Mustier Should Be Ruthless to Salvage Italy's Unicredit
(Bloomberg View) -- Next week, Unicredit Chief Executive Officer Jean-Pierre Mustier is scheduled to present his five-month review of the bank's strategy. To salvage a bank that's seen its market value drop to just 13 billion euros ($14 billion) from almost 40 billion euros in the space of just eighteen months, Mustier needs to become best-in-class -- and that means aggressively shrinking his bank to a more manageable size relative to its country of domicile.
John Cryan, Mustier's counterpart at Deutsche Bank, has arguably shown how not to reassure investors. The German institution is suffering death by a thousand cuts, with every quarter seeming to bring more job losses, more divisions axed and more units sold. Mustier needs a more decisive stance if he's to gain enough support to raise much-needed capital to bolster his bank's balance sheet.
Fund managers have punished Deutsche Bank for its dilly-dallying by wiping almost a third off its share price this year. But investors view Unicredit as the worst of the large European banks, based on how they've treated its shares:
In mid-November, Unicredit acknowledged for the first time that its Dec. 13 review is likely to include "a possible capital increase." While Mustier said this week that his plans won't be changed by the resignation of Italian Prime Minister Matteo Renzi after voters rejected a referendum on constitutional reform, it's clearly harder to tap shareholders for money when your country is in political disarray.
There's also the small matter of what Italy will do about Banca Monte dei Paschi di Siena. The Italian Treasury has denied press reports that it's seeking 15 billion euros from the European Stability Mechanism to bolster its weakest lenders. But Monte Paschi is likely to need some kind of state aid, which will make Mustier's fundraising just that bit harder.
Global regulators have tried to solve the too-big-to-fail problem with new rules that force banks to allocate more capital to riskier businesses; that in turn has encouraged investment banks to shrink by making some of those activities too expensive to fund. But Unicredit's total assets have actually increased in recent years, by 49 billion euros since 2013; at 875 billion euros, the bank is a bit less than half of Italy's total annual economic output:
So where should Mustier's axe fall? How about Bayerische HypoVereinsbank, the German institution Unicredit bought in the go-go markets of 2005 when it had aspirations to be a player on the global investment banking stage?
In the first nine months of this year, Unicredit's commercial banking revenue in Germany dropped by 7.6 percent compared with the year-earlier period, while its Italian business (which is three times bigger) shrank by less than 1 percent. The return on allocated capital in Germany is just 9 percent, compared with 14.5 percent in Italy.
Mustier, appointed in June, is the first non-Italian to run the institution. The Frenchman knows what he's taking on, after running Unicredit's investment banking unit until his departure in 2014. He's also globally minded; he joined Societe General in 1987 and worked his way up with stints in Paris, Tokyo and Hong Kong, running the French lender's corporate and investment bank from 2003 and taking charge of the investment management unit in 2008.
Unicredit has said its business review is all-encompassing. To succeed, Mustier needs to be ruthless. He's close to selling Pioneer Global Asset Management to France's Amundi SA in a deal that could fetch 3.5 billion euros, as well as offloading Unicredit's stake in Poland's Bank Pekao. But in the current banking environment, any business that can't generate a double-digit return on capital should be a candidate for closure.
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To contact the author of this story: Mark Gilbert at magilbert@bloomberg.net.
To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net.