Despite the creation of unprecedented wealth in Italy during the post-war boom years, private banking was an alien concept in the country un...

Despite the creation of unprecedented wealth in Italy during the post-war boom years, private banking was an alien concept in the country until very recently. Over the last decade, however, Italians have put firmly behind them the political turmoil and economic instability of the 1960s and 1970s that triggered capital flight. Italians are now choosing to invest at home instead of spiriting away their newly created riches from company sales, IPOs and stock options, as they did during what they call "the dark years".

One Milan banker recalled how the kidnapping and murder of Aldo Moro, the Christian Democrat leader expected to become president, by Red Brigade terrorists in 1978 threw the country into political and economic turmoil.

It was only a few years after the authorities finally cracked down on terrorism, however, that the "war on terror was won".

"That was followed by a 20 year bonanza in the financial markets," said Vincenzo Piantedosi of Banca Svizzera Italia, a Swiss private bank owned by Italy's Generali group.

Still, it has taken a while for investors to win enough confidence to bring their money home. But now that's just what they are doing.

A great deal of wealth has also been created onshore by the Italian government tax amnesty of 2002.

Known as the "scudo fiscale", the amnesty allowed Italians to repatriate their offshore holdings on the condition that they paid a 2.5 per cent flat tax rate without risk of prosecution. This has triggered the return of between €55bn and €60bn, bringing Italy's estimated wealth up to some €500bn.

Bankers believe a second tax amnesty, which will take effect in 2003, could trigger the return of as much money again, increasing Italy's wealth pool by between ten and 15 per cent.

Even without a Scudo II, bankers are optimistic about the prospects of a growing domestic wealth management market in Italy and see this onshore pool growing between seven and nine per cent in 2003, despite weak markets and little recovery in sight.

Everyone seems to be scrambling to set up private banking operations to grab a slice of this lucrative market, from universal banks like Banca di Roma, small regional banks like Cassa Lombardia, to big investment banks such as Goldman Sachs — if they haven't done so already.

"It's remarkable just how many are looking at developing that business, how many have set up or are setting up private banking operations," said Henry MacNevin, Italian banking analyst at Moody's in London.

"They are segmenting the customer base more than in the past and looking to take advantage of funds that returned by tax amnesty. The last year and a half has been difficult in terms of markets but, strategically, private banking is very much in focus," MacNevin said.

This expanding pool of wealth, combined with new market-oriented legislation, is boosting prospects for the growth of new assets. Hedge funds or "fondi speculativi" were made possible by a 1999 law which stipulates that hedge funds may only accept a minimum investment of €1m and take up to 100 investors.

Raffaele Jerusalmi, head of equity and derivatives markets at the Borsa Italiana, said some €860m in hedge funds at the end of 2001 could grow up to €15bn by 2005. But Piantedosi was sceptical, saying it would take another ten to 15 years for this young market to develop.

In 2001, more than 15 asset managers specialising in hedge funds had licences. Eight of those belonged to Italian banks while the others were independent. About ten more are in the pipeline including funds owned by Morgan Stanley and Deutsche Bank.

Prospects for Italy's domestic wealth management market look so good that UBS Private Banking, Credit Suisse Private Banking, Banca del Gottardo and BSI are busy building up or bolstering existing onshore networks in Italy, to recover lost client assets.

About half of the funds repatriated through Scudo I — some €30bn — came from Switzerland.

Ironically "private banking", for which there is no Italian word, is a relatively new concept for a nation that coined many banking terms, such as Lombard rate, and lays claim to one of the world's oldest banks: Monte dei Paschi di Siena, founded in 1472.

Italians started talking about "asset management" in the early 1990s, "wealth management" in the mid-1990s and although private banks have long existed in Italy, the idea of "private banking" or "private wealth management" has only gained common currency in the last two to three years.

MacNevin believes Italians are keeping their funds onshore partly because of increased regulatory scrutiny on Switzerland and other offshore centres.

"Maybe, as much as anything, the opportunities to move money to offshore centres are less the focus because [these centres] are coming under increasing scrutiny and efforts to know your client are much greater," MacNevin suggested.

Much of Italy's private wealth is in real estate. This was a popular investment after World War Two, particularly among a generation with vivid memories of war. Today 78 per cent of Italians are homeowners.

Until the last couple of years, Italians were investing heavily in government bonds, then many switched to equity funds at the peak of the stock market of the late 1990s. Others went into the emerging market debt, such as Argentine government debt, unable to resist the promise of high returns, only to get badly burnt.

"Many investors are currently pulling out of the markets for the time being and going into cash and shorter-term investments. Where they're going back in again, they're looking for lower risk, fixed income, more protection of capital and a lower risk profile," MacNevin said.

Italy's wealth managers are grouped into four main categories:

Investment and commercial banks — such as Morgan Stanley, JP Morgan, UBS, Schroders and Goldman Sachs, which take on private clients with more than €10m from the sale of a company or IPO.

Private banks specialising in asset management — such as Steinhauslin, Banca Profilio, Emilia Banca, Banca Alletti and BSI, targeting high net-worth individuals with between €750,000 and €10m.

Universal banks — of which Banca di Roma, San Paolo Imi and Monte dei Paschi di Siena hope to sift through their vast retail banking networks to find affluent clients with up to € 750,000.

Promotore finaciario — Italy's independent "financial promoters", who are qualified to do asset management. The Bank of Italy pushed hard for this qualification and in the last 15 years business has boomed. But now, with the downturn in markets, the 60,000 or so independent asset managers are dwindling and bankers expect to see up to 15,000 jobs shed in the near future.

Analysts and bankers say Italian investor behaviour and wealth management trends reflect those in the rest of the developed world, but the banking sector is perhaps more fragmented than the others.

There were 830 banks in Italy at the end of 2001, compared with more than 900 four years before. Of these, only a fraction is engaged in pure private banking.

The larger end of the banking sector is dominated by 40 to 50 banking groups, as opposed to the UK, for example, with four big banks. Even so, the top four or five Italian banks represent about half of the market.

Consolidation is also continuing in Italy; all of the top wealth managers and private banks are the result of fairly recent and complex mergers of many smaller regional players.

UniCredito Italiano, for example, is not only Italy's largest banking group in terms of market capitalisation (more than €22bn at the end of June 2002) but is also the country's largest wealth manager with €32bn or 6.4 per cent of Italy's assets under management.

It was born of a 1998 merger between five banks: Credito Italiano; Rolo Banca, which was founded in 1473; Cariverona; Cassa di Risparmio di Torino; and Cassamarca. In 1999, two other banks joined the group: Cassa di Risparmio di Trento e Rovereto and the Cassa di Risparmio di Trieste.

Italy's second largest wealth manager is Intesa Bci — formed through the fusion of Cariplo and Banco Ambrosiano Veneto in 1998, Cassa di Risparmio di Parma e Piacenza and Banca Popolare FriulAdria in 1999, and finally the integration of Banca Commerciale Italiana in 2001.

Intesa Bci has about €31bn or 6.2 per cent of Italy's wealth management market.

Deutsche Bank first opened an office in Milan in 1977, then in 1986 it acquired Italy's old-established Banca d'America e d'Italia (Bai).