UniCredit's new management team aims to revive the Italian lender's fortunes. They face a sizeable task to make the sprawling empire deliver on its constituent parts, particularly as the eurozone crisis threatens to suck in Italy and the bank's shareprice is sliding. However, the new CEO of the corporate and investment bank is confident that UniCredit can do it. 

UniCredit has, for the past few years, failed to add up to the sum of its parts. One of Italy's two largest banks and a major heavyweight in central and eastern Europe (CEE), the bank struggled to digest Germany's HVB, which it acquired in 2005, and, as the financial crisis unfolded, its aggressive growth into CEE did not serve the bank well. Similarly, it was punished by the bad debts of Italy's Capitalia, which it acquired at the top of the market in 2007.

A new management team is hoping to turn all the individual pieces of UniCredit into the powerful machine they should represent. Federico Ghizzoni took over as CEO in September 2010 after Alessandro Profumo was pushed out because of squabbles with shareholders. In March 2011, he hired Jean Pierre Mustier, former CEO of Société Générale Corporate & Investment Bank (who was shunted from SGCIB to head up the asset management business following the Jerome Kerviel affair, and left the bank in August 2009) to build-up UniCredit's CIB operations.

“We want to build on what is an unbelievable franchise and clients' goodwill for UniCredit,” says Mr Mustier. “Our aim is to make UniCredit the 'house' bank for clients in each of its core markets.”

Solid foundations

The bank has a lot of corporate client relationships on which to build. It has the largest corporate loan book in Europe – with €160bn in risk-weighted assets (RWAs) in the loan book, versus just €40bn for markets activities.

The bad news is that, aside from Austria, the revenue on UniCredit’s corporate loan book is lower than the bank's cost of capital. The good news, says Mr Mustier, is that it will not take much to turn this around.

Following a cross-business review, the bank is focusing on improvement in three core areas: corporate banking and transaction services; structured finance and capital markets; and delivering on its western European (mainly Germany and Italy) and CEE presence.

In the first two product-related areas, it is largely about doing more value-added business with clients. “It’s pretty straightforward,” says Mr Mustier. “We need to make sure that we are doing more business with each client,” he says. “We need to cross-sell one or two more products, develop our cash management business a bit more, do more trade finance, interest rate hedging and structured finance, etc.”

Team revamp

To do this Mr Mustier has, in turn, brought in some fresh faces and revamped his senior CIB team. In May, he hired Olivier Khayat – a trusted ally from Mr Mustier's SocGen days – as deputy head of corporate and investment banking and co-head of the unit's financing and advisory business with Vittorio Ogliengo, the head of investment banking for Italy. TJ Lim, a debt capital markets veteran from Merrill Lynch, and co-head of markets since his credit advisory business, NewSmith Financial Products, was acquired by UniCredit in July 2008, will become sole head of markets. Mike Hammond, who was co-head alongside Mr Lim and is also a former Merrill Lynch banker, is leaving the bank.

In terms of making UniCredit's impressive footprint yield dividends, Mr Mustier says that it is about “monetising” the goodwill and the relationships that the bank has across Europe. “We have an excellent client base and deep local knowledge in 22 countries; in about five of those we are first, second or third – we are the [largest] bank in Austria and third largest bank in Germany, for example. We can build on that,” he says.

During the crisis, the bank's aggressive move into CEE – and into the former Soviet Union particularly – proved painful. According to figures from Deutsche Bank, in 2009 and 2010, provisions on loan losses in Russia, Ukraine and Kazakhstan constituted 9%, 10% and 18% of each operation's loan books, respectively. The Kazakh business alone accounted for goodwill impairment of €359m in 2010.

The region's prospects are now improving, however, and Mr Mustier is confident that there is scope for the bank to grow its business there. “There are plenty of opportunities in terms of in-bound investment by our developed market clients and also for providing local funding or access to these markets to institutional investors,” he says.

Targeted ambition

On the investment banking side, the bank will pick its spots. “Our ambition is not to deliver the US or Africa to our clients, or to advise clients on an Asian acquisition. Our job is to focus on where we can add value, such as providing advice on local targets in our core markets. If [clients] want to look at their balance sheet structure or their funding capacity, how they could finance an acquisition, or how they would structure a take-out to the market, then we can add real value. If they want advice about ratings or hedging strategies, we want to provide it to them as well.”

To increase the bank's proportion of the markets business, Mr Mustier says that the bank will have to build out its distribution capabilities. But there is not going to be a major hiring campaign as he believes the bank has “more or less” got the proper resources – they just need refocusing. “On the credit side, we need to reallocate resources to our syndicate team, for example, and we need to reinforce our loan distribution team and our debt sales effort. We can do this by reallocating some resources from origination to distribution,” he says.

The idea of getting more out of the same clients is replicated in terms of balance sheet capacity. Mr Mustier says the strategy is to develop the business but keep the bank's RWAs relatively stable. The key will be to increase balance sheet velocity.

“We can make room in our balance sheet by turning it more,” he says. “We expect a slight jump in RWAs – maybe about €20bn to €25bn – because of the move towards Basel III, but otherwise, we want to keep our RWAs stable and make sure that we turn our balance sheet by selling more to clients, doing more hedging and doing more collateralised business.”

Appropriate growth

In contrast to the bank's history of being an acquisition machine under Mr Profumo's leadership, the new management team now puts a lot of emphasis on “appropriate” growth. Mr Mustier stresses that UniCredit's ambitions are about achieving the “proper” market share in each of its core markets. In Germany, for example, the aim is to gain 1% (moving from 6% to 7%) market share by developing its presence in the corporate sector and taking advantage of the relative weakness of some other German players. In Poland and Austria, where UniCredit is the largest bank, Mr Mustier says the idea is to “maintain and protect” its franchise.

“We have a rational and reasonable strategy, country by country,” says Mr Mustier. “We have no ambitions to be among the top 10 banks for cross-border advisory work. But we aim to be the house bank for clients in the areas where we can add value.”

Eurozone worries

The fear in July that Italy would be sucked into the eurozone crisis has seen shares in Italian banks – used by many to take short positions on Italy's debt because of Italian lenders' huge holdings of government paper – continue to slide. At the time of writing, shares in UniCredit had fallen by well over 20% before recovering slightly in mid-July. 

It once again focused analyst attention on Italian banks' capital levels, with many analysts expressing worries that they did not have enough to absorb potential losses. Mr Mustier dismissed such concerns and said that, with core Tier 1 capital now at just over 9%, UniCredit (which passed European stress-tests) is in line with Basel requirements.

"The [Basel] rules are designed so that between now and 2016 [onwards] banks go through several stages of capital increase. Some analysts are disregarding these stage increases and judging us today on what capital we should have in 2018."

Our ambition is not to deliver the US or Africa to our clients, or to advise clients on an Asian acquisition. Our job is to focus on where we can add value, such as providing advice on local targets in our core markets.

Jean Pierre Mustier

Moreover, Mr Mustier believes that the bank's business mix – which, compared to some other corporate and investment banks, has a large corporate lending business versus a much smaller markets business – may prove beneficial for the bank in terms of future capital consumption. “In the current regulatory environment, it is probably better to be in our position than the opposite, because the capital charges against market activities are going to be quite punitive.”

In the same vein, he suggests that the bank's structure, with different bank brands in each market – where each is locally capitalised and locally funded – is a real strength.

“It is the unique character of UniCredit. The downside is a bit of additional complexity. When you are a large player in many countries, as we are, you have to work with multiple local regulators as a local bank, not as a branch of a foreign holding company. But it is the way the European industry is going. There is a lot of talk about subsidiarisation, but we are already there. Many in the industry talk about the difficulty of achieving this, but we would recommend that other banks move to something like UniCredit's structure, as it makes a lot of sense from the regulatory point of view.”

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