Wednesday, February 28, 2024

How politics took precedence over investor pragmatism at UniCredit

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The optics are horrible. The former Italian finance minister and deputy for the Tuscan city of Siena is appointed president-elect of UniCredit, the country’s second largest bank. In a matter of weeks, a respected CEO is ousted of his work amid suggestions that UniCredit should save the shattered bank, Monte dei Paschi, Siena’s largest employer.

When acclaimed but seemingly obstructive Jean Pierre Mustier parted ways with UniCredit last week, it looked like the bank was putting Italian interests ahead of shareholders. No wonder investors got scared, pushing UniCredit’s share price down 13% in two days, because the news has appeared.

The scenario is not unique to Italian finance: it reflects the type of inward and outward facing tensions unfolding around the world – from the US presidential election to Brexit to advice. business administration. Credit Suisse took the opposite direction of UniCredit by choose António Horta-Osório, a Portuguese banker who led UK bank Lloyds for a decade, as the next chairman. But it is revealing that in Brexit Britain, Mr Horta-Osório himself will be replaced by a Briton.

Such accounts are of course simplistic. In UniCredit’s case, the reality is certainly more subtle – but perhaps not more reassuring for investors.

UniCredit has long operated in a difficult domestic market, plagued by bad debt and a sluggish economy even before the tribulations of Covid-19. Seeking to reduce its dependence on Italy, it presented itself instead as a pan-European lender. Two acts stand out: the acquisition in 2005 of the German HVB; and the appointment in 2016 of Mr. Mustier, a high-profile French banker eager to redeem his reputation after overseeing a dishonest trading incident at Société Générale. They combined explosively last week.

The mine that caused the explosion was laid a year ago, when the determined CEO announced in a new strategic plan that the bank would “continue to work on a project” to create a holding company in Germany. The idea was not new, conceived earlier as a mechanism to calm German political unease over UniCredit’s proposal to acquire Frankfurt-based Commerzbank.

This deal was going nowhere, but the idea of ​​creating a German holding company, centered on the old HVB business, had obviously been maintained. This would provide a significant advantage: the costs of financing the issuance of debt and regulatory capital via a German entity would be cheaper and more stable than using the base Italian group. Hence the appearance of the holding company project in the strategy document.

But the plan quickly began to escalate, as UniCredit’s 14-member board of directors (10 Italians, plus Mr. Mustier, an Austrian, an Argentinian and an Emirati) grew increasingly irritated by a decision. which would dilute the Italianity of the bank.

When the president designates Carlo Padoan Pier had to choose between a CEO valued by shareholders and a board that Mr. Mustier had complained of being weak and too narrow-minded Italian, he chose the latter.

Despite the optics, it was never really a question of whether or not to bail out Monte dei Paschi di Siena. It is understood that Mr. Mustier and Mr. Padoan had found a deal acceptable, but only if there was no cost of capital and legal safeguards were in place to protect the new owner.

But that was the way Italian UniCredit should be. In the eyes of Mr Padoan – and the board of directors at large – it was dangerous to approve a new structure that could have foreshadowed a complete break with the Milan-based group.

For the new president, economist and politician who has spent much of his career at the heart of the European project, the idea of ​​restructuring an Italian bank into a bank with a German holding company would conflict with the essence of the union. banking sector in the euro zone. In particular, it would undermine the central aspiration – yet another pipe dream – that, other things being equal, the market should view the debt of an Italian, German or any other eurozone issuer on a par. equality.

In scotching the project of a German holding company, Mr. Padoan clearly placed the political interests of Italian-European idealism before the pragmatic interests of shareholders. To his credit, he is keen to strengthen and further internationalize the Board of Directors. But as headhunters search for Mr Mustier’s successor, a bet seems certain: the new CEO will be Italian.


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