Europe’s banking union should refocus on regulatory consistency and transparency, UniCredit chief executive Jean Pierre Mustier tells Euromoney, in an unusually frank recognition of the impracticality of eurozone risk sharing.
Jean Pierre Mustier,
Amid new rumours this week of UniCredit’s interest in taking Deutsche Bank’s place on a merger with Commerzbank, Mustier says: “The banking union will never be completed.”
Speaking to Euromoney ahead of the magazine’s official 50th anniversary edition in June, Mustier’s comments contrast with others – notably Société Générale’s chief executive Frédéric Oudéa – who hope that agreement on a European deposit insurance scheme (EDIS) could be a trigger for more cross-border mergers, after this year’s new European Parliament and European Commission.
But the Deutsche deal is thought to have piqued UniCredit’s interest in Commerzbank, because if talks with Deutsche end, Commerz will then be “in play”.
Although he does not link his view to any specific situation, Mustier tells Euromoney: “I cannot see how the European deposit insurance scheme will be completed in my lifetime and I intend to live a very long time.” He thinks that the risk profile of European banks is too different to allow EDIS, which is the banking union’s missing third pillar after the 2014 creation of single supervisory and resolution mechanisms.
UniCredit is preparing to unveil a new three-year plan in December, and in some respects a Commerzbank deal has better merits than the one rumoured last spring, with France’s Société Générale. UniCredit, Italy’s biggest bank, does not have a big operation in France. On the other hand, it already owns Germany’s third biggest private bank, HVB, so a Commerzbank deal would rely less on the benefits of a closer banking union.
Commerzbank – which sold its equity derivatives business to SocGen last year – could sync better than SocGen with UniCredit’s strengths in transaction banking, and with Mustier’s view that “cash management is the new derivative”. UniCredit’s smaller investment bank could also make it more attractive to Commerzbank shareholders than Deutsche, says an analyst, although Commerzbank’s biggest shareholder is the German government, which may prefer to demonstrate support for Deutsche.
I cannot see how the European deposit insurance scheme will be completed in my lifetime- Jean Pierre Mustier, UniCredit
When speaking to Euromoney in November, Mustier said there can be “no non-organic evolution of the group [for] three to four years”. Since then, UniCredit’s share price has only risen by 5%, though its discount to book value is lower than Commerzbank.
Mustier does not pretend the environment for European banks has returned to health. “Growth is not the name of the game,” he insists, while visiting London for the Morgan Stanley European Financials conference in late March. Eurozone banks are not going to be “bailed out by rates increasing”, according to Mustier. Their corporate and investment divisions will struggle to post low single-digit revenue growth at best, especially in a more sluggish economy, he says.
His strategy would therefore be to bolster the bank’s share price by reducing its perceived risk, and by extension its cost of capital.
More equity capital, meanwhile, is something UniCredit would most probably need to get the supervisory green light for a merger with Commerzbank. Doubling down on such an unprofitable banking sector may not help the attractiveness of its shares, says the analyst – but it could lower the perceived risk of its bonds, as it would help UniCredit downplay the extent to which it is a primarily Italian bank and therefore more subject to Italian sovereign risk.
Despite his stated pessimism on common deposit insurance and European banking more generally, Mustier says policymakers can take steps to improve the eurozone’s banking framework. Combating regulatory opacity and ironing out inconsistencies between national banking-sector rulebooks – together with taking steps to boost equity financing for European banks and borrowers – is vital, he says, as it would help bank investors look at the block as a whole.
He says: “The point is to create true a pan-European banking sector, a true pan-European insurance sector, so investors invest not in national financials, but in European financials. That changes the dynamic. Today investors look at German banks, Italian banks, or French banks, because the rules are not unified and transparent enough. In the US, investors see US banks, not Californian or New York banks.”
His views sync with calls for more transparency and consistency across Europe by the Single Supervisory Authority’s leadership, including its new head, Andrea Enria. The SSM’s board, however, is still primarily composed of national supervisors, rather than Frankfurt-based roles like the one held by Enria.
UniCredit’s $6 billion senior preferred debt issuance between December and January – all in dollars – highlights how much Mustier’s bank, like its peers, has to rely on US investors. Part of the reason is too much focus on issuers rather than investors in the EU’s banking union and capital markets union projects, according to the CEO. The cost for UniCredit is particularly high, with its December senior non-preferred coupon reaching 7.83%.
He concludes: “Investors in Europe need an understanding of the financial sector – banks and insurance companies. It needs transparency, and consistency between countries. Investors need to understand what the regulator wants and how things are going to evolve. The key focus for the banking sector is to make sure that we have uniform rules that can be effectively communicated to investors, so you can attract more funds into European financials.”