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UniCredito: Is This Italian Bank A Powerhouse In The Making?


Alessandro Profumo has been grooming UniCredito Italiano for a starring role among Europe's top-tier banks for years. Now he's finally closing in on that goal. Profumo, the Milan lender's ambitious chief executive, has quietly cobbled together a thriving business stretching from Sicily to the fringes of Eastern Europe and across the Atlantic to the U.S. In the seven years he has been at the helm of UniCredito, he has forged one of Europe's most profitable financial institutions from seven small Italian banks. "He has an extremely good track record and extremely good execution," says Paola Biraschi, bank analyst with Lehman Brothers Inc. (LEH) in London.

The restless CEO's next likely acquisition target: a bank big enough to transform UniCredito, whose $33 billion market cap makes it the No. 1 bank in Italy, into a European powerhouse. Profumo has been frustrated time and again in his attempts to take over larger banks in Italy or merge with heavyweights abroad. A protectionist Bank of Italy, led by Antonio Fazio, has constantly thwarted deals with international banks to keep Italy's largest players Italian as long as possible, allowing them to restructure and brace for competition. Inside Italy, political and economic powerbrokers who still seek to wield influence over dealmaking in the formerly state-owned banking sector have blocked other moves by UniCredito, which has $293 billion in assets, to further bulk up. But now that Italian financial authorities are undergoing a sweeping reform drive in the wake of the $18 billion Parmalat scandal, bankers and analysts say the time is right for Profumo's next big act. "A deal will come," says a London-based analyst who follows UniCredito closely.

Italy's pending overhaul of financial market regulation is expected to erode long-standing political opposition to megamergers among Italy's top three banks as new rules for vetting deals are defined and new financial regulators take charge. That overhaul is likely to trigger a final round of mergers in Italy before cross-border deals in Europe finally take off.

Anticipating these changes, Profumo is quietly laying the groundwork for a major deal in the next 12 to 18 months, according to financial market analysts and Milanese bankers. They say he will likely first consolidate his base at home by taking over another Italian bank and then seek to capture sizable cross-border prey or strike a big European merger. For his part, Profumo plays down such notions and coyly suggests he is open to UniCredito being acquired by a larger suitor. "Nothing is on the table," he says, adding that he is open to being acquired "at the right price."

TALENTED AND IMPATIENT. Analysts and investors believe Profumo is simply biding his time as he waits to see how Italy's financial reform drive plays out. The former McKinsey & Co. consultant led the drive in Italy for Anglo-Saxon-style transparency and corporate governance. And last March, Profumo spearheaded the shareholder charge to oust investor-unfriendly management at Milan's secretive Mediobanca, rallying support among other board members after management failed to inform them about its actions. UniCredito held a 9% stake at the time and now aims to reduce its holding.

Profumo has won accolades as one of Italy's most talented managers -- and one of the most impatient to see its finance institutions play by global market rules. He launched Italy's first hostile bid for a bank in 1999, offering $14 billion for Banca Commerciale Italiana in an effort to create what would have been Europe's fifth-largest bank. When that deal was thwarted by Mediobanca, Profumo sought a merger six months later with Spanish powerhouse Banco Bilbao Vizcaya Argentaria, only to be derailed by the Bank of Italy. Other efforts to get bigger -- he's courted Turin's Sanpaolo IMI (IMI) and Germany's Commerzbank -- also went nowhere. Frustrated, Profumo looked north -- and east. Between 1999 and 2002, UniCredito snapped up seven East European banks for $3.2 billion and turned them into high-profit fiefdoms. It did that by exporting Profumo's restructuring and cost-cutting methods, honed during the mid-1990s in Italy. That meant introducing information technology and retraining entire staffs in UniCredito's credit-control systems.

Net income from the New Europe division soared 45.5% in 2003 to $374 million. Profumo projects that the region's contribution to overall revenues could rise from 18% in 2003 to as much as 25% over the next five years, depending on acquisition opportunities. The jewel in UniCredito's New Europe crown is Bank Pekao, Poland's No. 2, in which UniCredito took a 53.2% stake in 1999. The newly privatized Pekao was reeling from its high-cost operations. UniCredito's team got that under control by slashing the staff by 30% and restructuring. In 2003, Pekao earned net income of $127 million, up 14.8% from the previous year. Those profits have added to an already healthy bottom line. UniCredito posted net income of $2.4 billion last year, up 8.9%, on revenue of $12.8 billion.

Profumo has worked the same turnaround magic at Pioneer Investment Management, a Boston asset-management company that he acquired for $1.2 billion in 2000, after it missed out on the tech-fueled boom but before the markets tanked. UniCredito was criticized for paying too rich a price for a money-losing group hemorrhaging assets. But last year, Pioneer's assets under management grew by $11 billion, or 12%, to $150 billion. It has also expanded its global footprint and is now No. 1 in asset management in Eastern Europe, with a 25% share of the mutual-fund market. Pioneer earned $332 million in 2003.

Now that UniCredito has a firm foothold in Eastern Europe and a steady asset-management business via Pioneer, Profumo will be under pressure to seek growth elsewhere if he's going to maintain his stellar performance. He wants average annual growth of 8.6% in revenues and 11.5% in operating income. Analysts believe those targets will be tough to meet if he relies only on organic growth. "He can't maintain the same pace," says Lehman's Biraschi.

Profumo's ideal target at home, financial market insiders say, is Italy's No. 3 bank, Turin-based Sanpaolo, with $246 billion in assets. Welding the two together would create a $539 billion-in-assets behemoth -- Europe's eighth-largest bank by market cap with a value of nearly $50 billion, ranking just ahead of Deutsche Bank. Other possibilities are No. 2 IntesaBci, which UniCredito courted two years ago, or Banca Nazionale del Lavoro.

Few believe Profumo will be content sitting on the sidelines for long. If regulators stymie him, Milan financiers say, the banking ace might well give up his CEO's chair to go into politics, with the idea of becoming Finance Minister in a future center-left government. That, of course, might be the most effective way to loosen the political shackles that for so long have kept UniCredito from taking what Alessandro Profumo considers its rightful, prominent place in the firmament of European banking. By Gail Edmondson, with Maureen Kline, in Milan


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