What scenarios are opening up for Unicredit and Mps but, more generally, for the Italian banking system after the noisy breakdown of negotiations between Andrea Orcel's bank and the Mef on the Sienese bank? Are we really sure that Unicredit should follow the banking model of its great rival Intesa Sanpaolo or shouldn't it instead think of an alternative and less traditional business model integrating itself not with a commercial bank but with an investment bank such as Mediobanca for example? And in the future, is the hypothesis of an Italian bank-insurance financial hub made up of Unicredit, Mediobanca and Generali pure fantasy or could it become a fascinating working hypothesis? As for Monte dei Paschi, to think that the extension of public control could avoid a profound restructuring or, worse, pave the way for the "Alitalia of the banks" and that is, for a sum of banking weaknesses such as the one that would arise from the union between Mps, Carige and Banca Popolare di Bari would be a real madness as well as an unsustainable waste of public money. These and other reflections, not excluding those on the importance of the third banking pole and the relationship with the dense fabric of small and medium-sized enterprises, are at the center of this interview released to FIRSTonline by one of the most brilliant Italian economists and a great banking expert such as Marcello Messori, professor of European economic policy at the Luiss University of Rome. Here is his thought on crucial issues for the Italian banking and financial system that the non-marriage between Unicredit and Mps has made even more topical.
Professor Messori, in unsuspecting times you had expressed strong doubts about the validity of the Unicredit-Mps operation but, given the long duration of the negotiations, did you expect the negotiations to fail?
“My doubts, discussed during an interview with FIRSTonline commenting on the resignation of the previous CEO of Unicredit (Jean Pierre Mustier), stemmed from a general assessment and a specific observation. On a general level, I believed that the evolution of the Italian and European financial market and the future competitiveness of Unicredit did not benefit much from an attempt to imitate Intesa-Sanpaolo (ISP) in terms of dimensional growth and traditional business model; on the other hand, it would have been more useful, both for the system as a whole and for Unicredit's prospects, to pursue an alternative business model aimed at filling the many gaps in the national and European offer of financial services. On a specific level, however, I confined myself to noting how complex it was, for Unicredit's organizational balance, to acquire a banking group as problematic but significant as MPS without having first defined a 'business model'. When the negotiations formally started, I believed that the involvement of Unicredit was bound to a non-negotiable condition: the assimilation of the operation to a real bailout, with no negative impact on the capital requirements of the purchasing group. This interpretation of mine assimilated the operation between Unicredit and Mps to the intervention of Intesa-Sanpaolo with respect to the two Veneto banks (summer 2017). It seems to me that, in the end, this did not happen. From this point of view, I am not surprised that the negotiation has, at least for the moment, failed".
You commented immediately that the interruption of the negotiations frees Unicredit from the weight of Mps and opens up new scenarios for Orcel's bank either towards strengthening the commercial network and establishing roots in the national territory or towards an investment bank: Piazza Affari assumes the acquisition of Banco Bpm in the first case and the integration with Mediobanca in the second. What do you think and what would be the pros and cons of both operations for Unicredit?
“My comment was based on considerations similar to those I have just mentioned. Even if the absolute majority shareholder of MPS, i.e. the Ministry of the Economy and Finance (MEF), had agreed to bear the recapitalization charges and the various other financial commitments requested by Unicredit, it would have been illusory to think that an acquisition as important as that of the Sienese bank would have been without consequences for the future business model of the acquiring banking group. Unicredit would, in fact, have chosen to extend its traditional business, chasing ISP in size but without having the factors that make that traditional model efficient and profitable in the case of the ISP itself and - in general - of the Italian banking sector: in addition to holding shares consistent market, integration with large 'product-factories' related to savings and wealth management and insurance products. In other words: after having sold (under Mustier management) its strengths as a traditional commercial bank, Unicredit would have found itself re-proposing the old model but in a very weakened condition. In the medium term, even a generous disbursement from the MEF would not, in my opinion, compensate for the disadvantages of the specialization thus acquired.
From this point of view, while realizing the market opportunities that the acquisition of Bpm or a similar medium-sized banking group could open up, I still think that the most effective strategy for Unicredit consists in pursuing a non-traditional model of activity. This would allow Unicredit to carry out activities complementary to those of ISP and, for the Italian and European financial markets, to thicken segments that are today weak but essential for sustainable development of the 'real' economy. In this perspective, once the new business model has been defined and launched, Unicredit could find it very convenient to acquire or integrate with an investment bank in the broadest sense".
From a systemic point of view, a possible acquisition/merger between Unicredit and Banco Bpm would probably celebrate the de profundis of the so-called third national banking pole but would ignite the competition between two large Italian groups such as Intesa Sanpaolo and Unicredit: on balance for the country they would greater the advantages or the risks? Isn't there a danger that the fabric of small and medium-sized enterprises will suffer?
“Your question raises at least three important issues. The first problem concerns competition in the Italian banking market. It could be argued that if Unicredit were to follow ISP's path (with at least dimensional success), there would be more competition between the two major national banking groups. However, it is by no means certain that the strengthening of a substantial duopoly, such as the one that already characterized the Italian banking situation until 2019, implies a more efficient market structure compared to that of a quasi-monopoly, however put under pressure by a potential competitor in complementary activities. In this regard, even if in an economic context very different from that of the Italian banking sector (transport) and with a quasi-monopolist already undermined by irreversible weaknesses, an interesting indication is offered by the recent example of the Rome-Milan air route: the Did competition from the quasi-monopolist Alitalia really decrease when Air-one disappeared but high-speed trains took over? I believe that the empirical evidence shows that the result has been the opposite.
The second problem concerns the advantages of establishing a third banking hub in Italy. Although the goal is ambitious, it is a possible goal especially if it involves European banking groups already operating in Italy but with a non-Italian parent company. Almost by definition, this third pole would have a traditional business model as it is the result of the aggregation of traditional banking groups. To be efficient, it should therefore achieve both a consistent aggregate size and a minimum threshold in terms of economies of scale for vertically integrated 'product-factories'; conditions that can only be met with adequate capitalization rates. Having said that, a third pole would contribute to a significant competitive opening up of the Italian banking market and, especially if it were accompanied by the strengthening of Unicredit with a non-traditional business model, could enrich the offer of financial services to the 'real' economy”.
And the third problem?
“The third problem concerns the relationship between the size of banks and the size of the borrowing firms. I do not believe that, especially in the presence of the digital technological evolution, this relationship requires a strong dimensional homogeneity between lenders and borrowers. By now, many large European banks have organizational articulations that are able to exploit economies of scale and - at the same time - to adapt to the needs of a heterogeneous range of customers, also in terms of size. However, this does not mean that, in such a scenario, the role of small Italian banks is destined to shrink in the national market. If anything, the opposite is true: our small banks can find growing space if they reorganize themselves to offer specialized services that require a certain degree of expertise and which, despite being niche, are essential for the affirmation of small and medium-sized enterprises. success.
In the light of what has been said, I do not believe that, despite being crushed by small and very small dimensions, Italian companies should worry about the establishment or otherwise of a third pole except with respect to the fact that the consequent market configuration facilitates more effective financial services offered. Therefore, the last part of his question is answered in the second problem that I have tried to examine ”.
The hypothesis of an acquisition/merger between Unicredit and the noble Mediobanca is perhaps not entirely an alternative to a possible Unicredit-Banco Bpm deal but it is certainly the one that has the most glamor also because it would have decisive effects on Generali's structure. This would create a large Italian financial hub with a leading role in the bank-insurance field capable of dealing with foreign giants, but wouldn't it risk suffocating the Italian financial system?
“I am aware that, by pursuing the reasoning relating to Unicredit's non-traditional specialization, I would have run the risk of finding myself enrolled among those who are proposing the merger process between Unicredit, Mediobanca and Generali. I must immediately deny such inductions. In fact, I do not have sufficient detailed knowledge of the situations mentioned to evaluate the feasibility of such a complex operation; and I would never put myself in the position of active adviser of specific operations vis-à-vis a management which, in any case, has much more information than an external scholar can acquire. I limit myself to recalling that, in the European market, there are various operators who perform functions specific to an investment bank in the broadest sense.
Having said all this, I do not deny that the plan for a long-term merger between Unicredit, Mediobanca and Generali has a particular charm, if only because it evokes past and recurring suggestions regarding structural and still open problems in the country. The only thing I feel like adding is that a necessary (although not sufficient) condition for starting the design of such an operation is that there is a widespread presence of patient shareholders with a farsighted strategy”.
After the halt in negotiations with Unicredit, for Mps and for the public shareholder the problems are greater than before: lengthening the privatization times by renegotiating the terms of the agreements with the EU and recapitalizing the Sienese bank seem to be the inevitable first steps, but after ? Doesn't it seem to you that the political and trade union forces and public opinion have not yet fully understood that, in order not to waste more public money, a serious restructuring of MPS is inevitable and that, on the other hand, combining the weaknesses of the banking system with a Would the Mps-Carige-Popolare wedding in Bari be a fatal mistake?
“I agree that it would be a serious mistake to look for 'easy' solutions for Mps. Apparently 'easy' solutions are, in reality, impractical or harbinger of future disasters. Some implications follow.
First: the union of three weaknesses, which would underlie the operation you mentioned (Mps-Carige-Popolare di Bari), would give birth to a banking group characterized by profound inefficiencies and destined to weigh heavily on public finances for many years for the community. Therefore, it is a 'non-solution' which must be avoided at all costs.
Second: the attempt to reproduce over time, without radical discontinuities, the current organizational and accounting situation of MPS would produce similar negative results. Today, Mps is unable to stand on its own; and, moreover, the European institutions require a significant recapitalization which will have to be followed by restructuring and ownership reallocations.
Third: as is implicit in the examination of the previous problem, the illusion, nourished throughout 2016 with harmful consequences, that a market recapitalization of MPS is feasible cannot be re-proposed. The corollary is that the attempt to replace Unicredit with a medium-sized Italian banking group in the role of buyer of the current MPS would be equally illusory.
Such a buyer would not have the strength to absorb Mps without irreversibly compromising its balance. In the best of cases, time would be wasted and the Sienese bank's problems would be aggravated. These considerations lead me to share what you say: the absolute majority shareholder finds himself, today, in a very complex situation to manage. The MEF could broaden its gaze to look for a buyer of MPs outside national borders. I think such a solution would be reasonable but politically impracticable."
So what prospects are opening up for Monte dei Paschi and how should the MEF move?
“It will be inevitable for the MEF to renegotiate the commitments undertaken with the European Commission in order to obtain the authorization and the time extension necessary to carry out a new public recapitalisation. However, it is difficult to think that, despite the strong easing of state aid rules resulting from the pandemic, the European institutions will accept a form of public recapitalization that goes beyond safeguarding the current ownership stake in the MEF, without imposing a new "precautionary recapitalization" ( like the one at the beginning of 2017).
However, it has already been said how difficult it is to identify Italian financial intermediaries ready to engage in MPS; and, if so, it would be a question of subscribing a share of its capital increase slightly greater than 33%.
Consequently, the MEF will find itself forced into the following alternative: introduce non-Italian players into the MPS shareholding (albeit with shares that, at least at the beginning of the process, will be minority interests) or accept the penalization of a part of the bondholders issued by Mps. Perhaps erring on optimism, suppose the MEF overcomes this obstacle course and carries out an adequate recapitalization by the autumn of 2022. At that point, the old and new shareholders of MPS should start a process of radical restructuring of the bank so as to make it attractive for sale on the market. Even in this case, the obstacles would be many and very significant. It is therefore a matter of resigning oneself to the fact that the fate of Mps is linked to long and tortuous processes. As an Italian citizen, I hope that, in the end, the accounts will come together in the sense that the overall financial costs of the long processes do not exceed those required by the transaction with Unicredit".
