Federico Ghizzoni, UniCredit's new CEO, appears to strike the right personal balance between the group's Italian origins and its pan-European reach. But some of the dilemmas that dragged down his predecessor, Alessandro Profumu, need resolving. Writer Philip Alexander

Did Alessandro Profumo's departure as CEO of UniCredit after a decade and a half at the top come as a surprise to Federico Ghizzoni, the man appointed from within as his successor? The answer is yes - and no. In his first English-language interview since being appointed to the post at the end of September 2010, Mr Ghizzoni tells The Banker Mr Profumo's resignation was "unexpected, there was no special reason", but he also acknowledges there had been "a progressive lack of chemistry between the management and the board".

The main point of contention is clear enough, as described in our November 2010 edition. The bank had become torn between the Fondazione - longstanding Italian strategic investors who own no more than 15% of UniCredit's shares but hold a majority on the board of directors - and its breakneck international expansion over the decade, starting with the acquisition of Bank Pekao in Poland in 1999.

If anyone can resolve the dilemma, Mr Ghizzoni certainly seems a contender. Beginning his career three decades ago in a branch of the Credito Italiano core of the UniCredit group, he first embraced its international expansion as head of the Singapore office in 1995, and most recently as head of its central and eastern Europe (CEE) operations. Mr Ghizzoni has also worked across retail banking, from his first branch in Piacenza to the almost 4000 branches across the CEE region, as well as running corporates and markets operations from Singapore to Poland.

Many CEOs would be delighted to inherit Mr Ghizzoni's bank. It has not lost shareholders a single euro during the past two years, a time that has been so devastating for global banking, and holds top-three (and often top) market share positions in most of the countries where it operates. But return on equity is not what it was, languishing at an annualised 2.7% for the first nine months of 2010, even after the bank's one loss-making country unit in Kazakhstan returned to profit. This compares to a return on equity of 16.8% as recently as 2007, and 9.5% even in the tough times of 2008. Meanwhile, jitters over eurozone sovereign debt are gradually pushing up funding costs for banks based in the region, further undermining margins.

Still looking east

Mr Ghizzoni seems in little doubt that the international expansion strategy pursued by his predecessor was fundamentally correct in terms of generating profitability. The group's franchise of more than 40 million European customers is unparalleled, and the average gross domestic product (GDP) growth rate of 3.5% in CEE is well above that for UniCredit's Italian home market. In addition, UniCredit has a particularly strong presence in some of Europe's healthiest economies - Turkey, with 10% GDP growth in the first half of 2010, Russia and Poland, both with 4% GDP growth.

"Two years ago, some investors were telling me that, unfortunately for you, you are the leading bank in the central and eastern Europe economies, and you will die with them. Two years later, it is interesting to see that spreads on CEE government bonds have widened much less than those in western Europe during the recent market fears over sovereign debt. So CEE is a highly strategic region for us that will drive the success of UniCredit, and we will progressively allocate more capital to it for this reason - it is our future," says Mr Ghizzoni.

More than 70% of the group's revenues in the region derive from five markets that Mr Ghizzoni believes show the best potential - Turkey, Russia, Poland, the Czech Republic and Croatia. He emphasises the importance of being seen as an active local bank in each of these countries. That strategy appears to be paying off, with UniCredit included in a list of potential advisors to the Russian government on its ambitious privatisation programme from 2011.

Of the other countries, Mr Ghizzoni says his approach will be entirely pragmatic, as capital for banks in general is too scarce to invest massively in every market. One of the largest question marks is Ukraine, which gave Mr Ghizzoni what he calls "a major headache" in his previous role during 2009. Ukraine is a substantial market where UniCredit subsidiary Ukrsotsbank is a top-five commercial bank. But a breakdown of government at the height of the global financial crisis dragged the country perilously close to a sovereign default during 2009.

"All credit is due to the management of Ukrsotsbank, as the bank was deeply restructured. Inside the group this has become a benchmark, one of the best things we have done in recent years. We managed not to lose a single hryvnia in net income, and cost-to-income ratios touched 25%, so we were able to afford the higher cost of provisions. Now we have to move to a second phase, to understand if it is possible to make money in Ukraine," says Mr Ghizzoni.
Italian puzzle

There are also questions further west. Mr Ghizzoni is positive about Germany, where UniCredit subsidiary HypoVereinsbank has a larger share of mittelstand, or mid-sized corporate lending, than Deutsche Bank. German exports are booming and the economy has become even more dominant as the locomotive of the eurozone.

What is often forgotten is that Italy is the second largest eurozone exporter after Germany, so it should be an equally promising market. But instead, GDP growth is mired at about 1%, and a fragmented corporate sector is dominated by smaller companies with weak balance sheets.

"Most of these companies are performing but they have a higher risk rating, which requires more provisions by the bank under Basel provisions, so the cost of risk in Italy is higher than in Germany," says Mr Ghizzoni.

He believes the pressure of competition from Europe and beyond in the wake of the global slowdown could drive greater consolidation in the Italian economy. And he argues the banking sector can support the process.

"We can study the situation and look at some of the important sectors to see how to preserve these from external competition by favouring alliances and mergers - a proactive approach to proposing solutions for smaller companies," he says.

The Italian retail market is also important, even if credit growth is slow. Italian household debt is just 12% of household assets, compared to well above 100% in the US and UK markets. The market is cash-rich and under-penetrated, especially for consumer lending.

"Funding will be one of the big challenges for the banking sector in the future. Italy has a huge pool of funding in Europe because of its high savings rate. It is a mix of risk and opportunity, a market that may not be very profitable in all segments but will still be very important for us, with good potential when the economy bounces back," says Mr Ghizzoni.

Capital conundrum

Funding is not the only constraint on European banks - capital is just as important. Following Mr Profumo's departure, there were questions over whether the Fondazione were able to provide additional capital for UniCredit if needed, or willing to see further dilution of their shares if they could not invest extra equity.

Mr Ghizzoni emphasises that the bank has no immediate capital needs, and compliance with the Basel III requirements as drafted should be straightforward. Nonetheless, he warns that the nature of capital management has changed fundamentally for all banks, not just UniCredit.

"In the past 12 years since they were in the group, the Fondazione have constantly supported the group, and they are committed to do so in the future. All shareholders have realised there is a new normality, that the whole banking sector may need more capital in the future and that profitability may take time to recover. But if you have a business proposition that makes sense, it is still possible to raise capital," he says.

Private building

The need to optimise the use of capital influences Mr Ghizzoni's approach to the bank's strategy. UniCredit has the third largest private banking client base in Europe, and he intends to build on this as a way of generating fees that does not absorb capital.
He is also committed to maintaining a corporate investment banking (CIB) franchise, which has been under pressure following high-profile defections to Credit Suisse and CEE boutique investment bank Wood & Co. But Mr Ghizzoni emphasises that it cannot be grown simply by throwing balance sheet at clients.

"CIB is highly strategic, corporate banking will grow faster than retail in the next two to three years, and we must remain in this business because we have one of the largest corporate client bases in Europe. But we cannot think that just because we give a line of credit to a client they will come to us for investment banking products - unless we have the capacity to serve them with excellent products. The target we have is to invest in CIB, but being conscious of the fact that the absorption of capital has to be reduced. We have to change the model a little to be less a loan provider, more a service provider," he says.

In particular, he believes the bank can do much more for its cross-border client base in terms of transactional banking and corporate advisory services. He says there are more than 100,000 UniCredit corporate clients that operate in more than one of the countries where the group owns a bank, yet only 20% of them bank with UniCredit in more than one country.

"My vision is to become number one in European cross-border corporate banking," Mr Ghizzoni concludes, giving the clearest indication that the change of CEO has not dimmed the bank's global ambitions.

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