LONDON, Feb 6 (IFR) - Jean Pierre Mustier wanted out. The
Frenchman had been recruited three years earlier by UniCredit
chief executive Federico Ghizzoni to help him drive through an
ambitious turnround plan for Italy's biggest bank. But, by
mid-2014 differences had begun to surface between the two men
about the direction the firm was headed.
The overhaul, grandly named "Vision 2015", had already begun
to flounder. Targets were not being met, and a slowdown in Italy
had exacerbated the bank's festering bad loan problem. On some
measures, UniCredit was in worse shape than when the plan had
been launched two years earlier: despite Ghizzoni's pledge that
he would turn round the bank's fortunes in Italy, its bad loans
in the country had actually increased by 10bn.
Vision 2015 was ditched and a new plan put together. But
Mustier was not convinced. In August 2014, just a few months
into the new strategy, he resigned. "I didn't want to oppose the
then management, and so I said 'it's better for me to leave',"
he told IFR.
Two years later, the tables have turned. An impatient board
dropped Ghizzoni and re-hired Mustier, tasking the Frenchman
with nursing the bank back to health after a decade in intensive
care. But its condition remains critical: after 13.2bn of
writedowns last quarter, its capital levels are now below the
minimum allowed by the ECB.
UniCredit's future now hinges on a 13bn rights issue to
replenish capital that is being launched on Monday. Investors
are used to being asked for money: since the beginning of the
financial crisis, three different UniCredit CEOs have launched
four capital raises to fund five overhauls. And the bank has
burned through that money: all the 14.5bn raised in the last
three capital raises is now gone.
Mustier spent much of January on the road telling investors
- both old and new - that this time it was different. Many have
bought into that narrative: the shares are up about 10% since
the Frenchman announced his latest plan (although they are still
94% down from their 2007 peak), and bankers on the rights issue
talk of big changes in UniCredit's shareholder register since
then, with new investors buying in.
Internally, too, there is a feeling that the bank is finally
sorting out its issues. "It became increasingly clear that more
of a step-change was needed," said one board member. "The old
plan was too much hype. It wasn't that management didn't see
the issues; they were aware of the need for change. But previous
plans were too cautious and slow."
A 77.8bn pile of bad loans is by far Mustier's biggest problem,
with one in every six euros lent out now classified as impaired.
No other bank has a bad loan problem of that magnitude. The
ill-timed and largely unvetted purchase of Capitalia in 2007,
Italy's economic stagnation and years of poor lending are all to
For years, the problem was dealt with the "Italian way,
according to one senior insider. Loan loss provisions were made
- almost 70bn so far - but never enough to actually facilitate
sales of the loans to clean up the books. Instead, the
responsibility fell on an under-resourced and under-motivated
workout area to try to get money from tens of thousands of
clients in arrears.
Mustier quickly became convinced of the need to shift as
many bad loans as possible off the books. Two days after
starting as CEO, he tasked then-markets head TJ Lim with trying
to do exactly that. Initially named Project Bastille - it was
launched on July 14 - that name was dropped after the Bastille
Day attack in Nice that evening.
Lim's mantra that "failure is not an option" - or FINO -
quickly became the new project name. But as he got to work, it
became clear that the magnitude of the clean-up would be
limited: big chunks of the portfolio such as mortgages and some
corporate loans were designated as too sensitive to sell on. Bad
"core" loans were also to be left out.
As a result, just 17.7bn of bad loans went into FINO, less
than a quarter of UniCredit's total. The bank met with potential
buyers, many of whom had been scarred by previous dealings with
Italian banks and doubted whether UniCredit was serious.
Difficulties soon arose: data were missing, and buyers were
unhappy about servicing and recovery plans.
"We had to prepare during the summer all the loan tape,"
said Mustier. "Over 200 people it was a massive amount of
work." Eventually, a deal was done - just minutes before the
bank's strategy announcement on December 13. PIMCO and Fortress
agreed to buy just over half the loans, at an undisclosed price
far below the face value of 8.9bn, according to people familiar
with the matter.
Already in the summer, it was clear the clean-up would be
costly. With loans booked well above market prices, facilitating
transactions such as FINO would mean billions in writedowns. On
top of that were restructuring charges and redundancy money for
14,000 jobs to be cut - as well as the cost of getting capital
to the desired core equity Tier 1 ratio of at least 12.5%.
Advisers told UniCredit it needed 20bn. Fortunately for
Mustier, Ghizzoni had already mandated banks to sell down two of
UniCredit's equity holdings - in its Polish unit Bank Pekao, and
in its online division FinecoBank. The two accelerated
bookbuilds allowed Mustier to finish his first week in the job
with 1bn already in the bank.
"The ABBs were in the making already, but Jean Pierre was
keen to use the sales to signal a change in tone," said one
banker close to the transaction. "That gave him time to work on
the bigger plan. Previous management would probably have done
the two trades and then called it a day."
"There were already some plans before Mustier came in. He
inherited a lot of ideas," added another banker who has been
advising the bank. "But what he did was make them his ideas, and
put some extra pepper into it to make it spicy."
More difficult was the sale of UniCredit's asset management
unit Pioneer Investments. Ghizzoni had agreed a tie-up with
Santander in 2015, but that deal had hit regulatory delays.
Mustier pulled the plug and mulled an IPO. Eventually, Amundi
Asset Management, which Mustier helped create years earlier,
agreed to buy it in December 2016 for 3.5bn.
UniCredit sold another stake in Fineco in October and a
32.8% stake in Pekao in December, bringing down the capital
needs to 13bn. But the sales were not without controversy.
"Poland was the most difficult decision," said the board member,
who said there were concerns on the board about giving up future
Others have gone much further. "Fineco is one big mistake:
it is short term, it's a business that could be the future of
the bank, and they are selling because they are so desperate,"
said one person who had advised various UniCredit shareholders.
After the sell-downs, the Italian bank still owns 35% of Fineco.
"We used Fineco as the adjustment variable basically to
limit the size of the capital increase to 13bn," admits
Mustier, who eyes future growth coming from elsewhere. After the
clean-up and capital raise, he is planning to invest in IT,
pushing a shift to digital banking and adding resources to do
more lending - but more prudently, of course.
The big question is whether Mustier can change the culture of a
bank that for years has failed to decisively deal with its
problems. "We can applaud what [Mustier and his team] have done,
and chances are good that the capital raise will be successful,"
said the board member. "But the real question is whether they
will deliver. The proof will be in the pudding."
Several senior managers have already gone, and Mustier has
hired an external communications agency to supplement internal
operations. New performance measures have been brought in,
long-term incentive schemes changed and greater transparency
added. IFR spoke to more than a dozen people and all agreed
things were changing.
But it will be a major task. UniCredit, even in Italy, is
the result of the merger of dozens of small, regional banks, and
its expansion through the 2000s was done using several bolt-on
acquisitions. Senior managers admit that the group never fully
gelled: too many parts of the business were run as
mini-fiefdoms, with central management never fully in control.
"Although we have been a group for many years, in reality
until recently we were the sum of different parts - a collection
of banks," said Gianni Franco Papa, general manager at
UniCredit, who has been with the bank for the past 37 years. "We
have always had the potential to offer cross-border products and
services but this ability was not fully exploited in the past."
Politics has also never been far away. Italian charitable
foundations were once the bank's majority owners and although
their ownership has been steadily diluted over the years, they
have traditionally maintained disproportionate power. "Each
region had its say, and the bank was never able to take any
strong action," said the adviser to shareholders.
The capital raise looks set to dilute that power yet again,
with many foundations not having enough free cash to fully take
up their rights in the capital raise. Board members spoke to IFR
of a big shake-up in the make-up of the board in 2018, when the
mandate of some members ends and new, more dominant shareholders
will demand better representation.
For Papa, the foundations can still add value to the bank:
"We like having the foundations as our shareholders
because this gives us an insight into the local communities in
which we operate. In Italy this is very important when you are a
large commercial bank," he said.
With 44.3bn of bad loans still assumed to be on the books
at the end of the plan in 2019, UniCredit will also be praying
the European economies do not take another stumble. After a
decade in intensive care, rehabilitation is likely to take many
(This article first appeared in the February 4 issue of the
International Financing Review)
(Reporting by Gareth Gore; Editing by Ian Edmondson and Matthew