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The probability of an outcome decreases as conditions increase. This applies forcefully to European bank mergers. UniCredit is a handy lens with which you can investigate the problem. The conclusions help explain why international investors rightly prefer US banks.

UniCredit is the second largest lender in Italy and also has a significant German business. Politicians have been putting pressure on it for years absorb Monte dei Paschi in Siena. A bailout of 2017 left this historic, troubled bank under state control. A deal that could be announced this week after the Italian by-elections is closer than ever before.

One major implicit condition has already been met. UniCredit has a new CEO in the form of former UBS investment banker Andrea Orcel. He is willing to make a deal without seeing it as a springboard for the foreign expansion that some board members opposed when Jean Pierre Mustier held the post.

Orcel could not even disclose UniCredit’s own terms for a takeover. The most important of these is a refusal to take up the substantial bad debt of MPS. Commercial transactions, when published, should hopefully reveal an injection of equity in the form of a creditworthy customer base. It is a reasonable compensation for UniCredit shareholders to relieve the government of the problem bank of Italy.

In return, UniCredit bears integration risks. This includes the danger that some loans that are classified as “performing” are nothing of the sort.

So far so good. The point where even the most patient foreign investors can start zoning is when political conditions enter the equation. The main reason the takeover has not yet been announced is that the current Italian by-elections include Siena, an incredibly beautiful city with around 55,000 inhabitants.

This superficial little game highlights how politics and banking are intertwined in parts of Europe. The Siena constituency, where MPS is a key employer, is at stake, as former incumbent Pier Carlo Padoan is now chairing UniCredit. The takeover of MPS, where jobs can be reduced, could leave its fiduciary duties and local loyalty interesting.

Enrico Letta, a former prime minister loyal to Mario Draghi’s ruling coalition, is predicted to win Padoan’s old seat and defeat candidates from parties hostile to the deal. Unlike upset, publicists in Rome, Siena and the hometown of UniCredit Milan can then send out the joint announcement about a merger that they have all been sweating about.

The problem for investors in European banks is that such a transaction is too rare. The European Commission has the task of putting heads together for greater integration. It shows little sign of it. Instead, domestic banks remain largely leaders of national governments and regulators.

The problem with most combined combinations is that national governments are happy that their banks are buying lenders in competing EU states, but not the other way around. The accepted wisdom is that household consolidation must therefore take place first. But progress on this is slow.

A few years ago, Wall Street bankers were just as pessimistic about consolidating local banks as their European counterparts. ‘There are a lot of transactions that need to be done,’ they would say, ‘but every bank has its headquarters in a big city that does not want to lose it, and is run by a CEO who also does not want to lose their job. .

They were wrong. Financial drivers behind consolidation outweigh local political resistance, albeit much weaker than in Europe. Over the past four years, US bank mergers have been valued at just under $ 40 billion annually. This consolidation is taking place because political and regulatory barriers are much lower. US banks are also trading at a premium thanks to a faster exit from the financial crisis, faster growth and fatter margins.

You could 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. It would only be valid if the EU was so economically and financially integrated. As long as progress towards the goal can be accelerated or hampered by a poll focusing on an Italian city smaller than Bismarck, North Dakota, most international investors will prefer simpler proposals.

jonathan.guthrie@ft.com



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