June 4, 2018 / 12:02 PM / 6 months ago

Breakingviews - Italy’s politics is new obstacle to UniCredit deal

Italy's largest bank UniCredit is pictured in downtown Milan September 12, 2013. REUTERS/Stefano Rellandini ( ITALY - Tags: BUSINESS) - GM1E99C1OND01

By Christopher Thompson and Lisa Jucca

LONDON (Reuters Breakingviews) - Jean Pierre Mustier can’t be faulted for his ambition. In the middle of a demanding turnaround of UniCredit, the Frenchman has once again raised the idea of merging Italy’s biggest bank by assets with his former employer Société Générale, according to the Financial Times. The much-mooted combination would create a behemoth stretching from France to Russia. But Italy’s radical new government presents a fresh obstacle.

There are good reasons why the idea of uniting the two lenders has been kicked around for a decade and a half – and why it has not happened. The combined bank would derive over two-fifths of its revenue from France, Italy and Germany, and another 16 percent from eastern Europe, according to analysts at KBW.

Its bigger investment banking unit would be better able to compete with American rivals. Jefferies analysts reckon the two could cut costs by around 1.6 billion euros a year before tax, equal to 18 percent of their combined 2017 pre-tax profit. The merger would also fulfil the European Central Bank’s aspirations for bigger, more diversified European banks.

Though past talks have foundered on clashing executive egos, there is some overlap between the two lenders’ respective management teams. Mustier once ran SocGen’s investment banking arm. The 30 billion euro French group’s Chairman, Lorenzo Bini Smaghi, is a respected Italian economist and former ECB board member.

Yet the usual barriers to cross-border European consolidation still apply. The larger bank would face extra capital requirements and struggle to mesh disparate computer systems. A merger would also do little to lower national barriers that require UniCredit’s German unit to maintain an unusually high capital buffer, more than a decade after the Italian group took control.

The new stumbling block, however, is Italy’s politics. The 32 billion UniCredit holds 51 billion euros of Italian government bonds, making it vulnerable to doubts about the new government’s commitment to the single currency.  The administration’s policies would also make Italy’s labour market less flexible, and could make it harder for lenders to seize collateral backing bad loans. Despite a recent bounce, UniCredit shares are down 17 percent over the past two weeks. Shifting UniCredit’s head office to Paris might help to insulate the bank’s non-Italian operations from political turmoil in Rome. But unless Italy’s euro zone tantrums diminish, the SocGen merger dream looks likely to remain just that.

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