Banca Popolare di Milano Will Benefit from Italy’s Reform of Cooperative Banks
Last Tuesday, the Italian Council of Ministers approved a new law to reform the cooperative bank (Banche
Popolari) sector. Pending parliamentary approval, the law would require those cooperative banks with more
than €8 billion in assets to convert to joint-stock companies, which implies the removal of the one-voteper-shareholder
governance rule.
Removal of the one-vote-per-shareholder rule (regardless of the number of shares held) would be credit
positive for Banca Popolare di Milano S.C.a r.l. (B1 negative, E+/b2 stable3
) because the rule has afforded
employees and small shareholders in Banca Popolare di Milano significant influence. The employees and
shareholders have so far elected the majority of the bank’s surveillance board and constrained the bank’s
ability to remedy corporate governance shortcomings and implement best practices, all of which would
strengthen its credit quality.
The risks associated with Banca Popolare di Milano's current corporate governance structure weigh on its
creditworthiness and were publicly acknowledged by the bank in April 2011 after a Bank of Italy inspection
revealed governance weaknesses. Banca Popolare di Milano subsequently made various attempts to change
its corporate governance structure, some of which failed. Because this reform will oblige Banca Popolare di
Milano to convert to a joint-stock company with voting rights distributed according to market rules, giving
institutional investors in Banca Popolare di Milano more influence, it is credit positive. The rebalancing of
power will facilitate the successful implementation of the bank’s strategic plan, which aims to cope with the
challenges of Italy’s still-weak domestic operating environment.
We do not think the reform will have a credit effect on other Italian cooperative banks. The mandatory
conversion into joint-stock companies and improved governance rules will not necessarily translate into a
material improvement of those banks’ credit profile. Becoming a joint-stock company will broaden access to
capital, although we have seen that the legal status of a cooperative bank does not diminish investor
appetite for their capital, as demonstrated by the large acceptance of recent capital increases made by these
banks. Neither has the one-vote-per-shareholder structure significantly jeopardised the corporate strategy
of the Italian cooperative banks, with the exception of Banca Popolare di Milano. Therefore, we do not
expect significant positive developments in terms of corporate governance after this rule is removed.
The reform also paves the way for further consolidation within the Italian banking system. Although overall
we think any move toward consolidation will improve credit quality, there is no guarantee that future
mergers involving cooperative banks would be executed in a way to ensure the emergence of stronger
banking groups.
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