The Italian banking system is experiencing a new spring these days, but the renewed prominence of Italian banks, of which the Unicredit takeover bid is the tip of the iceberg, has been brewing for some time and its origins can be traced back to the ECB's monetary policy that developed in response to the pandemic emergency. Professor Marcello Messori, one of the most brilliant Italian economists, a lifelong scholar of the banking system and currently a professor at the European University Institute in Florence, is convinced of this. The interview he gave to FIRST online helps to understand what is really happening these days among Italian banks and why at a European level, and not only Italian, there is a strong need for concentration and consolidation of banks, in which managed savings are increasingly assuming a central role.
Professor Messori, first Unicredit's blitz on Commerzbank, then Banco Bpm's takeover of Anima Holding and Monte dei Paschi and finally Unicredit's takeover bid for Banco Bpm: such an effervescent period for Italian banks has not been seen for half a century. How do you explain this dynamism and what is the common thread, if there is one, that holds together the activism of Italian banks at this time?
“Even more than many other banking sectors in the Euro Area (EA), Italian banks have been able to exploit the opportunities offered by monetary policy and market trends before and after the pandemic shock. The unconventional initiatives of the European Central Bank (ECB) had already allowed many Italian banks to overcome their serious crisis in the mid-2010s, accessing refinancing at rates close to zero or even negative and purchasing government bonds of fragile countries. These bonds, which were largely absorbed by the ECB's announced purchases in the secondary market and therefore incorporated low risks, guaranteed modest but positive rates of return (in any case higher than the refinancing costs). During the pandemic, the accentuation of ultra-expansionary monetary policies moved the interest rates on ECB refinancing into even more negative territory and thus expanded the opportunities for bank carry trade on government bonds, especially in the most fragile countries. Furthermore, the increases in financial wealth allocated to liquid assets by many Italian families and public guarantees on business financing have created further profitability opportunities for our banks”.
“The exit from the pandemic has fueled excess inflation and consequent increases in policy interest rates, which have added to strong macroeconomic uncertainty and prudential behavior by wealth holders. In the EA, banks have thus been able to exploit a new and different carry trade opportunity: raising liquidity in the form of deposits or other short-term liabilities, remunerated at very low rates, and increasing their non-mandatory reserves at the ECB, obtaining a remuneration rate that has long stood at 4% and is still very high. Furthermore, there is room for managing household wealth and purchasing government bonds. In Italy, the largest banking groups and many medium-small sized banks have effectively exploited these new opportunities. The fact is that today the six largest Italian banking groups have rates of return well above the European average”.
Given this starting point, can the ECB's rate cuts offer Italian banks further growth opportunities?
"It is now clear that the EA economy needs a profound restructuring to be financed, in addition to public resources, through credit and - above all - long-term instruments offered in truly European banking and financial markets. Combined with the gradual return to expansionary monetary policies, this offers European banks opportunities for growth and new profitability through the use of product factories that can mobilize household wealth, offering financial assets consistent with their risk profiles, and through investment services to be offered to non-bank intermediaries for the financing of new productive activities of companies. These tasks, which European banks are called upon to perform with profit prospects, require dimensional increases and organizational refinements; furthermore, they require overcoming the current local segmentations of financial markets. Hence, the need to start a phase of strong concentration and consolidation of banks at European level. Without banking consolidation, there will be no space for other non-bank financial intermediaries of European caliber".
"Having to overcome various and costly barriers (regulatory, institutional, market), it is understandable that the first steps of this phase favor national banking aggregations or between players from neighboring countries. In this sense, all the operations you mentioned (plus others in progress, such as the possible agreements between Generali and Natixis in managed savings) are part of the same plan and should be read not in a national but in a European way. The strong profitability of Italian banks and the persistent and strong segmentation of the national market explain their current protagonism".
The sights of Banco Bpm and Unicredit on Anima, after the takeover bid by Banca Generali on Intermonte and the acquisition in progress of Axa Asset Management by Bnp Paribas in France seem to highlight a rush to consolidate managed savings, perhaps as a response to the reduction in revenues from traditional banking activities due to the fall in ECB rates: what is your assessment?
"I think that, for several years, the most efficient banking groups have understood that, even in the EA, their long-term competitiveness is played out on vertical integrations that lead to the internalization of product factories. The so-called "Danish compromise" encourages this internalization with regard to insurance factories. A large part of managed savings has long been incorporated into banks. However, this is not enough. As I have tried to say, it is a question of mobilizing a huge financial wealth of the EU that is currently allocated to activities that cannot be used (even indirectly) to finance production reorganizations. Managed savings, which includes financial-insurance products, can be the first step to associate the satisfaction of the risk profiles of wealth holders with the offer of financial services for intermediaries equipped to finance innovative production activities. In this regard, an adequate size of banking groups is crucial. Moreover, she is right in pointing out that the expectation of a decline in policy interest rates accelerates the process of integration and concentration because it opens up substantial room for increases in bank profitability even in the short term”.
Let's get to the most pressing current situation: cHow do you judge Unicredit's takeover bid for Banco Bpm and what do you think is the central objective of Orcel's bank? Are you more interested in Banco Bpm or Anima?
"There is no doubt that Unicredit still suffers from the legacy of the "Mustier management" that had focused on short-term profitability, sacrificing all the bank's product factories and reducing the group's unique and positive European projection. This had also led to serious organizational imbalances and inefficiencies. The new management has so far favored the recomposition of the bank and has exploited the favorable and contingent conditions of profitability, which I have already spoken about. However, if today the European challenge is posed in the terms that I have tried to define, it is clear that Unicredit needs to strengthen its internal product factories and make a further leap in size. Furthermore, if I were right in placing managed savings in the broad sense at the crossroads of the process of unification of European financial markets, a stronger link would emerge than one might think at first sight between product factories and territorial presence. Wealth management, financing and other customer services are strongly linked. Hence a renewed interest in even traditional distribution networks.
In this regard, despite having its registered office in Milan, Unicredit is not very present in the crucial economic areas of the country (Lombardy and Veneto) so much so that it holds market shares lower than not only those of Banca Intesa but also those of Bpm. In light of these considerations, I think that Unicredit is interested in both Bpm and Anima. However, a question remains”.
Which one, professor?
"As far as we know, the terms of the public exchange offer (OPV) appear to be completely inadequate to convince the absolute majority of BPM shareholders to join and, even more so, 67% (i.e. the qualified majority) of these shareholders. Providing for a maximum recapitalization of UniCredit for 10,1 billion euros so as to exchange 0,175 of its shares for one BPM share recognizes too small a premium (and already absorbed by the variations in market prices) to the owners of BPM. Therefore, the doubt arises that, beyond what was stated by the CEO of UniCredit, the OPV on BPM may not be configured as a market operation but rather as an attempt to build a defense (as in the case of Commerzbank)".
But among the many possible scenarios for Unicredit, which is most likely to come true?
"I am not able to resolve the doubt. We will see in the coming weeks which of the three following possibilities will materialize. The first is that the terms of exchange proposed by Unicredit were an opening move in a complex game, destined to result in the acquisition of Bpm but with a premium much higher than the initial one also to overcome possible counter-offers advanced by a White knight or so-called. The second possibility is that Unicredit aims to impose on Bpm a long phase of passivity rule, so as to postpone extraordinary operations with respect to Anima and to hinder the construction of an integration between Bpm and Mps. The third possibility is that Unicredit aims to involve one of the current shareholders of Bpm in the operation. In this regard, the main (but not the only) suspect is Crédit Agricole, which holds 9,18% of Bpm's shares and is currently the largest shareholder of the Milanese bank. Crédit Agricole has control (65% and 61% respectively) of the insurance activities and the consumer credit company involving Bpm; furthermore, it has long internalized one of the largest savings management companies of EA (Amundi), which holds a share of Unicredit (1,3%) and has a distribution agreement with it for managed savings products. Crédit Agricole could be interested in reaching an agreement with Unicredit to sell it the product factories, held with BPM, in exchange for part of the network of Bpm branches in Italy”.
But what Is there a relationship between the ongoing operations and the European banking aggregation processes?
"I obviously cannot assess the probabilities of the three alternative scenarios I have described (and other possible ones). The fact remains that all three may be part of the European banking aggregation processes that include, in the medium term, also the acquisition of control of Commerzbank by Unicredit and possible defensive moves by banks that are prey today but that tomorrow could join other consolidation initiatives. The only certain fact is that national governments must not interfere with such initiatives, whose regulation is the responsibility of the ECB in cooperation, if necessary (less significant banks), with the national supervisory authorities.
The challenge to win is the construction of European banking groups with adequate dimensions to carry out, in their own interest, those activities that are essential for the construction of European financial markets and for the mobilization of the wealth of families and businesses. A smaller number of large banking groups and smaller banks, operating on non-segmented financial markets of a truly European dimension, ensure greater competition compared to a plethora of banks that are squeezed into protected market segments and into traditional activities with inefficient product factories because they are too small. From this perspective, acting for a supposed defense of national interests means opposing European progress and condemning our economic area to decline”.
