Papa, Ghizzoni, and Mustier: UniCredit’s new guard fights to revive its empire

NEW CHIEF EXECUTIVES usually enjoy a honeymoon period. Federico Ghizzoni has had no such luck. The boss of UniCredit, Italy’s biggest lender, who took over the reins last September, has one of the toughest tasks in European banking: turning around a fallen star.

Less than three years ago UniCredit was the fourth-biggest bank in Europe, with a market capitalization of more than €80 billion. Its growth had been rapid and seemingly inexorable; a bank transformed in 10 years through a series of acquisitions from a domestic player with total assets of about €170 billion to a pan-European financial institution with a €1 trillion balance sheet and a presence in 22 countries. Its long-serving chief executive, Alessandro Profumo, was feted as one of the continent’s best dealmakers.

Then came the financial crisis. Although the bank was partly burnt by its investments in structured credit, what really brought it down to earth was its ambition. The purchase of Germany’s HVB in 2005 led to a protracted integration process and that of domestic rival Capitalia two years later has yet to prove its worth and saddled the bank with bad debts as the financial crisis took hold. To make matters worse, its core growth markets in central and eastern Europe were badly affected by the first rounds of the credit crunch. The bank was left dangerously undercapitalized.

The economic environment has since improved in both emerging and western Europe but the scars of that acquisition-led strategy are still being felt at the bank.

Although the bank’s geographical reach remains, much else has changed. Profumo has gone, having fallen out with his shareholders over capital-raising plans. The Italian lender’s market capitalization, meanwhile, has collapsed to €31.7 billion, meaning it is no longer ranked within even the top-10 biggest banks in Europe. Or put another way, its market cap now is just €10 billion more than the amount UniCredit paid for Capitalia in 2007 – an acquisition that gave the group a combined value of nearly €100 billion at the time. Growth driven by daring acquisitions has made way for a period of reflection and consolidation.

It is against this backdrop that Ghizzoni is trying to resurrect the bank’s reputation. It will not be easy, not least because as a UniCredit veteran and one of Profumo’s former chief lieutenants he is intrinsically linked to all the key decisions of the past. In that sense he is Gordon Brown to Profumo’s Tony Blair.

When Brown succeeded Blair as UK prime minister he was determined to strike his own path and distance himself from the previous administration’s most unpopular decisions. Yet as one of the leading members of the Blair government he could never escape his previous role. Ghizzoni will hope for a more successful tenure at the top than Brown managed.

The market remains to be convinced. UniCredit’s share price has fallen since Ghizzoni’s appointment on September 30 as investors wait to see what plans the bank has to improve its profitability (although the stock is outperforming the Stoxx 600 index of bank shares year to date). Last year UniCredit announced a net profit of €1.32 billion, down 22% from 2009.

After UniCredit’s fourth-quarter results were announced in March the analyst community was split about the bank’s potential. Paola Sabbione, research analyst at Deutsche Bank, wrote that the quarter’s operating trends were encouraging and recommended investors buy the shares. In a more in-depth report the previous month, Sabbione had described UniCredit as "the phoenix [that] could realistically rise... due to macro-support, especially for Germany and central and eastern Europe, and a renewed commitment from senior management to the definition and achievement of a solid business plan".

Conversely, Paola Biraschi, analyst at RBS, wrote after the latest results that while they were "healthier than expected... balance sheet trends were weaker." Biraschi has a hold recommendation.

Marcello Zanardo, analyst at Alliance Bernstein, wrote: "Fourth-quarter results after many quarters finally triggered a positive reaction, driven mainly by better than expected revenues." Yet he also warned on asset quality in Italy and thin capital ratios. Zanardo has an underperform stance on the stock.

Ghizzoni, a quiet, mild-mannered person, knows he has to produce results. "In broad terms our biggest priority, after three years of declining results, is to turn around profitability," he says. "We want to bring back the group to a level of profitability in line with our best peers."

The strategy to do so is less about a radical overhaul than getting the most out of the bank’s existing growth businesses, especially central and eastern Europe and corporate and investment banking, while turning around its struggling Italian operation.

"One of the first questions we asked after I became chief executive was what we want to be," says Ghizzoni. "Did we want to change completely our DNA? We decided that our core business would continue to be commercial banking and we want to be a large European bank. But we had to understand why we had some difficulties and take some measures."