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StockBeat: Unicredit's March of Folly

·3-min read

By Geoffrey Smith -- The shareholders are revolted, and rightly so. UniCredit (MI:CRDI) has forced out its chief executive Jean-Paul Mustier, one of the most highly-respected CEOs in Europe.

It has done so in order to pursue a politically-driven domestic merger whose rationale is at best ambitious and at worst outright dangerous for shareholders.

The reaction of Unicredit’s share price says it all: down 6% on a day when everything else is melting up in a liquidity-fuelled euphoric anticipation of an economic recovery next year.

Mustier’s had had wretched luck. Earlier this year, just before the pandemic struck, he had unveiled plans for the biggest and boldest return of capital to the bank’s shareholders in years, an emphatic statement that he had found a way not only to preserve value, but to create it, despite all the headwinds of low euro interest rates, low growth and declining working-age populations in its core markets.

Then Covid-19 struck, and Unicredit was commanded by its regulators to keep all that surplus capital for absorbing a next wave of loan losses. All might have been well, had the bank been allowed to concentrate just on absorbing its own losses, but politicians in Rome had other, grander ideas.

In the spring, they engineered the appointment of career politician Pier Carlo Padoan as chairman. Padoan had overseen the nationalization of perennial basket-case Monte dei Paschi di Siena while finance minister, but the state now urgently needed to find a private buyer to take care of it.

Under state ownership, BMPS had planned a sale of 8 billion euros of bad debts and an accompanying capital increase to fix its balance sheet and allow a return to private ownership, but the European Central Bank had said its numbers didn’t add up, and demanded it find another 700 million euros (according to La Repubblica).

There was no way Mustier was going to blow all that accumulated capital on solving someone else’s problem, especially given BMPS’s reputation for finding a succession of black holes in its accounts. So he had to go.

The board’s argument is that Unicredit needs to bulk up in Italy, to respond to consolidation elsewhere. Intesa Sanpaolo SpA (MI:ISP) forced through a hostile takeover of UBI Banca earlier this year, giving it an even stronger hold on the lucrative northern Italian market, while Credit Agricole (OTC:CRARY) has made a move on third-tier lender Creval (MI:PCVI) after trying to tighten its alliance with Banco Bpm (MI:BAMI).

The shame is that Unicredit, having been a truly international bank capable of driving consolidation at the European level, is now doomed to become more inward-looking, more dependent on a stagnant Italian economy and, in all probability, less profitable. It could be a decent addendum to Barbara Tuchman's 1984 book "The March of Folly", a reflection the enduring ability of people to take decisions against their best interests, from the Trojans bringing in the Wooden Horse to the U.S. getting sucked into Vietnam.

It's a sad end to one of the few encouraging stories to come out of European banking in recent years.

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