(Repeats story published on Monday)
* Past peak of bad loan crisis, Italian banks face new mission
* Looking to catch up on digital, reduce reliance on lending
* How overhaul plays out will shape sector for years to come
* Ageing workforce, labour laws among obstacles to change
By Valentina Za
MILAN, Nov 20 (Reuters) - Bailed-out Monte dei Paschi, the world's oldest bank and a bastion of tradition dating back to 1472, has entered the realms of virtual reality. It's an unlikely sign of the times.
After surviving the worst of a bad loans crisis, Italian banks face another daunting mission: modernising centuries-old businesses and finding new ways to make money.
They are looking to catch up with European rivals in digital banking, and are reducing their dependence on lending by selling insurance and other financial products.
How this overhaul plays out could shape the sector for years to come, with those who adapt most swiftly sweeping up a larger slice of new business, say bankers and industry experts.
Monte dei Paschi's online arm last week launched virtual reality (VR) branches, accessed via phone app and VR headset, and said 3,500 customers had signed up in the first few hours. But other banks are moving far more aggressively in revamping their businesses.
Italy's biggest bank, UniCredit, set a template for lenders in need of restructuring by raising 13 billion euros from shareholders this year. As well as investing 1.6 billion euros in its IT systems, it is re-training 1,500 Italian staff and moving them from administrative jobs to client-facing roles.
Mediobanca has meanwhile acquired a "robo-advisory" service, an algorithm that proposes investments to customers of its digital arm who can access it directly. It is also hiring 100 financial consultants a year to reach more than 300 by 2019 to boost assets under management.
But modernisation will not be easy for an industry that has focused on lending to Italy's myriad small businesses for centuries. Banks must contend with employees who are resistant to changing roles, rigid labour laws, and a lack of funds to invest in technology.
Varying rates of progress among Italy's 600 lenders are likely to further widen the gap between large players and their smaller peers, which are still grappling with the loans crisis and lack the scale for the necessary investments. Banca Carige, for example, is raising capital to avoid collapse.
Executives say mergers are inevitable in coming years.
"Innovation and digitalisation have become a priority for all large lenders which are dedicating people and money to them. The problem is the industry is very fragmented and small banks find it hard to embrace the challenge," said Roberto Ferrari, Mediobanca's Chief Digital and Innovation Officer.
Heavyweight Intesa Sanpaolo, which has led the shift towards fee-earning businesses and has 230 of its 4,800 branches dedicated solely to advisory services, is launching a pilot project which will see some staff having two contracts. They will work part-time as a bank employee with set salary, and for the rest of the time as a consultant with pay based on the number of products they sell.
Changes are necessary for an industry which has shrinking revenues and is not repaying its cost of capital - meaning companies could struggle to raise cash from investors if they run into trouble.
Italian banks' return on equity - a key measure of profitability - was 2.3 percent in the first half of 2017 excluding one-off transactions, less than half the European average and a fraction of their 12.8 percent cost of equity, according to calculations for Reuters by consultancy Oliver Wyman.
There is a long road ahead for lenders in Italy, where only about 30 percent of bank customers use online services, against 45 percent in Spain and more than 80 percent in Nordic countries, Oliver Wyman found. At the end of last year, Italy had a bank branch every 2,000 residents, against an EU average of one every 3,800.
Italian banks were freed from the threat of a systemic collapse after Rome committed billions of euros of public money to buttress the industry by rescuing Monte dei Paschi and two smaller banks over the summer.
But thousand of jobs are yet to be axed in a sector that has already shed 40,000 since 2008. Banks will need to cut 25-30 percent of their 29,000 branches over the next five years, consultancy Accenture estimates, following a 15 percent reduction in 2008-16.
Those branches that survive are being redesigned to appeal to a new generation, and type, of clientele.
Under a 500-million-euro renovation push aimed at turning its branches into modern-day piazzas, Intesa is partnering with a pastry chef to host his patisseries from next year and recently launched its first branch with a cafe inside.
Meanwhile UniCredit opened its first branch for small corporate clients near La Scala theatre in September, with a lounge area where they can hold their own meetings.
"As bank branches dwindle the skills of people left in them must change to provide consulting and customer services," said Alberto Antonietti, head of financial services at Accenture Strategy in Milan.
"This is no small cultural revolution for people used to waiting for clients behind a counter who must now go hunting for them. The digital catch-up will happen, transforming people will be the real challenge."
There has been progress; excluding bailed-out Monte dei Paschi, fees have accounted for 40 percent of revenues at the top four banks this year, up from 31 percent five years ago.
But the changes are proving painful for employees.
Unions have complained against pressures on staff to sell financial products and have set up a joint committee with Italy's banking association to monitor the issue.
In a survey of bank staff in a Tuscan province, 84 percent of respondents felt uneasy recommending a product to a client in order to hit goals. More than a quarter had used at some point anti-anxiety or anti-depressant drugs, an academic study by La Sapienza University found this year.
"I was deeply struck by how unprepared most employees were to adapt quickly to changes happening in the industry," said Professor Giuseppe La Torre, one of the study authors.
"In everyone's mind a bank job is a well-paid, cushy job. Our study uncovered a very different reality. These are people in their 50s who started working at least 20 years ago - they have not been trained to adapt well to changes."
Former bank clerk Giuliano Leone, 60, who recently retired from a small bank, said learning the ins and outs of financial products did not necessarily teach people how to sell them.
"During training they told us that signing somebody up to an insurance contract took only a few minutes," he added.
"Well, it doesn't. It takes hours."
A senior bank executive, who declined to be named due to the sensitivity of the issue, said that it was difficult to hire talented people as the skills required broadened.
"The cuts discourage those who are after a secure job and those who want a dynamic work environment much prefer a start-up or a big tech company," he said.
"Nobody dreams of working for a bank anymore." (Reporting by Valentina Za; Editing by Pravin Char)