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UniCredit/Russia: Orcel favours less risk over greater return

High returns come with elevated risks. Take Russia. Some European banks have happily set up and maintained operations in the country. Italy’s UniCredit is one of them, and indeed sought to expand there. Partly due to tensions over Ukraine, discussions with Otkritie — Russia’s sixth-largest bank by assets — have ended, UniCredit said as it reported full-year results on Friday.

Chief executive Andrea Orcel, recently arrived from UBS, has decided that risk outweighed any rewards from a combination with Otkritie.

US sanctions could knock Russian banks for six. But ironically Okritie is much less risky than it once was, if geopolitical risks are discounted. The state nationalised Okritie in 2017 after its supercharged growth made it Russia’s top privately held lender, backed by overvalued assets. Five years on and the Russian central bank wants to list Otkritie to get its money back.

To be fair, UniCredit’s Russia subsidiary has delivered good profitability since 2007, recently beating the unit’s mid-teens cost of capital. Even adjusting for the rouble’s depreciation against the euro over the past five years, those kinds of annual returns on capital look worthwhile against UniCredit’s single-digit return on equity. But Russia contributed just 6 per cent of pre-tax profit to UniCredit group earnings. That is more than Société Générale’s 4 per cent, but far behind leader Austria’s Raiffeisen at 35 per cent, according to JPMorgan.

UniCredit could have added scale with Otkritie and curried some favour with Russia’s central bank, were it not for tensions in Ukraine. But frankly Orcel has other priorities. He has promised to return €16bn of excess capital to shareholders by 2024, worth over half its market value. Given the better than expected gross (pre-provisioning) operating profit in the fourth quarter, Orcel can feel satisfied so far. He confirmed a payout of €3.75bn payout against last year’s earnings, slightly better than expected.

Orcel has wisely sidestepped Russian expansion. UniCredit’s strong share price run in the past year shows he must not lose the love of shareholders through risky takeovers in Russia — or closer to home.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.

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