RPT-Fitch: Italian Banks to Step Up Corporate Governance Changes
(Repeat for additional subscribers)
Sept 3 (Reuters) - (The following statement was released by the rating agency)
Italian banks are likely to change their corporate governance structures to improve transparency, reduce conflicts of interest and remove obstacles to capital strengthening, Fitch Ratings says. Better governance structures and procedures that foster healthy shareholder participation and enhance management effectiveness could support bank ratings.
The Italian banks that experienced the greatest difficulties during the eurozone crisis often had corporate governance weaknesses. Mainly cooperative and foundation banks, their credit profiles deteriorated rapidly and convoluted decision-making structures has delayed restructuring and capital raising.
We believe that weak corporate governance structures can deter effective management actions, especially where ownership and management structures are vulnerable to interference from local politics, current and retired employees, and other parties.
Pressure is increasing for Italian banks with weak governance procedures to make changes so they can raise capital, restructure their business and recover from the crisis. The Bank of Italy is also encouraging banks to raise standards and has highlighted problems with cooperative banks particularly the largest listed ones, and banking foundations in recent public speeches. Both types of ownership have made it more difficult for banks to raise fresh equity and to take swift management decisions.
The anticipated supervision by the European Central Bank under the single supervisory mechanism, which we expect to be in place by end- 2014, should further help spur these banks to adopt stronger structures and procedures. This could support ratings as we see weak corporate governance as a negative rating factor.
Listed cooperative banks often still apply rigid voting rules and ownership ceilings to their fragmented shareholder bases that can hinder decision making.
For example, at Banca Popolare di Milano, a small group of active current and retired employee shareholders with close links to the unions have at times blocked strategic and restructuring proposals. The bank's ratings are on Rating Watch Negative (RWN) as we believe they will come under pressure if the bank cannot strengthen corporate governance so it can continue to improve cost efficiency, tighten risk procedures and raise capital.
Banking foundations sometimes have excessive influence over their bank's strategy. At Banca Carige, frictions between the bank's largest shareholder - a banking foundation - and the chairman of the board resulted in resignations from the majority of board members at end-July and early August. The foundation has very limited financial firepower, so would not be able to participate in a substantial equity increase, part of the bank's capital restoration plan, without being diluted. Banca Carige's ratings are on RWN, reflecting the execution risk it faces in strengthening its capital by end-2013.
Some mid-sized cooperative and savings banks in Italy (not rated by Fitch) are under special administration as a result of, among other reasons, opaque corporate governance. We expect some of these to also improve governance procedures.