UniCredit and Ferrari: Ambitions Amid Setbacks

During a recent event celebrating UniCredit’s new sponsorship with Ferrari’s Formula 1 team, CEO Andrea Orcel highlighted the common roots of the two firms. “Both brands began in Italy with aspirations of reaching a global audience,” he stated. “Ferrari has achieved that on a global scale, while UniCredit focuses on becoming a pan-European entity.”

However, Orcel’s plans for growth at UniCredit face significant challenges. The German government has opposed his takeover of Commerzbank, leading Orcel to pause those ambitions. Additionally, the Italian government has exercised its powers to block his intent to acquire Banco BPM, a smaller competitor based in Milan.

This situation raises doubts about whether Orcel, known for his aggressive approach to mergers and acquisitions, will be satisfied managing UniCredit as it currently stands. Observers wonder if he miscalculated in this – usually familiar – environment.

Yet, Orcel remains committed to his vision of transforming the bank into a regional leader. He insisted to the Financial Times, “We are set to be the pioneers in constructing a major pan-European bank.”

With his two major targets currently unattainable, analysts and investors are left speculating on UniCredit’s next moves.

Just under a year ago, the plan was for UniCredit to incorporate BPM by mid-2026, prior to pursuing Commerzbank. Sources had indicated that everything was still aligned for these significant acquisitions. However, the Italian government, led by Prime Minister Giorgia Meloni, utilized “golden power” — intended for scrutinizing foreign purchases of crucial assets — to block the BPM bid.

UniCredit had amassed a 29% stake in Commerzbank, but opposition from both the German bank’s leadership and Berlin, coupled with Commerzbank’s rising market valuation, now means that a full takeover has been pushed back to 2027. Critics argue that Orcel mishandled the political landscape.

“Banks are national treasures, vital for their countries,” remarked a senior banker. “You can’t just force a merger if the government opposes it. He seemed to ignore important local sentiments and misjudged the political temperature.” In contrast, another seasoned banker suggested that a more diplomatic approach could have led to successful deals.

Orcel contended that initially he had support from Berlin for acquiring a stake in Commerzbank, given UniCredit’s existing presence in Germany through Hypo Reinsbank. However, an analysis from UniCredit’s board found that after moving to BPM, political dynamics severely undermined the bid’s viability.

Orcel acknowledged the unexpected intensity of opposition regarding BPM, implying that the political landscape shifted more than anticipated.

Despite these obstacles, shareholder and analyst optimism remains high for UniCredit. Since Orcel assumed leadership in April 2021, the bank’s stock has skyrocketed by almost 650%, surpassing its major European competitors. This year alone, the stock is up about two-thirds, and analysts predict there’s potential for further gains. Only two out of twenty-three analysts have offered a negative rating on the bank, per Bloomberg data.

Citigroup analyst Andrew Coombs noted that UniCredit has notably enhanced its performance through stringent cost management. With a combination of lower credit reserves and increased fee income, factors are in place that should bolster earnings growth.

Nonetheless, rising interest rates have begun to affect European banks’ net interest income. For UniCredit, NII decreased over 5% in the quarter ending September compared to the same time last year. Orcel anticipates that the sector could face more difficulties after a period of robust growth, remarking, “The market has shifted from a bleak outlook on European banks to what might be an overly positive one. We are bracing for tougher times ahead.”

One of UniCredit’s advantages lies in its stakes in Commerzbank and Greece’s Alfa Bank, which analysts forecast could inject an additional 800 million euros in revenue annually. UniCredit holds a 29.5% stake in Alfa, underpinned by the Greek government’s support, hinting at a future bid for the 8.1 billion euro bank. However, Orcel stated that for now they would maintain only a minority stake.

In the context of European banking, observers point out that UniCredit lacks certain lucrative business lines, such as asset management or investment banking, that generate fee income compared to its larger rivals. Previous leadership streamlined operations by divesting subsidiaries, like the sale of asset manager Pioneer.

With major acquisition targets dwindling, it’s speculated that Orcel may pivot towards enhancing fee income at UniCredit. An executive from another Italian bank remarked that “Italy has essentially no retail M&A options left. UniCredit has alternatives to grow through areas like asset and private banking, while continuing to expand its international reach.”

Orcel indicated an “all organic” growth strategy for Banca Italia is on the horizon, alongside ongoing restructuring in wealth management. UniCredit has a partnership with Amundi, allowing distribution of the French firm’s products until 2027, which currently sees Amundi managing approximately 70 billion euros in assets for UniCredit in Italy.

Orcel has hinted that UniCredit may not renew its contract with Amundi, aiming instead to grow its own internal capabilities in asset management. As this internal capacity develops, the focus will shift to increasing managed assets. “We’re concentrating on private banking and want to enlarge our base among mass affluent clients,” he explained.

Additionally, Orcel aims to advance technological capabilities, aligning with the best in fintech while also revitalizing segments and regions previously sidelined after the financial crisis, particularly in Eastern Europe.

He expressed understanding that the current situation may not be as exhilarating as in previous years when net income was surging. “It’s different now than when we made our BPM bid last November. But we will adapt,” he remarked.

Orcel confirmed that while future deals aren’t excluded, the emphasis will initially be on achieving profitable growth and significant distributions. He also noted that M&A endeavors can distract focus, recognizing that management has sometimes struggled with maintaining discipline amid the BPM situation.

Regarding UniCredit’s operations in Russia, Orcel has reiterated the bank’s clear intent to exit, though legal challenges from Moscow complicate progress. He assured that efforts are ongoing to dissolve these operations, which are under increasing pressure from the European Central Bank, stating that they will likely be “effectively removed” from the landscape by next year.

Investor sentiment appears buoyant, as UniCredit has pledged to distribute a minimum of 9.5 billion euros to shareholders via buybacks and dividends in the upcoming financial year. Orcel announced that the bank currently has between 10 and 11.5 billion euros in excess capital.

“His discipline is commendable,” said Cole Smeed, a UniCredit shareholder. “Orcel displays the best capital allocation strategy among European banks. If it’s working, why change it?”

Conversely, a senior investment banker cautioned that if too much capital is returned to shareholders, Orcel might lose leverage for pursuing major M&A activities.

Yet, through these challenges, Orcel seems resolute. “UniCredit is a strange and wonderful creature,” he mused. “While Ferrari has its logo, we boast superior profit margins and returns on equity. My role here is incredibly rewarding.”