By Alessandro Boratti, Analyst, Financial Institutions

UniCredit’s expansion efforts reflect its robust financial position, underpinned by one of the largest capital buffers in the EU, the result of solid earnings generation and risk-weighted asset optimisation. The group’s large market capitalisation, bolstered by the sharp rise in its share price since 2021, is also supportive.

The long-awaited move on Banco BPM comes as European banks seek ways to maintain profitability levels as the European Central Bank cuts interest rates. Compared to more diversified European financial groups, UniCredit is more exposed to changes in interest rates due to its relatively limited presence in asset management and bancassurance.

Its share offer for Banco BPM only consumes 70bp of UniCredit’s CET1 capital ratio. At the end of September 2024, UniCredit maintained industry-leading capital buffers of 593bp above minimum regulatory requirements, offering ample room for strategic manoeuvres.

Management has estimated synergies from the deal within 24 months, including higher annual pre-tax revenue of EUR 300m in addition to cost savings of around EUR 900m. These factors are expected to enhance operating efficiency and support UniCredit’s profitability target.

We regard UniCredit’s move as broadly positive, but clearly it will increase the group’s dependence on Italy (BBB+ Stable) and detract from its recent efforts to diversify geographically by expanding its pan-European footprint. This increased Italian exposure may impact funding costs if Italian sovereign risk were to rise. With Banco BPM, Italy would have accounted for 56% of the group’s nine-month revenues, up from 46%.

But integrating complex organisations with different business cultures (Banco BPM was formerly a co-operative group) does come with execution risk. UniCredit may also have to sweeten its bid to win over Banco BPM shareholders and management, which may not please its own shareholders.

Supportive of domestic banking consolidation
We remain supportive of domestic banking consolidation in Europe as it offers greater potential than cross-border mergers for value creation.

The proposed deal with Banco BPM has several advantages for UniCredit. It would consolidate its position as Italy's second largest group, challenging Intesa's leadership. The domestic market share of the combined entity in loans and deposits would increase to 15% and 14% respectively (from 9% in both cases) while pricing power would increase, particularly in wealthy northern Italian regions like Lombardy, Piedmont and Veneto.

If Banco BPM’s existing bid for the remainder of Anima, Italy’s largest independent asset manager, succeeds and UniCredit then goes onto successfully acquire BPM, UniCredit’s asset management business would clearly be materially strengthened.

 
Reshaping the domestic competitive landscape
A merger of UniCredit and Banco BPM will have far reaching implications for the Italian banking sector. Banco BPM has been at the centre of the debate about consolidation among Italy’s mid-tier and former popolari banks, including MPS, BPER, and Banca Popolare di Sondrio. Banco BPM recently acquired a 5% stake in Banca MPS (alongside Anima’s 3%) to secure a long-term partnership in the distribution of wealth-management products, and positioning itself as a potential acquirer of BMPS.

Banco BPM also has a long-standing partnership with Credit Agricole, which considers Italy as its second domestic market and an area of growth. Credit Agricole has been an active acquirer of small and medium size banking franchises in Italy. As well as a long-term partnership in insurance, the French lender has a 9.18% stake in Banco BPM.

A successful merger of UniCredit and Banco BPM would remove an important player, leaving the remaining banking groups with fewer options to strengthen their market positions. It would also significantly diminish the likelihood of the emergence of a third major group, long promoted by the Italian government.

UniCredit’s management has long been keen to enhance the group’s business model through acquisitions where it can create value for shareholders. In 2023, it bolstered its market position in Romania and entered the Greek market in a deal with Alpha Bank. This year, UniCredit acquired Vodeno, a Polish Banking-as-a-Service provider whose services are accessed via digital bank Aion Bank, which UniCredit also acquired, to bring new proprietary technology in-house and to enter new market segments.

UniCredit said its bid for Banco BPM is “autonomous and independent” from its investment in Commerzbank, in which it recently built a 21% stake and for which it is still evaluating the possibility of a full takeover.

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