UniCredit observers accustomed to the brash confidence and domineering presence of the banks longtime chief, Alessandro Profumo, the personality of his successor, Federico Ghizzoni, made for a stark study in contrasts. Arriving at the banks London offices in March to announce UniCredits 2010 results, the new CEO dispensed with the formal presentation typically favored by his predecessor and asked journalists to pull up their chairs around his. Then, Ghizzoni outlined the banks performance and his plans in a voice so soft that listeners had to lean forward to hear him.
The new boss is bringing more than a different style to UniCredit. In eight months at the helm of Italys second-largest bank, Ghizzoni has introduced a number of subtle but important operating changes in an effort to jump-start UniCredits lackluster performance the issue that prompted Profumos sudden ouster last year. He has decentralized the business to give local managers greater autonomy in everything from lending decisions to hiring. The shift aims to invigorate UniCredits far-flung retail banking network in Central and Eastern Europe, which Ghizzoni oversaw before becoming CEO. At home in Italy, where UniCredit is big but barely profitable, he is stepping up a cost-cutting program begun under Profumo and pruning the banks bloated corporate loan book. Ghizzoni is also sharpening the focus of UniCredits investment banking division, tailoring products for the banks corporate customers rather than competing with bigger European rivals for mandates.
The soft-spoken Ghizzoni may not seize the limelight like Profumo did, but he makes clear that there is a new regime at UniCredit. It would be wrong to try to manage the bank the same way Alessandro did, because we are such different people, says the 56-year-old banker in a recent interview at UniCredits London offices. I believe in teamwork, transparency, open dialogue, he says, using labels that were rarely applied to the impetuous, risk-taking Profumo.
The CEOs agenda is a far cry from the aggressive expansion of the Profumo era, which transformed the bank from a regional Italian lender into one of Europes largest banks over more than a decade of deal making. But the new emphasis on operational excellence may be just what UniCredit needs, some analysts and investors say. The bank has plenty of heft, with 911 billion ($1.3 trillion) in assets, some 9,600 branches and 162,000 employees across 22 countries. Ghizzoni needs to demonstrate that UniCredit can generate real returns from the business.
After such a strong leader as Profumo, the group needs for the next one to three years somebody to manage rather than expand the empire and to simplify the complexities that resulted from such fast growth, says Davide Serra, founder and partner of Algebris Investments, a $1.4 billion, London-based financial sector hedge fund that holds UniCredit securities.
Solutions to UniCredits complex problems wont come quickly. The banks net income fell 22.2 percent last year, to 1.32 billion, and was barely one fifth of the record profits of 6.5 billion achieved in 2007. The banks Central and Eastern European business and its investment banking arm generated stronger returns, but results were depressed by the dead weight of the banks Italian business, which generates nearly half of group revenues but operates at a virtually break-even level. UniCredits stock has tumbled 74 percent over the past four years, to 1.55 late last month, causing the bank to drop from the No. 2 position among European banks by market capitalization to No. 11. Its domestic rival Intesa Sanpaolo has climbed from fifth place to third over the same period. Facing another round of European bank stress tests before the summer, and with tougher regulatory demands under the Basel III capital accord scheduled to come into force beginning in 2013, all the major Italian banks have announced capital increases except for UniCredit, which is hoping to get by without one.
Net income rose a sharp 55.7 percent in the first quarter of this year, to 810 million, but most of the gain reflected higher profits from fixed-income and currency trading rather than any operating improvements begun by Ghizzoni. The rise in earnings and continued trimming of the balance sheet boosted UniCredits core tier-1 capital ratio by 49 basis points, to 9.06 percent of risk-weighted assets, helping to bolster the CEOs argument that the bank doesnt need a new capital increase.
Looking ahead, Ghizzonis vision is down-to-earth. He says he would be happy to see UniCredit return to the profitability levels it once enjoyed in Italy within two or three years. In 2007 the bank generated 76 percent of its retail banking operating profits at home. Crucially, Ghizzoni has succeeded, at least for the moment, in appeasing the fondazioni the Italian charitable foundations that spearheaded opposition to Profumo on the board last year. A peculiarly Italian institution, the foundations rely heavily on bank dividends to finance local charities often linked to politicians, and they have been squeezed hard by the sharp drop in payout on UniCredit shares. I want to have equally good relations with all shareholders on the board, says Ghizzoni. Our aim is to increase the profitability of the group, and this should progressively increase dividends for the benefit of all shareholders, including the foundations.
In the CEE region, Ghizzoni intends to focus investment on the most-profitable markets Poland, Russia and Turkey and says he would consider shedding operations elsewhere. UniCredit clearly wants to commit more capital and resources to its stronger CEE operations, says Antonio Guglielmi, a London-based banking analyst for Mediobanca. (The Milan-based investment bank has a 5.14 percent stake in UniCredit, which in turn owns 8.66 percent of Mediobanca.) And although Ghizzoni is committed to maintaining the corporate and investment banking division and recently hired former Société Générale banker Jean-Pierre Mustier to lead the unit, he wants CIB to focus on serving the needs of UniCredits corporate clients rather than trying to compete with bigger rivals like BNP Paribas, Credit Suisse and Deutsche Bank. The new strategy doesnt mean that we want to become a global investment bank, he says. That would be a losing battle.
Most analysts dont quibble with Ghizzonis broad strategy, but after four years of dismal returns, they want to see real evidence of a turnaround. We need more detail about what the bank intends to do on several fronts, like costs, revenues, capital management and capital allocation to different areas, says Renato Panichi, a Milan-based credit analyst for Standard & Poors. Up to now we havent seen any major discontinuities between the current and previous management.
UNICREDITS MODERN ERA BEGAN IN 1997, when Pro- fumo, then a 40-year-old former McKinsey & Co. management consultant, took over as managing director of Credito Italiano, one of three leading institutions in what was then a very fragmented Italian banking industry. At that point, the bank had only 3 percent of the Italian loan and deposit market. Believing that the introduction of the euro would usher in a new era of pan-European competition, Profumo moved urgently to gain scale, beginning with a 1998 merger with UniCredito, an umbrella group for three regional lenders. In the following years he streamlined operations and integrated the groups seven banking subsidiaries into a single brand. During the same period he fueled the banks growth by expanding into Central and Eastern Europe, most notably with the 1999 purchase of Bank Pekao in Poland. By 2005, UniCredit had become Italys second-largest lender, after Intesa, and boasted a significant franchise in the CEE region.
Then Profumo really turned bold, pulling off Europes biggest-ever cross-border banking deal: the 19.2 billion purchase of ??HVB Group, Germanys second-largest bank. At a stroke, UniCredit vaulted from 16th place among European banks to eighth by market capitalization. In the fast-growing CEE market, the combined networks of UniCredit and HVBs Bank Austria subsidiary controlled more than twice the assets of their closest rival, Austrias Erste Group Bank. I certainly did not dream of creating a bank the size of UniCredit, Profumo, 54, recalls in a recent interview. When I first joined UniCredit, it was inconceivable to me that it would become a major European player.
Rather than pause to consolidate his conquests, Profumo overreached. Determined to keep pace with Intesa, which leapfrogged UniCredit by acquiring Sanpaolo IMI in January 2007, Profumo in May of that year paid a startling 21.8 billion in shares to acquire Capitalia, a Rome-based bank that had been plagued for years by bad loans, low returns and boardroom intrigue. UniCredits market cap swelled briefly to 96 billion, second only to that of HSBC Holdings among European banks. There was great pressure on UniCredit after Intesa acquired Sanpaolo, Profumo says. If we wanted to maintain a significant share of the Italian market, we had to buy Capitalia.
The global financial crisis, however, upended the logic of the deal. UniCredit bought Capitalia at the height of the market, just as the crisis began, and it had one of the worst balance sheets in Italy, says Mediobancas Guglielmi. When he signed the Capitalia deal, Profumo sealed his departure from UniCredit and he knows it.
With UniCredits balance sheet stretched by the Capitalia deal and the fallout from the financial crisis, Profumo was forced to go to shareholders in October 2008 for a 3 billion capital increase. Moreover, UniCredit paid its 2008 dividend in scrip rather than cash, effectively postponing payments until the bank could shore up its capital and liquidity.
The maneuver angered the foundations, UniCredits most powerful long-term shareholders. Six foundations hold about 12 percent of the companys shares and nine of the 23 seats on its board of directors. Vice chairman Luigi Castelletti, who represents the largest foundation, Cariverona, led the opposition to Profumo. Over the years the CEO had diminished the foundations influence by diluting their holdings, had forced them to pony up more capital for acquisitions and had reduced their dividend income to a trickle. And they really need dividends to finance their local projects, says Isabell Albus, a Frankfurt-based analyst at Allianz Global Investors, which holds UniCredit in its 1.5 trillion of assets.
The media-savvy Profumo portrayed his growing troubles with the foundations as a struggle between a modernizer and the opaque forces of reaction. But behind the scenes he was losing support even among former allies on the board, who were concerned that his expansive ways didnt fit the new postcrisis era of austerity. By the summer of 2010, the banks share price had plummeted 70 percent from its 2007 peak. Falling profits and rising debts had left UniCredit as the big Italian bank most weakened by the crisis.
Profumo sought to strengthen the banks capital with yet another fundraising, this time a 4 billion rights issue. When some of the foundations balked at taking up their rights, Profumo secretly turned to the Libyan central bank and sovereign wealth fund which already held a 5 percent stake in UniCredit to make up the difference. The deal raised the Libyan stake to 7.5 percent (a stake that is currently frozen as part of Western sanctions against Tripoli) and prompted outrage on the board. All but one of its 23 members voted for Profumos resignation. Even chairman Dieter Rampl, former CEO of ??HVB, declined to defend his old friend and ally. Profumo stepped down on September 21, 2010. Nine days later the board appointed Ghizzoni as his successor.
Ghizzoni has spent his entire 31-year career at UniCredit and its predecessor. Born in 1955 in Piacenza, a small city about an hours drive southeast of Milan, he earned a law degree from the University of Parma and began work at Credito Italianos Piacenza branch in 1980. He rose steadily through the ranks to become a branch director in Trieste and Seriate. In the early 1990s he went to the U.K. for a two-year stint as deputy general manager of the banks London office, then moved to Asia, where he managed the Singapore office for five years. That overseas background helps explain why Ghizzoni favors giving more independence to the banks local managers.
As UniCredit underwent explosive growth abroad, Ghizzoni took on responsibilities in the CEE region. He served as head of corporate and international banking at Polands Pekao from 2000 to 2002, then went to Turkey in 2003 to join the executive board of Koç Financial Services, a joint venture of UniCredit and Turkeys Koç Holding that owns Koçbank. Three years later, Koçbank acquired its large but troubled rival Yapi ve Kredi Bankasi, forming Turkeys fourth-largest bank, and Ghizzoni took over as COO. He was a powerful agent of change who contributed a great deal to Yapi Kredis acquisition, transformation and success, says Tayfun Bayazit, chairman of Yapi Kredi and CEO of Koç Financial Services. The following year, Ghizzoni stepped up to oversee all of UniCredits banking operations in the CEE region.
The financial crisis gave Ghizzoni a chance to shine beyond UniCredits confines. In 2008 many policymakers and industry executives feared that Western European banks such as UniCredit, Frances Société Générale, National Bank of Greece and Swedens Skandinaviska Enskilda Banken would face pressure from their home governments to pull back from or abandon their CEE subsidiaries to focus resources on their domestic markets.
Federico played a very pivotal role, along with a few other key bankers, in negotiating with the home country regulators, bank headquarters and governments to ensure continued availability of credit and liquidity for subsidiaries in Central and Eastern Europe, says Charles Dallara, managing director of the Washington-based Institute of International Finance. That was a difficult balancing act, but Federico found the right balance between more-cautious lending and continued liquidity and credit.
In August 2010, as Profumos troubles with the board deepened, he appointed Ghizzoni as deputy CEO. One month later the board chose Ghizzoni over fellow deputies Roberto Nicastro, the head of retail, and Paolo Fiorentino, the head of banking services, to become the new CEO. Ghizzonis CEE experience and nonconfrontational style were crucial factors in the decision, according to a source close to the board. Ghizzoni says he remains friends with Profumo and stays in touch with him, but he insists that the days of close-to-the-vest planning and dramatic coups are over. I like to be open and set clear rules of the game, he says. I dont think that just one person can change everything. It takes a group of people working as a team to make things progress effectively.
Ghizzoni moved quickly to solidify his management team by naming Nicastro as general manager, the banks No. 2 executive, and Fiorentino as deputy general manager and COO. More surprising was the hiring in February of Mustier as head of corporate and investment banking. Mustier had resigned from Société Générale in 2009 effectively to take responsibility for the 4.9 billion loss racked up by rogue trader Jérôme Kerviel.
Mustiers appointment raised eyebrows at UniCredit because of his reputation for the kind of proprietary products and high-flying investment banking approach that the Italian bank had shunned even before the financial crisis. The executive insists he is in tune with Ghizzonis more modest vision, saying the CIB unit will pursue a simple, client-driven approach rather than one designed to push lots of complicated products. Under the new regulatory environment of Basel III, you dont want to develop your business through financial wizardry and complex derivatives, he says. Mustier is expected to design investment banking products that will help UniCredits corporate clients better handle transactions like currency hedging and M&A financing.
Some UniCredit investors would like to see Mustier move quickly to reduce the banks massive CIB loan book. The 289 billion portfolio exceeds those of Barclays (223 billion) and Deutsche Bank (240 billion). The good news is that the bank has begun to shrink its corporate portfolio, says Algebriss Serra.
The bad news is that UniCredits home market especially its Italian retail banking division is deeply troubled. Although Italy accounted for 44 percent of the groups 2010 revenues, it was a drag on earnings. UniCredit does not disclose overall operating or net income for its Italian operations, but outside estimates range from losses of 50 million, according to a detailed analysis published in February by Italian financial daily Il Sole 24 Ore, to as much as 800 million, according to a January report by Paola Sabbione, a Milan-based analyst for Deutsche Bank.
UniCredits travails in Italy stem from macroeconomic challenges common to all financial institutions, as well as the banks own missteps. It is a country with problems, for sure, says Ghizzoni. But we have to be successful even if the macroeconomic conditions arent the best. The nations problems begin with a low growth rate: The economy contracted by 5.1 percent in 2009, compared with a decline of 4 percent for the euro area as a whole. Last year output rebounded by just 1.0 percent, below the euro area average of 1.7 percent. Whats more, theres little prospect of improvement in the near term because of Italys high debt levels and poor competitiveness. Ghizzoni says he expects anemic annual growth of about 1.2 percent for the next few years.
The steep 2009 recession and tepid recovery have caused a rash of bankruptcies in Italy, particularly among small and medium firms, which dominate the business sector. If you are a bank and have so many SME clients going bankrupt, you end up with problems, says Nicastro. According to an April Standard & Poors report on Italian banks, nonperforming assets in the banking system both retail and corporate reached an estimated 10 percent in 2010, up from 8.2 percent the year before. UniCredits NPL rate in Italy rose to 6.58 percent last year from 5.53 percent in 2009. That rate was above the 4.98 percent average NPL rate for EU banks, according to analysts at Mediobanca.
Low interest rates, meanwhile, are helping to depress the banks net interest margins. Net interest income accounted for 6.2 billion of the banks total Italian revenues of 10.9 billion last year. Both of those numbers were down sharply from record highs of 8.4 billion in net interest income and 13.5 billion of total revenues in 2008.
UniCredit cant blame all of its Italian woes on a poor economy, though. The bank has lagged its peers badly. In 2010 the companys share price underperformed the Italian bank sector by 17 percent. The domestic performance gap between No. 2 UniCredit, with a 13.9 percent market share in loans, and leader Intesa, with a 15.8 percent share, was glaring. While UniCredits Italian operations were probably in the red last year, Intesa recorded net income of 783 million from its Italian retail, SME and private banking operations. (Intesa does not disclose its Italian corporate and investment banking results.)
The chief culprit for UniCredits dismal Italian showing is the shaky asset book it inherited from Capitalia. If you go down their results line by line, you will see the big problem is provisions, and the reason is Capitalia, says Mediobancas Guglielmi. Capitalia had one of the worst balance sheets in Italy, and it has taken UniCredit several years to digest these impaired loans. He gets no argument from Nicastro, who nonetheless insists that the worst problems at Capitalia are over.
Cleaning up Capitalias portfolio is part of a broader strategy under way over the past three years to restore profitability in Italy. Since 2008 the bank has closed some 600 branches, trimming its Italian network to 4,510. Under the so-called One4C project launched at the beginning of 2010, when Profumo was still at the helm, the company has merged six distinct Italian entities UniCredit Bank, UniCredit Banca di Roma, UniCredit Banco di Sicilia, the corporate bank, the private bank and the consumer finance bank into the holding company. UniCredit estimates this could generate 200 million in cost savings over the next two years, mainly because of lower personnel costs. An agreement with UniCredits labor unions reached last December will reduce the current Italian head count of 53,800 by 2,000 over the next two years; about 3,000 employees will be dismissed, and 1,000 new hires will be made at lower salary and benefit levels.
In addition to cutting costs, UniCredit hopes to improve the bottom line of ??its Italian operations through stricter risk management and more cross-sales, especially with business clients. In our SME sector in the past, we had corporate account managers with significant lending decisions and sometimes not enough risk controls, Nicastro says. To reduce nonperforming business loans, the bank has established 111 credit centers throughout Italy whose executives will work alongside the corporate account managers and have the final say on credit, he notes.
UniCredit aims to raise Italian revenues by overcoming the reluctance of many SME owners to use the same bank for business loans and personal deposits. In Italy owners traditionally keep their companies undercapitalized for tax reasons. The entrepreneur funnels much of his or her business profits into a personal savings account in one bank and runs up company debt with loans from another bank. For a bank to be successful, it is fundamental that it capture both the company lending side and the private asset-gathering side of entrepreneurs, says Nicastro. But he concedes that client resistance remains a problem: If an entrepreneur keeps both sides in the same bank and he needs more capital, he may not want the bank to pressure him to use his savings instead of taking a loan.
The bank is also seeking to woo retail clients with more-modern, efficient and welcoming branches. UniCredits best-known branch occupies a 1902 building with a belle epoque façade on Piazza Cordusio, in the heart of Milan, just a few blocks from the Duomo cathedral and Teatro alla Scala opera house. Inside, the decor is spankingly contemporary. Customers enter the lobby to face a trio of computers for Internet banking. ATMs are off to the left, and a large computer where customers can make complaints and suggestions is on the right. A client manager stands by to direct customers to the appropriate teller or to a product specialist.
In addition to the high-tech ambience, the branch has simplified the service fees that used to drive customers to distraction, says Patrizia Cella, who handles retail client relations at the outlet. Customers who keep total assets of at least 15,000 at the bank pay no fees for any transaction. At the low end of the market, clients who maintain no minimum balance pay a flat 14 monthly fee covering all transactions, including checking, utility payments, the use of a debit card and access to a small safe-deposit box. We are also making it easier for people who have already negotiated loans to take out new ones without incurring additional fees, says Cella. For example, UniCredit will waive fees for a client who wishes to switch from a fixed-rate to a variable-rate loan. And the bank promises quick decisions on any loan requests. Clients prefer a no in two days to a yes in two months, says Cella.
UniCredit does enjoy one big advantage over its Italian competitors: its ownership of HVB. Many analysts questioned the acquisition six years ago because of the banks modest scale and the low level of profitability in German banking. Last year, Germany accounted for 23.6 percent, or 219 billion, of UniCredits total assets and 18.4 percent, or ??4.7 billion, of operating income. The German operation is a predominantly corporate bank, with CIB loans amounting to 99 billion last year, compared with 32.5 billion in retail lending. HVB may not be a profit powerhouse, but it does give UniCredit a foothold in a triple-A-rated market and enables the group to tap the capital markets at cheaper rates than its domestic rivals. Our overall cost of funding is considerably lower than if we were only an Italian bank, Ghizzoni says.
A case in point was the simultaneous issuing on January 11 of a 1 billion bond in Germany and a 1.25 billion bond in Italy. The bank paid interest of just 22 basis points over Euribor on the German bond issue, which has a two-year maturity, but it had to pay a hefty spread of 135 basis points over Euribor on the Italian bond, which has a shorter lifetime of 18 months. With the recent worsening of the European debt crisis causing yield spreads on Italian government bonds to widen in May to more than 200 basis points above those on German bonds, the banks ability to raise financing in Germany is more important than ever.
Capital adequacy has been a persistent irritant for UniCredit. Despite calls from Bank of Italy governor Mario Draghi for the countrys banks to raise more capital, UniCredit has been the only major Italian bank to resist a new capital issue. According to Draghi, the boosts are necessary ahead of European stress tests and the beginning of the implementation of Basel III rules. Both No. 1 Intesa and Banca Monte dei Paschi di Siena, the third-largest Italian bank by assets, announced capital increases in April. Intesa plans a 5 billion increase that will raise its core tier-1 capital to 10 percent from the current 7 percent. Monte dei Paschi agreed to raise up to 2.5 billion to lift its core tier-1 capital from its current 6.3 percent to 8.1 percent.
Ghizzoni insists that UniCredit is sufficiently capitalized with a core tier-1 ratio of 9.1 percent. So personally, I dont see any concern over the banks capital needs nor feel any pressure to rush into capital hikes, he says. Some investors arent so sure UniCredit can resist a capital increase. The Bank of Italy has given them until Christmas to show whether they need to do so or not, says Algebriss Serra.
Such strains raise the stakes for Italian banks in the new round of European stress tests. The European Banking Authority is currently conducting tests of about 90 EU banks in an effort to ease market anxieties about the sectors health. Analysts criticized a previous round of tests last year that failed to expose the full extent of many banks troubled assets or to gauge the impact of a sovereign default. The new tests, which are due to be completed this month, will incorporate the potential impact of ?losses on some of the banks sovereign bond holdings.
Ghizzonis reluctance to raise fresh capital is understandable: The last two capital issues sparked the board revolt, led by the foundations, that ousted his predecessor. Since then, UniCredit managers have handled the foundations with diplomatic caution. For the development of any banking group, you need long-term shareholders like the foundations, says Nicastro, the UniCredit executive who reportedly has the strongest relations with the organizations. If you look at some bold decisions UniCredit made in the past, like expanding to Central and Eastern Europe or merging with HVB, these would not have been possible without such long-term shareholders.
But even though they arent being asked yet for an additional capital increase, the foundations are growing impatient over UniCredits puny dividend currently only 0.03 percent a share. The foundations need dividends for their charitable activities, says Mediobancas Guglielmi. So they may consider reducing their stakes in large, complex banks and moving some of their assets into smaller, more local banks. Thus far only Cariverona, the foundation with the largest stake in UniCredit 4.2 percent is considering such a move. In January, Cariverona said it was mulling taking as much as a 5 percent stake in Banco Popolare.
UniCredit has already rejected one means of raising capital: selling Pioneer Global Asset Management. The bank paid $1.25 billion for the then-Boston-based mutual fund company as part of Profumos expansion drive in 2000. The on-again, off-again sale of Pioneer underscores the peculiar blend of politics and finance that characterizes Italian banking. For three years, UniCredit had put Pioneer, with 187 billion in assets under management, up for possible sale, saying it did not consider the fund manager a core business. Last September, at the end of Profumos reign, the two most serious candidates to acquire Pioneer were French asset managers Natixis and Amundi. But with Italy facing higher sovereign risk as the debt crisis spread through the EUs periphery, Italian politicians expressed concern that Pioneers acquisition by foreigners would deprive the government of a ready buyer of its bonds.
Speculation then shifted to Eurizon, Intesas asset management arm, as a likelier acquisition candidate. If you put together the two biggest Italian asset management companies, you end up having a bigger buyer of Italian government bonds, says Guglielmi. But an open rejection of French bidders for nationalist reasons would have aroused the ire of the European Commission.
In the end, UniCredit announced in April that it would keep Pioneer and focus on growing the unit organically. The point is that all Italian banks are trying to dispose of as many assets as possible in order to postpone or avoid raising more capital, says Guglielmi. And that leads to low prices, which is the equivalent of a dilution through a rights issue for shareholders.
Given the dim economic prospects and high melodrama of Italy, the CEE region shines ever brighter as UniCredits promised land. Last year the CEE countries minus Poland, which is reported separately accounted for 18 percent of ?UniCredits revenues and 42 percent, or 1.06 billion, of its pretax profits. That was up from 911 million in 2009.
Poland, where UniCredit has a 60 percent stake in the No. 2 bank, Pekao, is the regions star performer; it was the only EU country to avoid falling into recession during the financial crisis. Pekao produced a net profit of 2.5 billion zloty ($901 million) last year on total assets of 134 billion zloty, up from net income of 2.4 billion zloty on assets of 131 billion zloty in 2009. The bank boasts a core tier-1 capital ratio of 17.6 percent, double that of the UniCredit group.
Pekao has been among the most cautious of ??Polish lenders, especially in terms of mortgages, which account for about 70 percent of ??its consumer loans. Since 2003, Pekao has extended foreign currency mortgages only to borrowers who derive their income from abroad. By contrast, large portions of the mortgage portfolios of other banks were denominated in euros and Swiss francs and went into arrears when the zloty fell against those currencies in 2008 and 09. Pekao took a very tight approach to credit during the crisis, says Nicastro. And maybe it lost some market share.
But as a reward, and in sharp contrast to UniCredits unprofitable Italian operation, Pekao is being given more autonomy in terms of its loan policies. In return, Ghizzoni wants Pekao to make more use of the UniCredit groups resources in investment banking, global transaction banking and leasing. I expect Pekao to interact more with the group and take full advantage of its expertise, he says.
To ensure that will be the case, Ghizzoni named a longtime associate, Luigi Lovaglio, as Pekaos new chief executive beginning last month. Lovaglio, the Polish banks deputy chief executive, joined UniCredit in 1973 and spent the past 12 years working to integrate Pekao into the parent group. He replaces Alicja Kornasiewicz, who moves up to Pekaos supervisory board after serving only 15 months as CEO.
In a recent interview with II, Kornasiewicz describes how Pekao has been focusing on mortgage lending, consumer finance and business loans, especially for infrastructure projects related to the 2012 European Football Championship, which Poland will host. Like Ghizzoni, she speaks of the possibility of acquiring the loan portfolios or branch networks of other Polish banks. But they should be in the right geographic region so there is no overlapping with existing Pekao branches, she says. Also, we should be looking at banks that have a similar philosophy to ours in terms of lending, risk assessment and client products.
UniCredit is fortunate to have its strongest exposure in the best-performing CEE markets the Czech Republic, Poland, Russia and Turkey while keeping a lower profile in more-troubled regional economies such as Hungary, Romania and Ukraine. The one stark exception is Kazakhstan, where UniCredit racked up 359 million in goodwill impairment losses in 2010.
Ghizzoni has hinted that UniCredit might sell off the worst-performing CEE assets. There are some CEE markets in which we may decide to streamline or redesign our presence, he says. But overall, this region is even more important to us than it was a few years ago, and we will invest and allocate more capital there compared to Western Europe in the next five years. Without citing any investment figures, he says the bulk of the spending will be funneled into the Czech Republic, Poland, Russia and Turkey, either to foster organic growth or to purchase more banks or branch networks. By 2015, UniCredit intends to have added 900 new branches to its 3,860 CEE outlets. Ghizzoni predicts that GDP in Central and Eastern Europe will grow by about 4 percent this year, more than three times the estimated growth rate for Italy.
Yet for all its strength in Eastern Europe, UniCredits ultimate success will depend on its home market. In 2007, Italy was the country with the highest profitability in our group, and it has to return to similar levels, says Ghizzoni. His predecessor is less sanguine. It would be an exaggeration to say that Italian banking will soon return to the profitability levels of four or five years ago, says Profumo. He does, however, continue to share Ghizzonis enthusiasm for markets further east. Ever the empire-builder, Profumo has taken on a new assignment this year: advising Russian state banking giant Sberbank on its plans to expand into the CEE region.