MILAN/ROME (Reuters) - While turmoil in the financial markets threatens profits of banks worldwide, Italian lenders face an altogether different headache: growing pressure to share some of their fat profits with angry consumers.
A frenzy of mergers worth $159 billion in three years has turned the long-protected Italian banking industry from a ragtag bunch of small lenders into a more dynamic system boasting two of Europe's top 10 banks: UniCredit and Intesa Sanpaolo.
Bank of Italy chief Mario Draghi, the country's top banking regulator, had hoped the merger wave would push down Italy's notoriously high bank fees. But the emergence of local giants and the entry of major foreign lenders such as France's BNP Paribas and Credit Agricole have yet to trigger sharp changes.
Italians pay the highest fees of 25 EU countries to manage their bank accounts, according to a European Commission survey: consumer groups and regulators are ratcheting up pressure on banks to spread the benefits of the mergers to ordinary folk.
Being able to churn out high profit margins from simple retail banking services -- and the conservative outlook of their clients -- have helped Italian banks sidestep the credit crisis triggered by U.S. banks' exposure to subprime mortgages.
Some investment analysts argue Italian banks are better placed than peers to tackle a slowing global economy.
"They mainly operate in the domestic market and their business mix is largely focused on the domestic retail business," Dresdner Kleinwort analysts said in a February note.
"This business model has reduced exposure to risky investment banking revenues ... and critically, has limited the impact of the recent liquidity squeeze."
Just over half of analyst recommendations on banks globally are neutral or bearish, according to Reuters Estimates data: on Intesa only around a third recommend investors hold or sell the shares, and for Unicredit that proportion sinks to 15 percent.
"Consolidation has brought more competition in banking services for companies. There is less evidence that competition has increased much for retail bank clients," said Marcello Messori, professor at Rome's Tor Vergata University and author of a recently published book, "The Power of Banks."
Indeed, foreign banks, lured by the prospect of high margins, have tended to charge the same high fees that have made banking one of Italy's most profitable domestic sectors, said economic analyst Anna Vizzari of consumer group Altroconsumo.
Italian banking group ABI says banks are forced to charge high fees because their own costs are high, while customers buy fewer financial products than in other countries.
"It's true that they (banking fees) are among the highest in Europe but we also have the highest number of front-office transactions," UniCredit CEO Alessandro Profumo said in January, partly blaming Italy's still widespread use of cash.
Italian banks have long been known for high fees and poor service. Forget more complex transactions like buying or selling foreign stocks, just opening a bank account means endless forms.
Until recently, closing an account was worse. Some customers paid as much as 450 euros for the privilege, says Altroconsumo.
Online banking is popular in many other countries, but Italians often can carry out basic transactions like cashing in cheques only at the branch where they opened their bank account. Fees of as much as 2 euros are slapped on each statement sent.
The Bank of Italy says completing a payment by cheque still takes an average of seven days, pointing out that Italy, one of the Group of Seven most developed nations, is considerably behind in the use of electronic payments.
Banks can refuse to accept certain payments by cheque if issued by another bank, forcing customers to carry out a bank transfer or use cash.
In all, Italians pay an average of 90 euros a year to maintain an account -- more than six times the EU average of 14 euros, the European Commission's Consumer Scoreboard 2008 shows.
"Every month I spend a whole lot on ATM fees and maintenance fees -- much more than any interest I ever get," says Cosimo Fanfani, a store manager aged 28, who for years left money idle in an account for fear of being hit with a closing fee. "Putting money in the bank seems to do more for the bank than for me."
Even interest rates charged for home mortgages and consumer credit are both higher than the euro area average, the Bank of Italy has said.
But pressure from consumers and regulators is starting to yield results. The outgoing centre-left government in 2006 made it illegal to impose fees to close accounts and in 2007 allowed customers to switch mortgages without paying a penalty.
Consumer groups hope the next government, due to be elected in April, will continue with reforms -- but they plan to keep up their fight. One group, Adusbef, plans to use newly introduced class action lawsuits to target banks charging a type of compound interest on loans that it likens to "usury."
Top Italian regulators have stepped up the pressure as well.
Draghi has repeatedly called on banks to boost transparency and cut fees. He has lauded recent improvements on the consumer front but called for swifter progress.
Italy's antitrust regulator Antonio Catricala has been even more vocal. He says his agency has seen a number of banks not applying new laws on fees, complaining that he too was once slapped with a large fee for paying off a mortgage early.
"It's clear that competition is possible only if there is transparency," said Catricala. "Banks can still do more to produce savings."
Editing by Sara Ledwith