UniCredit Can't Rely on M&A as a Cure for Its Ills

(Bloomberg Opinion) -- Unlike some of his peers, UniCredit SpA Chief Executive Officer Jean Pierre Mustier can’t be faulted for wavering. In his three years on the job, he has sold assets and cut costs to put Italy’s largest bank on a more solid footing. He now faces a much harder task: finding growth.

While the headline first-quarter results the lender reported this week were the best in a decade, profit was helped by one-time items. Revenue fell 3% to 4.95 billion euros ($5.6 billion), hurt by the sluggish performance of the bank’s Western European operations.

It’s a familiar refrain. Low interest rates and anemic economic expansion across Europe are squeezing margins and earnings. And for all Mustier’s efforts to overhaul the lender, using cheap funding from the European Central Bank to hoover up Italian sovereign debt has dented its valuation. If you include the record share sale Mustier embarked on soon after taking the job, UniCredit’s market value is little changed from when he took over. 

The temptation to embark on a takeover of a rival such as Commerzbank AG to secure growth is clear. As things stand, analysts polled by Bloomberg expect revenue to plateau this year and edge up by about 4% through 2021; net income is set to grow a less exciting 2.3% by 2021 from 4.6 billion euros this year.

Just by diversifying away from Italy – the biggest of its 14 core markets – UniCredit could get a re-rating. But the odds that a worthwhile, transformational deal won’t materialize are very high. Even then, the execution risk creates significant downside. Investors will need keep the pressure on Mustier to prepare for the possibility that a deal won’t happen.

Though he won’t admit it, there are plenty of signals that the French executive is leaning toward a takeover. The lender said this week it will finally start to trim its holdings of Italian government debt. At 54 billion euros, UniCredit not only has the largest pot of sovereign debt compared to its peers, it also has the highest exposure relative to its tangible equity, according to Mustier.

More surprising was UniCredit’s decision to dispose of another asset, its digital lender FinecoBank SpA. By exiting the broker, the lender is forfeiting a small earnings loss for a welcome capital gain. But it is also giving up a successful tech platform with enviable profitability. At about 28%, Fineco’s return on common equity is about four times that of UniCredit.

But improving the capital buffer could make the Italian bank a more attractive companion to a foreign partner. And combining Commerzbank with UniCredit’s German subsidiary, HypoVereinsbank, makes sense, for sure.

Nonetheless, significant hurdles to cross-border deals persist, a fact that Mustier reminded analysts of on Thursday. Absent a common deposit insurance program, European nations will remain highly protective of their banks.

Mustier did offer a glimpse of the futuristic UniCredit he has in mind, talking about a greener, leaner, paperless bank. What he didn't share is a sense of the scale of investments the company would need to make a bigger push into digital. Keeping apace with technology, let alone being ahead of it, will require significant spending – and the payback in the form of lower overheads and higher returns takes time.

Still, it’s a transformation that all European banks will have to face, even if they combine. The former paratrooper shouldn’t overlook what UniCredit will have to do on its own. A merger is no guaranteed fix.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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