How politics trumped investor pragmatism at UniCredit

The optics are awful. Italy’s former finance minister, and the member of parliament for the Tuscan city of Siena, is appointed chairman designate of UniCredit, the country’s second-biggest bank. Within a matter of weeks, a respected chief executive is squeezed out of his job amid suggestions that UniCredit should rescue the busted-flush bank, Monte dei Paschi, Siena’s biggest employer.

When the widely-lauded, but apparently obstructive, Jean Pierre Mustier parted ways with UniCredit last week, it looked like the bank was putting Italian interests ahead of those of shareholders. No wonder investors took fright, sending down UniCredit’s stock price by 13 per cent over two days as the news emerged.

The scenario is not unique to Italian finance: it reflects the kind of inward-looking versus outward-looking tensions that are playing out the world over — from the US presidential election to Brexit, as well as in corporate board rooms. Credit Suisse went the opposite direction from UniCredit by choosing António Horta-Osório, a Portuguese banker who has led the UK’s Lloyds bank for a decade, as its next chairman. But it is telling that in Brexit Britain, Mr Horta-Osório will himself be replaced by a Brit.

Such narratives are of course simplistic. In UniCredit’s case, the reality is certainly subtler — although perhaps no more reassuring for investors.

UniCredit has long operated in a difficult domestic market, plagued by bad debts and an anaemic economy even before the tribulations of Covid-19. Seeking to diminish its reliance on Italy, it has cast itself instead as a pan-European lender. Two deeds stand out: the 2005 acquisition of Germany’s HVB; and the 2016 appointment of Mr Mustier, a high-flying French banker keen to redeem his reputation after overseeing a rogue trading incident at Société Générale. They combined explosively last week.

The landmine that produced the blow-up was laid a year ago, when the single-minded CEO announced in a new strategic plan that the bank would “keep working on a project” to set up a holding company in Germany. The idea was not new, conceived earlier as a mechanism to calm German political unease about UniCredit’s pitch to acquire Frankfurt-based Commerzbank.

That deal went nowhere but the idea of establishing a German holding company, centred on the old HVB business, had evidently been kept alive. It would bring one notable benefit: funding costs for issuing debt and regulatory capital through a German entity would be cheaper and more stable than using the core Italian group. Hence the appearance of the holding company project in the strategy document.

But the plan soon began to fester, as UniCredit’s 14-member board (10 Italians, plus Mr Mustier, an Austrian, an Argentine and an Emirati) became increasingly peeved with a move that would dilute the bank’s Italianness.

When chairman designate Pier Carlo Padoan had to choose between a CEO popular with shareholders and a board that Mr Mustier had complained was weak and too narrow-mindedly Italian, he chose the latter.

Despite the optics, this was never really about bailing out Monte dei Paschi di Siena or not. It is understood both Mr Mustier and Mr Padoan had deemed a deal acceptable, though only if there was no capital cost and legal guarantees were in place to protect the new owner.

But it was about how Italian UniCredit should be. In the eyes of Mr Padoan — and the broader board — it was dangerous to countenance a new structure that could have prefigured a wholesale breakaway from the Milan-based group.

For the new chairman, an economist and politician who has spent much of his career at the heart of the European project, the notion of restructuring an Italian bank into one with a German holding company would clash with the essence of eurozone banking union. In particular, it would undermine the central aspiration — still a pipe dream — that, all else being equal, the market should view the debt of an Italian, German or any other eurozone issuer on a par.

By scotching the plan for a German holding company, Mr Padoan has clearly put the political interests of Italo-European idealism ahead of the pragmatic interests of shareholders. To his credit, he is keen to strengthen and further internationalise the board. But as headhunters search for Mr Mustier’s successor, one bet looks safe: the new CEO will be Italian.

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