Italian Banks Outperform Peers

European banks will be happy to put 2008 behind them. From the $48 billion in writedowns suffered by Swiss financial giant UBS (UBS) to the €4.9 billion ($6.3 billion) trading scandal that rocked France's Socit Gnrale (SOGN.PA), the Old World's banking sector has been at the center of the global financial crisis this year. Indeed, European financial institutions have booked $1.2 trillion in mark-to-market losses since the credit crunch began—not far short of the $1.6 trillion loss recorded by U.S. banks, according to the biannual Financial Stability Report from the Bank of England.

To make matters worse, analysts don't expect Europe's financial-services sector to pick up until the second half of next year at the earliest. Yet despite the bleak outlook, one European country has bucked the trend of multibillion-dollar writedowns and government bailouts: It's Italy, Europe's fourth-largest economy, whose banks have outperformed larger continental rivals over the past 18 months.

Don't attribute it to management foresight, sharper risk analysis tools, or fatter coverage ratios, though. Italian banks such as Intesa Sanpaolo (ISP.MI) and UniCredito Italiano (CRDI.MI) have outpaced European heavy hitters such as Barclays (BCS) and BNP Paribas (BNPP.PA) primarily due to their extremely conservative business models. The Italians steered clear of securitized assets and subprime loans, forgoing the windfall profits that boosted rivals' balance sheets in the salad days, but also avoiding the huge losses that later ensued.

Instead, Italian banks have remained squarely focused on traditional retail operations and corporate lending, relying on customer deposits to fund day-to-day operations. Even when the country's banks expanded to other countries, they moved mainly into nearby Eastern European markets that have outperformed Western European economies since the mid-1990s. "They don't make the same level of money as other European banks, but their business model certainly isn't broken," says Credit Suisse (CS) analyst Andrea Vercellone. "Italian banks didn't get into the securities business in a major way because frankly they just didn't understand it."

Back to Basics

While this conservatism and lack of global ambition were previously seen as major weaknesses, analysts now applaud Italian banks for their focus on traditional ways. Indeed, banks around the world are following suit and going back to basics. One result is that while Italian banks have seen their share prices plunge this year, the damage is less than average. The DJ Euro Stoxx Banking index, for example, is down 64% so far this year, but shares in Italy's largest bank, Intesa Sanpaolo, have dropped 57%. Italy's mid-cap banks have done better: Milan-based Unione di Banche Italiane (UBI.MI), for instance, has lost just 40% of its value since the start of the year.

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