The Italian Government forces biggest listed cooperative banks to change their ownership into public traded corporation

Posted on January 28, 2015

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Through the so-called “Investment Compact” Law Decree, approved on January 20th, the Italian Government aims at deeply reforming the biggest Italian cooperative banks, i.e. the “popular banks” (banche popolari). Pursuant to the new rules, all “popular banks” with more than 8 million Euros of total assets shall change their status from cooperative to public traded corporation (Società per Azioni, or SpA). The transformation shall be proposed at the EGM, to be held within 18 months, and it will require a supermajority vote of at least two-thirds of voting members.

The Parliament shall convert the Decree into Law within 60 days, and it will likely amend the new rules, as trade unions and many political parties strongly contested the transformation into SpA. In any case, the path towards the elimination of the anomaly of Italian listed cooperative banks seems to have been marked.

The new rules will concern the following listed banks: Banca Popolare dell’Emilia Romagna, Banca Popolare dell’Etruria e del Lazio, Banca Popolare di Milano, Banca Popolare di Sondrio, Banco Popolare, Credito Valtellinese and UBI Banca.

Main implications for listed cooperative banks

The transformation into public traded corporation will eliminate the share ownership ceiling, set at 1% of the share capital by the Unified Banking Code (unless the Bylaws set lower limits, down to 0.5%).

Another revolutionary change will concern the voting mechanisms at shareholder meetings. Only shareholders who have been registered for at least 90 days are enabled to vote at cooperatives’ general meetings, and each shareholder holds just one vote, regardless the number of shares held. Therefore, the transformation into publicly traded companies will finally restore the principle of equality of treatment of shareholders at listed “popular banks” (unless the EGM approves the possibility to increase the voting rights per ordinary shares, recently introduced by the Italian Law).

The anomaly of Italian listed cooperatives

The reform aims at fixing an anomaly of the Italian system, which contributed to make listed cooperatives “hybrid” institutions, halfway from big universal banks, focused on making profit, and mutual entities, focused on supporting local communities.

Cooperative banks were born in Germany in the second half of 19th century, and the German system has been take as example of efficiency of mutual financial institutions by many of the opponents to the transformation of banche popolari. Indeed European cooperative banks outperformed the traditional big banks during the financial crisis, but the Italian anomaly does not resides in the cooperative status of the “popular banks”, but in the fact that they are listed on the stock exchange. None of the more than 1,000 German registered cooperative banks (eingetragene Genossenschaft) is listed, and no other major European listed bank adopts the “per person” voting mechanism.

As already highlighted in this blog, the status of cooperative may conflict with the maximization of shareholder value through the generation of profit, which is the primary goal of any listed company. On the other hand, listing a cooperative bank may jeopardize its primary mutualistic purposes, as well as its focus in supporting local communities.

Thanks to the special voting mechanism, employees represent the large majority of shareholders voting at the listed cooperative banks’ general meetings, and interests of employees are not always in line with those of independent shareholders. The shareholders’ association of Banca Popolare di Milano, “Amici della BPM” (literally Friends of BPM), was a clear example of undue influence of employee-shareholders over the corporate management. The association originated from trade unions was dissolved in 2012, after havinf received several sanctions from the market authority (Consob), inspections by the Italian Central Bank and Public Prosecutor’s investigations.

Furthermore, meeting resolutions are usually approved by a very low or insignificant percentage of the share capital: in 2014, an average of only 11% of the share capital was represented at the AGMs held by biggest Italian listed cooperative banks, and the Annual Reports were approved by 6.5% (0.38% in Banca Popolare di Milano). It is clear that such mechanisms are in no way compatible with a good governance, which should always be based on the principle of equality of shareholders.

A necessary reform, but some concerns remain

The transformation into publicly traded companies is definitely a long-awaited great news for all independent shareholders of the banche popolari, who will finally have the same rights as their registered colleagues and the shareholders of all other listed companies. The new rules have been immediately welcomed by the stock markets, and target prices increased by 25%-30% just after the Decree was announced.

Although greatly appreciated by the market operators, the Decree has been strongly contested by cooperative banks’ representatives, trade unions and several political parties. That is not surprising, considering the external interests lying on cooperative banks. Indeed, the emphasis on local communities catalyses strong political interests, mainly in terms of building consensus through financing local activities. Nevertheless, the forced transformation required by the Decree still raises some concerns. The main risk of major popolari does not really reside in their size, but in the fact that they are listed on the stock exchange. As mentioned, German popular banks are not listed, but nothing prevents a Volksbank from increasing its assets (Berliner Volksbank eG’s total assets exceeded 10 billion Euros in 2013) still pursuing the mutualistic objectives.

The Italian cooperative banking system, including more than 450 institutions, played an essential role during the financial crisis. According to a study of the industrial association Unimpresa, from 2010 to 2013 the cooperative banks increased by 6.3 billion Euros their lending to companies and households, while other banks reduced theirs by 52 billion Euros.

The reform will only involve 10 major banche popolari out of 70, and it will not concern other 400 small cooperative banks (banche di credito cooperativo), therefore it will unlikely have a great impact on the mutualistic system. The transformation is also required by a higher homogeneity in the governance of the European big banks, which since November 2014 are under the direct supervision of the ECB. Anyway, the same results might have been probably achieved even through a simple rule preventing cooperative companies from being listed on the stock exchange. By this way, the banche popolari would have had the option of aligning their governance to the ones of all other listed companies, through the transformation into SpA, or re-focusing their activities on pure mutualistic purposes, through the delisting of their shares.

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