Just a few weeks before Covid-19 arrived in Europe, chief executive Jean Pierre Mustier had predicated UniCredit’s 2020-2023 plan on a new commitment to returning capital to shareholders. Dividend payouts were to rise and share buybacks were promised for the first time in 10 years.
The European Central Bank’s effective ban on dividends and buybacks in late March might therefore have brought a special frustration for Mustier and his efforts to boost UniCredit’s share price. Yet the fact that the bank had accrued €7 billion of additional capital through asset sales in 2019 to ramp up payouts and buybacks may have been a bit of luck in the circumstances.
The asset sales in 2019 included the bank’s exit from its joint venture in Turkey and sales of large minority stakes in Finecobank and Mediobanca.
Investors might have treated UniCredit with even more caution if it had not had the proceeds as Covid hit.
“We took decisive actions in 2019 to strengthen our capital, and although we did not anticipate this crisis, we entered it with a very strong capital base,” says Mustier.
In any case, the dividend ban is not designed to hurt the banks, which is why Mustier, who is president of the European Banking Federation, has been more supportive of it than many of his peers. Rather, it is designed to ensure banks have the capital both to absorb loan losses and to provide firms with the borrowing they need to get them through the pandemic.
Centre of scare
Given the subsequent spread of Covid-19, it’s sometimes easy to forget how much Italy was at the centre of the scare in early 2020. The country’s infection and hospitalization rates were so bad that it had to impose a particularly harsh and early lockdown.
At the same time, investors worried that the country could ill afford the economic impact of that lockdown and couldn’t mobilize as much government spending to alleviate the impact as richer states.
With investors soon recognizing the implications of these events – and Italian-German sovereign debt spreads rising rapidly – UniCredit could have posed a grave risk to the health of the international financial system. Even before the pandemic, it was one of Europe’s least profitable big banks.
In the months that followed, despite a step-up in European Union solidarity towards southern Europe, UniCredit’s shares fell more than 50% – more than other Italian banks.
Nevertheless, largely thanks to new sector-wide regulatory capital relief coupled with the dividend ban, its common equity tier-1 ratio continued to grow. The bank’s maximum distributable amount buffer reached an all-time high of 538 basis points at the third-quarter results.
Now Mustier, who is stepping down as UniCredit’s CEO in April, hopes the bank can give investors better news than other banks in 2021, as he says he has frontloaded the cost of risk in 2020.
What we were planning to do in four years in terms of business transformation, we will do in two
Jean Pierre Mustier, UniCredit
The bank took an additional loan loss provision of €902 million in April, exacerbating a first-quarter loss. This was on the basis of predicting a eurozone economic contraction of -13% in 2020 versus an IMF prediction of -7.5%, downgraded to -8.3% in October.
“We were criticized for that, for being too conservative,” Mustier recalls.
Despite lower loan losses in the second and third quarter, UniCredit continued to guide for an expected 2020 cost of risk of between 100bp and 120bp, implying bigger provisions in the fourth quarter.
Mustier says that’s because the guidance in April was based on the clear risk of a second wave of infections, even as others disregarded that danger.
“In the Spanish Flu and other pandemics, you always had a second wave,” he says.
The hoped for outcome, now that the second wave has happened, is that UniCredit won’t have to admit to needing greater provisions than it said before. That should help it convince investors of its target to reduce the cost of risk in 2021 to between 70bp and 90bp.
However, given the longer-term hits to UniCredit’s profits as a result of the pandemic, more cost cuts are still needed. By 2023, in just six years of restructuring, UniCredit will have cut its staff numbers by 25% and its branches by 38%, according to Mustier. But Covid-19 demands and allows an acceleration of the shift to remote banking.
“What we were planning to do in four years in terms of business transformation, we will do in two,” says Mustier.
Under pressure
At the third-quarter results, Mustier gave an update to the 2023 plan, due early 2021, and confirmed the existing plan’s 8% target for underlying return on tangible equity. He announced an additional €250 million of cost savings on top of the €1 billion previously targeted.
In this context of capital strength and the desire for cost synergies, Mustier has been under pressure from some quarters to rethink his aversion to bank M&A to improve deal activity.
Unlike Intesa, which is now preoccupied with integrating UBI Banca, UniCredit still has room to grow in northern Italy. Regulators might like to see it taking some of the more problematic mid-tier lenders out of the game, including Banco BPM and the nationalized Banca Monte dei Paschi di Siena.
“We want to transform rather than integrate and use our excess capital to return capital to shareholders and finance the economy,” Mustier insists, speaking to Euromoney in early November.
