„We will need four or five really big banks in Europe“

Let me paint you a picture: If the transformation of the economy was a car, banking and capital markets are the gasoline. All the other economic blocks except the European Union have understood this. Therefore, they try to create a banking sector and a capital market that can support and feed the growth of their economies. We have not. That is a clear competitive disadvantage.

You can see that in many key figures. In Europe, the market capitalization of the stock exchange represents 75% of the GDP, in the United States it is 270%. Also, the US GDP is a lot bigger than ours. In the European Union retail savings in market instrument represents 93% of GDP – in the US it is 300%. We could go on and on like that. In Europe we have 33% of total financial assets in cash and deposits. In the US that is only 10%. That means we have less of our savings feeding the capital markets and fewer strong banks that can feed the economy. Both engines are not really feeding. A second problem is that a large proportion of our savings do not end up in Europe, particularly when it comes to equity markets, they end up in the US instead. If you have a lot of wealth, where are you going to put your savings? Well, there aren’t enough options in Europe, so you go outside. Currently, we’re feeding the growth of the US rather than feeding the growth of Europe.

In my opinion there’s a lack both of clear understanding of why we should have one single framework and a misplaced attempt to protect each national market not only to the detriment of the EU but also of each one of our countries. We spend a lot more time debating where something is going to be based as opposed to debating what needs to happen and then executing it at pace. Right now, we don’t have any tax harmonization; we don’t have any rule harmonization. It’s all fragmented country by country, and that is not going to work. What we need is one framework, one regulator, one set of rules and a few policies to facilitate the recycling of savings and investments. Another important factor is the pension system. Our fragmented systems in Europe are mostly public. We are missing an entire leg of investment into our capital markets.

I would not put it down to only Germany. I think that every nation in Europe has quite a restrictive view of having banks from other European Union countries in their market. Sometimes there is even a debate within a market, as the recent failed bids in Spain and Italy demonstrate. It’s the same story everywhere – on banks and on other things that you see within Europe. There’s always this fear of losing an identity – sometimes national, sometimes even regional. But building Europe is not a question of eliminating identity. It’s a question of finding a common denominator on things that do not affect our identities but support a development that is the very foundation to defend those identities, and we have lost sight of that. And I think we don’t do that enough.

With few exceptions all nations are very focused on their banking system. And they do not understand the importance of scale. It means, having more ability to fund the industry. Multi country diversification also means that one can take more risks, because one can balance those risks out. It is not understood that European banks therefore cannot invest the same amount of money as US banks when it comes to topics like technology and artificial intelligence. We simply don’t have a balance sheet to do so. But when it comes to consolidating the market, we always end up with excuses like „But this bank is really the bank of this region“, et cetera. But what we should focus on is whether the transaction maintains the closeness to the clients whilst enhancing the ability of the combined banks to deliver for those clients, and politically whether that creates strong players capable to compete with non-EU banks, tech companies and fin techs alike.

Yes. I do think it’s still possible and we are trying to build one. If you want a banking union, you need to promote both domestic and cross border mergers. I don’t look at what Unicredit can potentially do in Germany or in Italy as cross-border mergers. Those are domestic mergers, because we already have a bank in each market. With respect to executing transactions in markets where one is not present you do need a Banking Union to be able to realize the level of synergies that justifies a transaction. That said at Unicredit we have learned to get around the lack of Banking Union and are now capable of realizing the lion’s share of the efficiencies and synergies even in markets where we are not present as the success of our partnership with Alpha demonstrates.

Yes. We at Unicredit are not taking the lack of banking union as an excuse. This group was built in the early 90s with a vision that the European Union would thrive. And we are now in 14 countries. We have 14 boards, 14 management teams, 14 legal entities, 14 technologies, 14 of everything, including 14 regulators. 15, because we have the ECB coordinating the local regulators and they often have conflicting agendas. Liquidity is not freely moving, capital is not freely moving, people are not freely moving. It is difficult to put technology to common denominator. So, Unicredit should be the least efficient, the least profitable and the least growing banking group in Europe. But we are the most efficient, the most profitable and one of the most growing in a quality way. The reason is that we have decided that we’re not going to take the excuse of these European obstacles. We’re going to find a way to deal with them one by one and we are. So, can you do cross-border deals and can you make them work without banking union? My answer is yes, particularly for Unicredit.

If tomorrow we had a banking union, Unicredit group would make a huge jump forward in terms of even greater efficiency, even greater profitability and even create quality growth. And the door to all the other banks in Europe to do cross-border deals would open up as they are not prepared to do so today. And they would then not need the knowledge and experience we have to realize a lot of synergies. It would help the competitiveness of all banks in Europe not only to the benefit of the banks, but the benefit of the EU and any single nation. Indeed the fastest growing market share gains in Germany across large caps and mid-caps is not Unicredit, it is not Commerzbank, it is not Deutsche Bank, it is not BNP Paribas. It is American banks and the same is about to happen in retail. Their regulations are different, their size is different, and they come in with a lower cost of funding, less demanding capital rules, more technology investment and more aggression. So, we are defending our banking markets within Europe – but against each other instead of against competitors from abroad which then take advantage of an uneven playing field.

Absolutely. We don’t like investment banking in Europe, because we assume it’s very risky. Which isn’t true, at least not completely. Advisory is not risky. Capital market is not risky. Trading may be risky, depending on what it is and how it is managed. But in Europe we have painted it all with the same brush: It’s risky, so we don’t want it. And what happens today is that the large majority of advisory, capital market and trading in Europe is done by US banks, not by Europeans. But this is a significant strategic disadvantage because it means that all our companies, when they merge, when they list, when they raise capital, when there is funding in bonds, are now relying on actors from a third-party economic block to help them. Don’t get me wrong – it’s okay to have competition and we thrive of it. But now there is none. Because the biggest local players in the European Union are dwarfed by their US peers so the EU effectively gave away one of the most strategic areas of banking and now we may be doing the same in lending and other products for corporates which are already under pressure. It is difficult to find any Large Cap deal in our market in which American banks are not active and now their competition is spreading to Mittelstand.

Absolutely. The US banks are doing that more in Germany than they’re doing it in Italy. For one reason: your economy is bigger, it’s more attractive, has more scale. But it’s going to happen everywhere. And then you look at the retail segment and there are also US players that have fully retail offerings and add to the competition from big tech and fin tech. So, if you look at it like that – what exactly are national governments defending and do we realize that this position not only disadvantages the EU but each single nation that is part of it?

No I don’t, I am fully in favour of open markets and competition. However, Europe should strive to put its banks on a level playing field vis-a-vis US banks, big tech and fin techs. It is a question of wealth creation for our citizens. In Europe we used to have the same GDP per capita as in the US. Today we’re at 50%. Germany is close to having the same GDP per capita as Mississippi, which is the least prosperous state in the US. This is because all these preconceived ideas prevented growth and prevented development. And this causes a massive issue for our societies, especially for the younger generation: if we’re not growing, there are no jobs. If there are no jobs, the most talented and dynamic Europeans will go somewhere else. They will study there and set up companies where there are investors to fund them. Politically and economically, we must face the fact that we need a much stronger Europe if we want to defend our own beliefs.

If you look at the US Banking market you have J.P. Morgan, Bank of America, Citi, Wells Fargo and the two investment banks and further down you have smaller community banks. In between you have what they call the supra regional which are mostly commercial and focused on more than one region of the US. In this layer we have very few in Europe. We are one of the exceptions, the rest are mostly single market players and community players.

What matters is that we do not have the level above. So I think that’s what you need to look at: Pan-European banks with credible projection outside the European Union. We will need probably four or five really big banks in Europe. And then you would have a higher number of banks that are present in a few markets without being really pan-Europeans nor having a global projection.

There will always be a lot of banks in Europe. That is the same in US, where the banking market isn’t limited to the global players and the Supra regionals. Below them you have a large number of regional and local community banks. These local banks have a different model, and their customers have a different experience, because they want different things. That’s why I wouldn’t expect an extreme consolidation in this layer.

Firstly, it’s the lack of Banking Union and the continued restriction on banks consolidation. Then it is the lack of capital markets union. If you look at the average bank size, in the US vis a vis Europe, it’s three times. But the average balance sheet is 20% greater, what does that tell you? Our banks cannot recycle the risk through capital market and securitization like US banks do. Thanks to the capital markets their balance sheets are relatively smaller, and they can originate more risk recycling it. In Europe we don’t have either: we don’t have the size and market share; we don’t have the balance sheet efficiency that comes from capital markets and securitization.

On the one hand, we would have not only another source to improve banks efficiency in taking risk but also another source to support the needed European transformation and development. But remember, US banks are already here, they’re already doing most capital markets transactions. Could we push them away? Could we go to the US, if we were backed by a bigger capital market? It is still difficult. That is why it’s an important political decision, which products and services do we think are strategic and do we think we need European banks to leading in. It’s the same thing as technology. Cloud, AI, technology in general is all American. But if you take a five- or ten-years view, shouldn’t we rebalance what we can rebalance? And how do we do that? Not my job, but I do think these are important questions. But it starts from having a clear vision supported by a clear framework and incentives to allow us to at least try. 

When I arrived at Unicredit in 2021, people had two convictions, both wrong. One that I would do a lot of M&A. And two that I would grow an investment bank. But I didn’t, because I did not think that it was the right time and the right step in the strategy. But now we are starting with that. If you look at how we are positioned in several sub segments of investment banking in Italy, in Germany, in Central and Eastern Europe (CEE) and Austria, we’re positioned well. That works because once you have a very strong commercial banking base, if you’re credible in your product and services offering to corporates in specific areas of global investment banking, you do get the mandate. The limitation is that usually they want a US bank, because most of the capital ends up coming from the US.

Well, there were a lot of reasons to do so. We all went through the great financial crisis. Unicredit had to pull back from Poland; it had to pull back from Turkey. In many cases, we are where we are because we had to restructure and the previous management had to take difficult decisions. Was it right or wrong? In America, they call that „Monday morning quarterbacking“. It’s very easy to opine now. But back then, thinking was very different. Today I am extremely positive about CEE. The population dynamic, the attitude, the ethics of work, the economic convergence – it’s a great flow of growth in economies that are converging towards the EU. Therefore, we are very happy with our subsidiary banks in the CEE, where we are top three in most of the banking markets from Czech Republic all the way down to Bulgaria. You always have one or two markets that are a little complicated any given year, but we have 10 markets in our portfolio. I can’t remember one year where we had a loss or did not cover the cost of equity for the franchise.

Absolutely. The same goes for population dynamics and education. Retail markets are growing; internal demand is growing. They are much more dynamic in CEE because they want to get to where we already are. That’s why they are running a lot faster. So, for our group, it is not only critical, but completely in our DNA to be in that region. We are recognized there. The local central banks and the governments know us and trust us. Employees join us because they want to have an international career that may start from their country and that then evolves into 13 others within Europe. If young people want to go international, we can accompany them throughout Europe. Obviously, if they want to go to the US, we cannot help that. But throughout Europe, within the same bank that is the unique opportunity that we offer.

Technology integration and technology modernization are the most important things banks need to do now. We had well over 100 acquisitions and mergers in this group and we have always integrated IT and I might add, at pace. It is one of the most critical priorities when we make an acquisition. Of course, it’s sometimes easier, sometimes more difficult. The last integration we did took us nine months without losing any clients.

I know that some people have had nightmares with IT integration. But that doesn’t mean everybody has. Thanks to the cloud and other innovations, integration has become easier, not more difficult particularly for the banks that have experience in doing it. The main issue is money. At smaller banks little by little, every Euro spent goes into maintenance, not into modernization. At some point, they hit a wall. At Unicredit, we can absorb the costs for modernization and improvement. IT is the first thing we look at when it comes to integration.

Given the size of the business and the state of their IT, I would say several hundreds of millions, probably going on the high end of hundreds. I think it is not only critical but it’s worth it. Because what people often don’t understand is that IT – and by that I mean to include data and AI – is not only about resilience. It’s also about efficiency and client experience. At the moment, Unicredit has all its branches digitalized. Even if people in the branch don’t know certain things that a client wants to know, they can connect online with our specialist who is going to deal with the client. It is also about people’s experience. We’ve seen this in Romania, where the employees were really like: Wow! I can do this in this little time? It would take significant amount of money to integrate Commerzbank. But I think even beyond efficiency it’s well worth it because of the impact it will have on employee satisfaction and on client satisfaction.

The metrics are simple. Today we are valued by a multiple based on the expected earnings profitability and distribution to shareholders for this year and the following years. Any bank we look at, we first compare their valuation with the same metrics. At this point in time, Commerzbank is valued with a big premium to us. That means that any value creation first needs to compensate their higher valuation – and then add more value. Why is there a premium? There might be speculation in the stock price. In any case it’s not a question of price, but about relative value and the value that can be created in a combination for all shareholders. 

A lot of value but at this valuation plus the expected premium it would not work for Unicredit’s shareholders. This may change if Commerzbank achieves its financial targets and the valuation converges to a level where it makes more sense. But valuation is not the only consideration, just as important are the people. You need to bring people along to be successful in integration.

I would say that it is more the Workers Council and trade unions, because of what they think we might do. But they cannot know because we have never had the chance to talk to them. That would be a critical step. If people at Commerzbank think that we’re going to go there and act without any consultation we’re not happy. Yes, there will be some rationalization at a management level. But how many, where, over which period of time, under which conditions? That needs to be discussed. How many new young people are we going to take in? How much training and reskilling will we offer? Is our proposition one that makes sense? I think that dialogue is critical. At some point, I hope we will have it.

As chairman of HVB and CEO of Unicredit group I must admit that I benefit greatly from the input and challenge of the workers council on certain topics. That is not a negative. They just challenge you from a different perspective. And often they know a lot more about what’s happening on the ground than what you would hear at the top.

I would like to respond to this more generally. When we bought the government’s stake and even before, we honestly believed, we had the support both from the government or at least from a part of it. The same goes for Commerzbank’s management. When we woke up in the morning, we found out that we didn’t. We had to decide to retreat or to go all-in. We went all-in and now we are where we are. We did not buy the initial stake in Commerzbank to be at almost 30% in the end. We planned to do something different. And it was something different because we had had a dialogue of what it could be. Today we are in a different position, but we are making the best out of it.