Profumo Exit Throws UniCredit's European Expansion Into Doubt
Profumo, 53, stepped down after relations soured with some of the bank’s largest Italian shareholders over Libyan investments in the company. Chairman Dieter Rampl, 63, will take over Profumo’s duties on an interim basis and seek a replacement, the Milan-based lender said in a statement.
The fall of Profumo, one of Italy’s most prominent bankers, had its roots in the expansion that made UniCredit the country’s most European bank. Takeovers left him short of funds when confidence in banks collapsed in 2008 and credit became scarce, forcing the CEO to turn to investors for cash twice in 18 months. Recent Libyan investments in the lender met opposition from the Italian foundations that own more than 11 percent of the bank.
Profumo’s resignation is “a lose, lose situation,” said Fabrizio Bernardi, an analyst at Evolution Securities Ltd. in London, who has a “sell” rating on UniCredit shares. “He won the respect of international investors for putting together a large banking group and being open and transparent. Profumo sought to limit foundations’ weight and the strategy backfired.”
The Italian bank fell 4 percent to 1.82 euros in Milan, the lowest price since July 5, giving the company a market value of 35.2 billion euros ($47 billion).
Italy’s banking foundations are non-profit entities created two decades ago when the government started privatizing lenders. The foundations were formed to separate savings banks’ philanthropic work from the lenders, which became corporations. The foundations retain stakes in Italy’s biggest banks, including UniCredit and Milan-based Intesa Sanpaolo SpA, and they use the investments to fund philanthropic expenditures.
Profumo, a former McKinsey & Co. consultant, seized on the opening of European markets brought on by the introduction of the euro to expand at home and abroad. He turned regional bank Credito Italiano SpA, which he took over in 1997, into UniCredit, the sixth-biggest lender in the euro region, with 954.6 billion euros of assets at the end of June.
“We are based on the euro project,” the former CEO, who also heads the Brussels-based European Banking Federation, said in an interview in Milan in May.
The company spent $65 billion on takeovers in the last decade, including the $29.4 billion purchase of Capitalia SpA in 2007 and the $18 billion acquisition of Munich-based HVB Group in 2005. UniCredit owns the largest lenders in Poland and Austria and operates in 22 countries.
Italian Finance Minister Giulio Tremonti lobbied UniCredit shareholders, including Fondazione Cariverona and Fondazione CRT, to support Profumo, and indicated his resignation was a mistake, Corriere della Sera reported today, without saying where it got the information.
Profumo “tried to free himself from the local power games with the internationalization of the bank,” said Fabrizio Spagna, CEO of Axia Financial Research in Padua, Italy.
The expansion came at a cost. UniCredit’s net income, which peaked at 5.9 billion euros in 2007, fell to 1.7 billion euros in 2009 as bad loans accumulated, particularly in central and eastern Europe, and commissions fell.
In October 2008, Profumo was forced to go back on his word of not selling stock to investors, as he announced a 3 billion- euro rights offer after the bank’s shares shed 24 percent in three days on concerns over capital. He also replaced a cash dividend with shares. Profumo conceded at the time that the firm had “made some mistakes” by underestimating the financial crisis and making acquisitions at the top of the market.
Early this year, UniCredit tapped shareholders again for 4 billion euros to boost capital.
UniCredit shares, which more than quadrupled during Profumo’s first two years on the job, have dropped about 70 percent from their peak in April 2007. That compares with a 30 percent decline from the pre-crisis high at Banco Santander SA, Spain’s largest bank, which has also pursued international expansion.
UniCredit trailed behind European rivals over the last year, the Bloomberg Europe Banks and Financial Services Index shows. The lender, the 11th largest among the 54 members of the index by market value, fell 22 percent in the past 12 months, compared with the 9 percent drop in the index.
“The shares have been lagging,” said Dirk Sebrechts, a Brussels-based fund manager at KBC Asset Management SA, which oversees about 4.1 billion euros. “New management might not be bad news in the long term.”
Some of UniCredit’s largest shareholders asked Profumo to resign after he failed to inform them of the intention of Libyan investors to raise their stakes, people with knowledge of the discussions said Sept. 20. The Libya Investment Authority, a sovereign wealth fund, recently increased its holding in UniCredit by 0.5 percent to 2.6 percent. The Central Bank of Libya holds almost 5 percent.
Libyan investors remain committed to UniCredit, Farhat Omer Bengdara, governor of the country’s central bank and deputy chairman of the lender, told Il Sole 24 Ore in an interview published today. “We bought shares of a bank, not of a manager,” Bengdara said.
UniCredit should pay less attention to fostering international ties and more to its home market, especially northern Italy, said Flavio Tosi, mayor of the city of Verona, the biggest shareholder in Fondazione Cariverona, UniCredit’s fourth-largest investor. Tosi is a member of the Northern League party, part of Prime Minister Silvio Berlusconi’s governing coalition. The League has criticized the Libyan investments.
“The foundations have close ties to their territory, they cater to their constituencies and that needs to be kept in consideration,” said Axia’s Spagna.
Pressure from the foundations increased as UniCredit’s difficulties mounted. In February 2009, Cariverona didn’t participate in a sale of 3 billion euros of convertible bonds aimed at shoring up the bank’s capital. This year, foundations, including Cariverona, tied their support of the second rights offer to a return to a cash dividend.
“Profumo’s like a man halfway through a wade and the tide has risen,” said Giorgio Questa, a finance professor at Cass Business School in London and a former banker at Italy’s Banca IMI SpA. “He might have got to the other side had there not been a financial crisis. The bank’s international strategy needs to be reviewed, refocused, and Profumo might have done so himself if he’d been given the time.”
Profumo and the bank “agreed the time had come for a change in the top management,” UniCredit said in the statement, which followed a board meeting that lasted about five hours.
The executive agreed to a 38 million-euro severance payment and a 2 million-euro charitable donation from the bank, Corriere della Sera reported today, without saying where it got the information. Profumo had total compensation last year of 4.3 million euros, according to the bank’s annual report.
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