1. Board of Directors and Performance in Italian Banking Groups Paola Ferretti, Alessandra Rigolini, Giulia Romano Department of Business Administration University of Pisa – Italy International competition in banking: theory and practice Sumy, Ukraine – May 24-25, 2012 1

2. Outline  The importance of good CG for banks  Interaction with profitability  Focus on the Italian Banking Groups and their performances during the period 2006-2010  Influence of Board of Directors’ composition and structure on banks profitability: method, data and results of a survey  Concluding remarks 2

3. Corporate Governance, profitability and much more…  Banks are «special», different from corporations….  …the financial crisis has showed severe CG failures and gaps  The importance of the reputation….  ….the way the CG structure is defined could contribute to reach efficiency purposes and to increase profitability 3

4. Overview of the Italian banking sector (I) 20062007200820092010 Banking groups 87 (2) 82 (-5) 81 (-1) 75 (-6) 76 (1) Banks of which: 703 (9) 806 (13) 799 (-7) 788 (-11) 760 (-28) Limited company banks 245 (2) 249 (4) 247 (-2) 247 (0) 233 (-14) Cooperative banks 38 (2) 38 (0) 38 (0) 38 (0) 37 (-1) Mutual banks 436 (-3) 440 (4) 432 (-8) 421 (-11) 415 (-6) Branches of foreign banks 74 (12) 79 (5) 82 (3) 82 (0) 75 (-7) 4 Evolution of the concentration process

5. Overview of the Italian banking sector (II)  At the end of 2010 the two largest banking groups (UniCredit and IntesaSanpaolo) and the three medium-sized and large groups (MontedeiPaschi, Banco Popolare and Unione di Banche Italiane) held respectively 32.9 and 18.9% of the total assets  The remaining 48.9% refers to 58 medium-sized and small groups and stand-alone banks (36.9%) and to 571 small banks principally oriented to local markets (11.3%)  During the 2001-2010 the portion of total assets held by the top five banking groups rose from 46.5 to 51.8% 5

6. Overview of the Italian banking sector (III) 2006 20072008 All groups Main groups All groups Main groups All groups Main groups Margins (growth rate percentage) Net interest income 10.09.0 8.4 5.2 10.8 10.3 Gross income 8.88.0 0.6 -3.5 -5.6 -7.5 Indicators (percentage) Ratio of non-interest income to gross income 47.4 48.2 43.4 44.4 33.6 33.4 Cost-income ratio 59.959.5 59.8 58.8 66.5 66.3 ROE 13.815.6 12.9 14.7 4.8 5.9 6 Profitability (margins and indicators) of the Italian banking groups

7. Overview of the Italian banking sector (IV) 7 2009 2010 Total banking system Main groups Total banking system Main groups Margins (growth rate percentage) Net interest income-5.8-6.2 -7.6-8.2 Gross income1.0-3.7 -1.8-4.2 Indicators (percentage) Ratio of non-interest income to gross income 39.0 41.4 37.9 41.5 Cost-income ratio62.765.5 61.963.7 ROE3.63.4 3.63.9 Profitability (margins and indicators) of the Italian banking system

8. Overview of the Italian banking sector (V) 2009 In comparison with 12 European large banks, the five Italian main groups show bad results; ROE of the foreigner sample is 7.0%! 2010 ROE of the foreigner sample is 7.8%! It is connected to the profitability of trading and to the raise of the Net Income ratio (they decline for the Italian largest groups) 8

9. Our research  Quite scarce (and often with incongrous results) are the empirical researches on the link between bank performance and Board of directors attributes, such as: size and composition; remuneration; existence of committees; women directorship  Our study analyses all the above cited attributes, considering ROE and ROA as performance indicators 9

10. Our research hypothesis 10 Performance of the Italian banking groups: 1. is not significantly related to the size of the Board 2. is positevely related to the proportion of non-executive and/or independent directors on the Board 3. is positively related to the existence of audit, remuneration and nomination committees 4. is positively related to the proportion of independent directors on the audit committee 5. is positively related to the existence of incentive executive pay 6. is positively related to the proportion of female members on the Board

11. Our sample  The sample consists of 22 Italian banking groups selected from the Bank of Italy’s Registry of Banking Groups, for the period 2006-2010 (110 observations in total)  The sample represents the 29 per cent of the population 11

12. Data collection  In order to investigate the role of board attributes on bank profitability we have collected two different types of data:  Data on corporate governance dimensions, collected from the “Report on Corporate Governance and Ownership Structure” for the listed bank holding companies, and from a questionnaire for the not listed ones  Profitability and accounting data (ROE and ROA), collected using Bankscope Database 12

13. Measurement (1/3) Independent variables:  Board size (LS) is described by the number of directors on the board of each bank holding company at the end of each examined financial year  Board composition is referred to the mix of inside/outside directors in the board room. These variables are captured considering the percentage of non-executive directors (NE) and the percentage of independent directors (IN)  Number and types of board committees and committee membership are captured looking at the existence of the nomination committee (CN), the compensation committee (CR) and the control and risk committee (CCI) 13

14.  Composition of the control and risk committee. This variable is captured considering the size of the committee (SCCI) and the percentage on independent directors who are members of this committee (INCCI)  Board remuneration (SOP) is observed considering the existence of incentive executive plans  Women directorship (WO) is captured considering the percentage of women in each banking groups, for each of the five years observed 14 Measurement (2/3)

15. Dependent variables:  ROA  ROE Control variables:  Total Assets and Number of Employees (Bank’s Size);  Operating profit/RWA (Level of risk);  Tier 1 ratio (Level of Capitalization) 15 Measurement (3/3)

16. Method Method: Fixed effect model on a panel dataset Test: Breusch-Pagan test for heteroskedasticity (Null hypothesis: Variance of the unit-specific error = 0; Asymptotic test statistic: Chi-square(1) = 0.993456 with p-value = 0.318899); Hausman test (Null hypothesis: GLS estimates are consistent; Asymptotic test statistic: Chi-square(13) = 190.31 with p- value = 1.32591e-033). Equations: ROA=α+β1LS+β2NE+β3IN+β4IN+β5WO+β6CN+β7SCCI+β8IN CC+β9SOP+ε ROE=α+β1LS+β2NE+β3IN+β4IN+β5WO+β6CN+β7SCCI+β8IN CC+β9SOP+ε 16

17. 17 VariableMeanMedian Minimu m MaximumStd. Dev.C.V. Skewnes s Ex. Kurtosis LS 13,4613,876.0025.000.360.14-0.09-0.87 NE 76,9%80%16,6%100%0.210.27-0.910.23 IN 40,7%36,3%0.00%100%0.260.640.70-0.13 WO 2,7%0,00%0.00%22,2%0.041.611.672.80 CN/CR/ CCI 38,8%0.00 1.000.491.260.46-1.79 SCCI 3.703.000.009.001.480.400.091.61 INCCI 83,9%100%40,00%100,00%0.180.21-0.43-1.34 SOP 49,53%0.00 1.000.501.010.02-1.99 TA 106.683.90423.454.500372.2001.045.612.100226.817.000 212290750 T1R 10.568.075.0554.907.920.753.6714.27 OP/RWA (t- 1) 1.381.00-8.7127.983.302.394.8039.73 ROE 0.940.58-6.9420.252.822.995.6537.98 ROA 7.527.11-86.6846.1712.231.63-3.7131.25 Descriptive statistics (2006-2010)

18. 18 Results (1/2) CoefficientStd. Errort-ratiop-value Const-1970.842985.66-0.66010.52277 YEAR1.111.460.760.46 NE57.5124.202.380.036** IN12.5518.620.670.51 WO-6.70101.29-0.070.95 SCCI-3.965.25-0.750.46 ICCI-26.4729.43-0.900.39 SOP-1.144.63-0.250.80 TA6.495680008.672480000.750.47 T1R2.250.593.780.01*** EM-0.00090.0006-1.42430.1821 CN/CR/CCI-2.7617.77-0.160.88 LS-106.80165.054-1.6410.129 OP/RWA (t-1)-0.990.26-3.760.01*** Fixed effects. Dependent variable ROE (R-squared 0.92) The t-statistics are presented in parentheses (***, **, and * indicate 1, 5 and 10% significance levels, respectively).

19. 19 CoefficientStd. Errort-ratiop-value Const 642.449653.9560.98240.34701 YEAR -0.270.32-0.860.41 NE 17.595.303.320.01*** IN -0.784.08-0.190.85 WO -10.5222.19-0.470.64 SCCI -2.761.15-2.400.03** ICCI -7.746.45-1.200.25 SOP 0.641.010.630.54 TA 3.8181700001.899550000.200.84 T1R 0.940.137.200.00*** EM -4.99420.0001-0.34970.7331 CN/CR/CCI 6.863.891.760.10 LS -37.6814.24-2.640.02** OP/RWA (t-1) -0.450.06-7.86<0.00001*** Results (2/2) Fixed effects. Dependent variable ROA (R-squared 0.96) The t-statistics are presented in parentheses (***, **, and * indicate 1, 5 and 10% significance levels, respectively).

20. Conclusion 20 Hypothesis ROAROE 1. Performance of the Italian banking groups is not significantly related to the size of the Board √X 2. Performance of the Italian banking groups is positevely related to the proportion of non-executive and/or independent directors on the Board √√ 3. Performance of the Italian banking groups is positively related to the existence of audit, remuneration and nomination committees XX 4. Performance of the Italian banking groups is positively related to the proportion of independent directors on the audit committee √X 5. Performance of the Italian banking groups is positively related to the existence of incentive executive pay XX 6. Performance of the Italian banking groups is positively related to the proportion of female members on the Board XX

21. Future research  The main limit of this research is the small number of bank groups observed Further research is needed to:  broaden the sample size, including more not listed bank groups;  extend the analysis to other relevant corporate governance matters, such as CEO- Chairman duality and ownership type;  Realize cross-country comparison 21