Jean Pierre Mustier’s new four-year plan for Italy’s UniCredit SpA marks a victorious milestone for the chief executive officer. He’s managed to turn a sprawling European bank laden with bad loans into a simpler entity that promises to improve its returns to shareholders. It leaves him well-placed to plot his biggest move yet (should he so choose): cross-border M&A.

The Italian bank has cut costs, sold non-core units and eliminated a bad-debt mountain. While he’s forfeited growth by exiting businesses in Poland and Italian online lending, Mustier has improved profitability. The group return on tangible equity is targeted to exceed 9% this year, up from just 4% in 2015.

He’s convinced regulators that the bank doesn’t need as much capital and he’ll seek their approval for the company’s first share buyback since 2004. The 27.8 billion-euro ($31 billion) lender plans to return 8 billion euros ($8.9 billion) to investors in dividends and stock purchases through 2023, giving an implied yield of as much as 7%. That compares with a 6% average for the sector, according to UBS Group AG analysts.

All this good work is just as well. While the Frenchman has made UniCredit a more stable, cross-border commercial lender, it still faces huge challenges. That was plain to see in some of the key targets in his “Team 23” strategic plan unveiled on Tuesday.

Under assumptions for interest rates that UniCredit says are more severe than the market’s, it sees ROTE declining again. Under this scenario, the measure will be no higher than 8% through 2022, while the bank’s revenue will increase by a meager 0.8% on average annually during the four-year plan. That’s below analyst estimates. Mustier won’t be able to do much more on costs, either; they’ll remain little changed throughout the plan’s duration.

Crucially, eking out that modest growth in revenue will depend on UniCredit expanding loans to Europe’s small and medium-sized businesses and consumers at a pace that exceeds GDP expansion.

There are some more levers Mustier can pull. UniCredit plans to set up an Italian holding company for foreign assets that could lower its capital needs. It still owns 32% of the Turkish bank Yapi ve Kredi Bankasi, a stake that could be sold.

But Mustier’s vision for a “pan-European winner” (his words) may require more radical thought. For the moment, he’s adamant there will be “no M&A,” pointing to smaller, bolt-on purchases. Valuations are a stumbling block to large deals. With UniCredit’s shares trading well below its book value, it makes more sense to pursue buybacks — as Mustier says.

Nonetheless, the bank’s smaller, nimbler form positions it for a cross-border deal should the European Union ever complete its banking union. Germany’s Commerzbank AG is often mooted as a partner. If UniCredit’s share price ticks up in the meantime, that would certainly help.

To contact the author of this story: Elisa Martinuzzi at emartinuzzi@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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