A strategic alliance in equities with a brokerage firm and the massive strengthening of the balance sheet have helped put UniCredit's corporate and investment bank ahead of the pack, according to deputy chief executive Olivier Khayat.

In November 2011, Italy’s largest banking group, UniCredit, announced that it was forming a strategic alliance for its western European equity sales, trading and research with brokerage firm Kepler Capital Markets, while retaining equity capital market origination capabilities. Rivals were quick to describe the move as desperate. But for Olivier Khayat, who had joined UniCredit as deputy chief executive of the corporate and investment bank (CIB) and co-head of financing and advisory earlier that year, this was not a defensive move at all. Rather, it allowed the bank to “attack the market, while keeping the right focus”.

In fact, he notes that the model is not radically new, as equities brokerage Exane fulfils a similar function for BNP Paribas – although the French bank has a 50% stake in Exane, whereas UniCredit does not own a stake in Kepler. What is now clear is that UniCredit was the first mover, with others following suit during 2012. Royal Bank of Scotland exited cash equities and sold its corporate brokerage to Jefferies in the first quarter. And in the third quarter, Crédit Agricole sold its Chevreux brokerage to Kepler, creating the largest standalone brokerage in the EU, and an even more compelling partner for UniCredit. By mid-2012, UniCredit had decided to transfer its emerging European cash equities and research business, in which it was a market leader, to Kepler as well.

Other banks increasingly recognise the deep-seated problems with cash equities at present, with falling volumes and ultra-tight spreads as most execution is undertaken electronically, leaving thin margins for brokers. But Mr Khayat also believes that the banking sector lags behind other industries in pursuing the concept of specialisation, allowing different partners to execute different parts of the value chain.

“Equity distribution and research is more of a brokerage business than a banking business. The way that you have to manage this platform is fundamentally different. In the same way, a large retailer would usually use a separate manager for its real-estate assets, for example. But of course we wanted to make sure that we were not jeopardising our ability to offer clients capital-raising services,” says Mr Khayat.

Winning over clients

The leadership team anticipated a campaign of about 18 months to bring its corporate clients around to the new structure. As it turned out, says Mr Khayat, most clients were convinced within six months that both the partners had the right incentive structure to deliver the best possible service.

The UniCredit/Kepler combination has already executed some important deals, including an accelerated bookbuild of €281m in the shares of Italian utility Terna sold by energy company Enel in February 2012, on which two other Italian banks and JPMorgan were joint lead managers. In the same month, UniCredit led a €156m accelerated bookbuild for Sky Deutschland jointly with Bank of America-Merrill Lynch, with a further €144m capital raising planned at a later date. And in September, UniCredit was one of several managers, including Goldman Sachs, to undertake a €1.6bn block trade of tyre-maker Continental’s shares sold by German car parts firm Schaeffler.

“It is a privilege to work with Kepler, the quality of placement on the deals we have done together was completely at par with the other leading equity houses. This allows us to be involved in our clients’ capital raisings, but in a less distracting way and without the management time and resources required to run a brokerage whose revenues are marginal to the bank,” says Mr Khayat.

Of course, a more active equity market will provide the UniCredit/Kepler combination with more opportunities to establish a track record that can win over clients. The co-operation remains complex to execute and came at the cost of job losses at UniCredit, especially in its London, Munich and Milan offices. But Mr Khayat still sees it as a rational and constructive response compared with the exit at any cost from certain business lines' that some rivals are carrying out.

Europe’s best balance sheet

But what applies to equities might not apply to other areas. Mr Khayat says UniCredit is highly unlikely to make similar changes in the debt business, as it is not practical to separate debt capital markets distribution from the provision of balance sheet lending to clients. UniCredit is ranked number one for loans and bonds in central and eastern Europe, and is in the top five in the western European loans market.

Even so, the fixed-income side is not simply being left untouched. The whole bank is subject to chief executive Federico Ghizzoni’s plans for a staff cut of about 8% to 10% and a reduction of €18bn in risk-weighted assets, and a focus on the 22 countries in which UniCredit has an on-the-ground presence. Mr Khayat says the reduction in risk-weighted assets has been accomplished mainly through redemptions rather than 'fire-sales' of non-core assets. In western Europe, Spain, Portugal and the UK will be more marginal markets for origination, with the focus on Italy, Germany and France.

UniCredit had always been conservative in its approach to balance sheet management. The proportion of risk-weighted assets to gross total assets has been consistently one of the highest among large European banking groups, which means there is less risk of regulatory changes forcing the bank to reclassify risk weightings and seek extra capital. Following the €7.5bn capital raising accomplished in difficult market conditions in January 2012, UniCredit now has the lowest raw leverage ratio of any major European banking group.

“We benefit from a strong balance sheet. What remains is to continue and accelerate the integration of the CIB, bringing together cash management and foreign exchange with a greater ability to originate and distribute debt products, so that we can in turn underwrite more,” says Mr Khayat.

Like most European investment bankers, he is anticipating a decline in the 70% share of European banks in financing the continent’s corporates, necessitating a greater focus on bond market origination. But his estimate is that the split between bond and loan financing will settle at about 50:50, rather than the 70% share for bond markets seen in the US.

“If a borrower has no problems, it can fund anywhere and bond markets are currently cheaper. But any company with a more constrained balance sheet will find it easier to negotiate with a bank, so it is a choice between pricing on the one hand and future flexibility of funding on the other,” he says.

Better cross-selling

Mr Khayat believes UniCredit already exhibits the model that will become the industry standard in the future, with a CIB where at least two-thirds or three-quarters of the business is lending, commercial banking and transaction services, and the remainder comes from investment banking including capital markets origination, hedging activities and flow foreign exchange, rates and credit businesses. He sees day-to-day cash management and trade finance as vital elements in the relationship with clients and the basis for bringing in the higher margin, deal-based business.

Mr Khayat was assigned interim head of global transaction banking in October 2012, in addition to his existing responsibilities. He says the right team and structure is already in place, but jokes that, like a football club, to keep improving requires the right management decisions, as well as having the right players.

“It is about how you make all the components work together. With the clients and technology that we already have, it is a question of bringing it all together and saving capacity to reinvest, and the cross-selling can always be improved. Cash management and transaction services are the spine and nervous system of the bank, and what I have been assigned to do is make sure this is not just integrated with the investment bank, but actually all part of the same business,” he says.

Eurozone improving

UniCredit has maintained good access to wholesale funding markets, raising covered bonds with spreads well inside the Italian sovereign, as well as tapping senior unsecured markets. In addition to its strong capital position, the bank benefits from surplus liquidity at HypoVereinsBank in Germany and the appetite for retail bond issuance among Italian savers.

Mr Khayat points out that a short position on Italian exposure would have heavily underperformed this year, obliging investors to move back into the market. He takes the view that the stock of bad news from the eurozone is now largely exhausted, even if outright good news is still in short supply. UniCredit straddles the German core and troubled Italian periphery of the eurozone in one institution, and Mr Khayat says he has witnessed first hand the determination of Italians to make sacrifices to save their country’s financial position.

“When you work within UniCredit you understand what Europe is in all its aspects, as the bank is so diverse, with various backgrounds cohabiting. There is nothing more fascinating than working towards clearly stated goals while building a culture with so many different extractions,” he says.


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