What will global financial firms look like in the future? Unicredit's CEO Andrea Orcel offers his take in the latest Breakingviews Predictions interview
In April 2021, when investment banker and storied dealmaker Andrea Orcel was named CEO of Unicredit, Italy’s second-largest commercial bank, investors throughout Europe had plenty of questions about his future plans.
In December 2021, Orcel provided some rather bold answers: First, he promised to deliver 10% returns and give €16 billion (US $18 billion) back to shareholders over the next four years — primarily from revenue generated by streamlining Unicredit’s operations, investing in digital technologies, and on fees for consulting services. Second, he said he would consider spurring growth through mergers & acquisitions, but only if the timing was right and the terms of any given deal met his very selective criteria.
Shifting the business model
In a recent interview titled Banking in Transition for the Thomson Reuters Breakingviews Predictions 2022 series, Orcel told Reuters editors it was “fair” for investors to wait for concrete results before celebrating, but that the bank was “on track” with its plan, despite an unexpectedly rocky start to 2022.
“We can take benefit in the fact that we have a very diversified franchise, and that means that [world] events and choppy markets do not affect the franchise in the same way,” Orcel says, explaining that diversification creates “offsets” that help balance the good and the bad. “Generally we are quite conservative, and we are focused on what we can control — and at the moment that seems to be working.”
To achieve the results he has promised, Orcel says he is shifting Unicredit’s business model from “a much more capital-heavy, volume-driven approach to a more capital-light, high-return, capital-generative approach,” which should yield excess capital well above the bank’s net income.
Distributing roughly €4 billion (in dividends and share buybacks) per year to shareholders may sound like a lot, he says, but only if one thinks the money is coming from net income. “If we take this year as an example, we generated €6.5 billion of additional capital organically, and we are distributing €3.75 billion,” Orcel explains. “If you look at it like that, we are not distributing a lot, and actually our capital is going up.”
Where are the deals?
Orcel’s reputation as a deal-maker has helped push Unicredit shares up almost 20% since the announcement of his strategy in December, and shares have gone up more than 35% over the past six months. But on the deal-making front, Orcel has actually rejected more deals than he’s made. In October, he nixed a rescue deal with Italy’s ailing bank Monte dei Paschi di Siena, and he also pulled out of discussions involving a bid for Russia’s state-owned Otkritie Bank because of tensions with Ukraine.
By way of explanation, Orcel says his M&A strategy is not driven by need. “We are under no pressure to do things,” he insists. “We need to prioritize what we do, because we don’t have never-ending capacity to do M&A.” Orcel says he’ll consider any potential deal, but if it isn’t a good strategic fit and doesn’t strengthen the franchise, he’ll pass.
He also says he would not do a deal if it jeopardizes the promises he made to shareholders in December. “My job is to say no” to deals that do not meet all of the right parameters, he adds. “If I look at 100 opportunities and say no for those reasons 100 times, I know that it appears like I might lose face, but in my opinion I will be doing what my shareholders want me to do.”
Allianz: the blueprint
One deal Orcel has sealed is an expansion of its ongoing partnership with German insurance giant Allianz in Italy and Germany, as well as several central and eastern European countries. The deal gives Unicredit the option of bringing the joint venture in-house in 2024, and will allow Unicredit to distribute its products through Allianz’s digital platform.
“We believe that the agreement with Allianz is a blueprint, because it’s predicated first and foremost on long-term partnership, technological integration, design of product, joint training and marketing, and their well-known sales support,” Orcel explains. It may take a few years, but integrating through Allianz’s digital platform will ultimately allow Unicredit to provide better service to its customers, he says.
Looking ahead to the rest of 2022, Orcel said he expects interest rates to rise, but concedes that inflation may negate any benefits the bank might realize from rising rates. He also doesn’t expect any major cross-border bank acquisitions to happen in the near future because of the pandemic’s economic impact on Europe and the regulatory complexities currently involved in executing such deals.
Over the next five years, one area that Unicredit is serious about is its dedication to sustainability through various environmental, social, and corporate governance (ESG) initiatives.
As a practical matter, however, “E,” “S,” and “G,” don’t always complement each other, Orcel notes, and banks themselves do not necessarily have the technical expertise to understand the risks involved in such green undertakings as carbon mitigation. For example, one can shut down a coal mine, which is great for “E,” but if it puts 5,000 people out of work, that’s not so great for “S.”
“The rate of acceleration in ESG is massive,” Orcel says, and it will require banks, including Unicredit, to develop new skills and knowledge to meet the coming challenges. “But if we do what we do well, all the banks will have a very deep understanding of a lot of these issues in-house, or with the subject-matter experts that they go to when they are in debate.”
As Europe’s economy transitions to cleaner energy, Unicredit will be walking its talk, Orcel assures. “For us, it is kind of difficult to go to our clients and drive the right behaviors if we cannot point to ours as being an example. From an ESG standpoint, Unicredit needs to truly be able to say, ‘Hey clients, we have a partnership, look at what we are committing to in the next five years. Yes, it’s pretty tough and ambitious, but it’s the right thing to do—now let’s talk about you.’
“If we can’t do that,” he says, it’s “a hypocritical discussion.”