In 1999, UniCredit (then known as Unicredito Italiano) was not only forging itself into becoming one of Italy’s largest banks through domestic mergers, it was also embarking on an ambitious plan of expansion into central and eastern Europe. Five years on, it has crafted a genuine second home market with a network stretching across seven countries, from Poland, where it controls Bank Pekao, the largest privately-owned bank, to Turkey, where it has a 50/50 banking partnership with the Koç Group.
With the 53% acquisition of Bank Pekao in 1999, followed quickly by purchases in Slovakia and Bulgaria in 2000 and then in Croatia, Romania and Turkey in 2002, UniCredit snatched the narrow window of opportunity available to build what it calls its New Europe division, which it regards as a powerhouse for future growth. The new division produced 16% of the group’s total revenues in 2003 and division head Paolo Fiorentino believes there are a lot more opportunities for restructuring and growth. He notes that the 12 countries of ‘New Europe’ (excluding Turkey) produced GDP growth of 3.8% in 2003, compared with 0.4% for the EU’s 15 member states, and in 2004-06 the growth advantage will continue at an estimated 4.4% versus 1.9%. ‘New Europe’ still has an underdeveloped retail banking market, he says: loans and deposits represented only 70% of GDP in 2003, compared with 193% in the EU’s 15 states, leaving huge potential for expansion.
Optimistic about the prospects of ‘New Europe’, Mr Fiorentino told The Banker that revenues from the division could be expected to exceed 20% of the group’s total revenues within three years. In 2003, net profits from ‘New Europe’ were E427m, 15.7% of the group total of E1961m after adjustments for minority interests. At the end of 2003, UniCredit had 28,000 employees in ‘New Europe’, more than 40% of the group total, and 1281 branches, 28% of the group total.
Acquisitions market
While Mr Fiorentino admits that the privatisation season in central Europe is over and now it is more difficult to find and make acquisitions, UniCredit regards the region as a priority and is clearly in the market for acquisitions, but at the right price. And on July 1, he says, the two Bosnian subsidiaries of the bank’s Croatian subsidiary, Zagrebacka banka, were consolidated into the biggest bank in Bosnia Herzegovina. Formed by the merger of Universal Bank of Sarajevo and Zagrebacka banka Mostar, the new entity, called Universal Zagrebacka Bosnia Herzegovina, will have a combined network of 59 branches. UniCredit is also keen to expand its strong presence in south east Europe into Serbia. “We would like to be in Serbia, the country is heading in the right direction, the privatisation process is starting and we will compete,” says Mr Fiorentino. “We have the restructuring skills and we want to leverage those skills in Serbia and all the countries we are in.”
Profitable Polish prize
UniCredit’s prize asset in central Europe is undoubtedly Poland’s Bank Pekao, the second largest bank in the country after state-owned PKO BP. According to Fox-Pitt, Kelton analyst Garth Leder: “Bank Pekao remains the most profitable of the large listed Polish banks, achieving a return on equity of 13% in 2003, compared with between zero and 6% for the other four banks examined. We believe Bank Pekao will remain more profitable than the majority of its peers (though the gap may close somewhat) and will boost return on equity to around 20%, mainly through revenue growth.”
With 10% overall market share, Pekao is well placed in what is seen as the largest and potentially most attractive market in the region. Also, Poland’s macroeconomic prospects look good with 4.7% growth forecast for 2004 and 2005. Although 70% of the Polish market is already foreign-owned and PKO BP will not be sold to a foreign buyer, it is possible that some of the smaller foreign players may sell out.
Mr Fiorentino sees some rationalisation coming in the market in the next year and is clearly interested. “There is nothing in the market at present but we are ready to evaluate opportunities. We are looking,” he says. “To have a second domestic market (in Poland) is exciting and this market is exciting.”
Pekao is also benefiting from the strong growth in the mutual fund market. Pekao Pioneer and F&C, the group’s mutual fund manager joint ventures, accumulated 10bn zlotys (E2.2bn) of funds by the end of 2003, according to Mr Leder, accounting for a market-leading share in Poland of about 30%. He suggests that Pekao is well placed to benefit from the continuing shift from on-balance-sheet deposits to funds.
Lending growth
Mr Leder also says that Pekao has revamped its credit control and credit granting procedures during the past year, using UniCredit expertise. The granting of new mortgage loans has been speeded up through introducing credit scoring models and pre-assigned credit limits from four to six weeks to only a few days. As in other parts of ‘New Europe’, the mortgage product is taking hold and not only growing in popularity but also working well within new legal frameworks. “Mortgages are safe,” says Mr Fiorentino. “The volume is growing and people are repaying.” Unlike its competitors, Pekao has decided not to lend in foreign currency and this may have affected mortgage growth. Grzegorz Zawada, banking analyst at Austria’s Erste Bank, notes: “Pekao can increase its market share in mortgages if it sells more aggressively. With the second largest distribution network (after PKO BP), it has the potential to capture significantly more clients.”
Expansion hopes
While Pekao alone accounts for more than 5% of UniCredit total net profits, the Italian group is keen on expanding elsewhere in the region. With better credit scoring methods, consumer lending and credit card use are growing rapidly. Across ‘New Europe’, UniCredit banks have issued six million cards, including 700,000 credit cards – 400,000 of them in Turkey. Pekao is expected to double its current credit card customer base of 40,000 this year, adding more than 20,000 in the past three months. Significant card growth is also expected elsewhere.
Like its main rivals, Bank Austria, Erste Bank, Belgium’s KBC and Austria’s RZB, UniCredit is searching for expansion. Mr Fiorentino is trying to find a way to enter Hungary but is frustrated that “nobody is leaving”. While not attracted by Belarus, he believes that it is possible to construct a retail banking business in Moscow, which contains an estimated 500,000 affluent potential customers. “Moscow is mature enough to have sophisticated retail operations. We are evaluating the possibilities – our strategy would be through acquisition rather than organic growth,” he says. “There is a window of opportunity in Russia through Moscow and we would like to use it.”
Elsewhere, UniCredit has the leading bank in Bulgaria, through Bulbank, and in Croatia, through Zagrebacka Group. These banks have strong market shares on deposits of 18% and 31% respectively. They also added E40m and E93m respectively to UniCredit’s bottom line in 2003 and are expected to perform even better this year. Turkey’s Koç Financial Services has a 5% market share on deposits in the highly competitive Turkish financial sector and contributed a healthy E58m to UniCredit’s bottom line.
Meanwhile in Romania, Mr Fiorentino seems keen to grow organically rather than to go for the giant Banca Comerciala Romana (BCR), the last major bank in the region to be put up for sale. Through its Romanian subsidiary, UniCredit has a modest 2% market share and 28 branches, and looks set to grow quietly rather than seek further acquisitions. Analysts believe that four private banks might be interested in BCR: Erste, Bank Austria, Hungary’s OTP and Belgium’s KBC. But much depends on asset quality and analysts indicate that a guarantee system on BCR’s loan book will be required if a sale is to take place.
In the Czech Republic and Slovakia, UniCredit has 2% and 4% market shares of deposits respectively through subsidiaries Zivnostenska Banka and Unibanka-Slovakia. While these banks have branch networks of 26 and 68 respectively, their combined contribution to the bottom line is relatively small, at E11m. These markets will expand but, given the structure of the banking sectors in these countries, there is little prospect of dramatic growth or significant acquisitions.
While central Europe accounts for 46% of Erste Bank’s revenues and 27% of Bank Austria’s, the revenues of ‘New Europe’ for UniCredit are more modest at 15.5%. However, Pekao’s leading position in Poland offers significant growth potential and, unlike its competitors, UniCredit’s strong position in the growing Turkish economy also provides excellent prospects.
Profitability
Rating agency Moody’s, commenting recently on central and eastern European banks, noted: “Banks are increasingly concentrating on profitability rather than market position. Management teams are becoming more efficient and are prioritising those segments that offer growth potential. Thanks to a significant improvement in their risk management systems, and credit risk in particular, banks are also now focusing more on lending growth… We also note that, as banks have endeavoured to build more solid franchises and to maintain their market shares, they have significantly improved the quality of the services they provide.”
Moody’s analysis clearly reflects UniCredit’s strategy in the region, where in just five years, the Italian banking group has created an effective and profitable second home market with considerable upside potential.
