1. One of the key themes of the 2007 World Economic Forum in Davos is driving growth. How does your bank propose to drive growth in the coming year?
We expect a shift in growth from the US towards the eurozone and Japan in 2007, confirming a trend already under way. In recent months, in fact, along with a slowdown in the US, the growth in the eurozone economy surprised with its upturn, which was mainly driven by the recovery in domestic demand, though the contribution to growth coming from abroad should not be downplayed.
The other important factor that must be also emphasised is the role of a strong pick-up in Germany as one of the main drivers of this revival, mainly sustained by the corporate sector. Both exports and investment are growing steadily, while consumption, though improving, still shows some weakness.
In Germany, in fact, firms have undergone a long process of restructuring and mending of industrial processes and balance sheets, which allows them to benefit over proportionally from the strong world growth. The Italian economy also seems to participate towards the eurozone economy’s revival, though at a slightly slower speed. As for composition, Italian investment has been the bright star.
Going ahead, eurozone domestic demand should strengthen, helping withstand a slowdown in the US and world economy next year.
2. What are the main challenges facing the global economy in 2007 and how will your bank cope with them?
After three years of world gross domestic product growth at about 5% and four consecutive years above 4%, the global economy could suffer a somewhat weaker situation, due to some retrenchment of US consumers’ demand. The housing market cooling off should subtract one of the sources of funding for consumers’ expenditure there. Hence, world growth should be slightly hurt by this, nonetheless finding alternative sources of demand in Japan and the eurozone.
The main risks to this benevolent scenario pertain to a possible significant realignment of currencies, due to the need of mending the huge disequilibrium implied by the US current account deficit. But the likelihood of such a scenario seems quite limited at the moment.
In this context the financial system has to work in Europe in order to help fostering domestic demand, hence providing the needed resources in terms of lending to sustain corporate investment and consumers’ demand. Moreover it has to contribute to shape effectively the common market in order for Europe to actually reap all the benefits of the monetary union.
3. These days a global bank’s brand is one of its key assets. Can you describe your bank’s approach to managing brand value?
Financial institutions have generally undermined the power of their brand, however this is changing as top managers are detecting/uncovering its intangible value. Branding is crucial and able to inspire internal and external attitude and behaviour towards our several stakeholders: employees, customers, shareholders, suppliers and local communities. UniCredit Group is opting for a structured branding approach with global business lines and brands on one side and local branding strategy, to preserve the strength of local banks, on the other side.
4. Climate change is now firmly on the mainstream political and business agenda. Can you tell us about any initiatives that your institution is taking on this or other environmental issues?
As to the management of direct environmental aspects, to reduce greenhouse-effect increasing emissions, UniCredit is involved both in using renewable energy and in improving energy efficiency in all our branches. The most relevant initiatives are related to the management of the ‘indirect aspects’, by which UniCredit can influence businesses whose behaviour is able to cause greenhouse gas emissions. Besides project financing, we offer specific tools promoting renewable resources such as ‘Clean Energy Loans’ [total portfolio more than €5bn].
Second, in Germany we have HVB ‘carbon solution team’ and in Austria BA-CA ‘Kyoto Network’ – a service for customers to develop flexible mechanisms of the Kyoto protocol. We also participate in the Carbon Disclosure Project and in the European Carbon Fund, investing in rights relating to greenhouse gas emissions.
Third, we have an Environment Risk Assessment connected to loans and/or guarantees granted to industrial companies. The UniCredit and HVB Environmental Management System are certified to ISO 14001:2004 and EMAS.
5. Bank chairmen and CEOs are natural optimists. What reasons do you have for being optimistic in 2007?
In 2007, UniCredit Group will face a fairly positive macroeconomic and banking scenario, and will be able to take advantage of a rather beneficial positioning in regions, where bank profitability is expected to be sound. There are essentially two key challenges underlying the macroeconomic and banking scenario for the 2007.
The first challenge has to do with the sustainability of bank profits. We believe banks will be able to confirm the good profitability performance observed in the past two years for two reasons. The first one is the cyclical recovery in Europe, which finally not only appears under way but is also showing signs of further strengthening and which is going to sustain solid bank lending volumes in all countries. Moreover, the increase in interest rates has already stopped to narrow banks’ margins, thus providing further support to net interest income. Nonetheless, interest rates are expected to remain low, thereby preserving banks’ asset quality and keeping the cost of risk at its historical minima.
The second reason has to do more with structural factors: in Italy and in central and eastern Europe, for example, banking markets are still relatively underdeveloped compared with other European countries (in 2005 total loans on GDP were about 86% and 31% in Italy and CEE respectively, versus an average for the eurozone of 116%).
The second relevant challenge for the group has to do with the profitability of the German banking system. We firmly believe that in the coming years the profitability of the German banking system will close the gap with that of other European countries. This is because the cyclical upswing will be particularly strong in Germany (which in 2006-07 will contribute to about 30% of eurozone gross domestic product growth from a modest 15% in the 2003-05 period) but also thanks to past corporate balance sheets’ restructuring (financial debts on gross operating profits substantially fell from 4.6x in 2002 to 3.6x in 2005) and recent progress in enterprises’ profitability.
