Despite centrist Enrico Letta’s victory in a bruising local by-election, it is clear that chief executive Andrea Orcel and his bank UniCredit will not become heroes in the saga that still surrounds Banca Monte dei Paschi di Siena (MPS).
That is frustrating, as Intesa Sanpaolo managed to look much more heroic – from both a political and shareholder perspective – in its government-backed purchase of two failing banks in the Veneto region in 2017.
After agreeing pre-conditions for buying MPS in late July, Orcel sounded hopeful that he could sign a deal to buy the bank by the middle of September.
The conditions were that it must be capital neutral, de-risked, and only include the parts that were strategically important to UniCredit. UniCredit has completed its due diligence according to Orcel’s expected timetable.
But mayoral elections and a by-election in Siena could not have come at a worse time, accentuating the deal’s already high political sensitivity.
Rallying point
It is a quintessentially Italian mix of business and politics. Pier Carlo Padoan triggered the by-election when he stood down as member of parliament of Siena a year ago, to become chairman of UniCredit. He was previously finance minister, and was in that seat when MPS was nationalized in 2017.
Siena has long been stronghold for the centre-left Democratic Party (PD), of which Letta is the leader. Prime minster Mario Draghi’s coalition is reliant on support from the PD, and he is embedded in the saga, having been governor of the European Central Bank and, before that, the Bank of Italy.
Orcel can too easily be portrayed as an international capitalist destroying the social fabric of Siena
Matteo Salvini’s Northern League – not part of the coalition – snatched a golden opportunity to cause trouble.
The volume of job cuts at MPS, above all, has become a rallying point that has made it impossible for any party to back the deal with UniCredit.
It is hard to see the latter coming out of this in a way that looks good to most Italians outside the financial sector.
UniCredit is a privately owned bank, so Orcel cannot do a deal that’s brazenly political. The choice is to do a deal that could involve early retirement for up to 7,000 of MPS’ staff, many of them from the corporate centre in Siena. Or he can walk away and be seen to be abandoning the world’s oldest bank to its fate.
Deadline
Ironically, a UniCredit deal could result in fewer job cuts than the alternatives for MPS. They have relatively few branches that overlap and MPS is even experiencing job shortages in some areas. However, if it does not return to majority private ownership by the European Union’s deadline of the end of this year, the bloc’s state-aid authority will – at best – demand stringent cuts to its relatively bloated staff base, as well as Royal Bank of Scotland-style business sales.
Salvini has said a merger with another mid-tier bank would make for a more competitive Italian banking sector. Yet the reality is that no mid-caps are anywhere near as strong as UniCredit, especially after Intesa’s purchase of UBI Banca last year.
As the other mid-cap banks’ market caps are much smaller, they would end up with an uncomfortably large state presence in among their shareholders.
But of course, it is the optics that matter.
Orcel – formerly one of Europe’s best-known investment bankers – can too easily be portrayed as an international capitalist destroying the social fabric of Siena.
Political and reputational hits will, however, be part of the cost of the transaction.
The Italian government will have to inject more money into MPS and take on billions of euros of legal and credit risk to prevent the ailing bank dragging down UniCredit. The best Orcel can hope to do is pacify his immediate constituents on the board and in his shareholder base.
Decisions
MPS is a problem that has plagued Italian banking for years. Getting rid of it would give a boost to the local banking sector, and to Draghi’s international reputation.
But the institution is still capable of damaging both investors and the political centre. Involving UniCredit was always going to bring a danger that the MPS infection would spread to a larger host. In a way, it already has. It played a part in Mustier’s exit, and it is dominating the new chief executive’s tenure.
It would be understandable if Orcel walked away at this point.
The market, eagerly awaiting Orcel’s strategic plan in November, will not much lament it, and that plan will be largely meaningless unless the question of UniCredit’s involvement in MPS is decided.
