What Is Unicredit Thinking?

Earlier this year Italy’s largest bank Unicredit (LON:0RLS) undertook a €13bn capital raising which it assured investors would be used to boost its capital position. The money raised was the equivalent of the banks market capitalisation at the time, highlighting how concerned investors were about the banks financial situation. The bank also announced that it had set aside €8.1bn in provisions for bad loans in its fourth quarter, while it had also outlined plans to cut 14,000 jobs over the next three years.

It is also notable that this year’s fund raising was the fourth the bank had to undertake since the financial crisis, and since February the share price has recovered quite substantially from the levels of around €12 to just below €18 now. That still remains well below the heady levels we saw in 2015, above €30, helped in no small part by the recovery in the eurozone economy since then.

Even so the problems in the Italian banking sector remain far from being resolved, which makes this week’s revelation that Unicredit management are looking at a merger with Commerzbank (DE:CBKG).look rather bizarre.

While the shares have moved higher today shareholders are entitled to ask what management are playing at given that we are barely a year into the banks supposed turnaround plan.

It hardly seems sensible to look at taking on Germany’s Commerzbank, a bank with sizeable problems of its own in a banking sector that remains heavily overbanked and where Unicredit already holds a stake in HVB.

Notwithstanding the regulatory obstacles to any potential tie up, shareholders, who have had to dip into their pockets on numerous occasions in the past are probably asking themselves what management think they are doing.

Italy’s banking problems remain a long way from being resolved and to take on a German bank that only recently swung to a loss in its most recent trading update, and is undergoing its own radical restructuring program, with 9,600 job losses of its own, while also being part owned by the German government.

Unicredit management need to focus on their own problems and complete their own turnaround plan, before taking on new potential problems, and that’s before taking into consideration next year’s uncertain political environment in Italy where the prospect of rising political instability could increase with Italian elections.

This may help explain the cautious response of investors to this announcement with the share prices of both banks reacting fairly modestly.

The bank has made great strides over the past few months in offloading non-core assets and rebuilding confidence, yet as is so often the lessons of the past tend to get forgotten and management confidence starts to outweigh good sense.

Shareholders need to ask themselves and management if this is an entirely sensible road to go down so early on given that Europe’s banking problems remain far from being resolved.

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