Hugh Cuthbert, co-manager of SVM Continental Europe Fund (GB0032094954), says that Italian bank Mediobanca (IT:MB) is set to receive a boost from corporate restructuring in Italy.
"Mediobanca was formed after the second world war to provide financing for Italy's troubled industrial base," says Mr Cuthbert. "Murky corporate governance and a long series of convoluted corporate deals resulted in the bank owning, rather than just lending to, large swaths of corporate Italy. The company earned a reputation for secrecy with, supposedly, not even a nameplate on the entrance to the palatial headquarters just around the corner from La Scala Opera House in Milan.
"In recent years, however, all that has changed. The industrial holdings are being unwound and the company is focusing more on day-to-day banking. Italy has suffered more than most since the financial crisis, posting negative gross domestic product (GDP) growth in five of the past seven years. Yet despite this bleak environment Mediobanca has just managed to deliver the best net interest income in its history.
"Profits, however, have been less impressive, floundering some way below previous peaks and resulting in a far-from-impressive return on equity of 7.3 per cent. But there are multiple reasons to believe that this number will soon reach double digits, not least because the strong investment bank pipeline is boosted by the restructuring that much of corporate Italy is undertaking.
"The co-operative banking sector, for example, has been ordered to demutualise, which will result in a wave of mergers and acquisitions. This will be a lucrative and high-margin business for the bank and substantially boost returns. Telecoms companies and utilities are likely to follow a similar path.
"The economics of the whole country, meanwhile, are starting to improve and GDP growth is now forecast for the coming years. Provisioning for bad debts will benefit and loan growth is already visible.
"But despite this heady cocktail you can still buy Mediobanca shares for less than the price of the tangible equity. As this story develops that's highly unlikely to remain the case for long."
