UniCredit SpA Update
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It was hardly a “Tadah!” moment. It is widely accepted that the acquisition of Monte dei Paschi was one of the posts on Andrea Orcel’s to-do list when he was appointed CEO of UniCredit. So there was only polite applause when he announced it negotiations began with the Italian government. Shareholders know he is under political pressure. But for now, the deal seems to be in their favor.
Orcel set sensible main conditions to relieve the Italian government of the bank it had to nationalize in 2017. Presenting a list of conditions so early is hardly normal practice. But Monte dei Paschi is not a normal bank. Orcel says the transaction should be capital-neutral, add earnings and exclude improper legal obligations and existing bad loans.
An agreement that can come as early as September strengthens UniCredit’s presence in prosperous northern Italy. Even if the former UBS banker can make the acquisition financially viable, shareholders will have to weigh the effort and time it takes.
Monte dei Paschi remains a very flawed institution. Attempts to get the bank ready for sale have meant he has been giving up toxic loans for years. About € 4 billion of this remains. UniCredit does not intend to absorb it. This leaves € 80 billion in “performing” assets.
UniCredit will decide how well they perform during the coming months of due diligence. Independent shareholders must be vigilant for efforts by Monte dei Paschi and its political sponsors to sneak future written-off feed to UniCredit’s balance sheet. Government support for Italian affairs means that weak creditors have had access to funds that they may soon lack.
What comes to UniCredit and what is left behind will make or break the transaction. So do guarantees for future risks.
Politicians – a race UniCredit chairman, Pier Carlo Padoan, participated until 2018 – greedily watched UniCredit’s fat capital buffer. Capital neutrality will mean different things to different people. Orcel must continue to deal firmly with a political and financial institution that has warmed the lives of its non-cooperating predecessor.
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