Asian Markets

Russian expansion is a hard sell for UniCredit

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LONDON, Jan 13 (Reuters Breakingviews) - Fresh from turning up his nose at beleaguered Banca Monte dei Paschi di Siena (BMPS.MI), Andrea Orcel is looking east. The new chief executive of $34 billion Italian lender UniCredit (CRDI.MI) is considering buying Russia’s seventh biggest bank by assets, Otkritie. After a central bank rescue in 2017, it’s fast-growing, very profitable and has an experienced board. But competing with state peers will be tricky, especially if a more conservative parent makes it dump riskier corporate clients.

Otkritie, which means “opening” in Russian, has a lot going for it. Its return on tangible equity is around 19%, compared to a paltry 8% underlying ratio at UniCredit. Under the watch of respected central bank Governor Elvira Nabiullina, who has staked her reputation on cleaning up Russia’s banks, its non-performing loans have dropped to less than 3% of assets, from almost 10% in 2018. It has a diverse board full of doctorates and top-drawer Russian corporate experience.

Orcel could buy a unit or stake, but snapping up the whole thing would be a chunky bet. Otkritie has about $7.4 billion in equity. A price of just half book value – slightly richer than state lender VTB (VTBR.MM), which has a similar returns ratio, but less than dominant player Sberbank (SBER.MM), which boasts even higher returns – still amounts to nearly a tenth of UniCredit’s market capitalisation.

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There’s also an unusual family dynamic. Orcel’s brother, Riccardo, is deputy CEO and head of global banking at VTB. Otkritie has been selling down its stake but remains a VTB shareholder. But blood ties do little to justify a deal. The majority of Otkritie’s lending is corporate, which in Russia tends to be more commoditised and lower margin than retail banking. That market is also dominated by $88 billion state giant Sberbank, which has been investing heavily in technology “ecosystems” to boost revenue. Otkritie’s more personal approach may struggle to compete.

Keeping pace would be even harder with a parent with a lower appetite for risk, as UniCredit almost certainly would have. For instance, an Italian-controlled Otkritie would be less comfortable dealing with the state enterprises that represent a hefty chunk of Russia’s $1.7 trillion economy because of the risk of sanctions or politically exposed individuals. Throw in high level “political risk” including everything from war with Ukraine to industrial-scale corruption and it’s easy to see why Western banks have been pulling out. Going in the opposite direction would be audacious, but reckless.

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CONTEXT NEWS

- UniCredit, Italy’s second biggest bank, is among lenders interested in Russia’s Otkritie Bank, which is looking for potential suitors more than four years after being bailed out, Reuters reported on Jan. 11, citing a person familiar with the matter.

- A top-10 bank by assets, Otkritie was rescued by the central bank in 2017 during a wide-scale purge of the banking system that led to hundreds of lenders being shut.

- The central bank had said it was looking to cut its stake in the bank through an initial public offering or a sale.

- UniCredit Chief Executive Andrea Orcel said in December that he would consider M&A, a change in approach from his predecessors.

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Editing by Ed Cropley and Oliver Taslic

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