier assets if they are to obtain any return, and need good advice, products and diversification.

Large specialised private banks will gain market share at the expense of small banks, he says, and the recent bail in of four small local banks, which has caused much grief to Italian savers, accelerated investors’ shift towards high quality, large institutions. “While the upper segment of our client base will continue to develop, we expect a lot from the lower segment too.” 

On the other hand, heavyweight UniCredit Private Banking has created a specialised wealth management boutique, Cordusio, with €30bn in AuM from existing clients, dedicated to serving ultra high net worths with more than €5m in assets. 

The decision was driven by growth expectations for this client segment, mainly existing entrepreneurs, and the belief that smaller specialised boutiques are finding it increasingly challenging to serve them, explains Frederik Geertman, general director at UniCredit Private Banking. Increased regulatory pressure and low interest rates are affecting banks traditionally based on interest-based sources of revenue. Extreme market volatility also reduces client transactions and therefore commissions. 

Swiss private banks, for instance, having less than €10bn in Italian client assets, are likely to struggle. 

The Italian asset management industry, which has grown at attractive rates and has enormous growth potential, has become a fierce battleground for foreign firms based in Milan. “The increased use of mutual funds is not just a fad,” believes Cinzia Tagliabue, CEO Italy, head of Western Europe and Latin America at UniCredit’s Pioneer Investments, whose announced merger with Santander Asset Management is believed to be on hold due to the UniCredit CEO’s resignation.  

Investors will have to learn to live with low interest rates for years, and much improved advisory services, particularly important in this kind of market difficult to interpret, are the key reasons for this structural change of investment attitude. 

Although the penetration rate of managed savings on families’ financial activities remains low (28 per cent)compared to other countries (41 and 63 per cent for the US and UK), new entrants may find it challenging to succeed, given distributors’ tendency to work with a limited number of partners, believes Ms Tagliabue. 

The interest shown by foreign asset managers such as Amundi or Atlas in Arca, the asset management company owned by Banche Popolari  – shows acquiring one of the smaller managers with an integrated distribution network may be the next trend. 

Another potentially attractive way in for foreign assets managers is through private equity and venture capital, a market still largely undeveloped. Activity, both from foreign and domestic players, has increased in the past couple of years, also fuelled by reduced access to bank credit. Key problems remain the small size of Italian firms, particularly by UK or US private equity groups’ standards, and low opportunities for an exit route.

Azimut, Italy’s largest independent asset manager, has launched various alternative solutions and joined partnerships providing support to domestic firms through instruments of private equity, debt, crowdfunding and venture capital. “We support the whole life-cycle of Italian firms, from the start up-phase to listing on the stockmarket,” explains Paola Mungo, co-CEO of Azimut Group. 

Pioneer Investments, which introduced mini-bonds three years ago, is also looking to enter the venture capital or private equity space. However, tax incentives for investors are needed to encourage them to invest in these long term investment vehicles, believes Pioneer’s Ms Tagliabue. 

Areas such as digital technology are also benefiting from private equity investments with Milan-based robo-adviser Moneyfarm recently launching in the UK, moving a large part of its staff to London, thanks to capital raised from UK private equity funds. 

With government bonds and real estate now less attractive because of low interest rates and high taxes, and investors’ growing disaffection with banks, there is a great market opportunity for robo-advisers, believes Mario Bortoli, CEO and founder of Euclidea, an online wealth management firm which is set to launch in a few months.

Innovative start-ups and entrepreneurs have found their base in Copernico, an innovative co-working space close to Central Milan railway station, with more than 1000 people, similar to WeWork in London, but on a much smaller scale. “It is very positive to share experiences,” says Mr Bortoli, previously head of multi-management at Fideuram Investimenti. 

While Milan is the centre from which private banking and asset management firms target the domestic market, certain factors prevent the city from acquiring a more international perspective. Although certainly the most efficient of Italian cities, well connected in terms of transport, with high quality human resources and renowned university, Milan is still part of the ‘Italian system’. 

A not particularly appealing tax regime, the lengthy Italian judicial system for civil affairs, high public debt, bureaucracy, as well as the risk of political instability, although this has subdued in recent times, are some of the factors that discourage financial firms in general from setting up headquarters in Milan, unless they are targeting the domestic market. 

Some progress has been made, including recent labour reform which makes the market less rigid than before, say people in the industry, but a lot more must be accomplished.

Mauro Panebianco, partner at PwC believes Milan could differentiate itself from other European financial centres if it was able to drive the cultural and artistic re-launch of the country. With 51 Unesco sites, Italy is the country with most world heritage sites in the world. Similarly to Atlante, the private equity fund backed by the government fund dedicated to recapitalise Italy’s weaker banks, a private equity fund, perhaps named after some illustrious Italian Renaissance artist, could attract private capital, also from abroad, aimed at valuing the country’s Italian artistic and cultural wealth, also through the use of new technologies. 

“This union between finance and business would become the lever for the development of our beautiful country,” says Mr Panebianco.