Mediobanca incontra le Fondazioni di origine bancaria

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1 Mediobanca incontra le Fondazioni di origine bancaria Re-Foundation Andrea Filtri Mediobanca Securities 23 luglio 2012

2 2 Disclaimer THISRESEARCHREPORTISPREPAREDBYMEDIOBANCABANCADICREDITOFINANZIARIOS.P.A.(MEDIOBANCAS.P.A.)AUTHORIZEDBYTHEBANKOFITALYTOPROVIDEFINANCIALSERVICES.THISRESEARCHREPORTISPROVIDEDF ORINFORMATIONPURPOSESONLYANDDOESNOTCONSTITUTEORSHOULDNOTBECONSTRUEDASANOFFERTOBUYORSELL,ORASOLICITATIONOFANOFFERTOBUYORSELL,ANYFINANCIALINSTRUMENTS.ITISNOTINTENDEDT OREPRESENTTHECONCLUSIVETERMSANDCONDITIONSOFANYSECURITYORTRANSACTION,NORTONOTIFYYOUOFANYPOSSIBLERISKS,DIRECTORINDIRECT,INUNDERTAKINGSUCHATRANSACTION.THEINFORMATIONCON TAINEDHEREIN,INCLUDINGANYEXPRESSIONOFOPINION,HASBEENOBTAINEDFROMORISBASEDUPONSOURCESBELIEVEDTOBERELIABLEBUTISNOTGUARANTEEDASTOACCURACYORCOMPLETENESSALTHOUGHMEDIOBAN CAS.P.A.CONSIDERSITTOBEFAIRANDNOTMISLEADING.NEITHERMEDIOBANCAS.P.A.NORANYOFITSDIRECTORS,OFFICERS,EMPLOYEESORAGENTSSHALLHAVEANYLIABILITY,HOWSOEVERARISING,FORANYERROR,INACC URACYORINCOMPLETENESSOFFACTOROPINIONINITORLACKOFCAREINITSPREPARATIONORPUBLICATION.SAVEASOTHERWISEPROVIDEDINTHERESEARCHREPORT,MEDIOBANCAS.P.A.HASNOOBLIGATIONTOUPDATE,M ODIFYORAMENDTHISREPORTANDINFORMTHEREADERACCORDINGLY.THISDOCUMENTDOESNOTCONSTITUTEAPERSONALRECOMMENDATIONANDRECIPIENTSMUSTSATISFYTHEMSELVESTHATANYDEALINGISAPPROPRIA TEINTHELIGHTOFTHROWNUNDERSTANDING,APPRAISALOFRISKANDREWARD,OBJECTIVES,EXPERIENCE,ANDFINANCIALANDOPERATIONALRESOURCES.ALLSTATEMENTSANDOPINIONSAREMADEASOFTHEDATEONTHEF ACEOFTHISDOCUMENTANDARENOTHELDOUTASAPPLICABLETHEREAFTER. MEDIOBANCAS.P.A.ORONEORMOREOFTHECOMPANIESBELONGINGTOITSGROUPMAY,FROMTIMETOTIME,DEALIN,HOLDORACTASMARKETMAKERSORADVISERS,BROKERSORBANKERSINRELATIONTOTHEFINANCIALINSTR UMENTS,ORDERIVATIVESTHEREOF,OFPERSONS,FIRMSORENTITIESMENTIONEDINTHISDOCUMENT,ORBEREPRESENTEDONTHEGOVERNINGBODIESOFSUCHFIRMSORENTITIES.EMPLOYEESOFMEDIOBANCAS.P.A.ORONEO RMOREOFTHECOMPANIESBELONGINGTOITSGROUP,ORINDIVIDUALSCONNECTEDTOTHEM,MAYFROMTIMETOTIMEHAVEAPOSITIONINORBEHOLDINGANYOFTHEINVESTMENTSORRELATEDINVESTMENTSMENTIONEDINTH ISREPORT.BARCLAYSINITIALCOVERAGEASOF30/06/2010.BNPPARIBASINITIALCOVERAGEASOF30/06/2010.CREDITAGRICOLESAINITIALCOVERAGEASOF30/06/2010.CREDITSUISSEINITIALCOVERAGEASOF30/06/2010. DEUTSCHEBANKINITIALCOVERAGEASOF30/06/2010.INTHEPAST12MONTHS,THERATINGONDEUTSCHEBANKHASBEENCHANGED.THEPREVIOUSRATING,ISSUEDON10/09/2010,WASUNDERPERFORM.GOLDMANSACHSINI TIALCOVERAGEASOF30/06/2010.INTHEPAST12MONTHS,THERATINGONGOLDMANSACHSHASBEENCHANGED.THEPREVIOUSRATING,ISSUEDON07/02/2011,WASNEUTRAL.HSBCINITIALCOVERAGEASOF30/06/2010.INT HEPAST12MONTHS,THERATINGONHSBCHASBEENCHANGED.THEPREVIOUSRATING,ISSUEDON08/11/2010,WASNEUTRAL.JPMORGANCHASEINITIALCOVERAGEASOF30/06/2010.MORGANSTANLEYINITIALCOVERAGEAS OF30/06/2010.INTHEPAST12MONTHS,THERATINGONMORGANSTANLEYHASBEENCHANGED.THEPREVIOUSRATING,ISSUEDON07/02/2011,WASNEUTRAL.SOCIETEGENERALEINITIALCOVERAGEASOF30/06/2010.UBSINI TIALCOVERAGEASOF30/06/2010.INTHEPAST12MONTHS,THERATINGONUBSHASBEENCHANGED.THEPREVIOUSRATING,ISSUEDON09/02/2011,WASNEUTRAL.CERTAINMEMBERSOFTHEGOVERNINGBODIESOFBARCLAYS ORONEORMOREOFTHECOMPANIESBELONGINGTOITSGROUPAREALSOMEMBERSOFTHEGOVERNINGBODIESOFMEDBANCAS.P.A.ORONEORMOREOFTHECOMPANIESBELONGINGTOITSGROUP.SOCIETEGENERALEHASAREP RESENTATIVEONONEOFTHEGOVERNINGBODIESOFMEDIOBANCAS.P.A.ORONEORMOREOFTHECOMPANIESBELONGINGTOITSGROUP.MEDIOBANCAS.P.A.ORONEORMOREOFTHECOMPANIESBELONGINGTOITSGROUPEXP ECTORWILLSEEKTORECEIVE,INTHENEXTSIXMONTHS,FEESDUEFORDELIVERYOFCORPORATEFINANCESERVICESTOBNPPARIBASORONEORMOREOFTHECOMPANIESBELONGINGTOITSGROUP,ORHAVEENTEREDINTOAGRE EMENTSTOPROVIDECORPORATEFINANCESERVICESTOBNPPARIBASORONEORMOREOFTHECOMPANIESBELONGINGTOITSGROUP. 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3 Contents 1. Scope of the research 2. Foundations roles: much asked by many 3. Investments 4. The impact of the crisis on the sustainability of the business model 5. Three potential alternatives to the bank stakeholding 6. Foundations signs of self-reform 7. The Charter of Foundations and Conclusions 3

4 Scope of the research: three audiences Three audiences Foundations framework Legal framework, role, goals, firepower and limits of Foundations International Investors looking at Italy Main Italian Banks Business Model How Foundations business model and role work and how they have evolved over time Italian Banking Foundations Foundation Bank relationship Implication of structural changes in the banking sector on the relationship between Foundations operating and banks 4

5 Investments #2: risk-return comparison Well being of local communities Local communities are the Foundations stakeholders and they expect Foundations to promote their welfare Given the heterogeneity of the needs of the communities, Foundations grants range from financing high tech research or the purchase of medical equipment to sponsoring the refurbishing of artistic monuments (c.30% of the total annual Italian spend on Art&Culture), requiring a wide range of skills at the Foundation Promote economic development and infrastructure The high indebtedness of Italy has likely inspired the government to ask Foundations to play a role in promoting national development (i.e. Infrastructure, etc) Foundations have taken a 30% stake in CDP (F2I, strategic fund, key networks, etc) They have also recently organized initiatives of social housing developments and the financing of local relevant infrastructure projects Corner stone for Italian banking Foundations have been loyal shareholder in the largest Italian banks, accompanying the emancipation of the Italian banking sector in the last 20 years, from the banks IPO s to the creation of national players M&A allowed for the improvement in efficiency of banks, which guided the consolidation process 5

6 Investments #1: Foundations ownership in the banks Foundations stake into the bank 1/5 has left the bank s shareholder base Foundation with > 50% stake of the saving bank Foundation with no stake of the saving bank 1/6 is still over 50% control Over 1/2 is above the 5% stake Foundation with <5% stake of the saving bank 21 Foundation with stake of the saving bank between 5% and 20% Source: Mediobanca Securities, ACRI Foundation with stake of the saving bank between 20% and 50% Shareholder base of UCG, ISP, MPS, % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Market Other strategic shareholders Foundations 61% 28% 10% 54% 17% 29% 41% 14% 46% UCG ISP MPS UCG is the bank with the most fragmented shareholder base ISP is the bank of Foundations. The bank gathers over a dozen Foundations inherited through the Ambroveneto-Cariplo, Sanpaolo-Cardine, Intesa Sanpaolo-Carifirenze mergers MPS Foundation retains almost absolute control of the bank despite its growth process and the recent debtdriven turmoil lead to a partial dilution of the Foundation in the bank Source: Mediobanca Securities, company data 6

7 Investments #2: Foundations ownership in the banks Returns comparison: Foundations vs asset classes (2000=100) Source: Mediobanca Securities, ACRI, Bloomberg Cmmdty Govies R.E. IT infl Foundations Equity Over , the MTM value of Foundations assets was down c. 7% (-18% ) denting the real value of assets. Only global equities underperformed Foundations with a 10% fall in value over the same period, while the gap closed in 2011 given the heavy underperformance of banks vs the market (-17% ) : performance seems a blend of equity and government bonds and outperformed the Italian inflation rate : the banks underperformance and the increased exposure to this asset through the subscription of capital increases realigned the MTM evolution of Foundations assets to the one of equities Foundations total return vs volatility by asset class (2000=100) 40% 35% 30% 25% 20% 15% 10% st dev/avg return (rhs) 250% 200% 150% 100% 50% 0% Foundations banks delivered the lowest return (negative) over the period along with a volatility level in the higher part of the range of asset classes Government bonds and hedge funds delivered significant positive returns despite a volatility less than half of F-Banks R.E. and Commodity delivered strong positive returns with the same volatility of F-Banks 5% -50% 0% equity govmt r.e. cmdty HF IT infltn F-banks -100% Source: Mediobanca Securities, Bloomberg, MSCI, Dow Jones Wilshire, S&P, Istat, Foundations data, ACRI 7

8 The crisis: tough last four years #1 Financial crisis Large drop in earnings; Pro-cyclical increase in RWAs Drop in capital ratios Tighter regulation 10% Basel III all-in CT1 ratio 9% Basel 2.5 CT1 ratio post sovereign risk (EBA) 100% NSFR, LCR Pressure on Foundations Foundations asked to put the banks and the country s health before their interest Stakeholders asking for further efforts in tough times Capital increases UCG: 14.5bn from 2008 ISP: 5bn in 2011; MPS: 7.15bn from 2007 c. 7bn fresh cash injected by Foundations Dividend cuts ISP cancelled the dividend in 2009 UCG paid in shares in 2009 and cancelled it in 2011 MPS paid a DPS of 0.01 in 2009 and cancelled it in 2011 Foundations effort in the capital increases of the banks avoided their nationalisation......but compromised on their investment diversification DPS evolution e (2006=100) UCG ISP MPS Asset allocation of Foundations in our panel, post 2012e capital increases Saving Bank % 39% Other equity P.E. Hedge funds 20 Other e 2012e 2013e 8% 2% 2% 15% Cash and Bonds Source: Mediobanca Securities, Bloomberg consensus and company data Source: Mediobanca Securities, company data 8

9 The crisis: tough last four years #2 Falling revenues have sent cash flow in the negative region in recent years Reserves partly cushioned the fall in grants......but grants have been revised down by c.50% on average 2012/2007 Core profits grants approved 1, m ,000-1, Source: Mediobanca Securities, ACRI Evolution of grants in main Foundations, e Foundation (%) Cassamarca % (o/w 2 for LT) (o/w 3 for LT) (o/w 2 for LT) (o/w 2 for LT) MPS % CR Ascoli Piceno % (o/w 4 from SF) (o/w 7 from the SF) CRT % Cariverona CR Modena Fond. del Monte di Bologna % (o/w 64 for LT) (o/w 85 for LT) (o/w 10 for LT) (o/w 40 for LT) (o/w 53 for LT) (o/w 19 for LT) % (o/w 8 from the SF) (o/w 2 from the SF) (o/w 1 from the SF) (o/w 2 from the SF) (o/w 4 from the SF) % (o/w 1 from the SF) (o/w 2 from the SF) (o/w 1 from the SF) (o/w 1 from the SF) Cariparo % Compagnia San Paolo % Cariplo % Total, m 1,021 1, % YOY, % 2% -18% -7% -13% -26% Source: Mediobanca Securities, company websites LT = long term projects / SF = stability fund 9

10 Bank dividends could not suffice in supporting 2010 grants level Future bank dividends flat on 2010 would not suffice in supporting the 2010 level of grants* Consensus estimates of future bank dividends would imply flat evolution of grants on the 2010 level* Very optimistic assumptions (return to peak dividends paid) on a stable basis would imply investment proceeds strongly outtaking 2010 grants level and growing Foundations worth Two scenarios out of three suggest that Foundations would not be able to defend the real value of their assets and would be forced either to pay out capital or restrict their grants to compensate the falling yield on investments * Assuming other revenue sources flat on 2010 level Market value evolution from 3 bank DPS scenarios, e 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - flat dividend consensus dividend bull dividend avg Source: Mediobanca Securities, Bloomberg, ACRI 10

11 How could Foundations change? Three potential alternatives Investing in 10 yrs BTP Each option offers a different mix of maximisation and compromise of the following factors that would fit Foundations investment needs Cash flow maximisation Risk adjusted total return Capital preservation Local proximity/development Liquidity Three potential alternatives to the bank s stake Switching into Utilities The BTP would optimise liquidity, minimise risk and provide highly visible future cash flows, but it would have little connection to the local community Utility would maximise cash flows and grants, retaining somewhat the link to the local community Investing like International Foundations International Foundations option would optimise value, cash flows and grants, at the expense of local proximity links 11

12 Italian Foundations differ from international peers Mission Italian Foundations have a wider and more complex audience of stakeholders to respond to and a wider mandate of needs to satisfy than International Foundations in our panel, which largely focus their grant efforts in a single field/scope: Yale: to provide a critical foundation for the University s mission, supporting today s scholars with annual spending distributions while promising to maintain support for generations to come Wellcome Trust: to protect any aspects of the health and welfare of humankind; to support both the research into any of the biosciences and the discovery of treatments, cures, and processes that may in any way relieve disease; in final to promote the understanding of any of the biosciences or the history of any of the biosciences Harvard: HMC s singular mission is to produce long-term investment results to support the educational and research goals of the University. Returns from the endowment support academic programs, provide financial aid, and fund science and medical research. HMC's senior investment professionals are deeply integrated into the Harvard community. HMC executives teach and lecture on campus, speak before alumni and donor groups, and appear at numerous University functions. Additionally, senior members of Harvard's faculty and staff regularly engage with HMC's professionals on issues key to the University's programs and long-term goals Novo Nordisk Foundation: to manage the Foundation s financial assets and to ensure the Foundation sufficient dividends to cover its grant obligations for scientific, social and humanitarian purposes and projects in Scandinavia and elsewhere Governance The simpler mission reflects in International Foundations simpler BoD composition allowing for a higher presence of investment experts, focussing on investment performance, alongside sector experts, in charge of grant allocation Investments & Grants US Foundations cannot cut their grants to offset falling investment yield, they must spend 5% of the MTM value of their portfolio every year Examined Foundations which started from 100% ownership in one co. have fully dismissed the stake and have diversified investments (Wellcome, Ford, etc). International Foundations have chosen investment diversification as one of the tools to manage their investments The simpler structure reflects in a ratio of assets per board member 13x larger than Italian Foundations Board member distribution by expertise, 2010 Harvard 33% Novo Nordisk Fonden 48% 5% 46% 1% 67% Yale 18% Yale Endowment 17% 21% 9% Source: Mediobanca Securities, ACRI, company websites 4% 30% 73% 28% Wellcome IT Foundation 2% Asset allocation of the main international Foundations, 2010 Source: Mediobanca Securities Wellcome Trust 17% 45% 18% 64% 6% 9% 18% 24% Harvard Foundation 33% 29% 16% 22% 15% 13% 10% 23% 23% 14% Art/Culture Education/Research Entrepreneur Investments Medical/Social Politics Professionals Bond & Cash Real Assets Private equity Equity Hedge Funds 12

13 Backward looking: 20bn higher NPV from International Foundations, 8bn from Utility, BTP in line but lower risk International Foundations delivered risk-adjusted returns (Sharpe ratio) significantly higher than Italian Foundations over the period With 29bn NPV, the International Foundation is the option creating the highest value over the period. This is 2.5x higher than the average of the other three options; The Utility option generates 17bn, 2x the level of Bank and BTP but 41% below the International Benchmark BTP and Bank options generate similar NPVs ( 8.6bn vs 9.3bn), but with diverging characteristics of volatility and capital preservation (in favor of BTP), liquidity (in favor of BTP) and proximity to the local community (in favor of Bank) Sharpe ratio , % Yale Wellcome Trust Harvard 44.8% Source: Mediobanca Securities on company data 61.6% Italian Foundations 1.3% 42.0% NPV of investment scenarios alternative to the bank stake , bn Market value evolution bank vs alternative options, m, bn Bank BTP (max grant) NPV market value BTP (max MTM) 11.0 Source: Mediobanca Securities on company data NPV Grants Utility (max grant) Utility (max MTM) Int. Foundations (max grant) Int. Foundations (max MTM) 45,000 40,000 m Bank Utility BTP Int. benchmark 35,000 30,000 25,000 20, Source: Mediobanca Securities on company data 13

14 Forward looking: Bank the weakest, 22bn extra NPV elsewhere NPV of investment scenarios alternative to the bank stake , bn bn Bank BTP (max grant) NPV market value BTP (max MTM) NPV Grants Market value evolution bank vs alternative option, m, Utility (max grant) Source: Mediobanca Securities on company data Utility (max MTM) Int. benchmark Int. benchmark (max grant) (max MTM) The International Foundations option maximises value with 22bn extra NPV vs the Bank alternative Both Utility and BTP top Bank in value creation With only 6.4bn NPV, the Bank option is the weakest, generating 12bn lower NPV than the average alternative The simulation of pure value creation confirms the same ranking of the NPV creation with a significant gap between International Foundations and the alternatives 45,000 m Bank Utility BTP Int. Foundations 40,000 35,000 30,000 25,000 20, Source: Mediobanca Securities on company data 14

15 Conclusions and The Charter of Foundations The Charter of Foundations Conclusions The Charter of Foundations attempts to establish a common framework of best practices raising the quality of Foundations governance, grant making and investments The Foundations-bank symbiosis worked well for two decades, allowing banks to grow and improve efficiency, and Foundations to pour copious grants to their communities Incompatibility between any role in a Foundation and political roles Monitoring of results achieved by the financed projects Capital invested to generate returns able to allow the pursuit of spending targets At the same time, we notice that good principles are not coupled with quantitative factors allowing accountability and measurement of compliance The level of success of the initiative will therefore depend both on the joint effort of individual Foundations in self reform and in the monitoring action of ACRI Fondazione Roma proves that change is possible without new regulation. It deliberately decided to dilute the weight of the bank investment after 2007, outperforming peers in riskadjusted performance, capital preservation and in the sustainability of cash flows supporting grants Foundations mandates (economic development) and requests from stakeholders have increased as the public sector retreats from social services. Foundations effort in banks capital increases have allowed Italian banks to strengthen and have prevented nationalisations, at the expense of the Foundations financial health In recent years, Foundations have partly cushioned the fall in grants from the lower yield of their investments through the use of reserves and the payout of a part of capital. This is unsustainable If the current difficult environment for banks will endure, Foundations could struggle to maintain the 2010 level of grants, requiring significant cuts to grants or a re-thinking of their model: the Foundations-bank symbiosis has broken down Diversification of investments the solution adopted by International Foundations - can provide significantly higher risk-adjusted returns than the status quo, but is not the only answer and other options can also satisfy Foundations needs The Charter of Foundations acknowledges that change is needed, confirming the review of the way Foundations operate is under way 15

16 Mediobanca incontra le Fondazioni di origine bancaria Re-Foundation Andrea Filtri Mediobanca Securities 23 luglio 2012

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