EBF’s Mustier warns: ‘We cannot avoid a financial crisis’

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Jean Pierre Mustier, chief executive of UniCredit and chairman of the European Banking Federation, has led the industry’s support for the European Central Bank’s request last Friday that banks should suspend dividends and share buybacks until at least October.

Mustier – speaking to Euromoney earlier this week – gives a stark warning to those who do not support the measure. “We cannot avoid a financial crisis, although it is too early to say in what form,” he says. “There will be a lot of SMEs with problems and the cost of risk of banks will increase.”

New programmes of state guaranteed loans – worth hundreds of billions of euros in some countries – could reduce the increase of banks’ loan loss provisions by two thirds. Despite this, he emphasizes that “we need to plan and act as if the worst will happen, and if it doesn’t, it will be good news.”

For the moment, front and centre of everyone’s mind is the humanitarian tragedy – and UniCredit, based in Milan, is at its core – as even advanced health systems such as Lombardy’s are proving incapable of handling the number of people needing care. While other countries have hesitated to implement lockdown, there’s no debate about it there: even though the economic cost may be even bigger in Italy than in other western European countries, owing to its state budget constraints.

Faced with this human catastrophe, and as job losses deprive masses of people of their ability to buy food, issues such as dividend yields and near-term return on tangible equity seem almost insultingly irrelevant.

“We’re in a new world. In the new world, you need to think and act differently,” Mustier says.

“It’s going to take a bit of time. When you have a big shock, usually people think in terms of continuity, in a linear evolution. But in fact, when you have a big shock, you need to think in terms of discontinuity. Your behaviour needs to handle discontinuity, otherwise it won’t work. Crisis management has always shown that, when you have a big crisis, if you anticipate and manage the discontinuity, then you’re OK. That’s what we need to do on every topic.”

Ultimately, the CEO thinks the banks are strong and healthy enough to do what is needed of them: “Between what is being done by governments and what is being done by the ECB – in terms of liquidity, bond buying and commercial buying for large corporates – everything is in place to cushion the impact on bank capital and bank buffers. I’m confident that the banking system will continue to do its job.”

Nevertheless, trying to game this situation would be not just rash but impossible. 

“On what basis do you run your stress tests: a high single-digit GDP impact for Europe, mid double-digit?” he asks.

“We have no blueprint for how to deal with a situation like this, except common sense. One thing is clear, though: we must make sure we preserve our capital and protect our employees so that we can serve our clients and continue to support the economy.”

Intense transformation

As Mustier describes it, the biggest challenges facing bank chief executives have changed suddenly and radically.

Because of the coronavirus, in an instant, banks and their clients across Europe have been forced to stop using branches where possible and to turn instead to remote channels. 

“The transformation we have achieved in the last three or four weeks has been much more intense, and much more efficient, than what we did in the past three years,” says Mustier. “The ‘day after’, when things go back to a more normal environment, clearly, we will have changed how we work.”

In the longer term, this acceleration in the shift of the business model at UniCredit and other banks should mean lower costs, higher profits and more reward for shareholders.

Let’s be clear, the banks are not part of the problem; they are part of the solution 

 – Jean Pierre Mustier

For now, manning branches is a matter of personal safety like never before (its branches open, in a limited way, for those who rely on cash). UniCredit has had to reverse recent steps to remove physical barriers between clients and bankers in its buildings, ordering thousands of plexiglass screens to separate them and prevent the spread of the virus.

Meanwhile, society will depend on the banks, to fulfil their basic roles as depositors and payment providers, and to distribute the state-guaranteed loans that governments have designed to tide businesses over.

Mustier says: “The most important thing we need to discuss between the banks is how to make sure that the transmission mechanism works. Banks and governments need to work together to make sure the measures put forward by governments and the ECB are properly implemented: to help governments deposit money in people’s bank accounts; to pay temporary unemployment income; to properly implement loan guarantees and make sure they reach the SMEs.”

Understanding risks

Compared to this, the issue of whether or not banks should pay dividends almost begins to look trivial – even though it’s previously been the only way that European banks could attract equity investors. But the need to suspend dividends is obvious, in Mustier’s telling, not least because – after their employees’ health – the banks’ first concern must naturally be the health of their capital at this time.

“Covid-19 is a risk that banks don’t necessarily understand, because it’s not a financial but a health risk,” he says. “When you have a risk that you don’t understand, you need to be extremely careful, and very prudent. That’s why, as chairman of the European Banking Federation and as chief executive of UniCredit, I welcome the decision of the ECB’s recommendation to freeze dividends.”

According to Mustier, equity investors that see fundamental value in banks today will understand and sympathize with this move. “The view of [long-term] shareholders and banks is this is an unprecedented situation and a new world: hence we need to change our mentality and approach,” he says.

“The best long-term investors in Europe all agree that you have to be careful, and there’s no upside in trying to pay the dividend today. There’s only downside, because if the situation worsens later in the year, and your capital level is more at risk, then the situation would be much worse. But dividends can be paid if the situation improves later.”

Mustier won’t comment on the chances that he, perhaps in concert with other European bank chief executives, could add to these dividend measures by eschewing bonuses or even basic pay. Some European bank chief executives – notably in Spain – have already gone down this path, and Mustier has done so on previous occasions.

While dividends are bigger in monetary terms, Mustier is also aware of the signal that paying them might send to wider society, at a time when fiscal measures to prop up the economy might bring back bad memories of the European bank bailouts of 2008, and the years of austerity they triggered. 

“How would the public and the governments react if banks were to pay very large dividends now?” he asks.

“Let’s be clear, the banks are not part of the problem; they are part of the solution.”

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