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ECB and UniCredit clash over capital plans and Russia presence

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The European Central Bank has clashed with UniCredit over the Italian lender’s plans to return cash to shareholders and its failure to leave Russia, according to people familiar with the matter.

The friction has built since chief executive Andrea Orcel took over in April 2021 and implemented an aggressive strategy to overhaul UniCredit’s operations and pay out more funds to shareholders.

The two sides have aired their opposing views in a series of letters, according to one person briefed on the matter, who said the relationship was “more than just a little bit strained”.

UniCredit said the ECB had “continuously provided us with challenge and guidance” during the bank’s strategic overhaul, adding that regulators’ “public support” was “indicative of the trust that they have shown in us”. The ECB declined to comment.

The clash is also a sign of the central bank’s tougher stance towards eurozone lenders’ capital plans as officials brace for recession. Italy and Germany — UniCredit’s two biggest markets — are expected to be hit hardest by Europe’s energy crisis because of their previous heavy reliance on Russian gas.

Several people briefed on the discussions said the ECB had objected to UniCredit’s commitment to distribute €16bn to shareholders by 2024, saying it ran contrary to official guidance that “banks should not set their dividend policies in terms of absolute amounts”.

Another person familiar with the discussions said: “When the regulators send you a list of questions, you can come to a mutual compromise around the answers, but Orcel’s style is ‘I’m right because we’ve got all this capital’.”

UniCredit has told the ECB that it had the headroom to pay more to shareholders without significantly weakening its balance sheet thanks to relatively high capital levels, with common equity at 15.4 per cent of risk-weighted assets.

Line chart of common equity tier one ratio (%) showing UniCredit's financial strength has surpassed its European rivals

There is also tension over UniCredit’s failure to cut ties with Russia. UniCredit is one of two European banks, along with Austria’s Raiffeisen, to maintain large operations in the country.

The ECB views the bank’s Russian presence as an unwelcome source of risk and has been pushing it to exit the country, where it has €2.4bn of capital tied up.

Orcel has ruled out a fire sale to a local oligarch, as France’s Société Générale did this year, leading to a €3.1bn charge. Instead, UniCredit has held talks with potential buyers in China, India and Turkey. The ECB has been asking for regular progress reports.

A person who discussed the issue with Orcel recently said the UniCredit boss was “getting a lot of pressure from the ECB” over Russia.

UniCredit told the Financial Times it was “committed to disengaging from Russia in an orderly and decisive fashion”.

ECB officials were also disappointed by the lack of information they received from Orcel during his initial talks last year with the Italian government about a potential acquisition of local rival Banca Monte dei Paschi di Siena. UniCredit ended up pulling out of the deal.

Orcel has been less proactive about keeping the ECB up to date with the bank’s decisions than his predecessor Jean Pierre Mustier, according to several people familiar with the matter. But UniCredit believes it has provided its supervisors with as much information as before Orcel took over, only via different channels.

Line chart of share prices rebased showing UniCredit's performance under Andrea Orcel

The bank’s hard-charging CEO, who was awarded compensation worth tens of millions of euros from Santander after the Spanish bank withdrew an offer for him to become chief executive in 2018, has made higher capital return a key pillar of his strategy. UniCredit is on track to distribute €3.75bn via dividends and purchases of its own shares this year.

This contrasts with Mustier’s more cautious strategy, which focused on reducing bad loans, cutting costs and building up capital. The ECB told all eurozone banks to stop paying dividends or buying back shares to conserve capital when the Covid-19 pandemic hit in March 2020 and only lifted the restriction 18 months later.

Share buybacks by eurozone banks must be approved by the ECB, which gave the green light for UniCredit to buy €2.6bn of its own shares this year in two separate tranches. In September, the ECB approved the second tranche but the process took longer and “was anything but straightforward”, said one person briefed on the matter.

UniCredit’s share price is up more than 45 per cent since the arrival of Orcel, a former UBS investment banking chief, outperforming most European rivals.

The bank told the FT that it expected to make a record net profit of €4.8bn and generate over €6bn of organic capital this year, adding “both are best in the peer group”.

It has almost halved its non-performing exposures — long a source of concern for the ECB — from 5 per cent of its loan book in 2019 to 2.8 per cent this year.

Additional reporting by Owen Walker