Key Points

• Analysts say UniCredit could sweeten its rejected all-stock proposal to acquire Italian peer Banco BPM by adding a cash component.
• UniCredit is “more exposed to changes in interest rates due to its relatively limited presence in asset management and bancassurance,” said Alessandro Boratti of Scope Ratings. Acquisition targets Commerzbank and Banco BPM could cover this exposure.
• Orcel may have to decide between growing abroad or staying home, with analysts pointing to high integration costs and a high cost in management time if UniCredit tries to absorb the two banks it is courting.

Torn between two takeover processes, UniCredit’s Andrea Orcel still has room to improve its bid for Italy’s Banco BPM, analysts say, as political turmoil holds up a deal with Germany’s Commerzbank.
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Orcel, once a key architect in the controversial acquisition and subsequent dissolution of Dutch bank ABN Amro in 2007, revised its cross-border consolidation ambitions with the announcement in September of a surprise stake acquisition in Commerzbank. Until recently, the latter had been the subject of speculation as a possible merger partner of Germany’s largest lender, Deutsche Bank.

Amid resistance from the German government (and turbulence in Chancellor Olaf Scholz’s ruling coalition), UniCredit also turned its attention to BPM Bank last month, with a €10 billion ($10.5 billion) bid that, According to the Italian pair, it was delivered in “unusual conditions.” and does not reflect its profitability and growth potential.

Along the way, Orcel drew a scowl from the Italian administration, with Economy Minister Giancarlo Giorgetti warning that “the surest way to lose a war is to engage on two fronts,” according to the Italian news service Ansa.

Analysts say the despised UniCredit – whose CET1 ratio, which reflects the bank’s financial strength and resilience, remained above 16% in the first three quarters of this year – can still improve its domestic offering.

“There is room to increase [Banco BPM’s] offer,” Johann Scholtz, senior equity analyst at Morningstar, told CNBC.

However, he warned that the margin to do so is “limited.” “Think about a [increase] of more than 10%, it will probably dilute shareholders’ profits.”

UniCredit’s initial proposal was an all-share deal that would merge two of Italy’s largest lenders, but it offered just 6,657 euros for each share.

Both Scholtz and Filippo Alloatti, senior credit analyst at Federated Hermes, said UniCredit could sweeten the proposal by adding a cash component.

“Remember, that is Orcel’s second attempt to buy [Banco] BPM… I don’t think there will be a third attempt. I think they either close [the deal] now, or he’ll probably leave. So I think a cash component could be on the table,” Alloatti told CNBC. Last month, Orcel called Banco BPM a “landmark target,” fanning the flames of media reports that UniCredit had previously sought a national union in 2022.

The Italian stage was set for M&A activity early last month, after Banco BPM acquired a 5% stake in Monte dei Paschi, the world’s oldest lender and another former UniCredit takeover target, until that the talks collapsed in 2021, when Rome tried to reduce its participation. in the rescued bank.

Most importantly, Scholtz noted, UniCredit’s offer “places [Banco] BPM in a difficult position,” triggering a passivity rule that prevents it from any action that could hinder the offer without shareholder approval, and could stifle Banco BPM’s own early November ambitions to acquire control of fund manager Anima Holding, which also owns a 4% stake in Monte de

Offense-defense

A consolidation offensive could be UniCredit’s best defense in an environment of easing interest rates.

“Multi-year restructuring, de-risking of the balance sheet and substantially improved loss absorption capacity” prompted UniCredit to earn a BBB+ long-term debt rating from Fitch Ratings in October, above that of the bonds themselves sovereigns of Italy.

But the lender must now contend with an expansionary monetary policy environment, where it is “more exposed to changes in interest rates due to its relatively limited presence in asset management and bancassurance,” Alessandro Boratti, an analyst at Scope Ratings.

Both acquisition prospects cover some of that exposure. A merger of Commerzbank in Germany, where UniCredit operates through its HypoVereinsbank division, could create synergies in capital markets, advisors, payments and trade finance activities, JPMorgan analysts said in a November note. They added that such a merger would produce a “limited” upside in financing, as the two banks’ spreads are already closely traded.

Closer to home, Scholtz notes, BPM Bank offers complementary strength in asset management. Alloatti said absorbing a local peer is also one of the only options left for the Italian lender to take a leading role on the local scene.

“There really isn’t much they can buy in Italy to close the gap with [Italy’s largest bank] Intesa.
. Probably Banco BPM… that’s why they looked at it in the past,” Alloatti said. “Banco BPM is the only bank they could potentially buy to get a little closer to Intesa.” Intesa Sanpaolo is currently Italy’s largest bank by total assets.

The approach to Banco BPM, KBW analyst Hugo Cruz told CNBC in emailed comments, also has the “added value” of signaling to German shareholders that UniCredit has other M&A options available. However, he highlighted that the domestic takeover bid is probably “mainly a reaction to the acceleration of the consolidation process in the Italian banking system”, triggered by Banco BPM’s acquisition of its stake in Monte dei Paschi.

Orcel may have to decide between growing abroad or staying home, with analysts pointing to high integration costs and a high cost in management time if UniCredit tries to absorb its two acquisition targets.

Ultimately, KBW’s Cruz said, the Italian lender – which achieved its 15th consecutive quarter of growth this fall and has seen a roughly 61% rise in its stock price so far this year – may choose to hold out. . only.

“I don’t think Mr. Orcel has to make a bank acquisition. He already stated that any acquisition will need to add value compared to [UniCredit’s] stand-alone strategy and, if no acquisition is made, the bank will continue with the same strategy that already included a high level of capital distribution to shareholders and that aimed to the use of excess capital by the end of 2027,” he said, noting that the Italian lender refrained from submitting offers previously “because it was still in the process of restructuring and did not have the acquisition currency.”

“We hope they have the discipline to walk away from both deals” if they don’t deliver returns for shareholders, Morningstar’s Scholtz added.