Italy’s pension fund market may be small but recent moves suggest that custodians see great potential in the southern European country. Regulatory reform and the encouragement of more M&A activity among financial institutions by the central bank, Bank of Italy, are turning Italy into one of Europe’s most dynamic markets.
While the pension market may be immature, Italians are prolific savers. Jean-Marc Crepin, head of State Street’s Italy office, says Italy is a strong retail investor market, with 11% of disposable income invested in savings, usually mutual funds. “The institutional market in Italy is not very significant, but there is a big appetite for retail investing. I am convinced that the Italian market has untapped potential,” he says.
The prize in Italy for custodians is the reform of the TFR scheme, under which citizens will no longer be obliged to pay contributions to their employers. When the law comes into effect in 2008, market pundits predict that a huge inflow of money will head pension funds’ way.
“The government anticipates €6-12bn per year could be captured by pension funds – that is a good pool of assets to bid for,” says Massimo Cotella, head of 2S Banca, the securities services business of UniCredit Group, which was acquired by French bank Société Genéralé for €548m in January this year.
The UniCredit acquisition was a major move in the Italian market and followed a trend set the previous year when Credit Agricole Asset Management acquired a controlling interest in Nextra, the asset management subsidiary of Banca Intesa.
“The recent disposals of the asset management or the back office by some major Italian banking groups, demonstrate that the asset management community in Italy is thinking about what is crucial in terms of business development,” says Crepin. “It also shows that foreign banks are interested in Italy.”
Italy has been for many years a ‘captive’ market, with the large banking groups handling asset management, custody and clearing businesses within their own walls. Cotella says while the business is still a “petrified forest”, that is set to change. “Our deal with Société Genéralé could create a shakeout in Italy as other players start to think about outsourcing in order to get out of non-core business areas,” he says.
Alain Closier, global head of Société Genéralé Securities Services, says the deal has made the bank the second largest securities services player in the Italian market. “The opportunity for such a strong acquisition is very rare. Not many deals are able to transform the size of each player in the market,” he says. 2S Banca has more than €455bn in assets under custody and nearly €80bn in funds under administration.
Cotella, says UniCredit, realised it was too small to face competition in the medium term. “Although we were running a profitable business and were doing well, we decided securities services was not core business for UniCredit, given the difference in size between us and the major players.”
Closier says the bank’s aim is to attract non-Italian customers as well as developing an Italian customer base by providing them with international services. “We will be the only player like that in the Italian market. Italian banks have mostly Italian customers, while the foreign custodians almost only have non-domestic customers.”
Another market reform that has warmed the hearts of custodians has been the lifting of restrictions in July 2005 on fund administration and transfer agency services. Italian investment managers can now outsource fund administration and depository bank functions such as NAV calculations.
Elisabetta Pellichero, head of transaction services at Banca Intesa, says the bank has immediately updated its product offering to reflect the new landscape. “Banca Intesa has already exploited this new opportunity, offering a complete solution for fund administration. Banca Intesa can leverage its position as the market leading depot bank and widen the pipeline of fund services with an offering that previously could not be extended.”
Pellichero says the bank offers “a 360
degree service”, unique in Italy where other players focus on a specific line of business. “Banca Intesa is the ‘banca depositaria’ in Italy, a 35% market share – our nearest rival has just 7%. Our client base includes mutual, pension, hedge, private equity and real estate investment funds and institutional investors.”
Most other depot banks in the Italian market, she says, only serve the asset management arm of their universal bank group. Banca Intesa serves its asset management arm as well as third party clients. “When Banca Intesa sold its asset management company to Credit Agricole Group, the securities services business retained a lift out of the fund administration activities within the Banca Intesa asset management business.”
Past administration lift-outs have failed because the platform is usually too tied in to the legacy fund manager, she says. “Our platform can be easily customised to serve other fund management companies. The objective among Italian fund managers is to appoint one counterparty for activities in custody, depot bank, fund administration and transfer agency and we answer that objective with our full fund services platform and offering.”
2S Banca’s Cotella says the changes to the law will affect providers’ market positions. “I think smaller players will find it more difficult to keep abreast of the market with product offerings, particularly in risk management,” he says. “This is where the deal with Société Genéralé also benefits us, because we are acquiring expertise from the group.”
Crepin says the Italian market is “all about distribution and open architecture”, with €52bn of assets moved out of Italian domiciled funds and into Luxembourg domiciled funds during the past 12 months.
Cotella says the bank has been talking to institutional investors about transfer agency services as it becomes more favourable to sell funds based in Luxembourg into Italy. “We expect that the asset management market will look for more outsourcing services. This is likely to start with the smaller fund managers, but will expand to the larger ones and pension funds over time,” he says. Only a few years ago, says Cotella, fund managers chose a provider that was with a solid bank that had a good rating, now as the become more sophisticated, they are also looking for products like performance measurement, performance attribution, structuring and risk management.
Rowena Romulo, head of Italy at Citigroup Global Transaction Services says there has been a marked increase in the past few months on increasing efficiency among Citigroup’s foreign clients. “This has been a big theme across the board as broker dealers and custodians look to rationalise custody and clearing costs,” she says. “The large banks and investment banks are looking at consolidating with one provider in Italy or indeed across the whole European market.”
Local clients, who include financial institutions and asset managers, are re-engineering their operating models to align more closely with the global market, says Romulo.

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