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Western EuropeMay 4 2008

Italian giant leaps east

Italy’s leading light in eastern Europe, UniCredit has ambitious plans after buying into one of the region’s most dynamic markets with its purchase of Ukraine’s Ukrsotsbank, writes Philip Alexander.
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Political logjam and early elections last year did little to dampen foreign investor enthusiasm for Ukraine’s fast-growing economy. Foreign direct investment (FDI) reached at least $8.3bn in 2007, a rise of more than 70% year-on-year, as gross domestic product (GDP) expanded by an impressive 7.3%. Italy’s UniCredit contributed more than $2bn of that total FDI inflow, as it continued to expand its presence in the central and eastern Europe (CEE) region by purchasing a 94.2% stake in Ukrsotsbank (USB) in July.

The deal, which was the largest to date in Ukraine’s banking sector, was completed at the start of 2008, and represented an exit for Viktor Pinchuk, the previous majority shareholder in USB and one of Ukraine’s leading oligarch businessmen.

A good business fit

USB will now merge with UniCredit’s direct subsidiary operation in Ukraine, which opened a year ago, and the fit is a good one, says Gianni Franco Papa, who was appointed general manager at USB in January this year. “There is very little overlap. The UniCredit bank is more of a corporate bank and its relationships are with large corporates and multinationals, whereas USB is a much larger universal bank, very much into the local economy, mid-market and retail,” Mr Papa tells The Banker. UniCredit can add 65 branches to USB’s nationwide network of about 500 branches and 1.2 million retail customers.

In keeping with the size of the purchase, Mr Papa has big ambitions for the combined entity, which has a 6.2% share of the Ukrainian market. He is planning to increase that share to at least 8% by 2010, while opening about 200 more branches, to become the country’s third largest bank. At present, USB is behind Privatbank and Prominvestbank among the local players, and the foreign-owned UkrSibbank (now a subsidiary of BNP Paribas), as well as Raiffeissen Bank Aval on certain measures.

“We do not aim for the mass market but for what we call the bankable population as well as the corporates,” says Mr Papa. Based on continued economic growth of about 6% a year on average, he expects that bankable population of wealthier retail customers to rise by 30% over the next three years, to 16 million – Ukraine’s total population is just over 46 million.

Before moving to Ukraine, Mr Papa was on the board of UniCredit’s subsidiary in EU member Slovakia, and he is relishing the new opportunities and challenges of an underbanked and fast-changing market. Young Ukrainians are increasingly well travelled – the population has shrunk from more than 50 million two decades ago, partly due to migration – and those who return do so with high expectations. “They see what products bank customers can get in other countries... so the demand for change in the product offering is very fast compared with mature economies,” says Mr Papa.

He hopes to bring to bear UniCredit’s extensive experience in other CEE countries during their economic transition process to meet those needs. USB is one of the leading players in car financing, although Mr Papa acknowledges that this is still a relatively high-risk activity, and the bank already has two million credit card customers.

Mortgage and real estate finance products are a major part of USB’s portfolio, as it taps into a booming market in the capital Kiev and other major cities. According to UniCredit real estate analyst Karla Schestauber, the vacancy rates on office space in Kiev are as little as 1%, with rents second only to Moscow in the CEE region and rental yields averaging 9%.

The residential mortgage market is less well developed, partly because the process of overhauling Soviet-era land laws is incomplete. The government of prime minister Yulia Timoshenko, elected in September 2007, has pledged to forge ahead with land reforms that would make it easier to register a change of title or use. However, internal disputes in the fragile ruling coalition have prevented the government from making progress on the economic agenda.

Business as usual

For Ukraine’s commercial sector, such political uncertainty is merely business as usual, and Mr Papa is working with a corporate finance market in rapid transition, especially for mid-cap companies. “We are seeing a shift from plain vanilla lending to more structured products. This is also because the companies themselves are becoming more complex, starting to export or to build a different structure in the local market,” he explains.

And there is a new class of “Ukrainian multinationals” to serve with the help of UniCredit’s core investment banking arm, as the country’s largest companies and oligarchs join the growing trend in emerging markets by investing their new-found wealth in the West.

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