Ion-Marc Valahu is interviewed by Bloomberg

Mustier’s Run at UniCredit Hits Bump in ECB Review of Loan Sale
2017-11-01 13:14:21.372 GMT

By Edward Robinson and Luca Casiraghi
(Bloomberg) — Jean-Pierre Mustier’s honeymoon is over.
Since becoming chief executive officer of UniCredit SpA in July 2016, Mustier has won plaudits for rekindling confidence in Italy’s biggest lender by raising 13 billion euros ($15.1billion) in a February stock sale and moving decisively to offload billions in bad loans from its balance sheet.
Now Mustier’s plan to sell a record 17.7 billion euros of non-performing debt has hit a snag that could slow his turnaround of the Milan-based bank. The European Central Bank is examining whether the value of the portfolio included substantial fees paid to the buyers, according to people familiar with the matter. A higher price means UniCredit doesn’t have to set aside as much money to cover potential losses, providing a bigger boost to capital buffers.
The review pits Mustier against the ECB on a question that’s long bedeviled UniCredit and other Italian lenders: How do they get rid of their bad loans? If the ECB finds fault how the bank is seeking to account for the sale, that would be a blow to a banker who’s staked his institution’s comeback in part on his deal-making prowess.
“He tied his name to the deal and he’s the CEO and obviously liable,” said Ion-Marc Valahu, the co-founder and a money manager at Clairinvest in Geneva, which holds UniCredit shares. “But the ECB is nitpicking here. The loans have been problematic for years, and UniCredit is the first bank to really tackle the issue so they can release value to shareholders.”
The ECB’s examination comes in the wake of two snafus at UniCredit. In July, the bank disclosed that hackers took biographical and loan data from 400,000 client accounts. And last month, the lender published its third-quarter earnings two weeks early after some results were erroneously posted on its website and sent to investors and analysts.

Industry Impact

The potential setback could cloud the Italian banking industry’s recovery from its bad-loan crisis last year. That UniCredit found buyers at all for its bad-debt offering generated optimism the nation’s lenders were finally getting serious about cleaning up their loan books. While investors aren’t panicking at the news of the ECB’s review — UniCredit’s shares have slid 2.4 percent this week — it’s always a concern when regulators start asking questions.
“This is potentially an issue of business conduct for UniCredit, but it’s not a systemic issue for the Italian banking system,” said Nicolas Veron, a senior fellow at Bruegel, a Brussels-based think tank. “Of course, we have to wait for further details on what they find.”
Officials at UniCredit and the ECB declined to comment.
Mustier, a 56-year-old Frenchman who made his name as the investment-banking chief at Societe Generale SA, took charge at UniCredit with a mandate to repair the damage wrought by Italy’s perennial recessions. In 2016, the lender was saddled with more than 75 billion euros in bad loans and the ECB was leaning on it and domestic rivals to sell the debt to investors.
Not that Mustier needed any prodding. At Societe Generale, he’d been stung by the 4.9 billion euros in losses racked up by Jerome Kerviel, the rogue trader who’d worked in Mustier’s division. In his new role, he vowed to rally the bank around a “very disciplined risk approach,” pledging to raise capital and clean up the balance sheet.
Read here for more on the bad-loan sale and the ECB’s review
Mustier tasked TJ Lim, then global head of markets at the corporate and investment bank, to sell a big chunk of the bank’s non-performing loans, people familiar with the matter said.
Underscoring the deal’s importance, Lim’s team dubbed it Project FINO, an acronym for “failure is not an option.”
Finding buyers for soured Italian debt in 2016 was a tall order. The industry’s 360 billion euros in doubtful loans amounted to more than a fifth of the nation’s gross domestic product, and Italy’s bankruptcy laws made it hard to collect from deadbeat borrowers.
Banca Monte dei Paschi di Siena SpA, the ancient Tuscan lender that had become a byword for financial scandal, was near collapse and eventually got bailed out by the state. A handful of smaller banks stretching from Venice to Genoa were buckling under a legacy of shaky underwriting. Lawmakers in Rome were so worried they cobbled together a bank industry-financed rescue fund named Atlante.

Banker of the Year

Yet Lim, a debt-market veteran, struck a deal with Francesco Colasanti, the managing director of Italian operations at Fortress Investment Group. In a filing in January, UniCredit indicated that it agreed to sell a majority of the loans at an average price of about 13 percent of gross book value, a figure that may change, the people familiar said. The U.S. asset management firm agreed to buy the majority of the biggest piece of the portfolio. Pacific Investment Management Co. took a smaller stake, and UniCredit kept part of the debt for itself, with a plan to sell it down by the end of the year.
Even though the deal has yet to be completed, it proved a breakthrough for UniCredit in restoring its credibility in the marketplace. The transaction also helped jump-start more than 33 billion euros worth of offerings by other Italian banks. Through a combination of write-offs, government bailouts, and sales to investors, lenders have whittled down their non-performing loans by 14 percent since January, according to data compiled by Bloomberg Intelligence.
With Mustier delivering on both of his main goals, UniCredit’s stock soared 48 percent in the last 12 months, beating the 32 percent surge in the Euro Stoxx Banks Index. In July, Euromoney magazine named Mustier Banker of the Year.

Systemic Bank

Now, UniCredit’s rebound may be tested as the ECB reviews the FINO transaction. UniCredit agreed to pay the buyers fees to service the loans. While this is standard practice in sales of distressed bank debt, ECB examiners are looking into some of the fees that UniCredit will pay the buyers, which allowed them to close the deal quickly and limit the hit on the bank’s capital buffers, according to the people familiar with the matter. As a result, the portfolio may have been overvalued.
“It makes sense for the ECB to look into this because UniCredit is a systemic bank, the sale is huge, and it was a condition for the capital increase earlier this year,” said Massimo Famularo, a Milan-based adviser on bad-loan deals at Frontis NPL.
Spokeswomen for DoBank, the Italian unit of Fortress which is servicing the loans, and Pimco declined to comment.
Should the ECB take steps that force UniCredit to rework the deal, that wouldn’t just be a setback for Mustier and the lender. It could also impede the very program the central bank has been pushing since last year. “The ECB’s approach has been to gradually tighten the screw on non-performing loans and take advantage of economic momentum,” Bruegel’s Veron said.
It would be ironic if the showcase transaction in that program disrupts that effort.