(Bloomberg Opinion) -- Andrea Orcel is making Italy’s bank bosses nervous. Chief executive officer of UniCredit SpA since April, he has been overseeing its mooted acquisition of the best bits of Banca Monte dei Paschi di Siena — a move that unsettles the status quo in the old-school world of Italian banking. It may well touch off a new season of mergers and acquisitions.
But that’s all good news in the years-long unwinding of Monte Paschi, the nearly 600-year old bank that was battered by the global financial crisis and has been bailed out by the government. It may just jump-start necessary changes in Italy’s overbanked, weakly profitable financial industry to reshape it for the post-Covid age. Better still, the Monte Paschi deal could set an example for other European countries where M&A has been blocked by bureaucratic and legal obstacles.
Orcel is as close as anyone’s gotten to closing the transaction. On Sept. 2, UniCredit, Italy’s second largest bank by assets, confirmed that its due diligence on Italy’s fourth largest was on track. UniCredit wants choice portions of Monte Paschi to grow its retail clients in Italy’s wealthy north and make it a closer rival to Italy’s biggest bank, Intesa Sanpaolo SpA.
In many ways, it’s the ideal moment to cauterize the Monte Paschi sore. The crisis has cost the Italian taxpayer billions of euros since the bank was nationalized in 2017, and yet it still languishes at the bottom of eurozone bank league tables.
For UniCredit, any deal would be capital neutral, according to Orcel. It can expect the state to deal with Monte Paschi’s bad and soured loans as well as legal claims and the future of some 6,000 employees. (The government has cushioned layoffs in the past, including during the 2001 restructuring of Fiat.) In exchange, Italy gets rid of a blot on the banking landscape that, while no longer a threat to financial stability, would be enough to incite panic with a collapse.
A bystander could be forgiven for thinking it’s all part of a grand plan — or at least an inadvertent reunion of characters already involved in the drama. In 2007, Orcel — with Merrill Lynch at the time — advised on the 2007 flip of Italian regional bank Antonveneta to Monte Paschi for 9 billion euros ($11 billion), a costly deal from which the latter’s balance sheet never recovered. Mario Draghi, Italy’s technocrat prime minister and the former president of the European Central Bank, was Italy’s banking regulator who greenlighted the Antonveneta deal. Pier Carlo Padoan, UniCredit’s new chairman, was the finance minister who nationalized Monte Paschi in 2017.
The real upside though is still to play for. A selective purchase of Monte Paschi starts to have real value if it triggers a reshaping of Italy’s moribund banking system. That prospect rattles the country’s other bank bosses, especially those who might end up being prey. There are so many of them: At the end of 2020, the industry had an astonishing 474 banks, 23,481 branches and 275,224 bank employees, according to the Bank of Italy. The system is bloated.
The smaller banks are nervous about UniCredit’s ambitions and the likelihood of an M&A free-for-all if the Monte Paschi deal goes through. Milan-based Banco BPM SpA Chief Executive Officer Giuseppe Castagna — clearly seeking some kind of defense against potential acquirers— created headlines in August when he claimed it was time to create another major banking group in addition to UniCredit and Intesa SanPaolo. Banco BPM would be a likely target for UniCredit’s stated goal of bulking up its business in the north.
But time has to be called on Italy’s banking status quo. For one, Italy’s banks have only started to cope with the pandemic fallout. Debt moratoriums only ended in June. Fitch Ratings estimates the sector’s gross impaired loan ratio of total loans could climb to more than 10% this year. The two majors — Intesa Sanpaolo and UniCredit — had impaired loans below 5% at the end-2020, the lowest in a decade. But smaller banks are struggling. The sclerosis will turn to rot if the system is not shaken up. Italy’s real gross domestic product per capita will still be below 2000 levels after the post-Covid recovery, the OECD noted this month.
Germany-based Scope Ratings estimates that on average Italian banks have been value-destroying businesses for more than 10 years once the cost of capital is taken into account. Furthermore, based on some measures, the country’s banks have failed in their duty to support businesses and entrepreneurs. Credit is provided not according to the merit of an enterprise but on the basis of a client’s history with the bank, Andrea Alemanno from research firm Ipsos recently told me. By clinging to their clubby, insider management style, Italy’s banks are failing Italy.
The country’s capital market is shallow compared with the rest of Europe, let alone the U.S. It has no venture capital industry to speak of. Italian businesses need competitive funding from different banking models, and banks from across Europe. All this goes a long way to explain why Italy, despite its entrepreneurial fervor, has only produced one tech unicorn, the luxury etailer Yoox.
Italy is not alone in this sorry state. It’s a malady shared by Europe, especially Germany. That’s why the outcome of Orcel and UniCredit’s dance with Monte Paschi is crucial. Ironically, one of the biggest critics of Europe’s banking status quo was Draghi when he was at the ECB. Any failure by his government to support change in Italy’s banking sector while it has a chance is going to be a blot on his record.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Rachel Sanderson was Milan correspondent for the Financial Times from 2010 to 2020. She has also written about Italy for the Economist and reported for Reuters and Reuters TV from Rome, Paris and London.
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