Last year, UniCredit, with new management and increasingly worried shareholders, embarked on an ambitious project — it shed almost a quarter of its worst non-performing loans, in less than six months, to prepare shareholders to swallow a €13bn rights issue and the story of a new UniCredit.
At the same time, its more troubled Italian peer Monte dei Paschi di Siena was also going through a restructuring. It had an even more ambitious plan to dispose of non-performing loans, along with a liability management exercise and a capital raising which would see the bank back on its feet.
Fast-forward six months from the end of 2016, and Monte has, finally, been rescued by the state, while UniCredit is the turnaround story of the year.
The banks had very different problems going into last year — the scale of Monte’s bad loan problem relative to its balance sheet was much larger, UniCredit group is far more diversified and exposed to high growth outside Italy, Monte had already failed a regulatory stress test— but also illustrate different approaches.
Monte’s plan required several pieces to come into place at once — government backing for its NPL sale, in the form of a senior guarantee, industry backing for the junior and mezzanine, from Atlante, adequate participation in its sub debt liability managements, and a capital increase, which needed the underwriters to be comfortable about…every other aspect of the trade.
It wasn’t so much a jenga tower, since that implies some pieces near the bottom were stable. It was more like a vaulted ceiling — pull out one brick, and it collapses from every direction.
This complex, interdependent rescue package, and the close regulatory involvement, meant Monte gave off a sense of dithering. The notoriously leaky nature of the Italian banking system meant a constant stream of will-they, won’t they headlines, while the insistence that the bank wouldn’t need a bailout looked less and less plausible asthe months dragged on.
In contrast, UniCredit went into a flurry of activity, once chief executive Jean-Pierre Mustier had rejoined the bank, with the sale of stakes in Fineco and Pekao, retail banks and brokers in Italy and Poland, respectively, almost as soon as he arrived, the revival of the plan to sell Pioneer Asset Management, and the acceleration of the NPL sale in Project Fino (plus other NPL initiatives, like Project Porto, to boost coverage levels, and the closing of Project Sandokan, which was started in 2015).
Some of this, as GlobalCapital reported last week, wasn’t quite as clean and simple as it was presented. UniCredit kept 49% of Fino, and lent Pimco and Fortress 60% of the money to buy the other 51% (through a deferred purchase arrangement; UniCredit is technically facing the Pimco and Fortress corporate parents, not providing a secured financing against the portfolio).
But, though such an arrangement looks suspect to outsiders, it didn’t matter. The important thing was that the speed of execution gave the impression of momentum, progress, and being in charge of one’s destiny. The scale of the non-performing assets still owned by UniCredit, even after the €12bn sold before Fino, and the €17.7bn deal itself, can be terrifying, but tackling them fast and aggressively allows the bank to be turnaround story rather than a sympathy case.
Banks fundamentally require the confidence of the market, from retail depositors to corporate treasurers to interbank counterparties, and it was clear, late last year, that Monte had lost it. Deposits were draining away to be replaced by repo funding, with more and more of the balance sheet encumbered and collateralised.
The decay of confidence (and divisions between regulators) also pushed the final bill higher. Monte had originally sought €5bn of capital from private sector sources, but by the time MPS asked for a bailout, it was seeking €8.8bn, under pressure from Europe’s single supervisor. Moving slowly came with large costs.
To be fair to Monte and its management, it had few good options, and the task in front of it was Herculean, once it had failed the stress test and been asked for a recap plan.
But the bank prioritised penny pinching — a rescue recap which would cost as little as possible — over speed and certainty. When confidence is your business, that’s a false economy.