“If it didn’t exist, would you invent it?” I asked in a piece about UniCredit almost exactly fours ago around the time of the restructuring plan it unveiled in November 2011. “Should UniCredit consider break-up?” Then, my follow-up in January 2012: “I think the time may have come …”
Fast forward four years. How little has changed.
And since the restructuring plan unveiled yesterday has a target date of 2018, how about this for then-and-now similitude? “The results of the [2011] programme won’t properly be known for two to three years,” I wrote four years ago. “And the question that weighs on the mind is: will the bank that comes out of its restructuring around 2015 be a go-to player with unrivalled competitive positioning or with a unique multi-product skills-set? Call me a cynic but I doubt it on both counts”.
I reckon I nailed it.
In the wake of the latest plan, one of my many questions is this: how many throws of the dice and how much time should a CEO realistically have to turn things around? Granted, you can’t take a group of the size and complexity of UniCredit and effect change overnight. But CEO Federico Ghizzoni isn’t a Politburo chief presiding over botched five-year plans. Hasn’t he had enough time to have generated tangible and sustainable results? I mean really…
He’s been in the job for five years now in what I bet is a very comfortable office in the funky UniCredit tower in Milan, the tallest building in Italy that has served as the bank’s HQ since its inauguration in 2013. Yet here we are in November 2015 in the wake of another rehabilitation plan.
The share price has sucked for years and Ghizzoni is still in office. On the day he took over on September 30 2010, the stock closed at €11.82. He watched it collapse ignominiously by more than 80% to a low of €2.2 in early 2012, since which time the shares have clambered their way painfully, slowly and without much conviction to €5.76 in mid-morning trade today. From the pre-financial crisis high of May 2007 and that 2012 nadir, the shares were off by 95%.
So rather remarkably, Ghizzoni got to launch two trades on Wednesday. Another revitalisation trade that he described as rigorous and ambitious but realistic (unlike the previous plans, clearly), and a two-step salvation trade for his own job.
The immediate element of his salvation comes from the fact that, à la Deutsche Bank, he’s eschewing a rights issue. Had he been forced to go cap in hand to shareholders, it’s clear it would have been curtains for his tenure in the corner office. No matter that he’s subjected the group to another stretch of hard slog to whip it into shape: swerving the cash call was seen as an achievement. (I say: watch this space …)
The longer-term element of his salvation will accrue from successful attainment of the latest round of pain and slog. Except we’ll never get there because a new plan will be hatched before the end-date of the current one. Why subject yourself to a binary outcome if you can concoct another three-year plan?
Bait-and-switch
I’m bemused that CEOs can get away with this constant bait-and-switch around lack of execution. At this precise moment, it’s less an issue that capital raises per se come with stigma attached. It’s always tough to ask shareholders to put in more money today on the promise of future expected returns (the good money after bad syndrome), But times being what they are – Credit Suisse, Standard Chartered etc – and the degree of pragmatism around capital-raises in the new world of super-regulated capital-heavy banks, now is as good a time as any in recent years to make that call.
Except UniCredit, like Deutsche Bank, is in a bit of a bind in that it’s already gone the shareholder route. About a year after he took the reins at UniCredit, Ghizzoni was forced into a €9.9bn capital increase (a heavily discounted €7.5bn rights issue plus a €2.4bn capitalisation of converts and hybrid equity-linked notes). That was in January 2012 when the shares were in the toilet. That route was closed to him this time around.
So it’s about execution. Again. But should anyone be asked to hold their breath until 2018? Like other banks in today’s rehab tank, Ghizzoni has slapped another three-year exclusion zone around his targets. This time, he’s promised a fully loaded pre-dividend CET1 ratio of 12.6% (Q315 number was 10.93% including Pioneer/SAM JV); an 11% group return on tangible equity (up from 5% in 2014); a 14% return on allocated capital for the core bank; and a (massaged down) group net profit target of €5.3bn.
In a plea to shareholders, he stressed the plan would be self-financed; he also put out a carrot of a substantial dividend pool equivalent to an average pay-out of about 40% over the Strategic Plan. Nice try.
No fireworks
So with a rights issue off the current agenda, what is on the agenda? In truth, no fireworks. It’s a grind. He’s taking another €1.6bn of costs out of the business (targeting an 11 percentage-point reduction in the cost-income ratio to 50%), he’ll exit or restructure low performing assets; cut headcount by 18,200 and close around 1,500 branches. To compensate for the latter, he’s investing €1.2bn in a digital agenda, one of the outputs of which will be the launch in 2017 of “buddybank”, a “24/7 capital-light and mobile-only bank”. (The name is infuriating. Why do banks insist they’re your mates?)
The staff cuts sound like a lot but the number includes staff going with the sale of its Ukrainian unit to Alfa Group and exit from the Pioneer asset management JV. In total, the employee reduction equates to 14% of total headcount relative to end-2014 and will see FTE reduced to a mere 111,000 by 2018.
The bank is also going to exit or restructure poorly performing businesses: retail banking in Austria and leasing in Italy are for the chop. But we didn’t get the headline-grabbing partial IPO of HVB or the sale of Bank Austria in an accelerated unravelling of what’s taken 15 years to build.
This is a point worth pondering. Don’t forget what UniCredit is: it’s a confederation of re-branded and formerly grand European banks. Bayerische Hypo- und Vereinsbank, Vereins- und Westbank, Oesterreichische Laenderbank, Creditanstalt-Bankverein, Credito Italiano, Banco di Roma, Banco di Santo Spirito, Cassa di Risparmio di Roma, Bipop-Carire, Banco di Sicilia. Remember them?
Take that unwieldy, unlikely, fractious and untidily organised grouping and lob in around a dozen takeovers across Eastern Europe, Turkey and Central Asia executed over half a dozen frenzied years in the last decade. That’s what UniCredit is.
And you know what the joke is? The widely dispersed and diversified group that’s so heavily exposed to Eastern Europe is being shamed by the performance of domestically focused (and non G-SIB to boot!) Intesa-Sanpaolo.
Its arch-rival, the result of a domestic merger spree (Cariplo, Banco Ambrosiano, Banca Cattolica del Veneto, Banca Commerciale Italiana, Istituto Bancario San Paolo di Torino, Istituto Mobiliare Italiano, Caboto) is generating better profits and its share price has gone up 34% YTD compared to UniCredit’s 10%. Carlo Messina, CEO of Intesa-Sanpaolo, must be laughing up his sleeve.
Beyond his geo and business-line review plans, Ghizzoni is also (like everyone else) kicking off a process of organisational simplification and management de-layering to focus on – what else? – high-growth and capital-light businesses, which it lists as CEE and Poland (no choice there but targeting a €22bn increase in customer loans by 2018); CIB transactional and advisory services (2018 CIB revenue target of €4bn); and wealth management.
On legacy matters, the Q3 earnings statement noted that asset quality had improved. But gross impaired loans still stood at €80.7bn. And despite an active programme that has seen billions of euros worth of loan portfolio sales (project finance, performing, non-performing and defaulted) to the likes of Alvarez & Marsal, AnaCap, Cerberus, Fortress, KKR, PRA Group and others, the net impaired loan ratio was still 8.3% at the end of Q3.
This story is going to be a slow burn. At first blush the 2018 targets look tough. UniCredit is in so many ways a private-sector version of the European Union. Is it time for a UniCrexit?
