Board of Directors and Performance in Italian Banking Groups

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

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 banksprofitability: method, data and results of a survey • Concludingremarks

3. Corporate Governance, profitability and much more… • Banks are «special», different from corporations…. • …the financialcrisishasshowed severe CG failures and gaps • The importance of the reputation…. • ….the way the CG structureisdefinedcouldcontribute to reachefficiencypurposes and to increaseprofitability

4. Overview of the Italian banking sector (I) Evolution of the concentration process

5. Overview of the Italian banking sector (II) • At the end of 2010 the twolargest banking groups (UniCredit and IntesaSanpaolo) and the three medium-sized and large groups (MontedeiPaschi, Banco Popolare and Unione di Banche Italiane) heldrespectively 32.9 and 18.9% of the totalassets • The remaining 48.9% refers to 58 medium-sized and small groups and stand-alone banks (36.9%) and to 571 small banksprincipallyoriented to localmarkets (11.3%) • During the 2001-2010 the portion of totalassetsheld by the top five banking groups rose from 46.5 to 51.8%

6. Overview of the Italian banking sector(III) Profitability (margins and indicators) of the Italian banking groups

7. Overview of the Italian banking sector(IV) Profitability (margins and indicators) of the Italian banking system

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

9. Ourresearch • Quitescarce (and oftenwithincongrousresults) are the empiricalresearches on the link betweenbank performance and Board of directorsattributes, suchas: size and composition; remuneration; existence of committees; women directorship • Ourstudyanalysesall the abovecitedattributes, considering ROE and ROA as performance indicators

10. Ourresearchhypothesis

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

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 listedones • Profitability and accounting data (ROE and ROA), collected using BankscopeDatabase

13. Measurement (1/3) Independentvariables: • 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)

14. Measurement (2/3) • 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) iscaptured considering the percentage of women in each banking groups, for each of the fiveyearsobserved

15. Measurement (3/3) Dependentvariables: • ROA • ROE Controlvariables: • Total Assets and Number of Employees (Bank’s Size); • Operating profit/RWA (Levelofrisk); • Tier 1 ratio (LevelofCapitalization)

16. Method Method: Fixed effect model on a panel dataset Test: • Breusch-Pagan test forheteroskedasticity (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+β8INCC+β9SOP+ε • ROE=α+β1LS+β2NE+β3IN+β4IN+β5WO+β6CN+β7SCCI+β8INCC+β9SOP+ε

17. Descriptive statistics (2006-2010)

18. Results (1/2) 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. 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

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 listedbankgroups; • extend the analysis to other relevant corporate governance matters, such as CEO-Chairman duality and ownership type; • Realize cross-country comparison