Monte dei Paschi’s slow approach to altar reveals EU banking flaws
Politics still stymies the consolidation of European banking fiefdoms
The likelihood of an outcome declines as preconditions multiply. That applies forcefully to European banking mergers. UniCredit is a handy lens through which to examine the problem. The conclusions help explain why international investors justifiably prefer US banks.
UniCredit is Italy’s second-largest lender and also has a sizeable German business. For years, politicians have been putting pressure on it to absorb Monte dei Paschi di Siena. A 2017 bailout left this historic, troubled bank under state control. A transaction, which could be announced in the wake of Italian by-elections this week, is closer now than ever before.
One big implicit precondition has already been met. UniCredit has a newish chief executive in the shape of ex-UBS investment banker Andrea Orcel. He is willing to do a deal without, it appears, seeing this as a springboard to the foreign expansion some board members resisted when Jean Pierre Mustier had the job.
Orcel has been canny in publicising UniCredit’s own preconditions for a takeover. The most important of these is a refusal to take on MPS’s substantial bad debts. Deal terms, when published, should hopefully reveal an injection of equity in the form of a creditworthy customer base. That would be a reasonable fee to UniCredit shareholders for relieving the government of Italy’s problem bank.
In return, UniCredit would be shouldering integration risks. These include the danger that some loans classified as “performing” prove to be nothing of the sort.
So far, so good. The point where even the most patient foreign investors may start zoning out is when political preconditions enter the equation. The main reason, it appears, that the takeover has not already been announced is that current Italian by-elections encompass Siena, a stunningly beautiful city of some 55,000 inhabitants.
This superficially minor contest underlines how politics and banking interweave in parts of Europe. The constituency of Siena, where MPS is an important employer, is up for grabs because former incumbent Pier Carlo Padoan is now the chair of UniCredit. The takeover of MPS, where jobs may be cut, might leave his fiduciary duties and local loyalties interestingly counterpoised.
It has been predicted that Enrico Letta, a former prime minister loyal to Mario Draghi’s ruling coalition, will win Padoan’s old seat, beating candidates from parties hostile to the deal. Barring upsets elsewhere, publicists in Rome, Siena and UniCredit’s hometown of Milan can then send out the joint communique on a merger they have all been sweating over.
The problem for investors in European banks is that such a deal is all too rare. The European Commission has the job of banging heads together in the cause of greater integration. It shows little sign of doing so. Instead, domestic banks largely remain fiefs of national governments and regulators.
The snag with most mooted combinations is that national governments would be happy for their banks to buy lenders in rival EU states, but not vice-versa. The accepted wisdom is that domestic consolidation must therefore occur first. But progress on this is slow.
A few years ago, Wall Street bankers were as pessimistic about regional banking consolidation as their European peers. “There are plenty of deals to be done,” they would say, “But each bank is headquartered in a big city that does not want to lose it and is run by a CEO who does not want to lose their job either.”
They were wrong. Financial drivers behind consolidation outweighed the local political resistance, admittedly much weaker than in Europe. Over the past four years, US banking mergers have totalled just under $40bn in value annually. This consolidation is occurring because political and regulatory barriers are far lower. US banks also trade at a premium thanks to a slicker exit from the financial crisis, faster growth and fatter margins.
You might complain that the comparison weighs apples against pears. But the same objection applies to bullish descriptions of the EU as the world’s third-largest economy after the US and China. These would only be valid if the EU was as integrated economically and financially. As long as progress toward that goal can be speeded or impeded by a poll centred on an Italian city smaller than Bismarck, North Dakota, most international investors will prefer simpler propositions.