It’s an all too familiar catch-cry for UniCredit’s seemingly perennial fledgling FX business, which for sometime has been long on potential yet short on results. As far back as December 2007, the bank’s then head of FICC Ben Welsh told Euromoney of the UniCredit’s underestimated depth and potential to become a top-five player in global foreign exchange. The bank had ambitions to expand beyond its corporate foundation, into real money and hedge fund clients and in last year’s Euromoney FX survey, the bank reached 20th position, its best ever finish.
There has never been any denying the potential of UniCredit’s FX business. It has a balance sheet approaching €1 trillion, a presence in 22 countries and access to more than 437,000 European companies, which range from multinationals in Italy and Germany, to SMEs in the Ukraine and Turkey. The problem, it seems, has always been in the execution.
This, in recent years, has been complicated by some fairly severe headwinds. The eurozone crisis has taken its toll on UniCredit, while the integration of a rapid succession of mergers across Europe, between 1998 and 2007, has been protracted, leaving it vulnerable to being undercapitalized as the crisis deepened through 2010 and 2011. Indeed, it needed to raise €8 billion, the second-largest amount of any European bank.
That came after a €10.6 billion loss in the third quarter of last year, which saw its share price plummet 58%, and its five-year CDS to sky rocket to more than 546 basis points – a red alert for counterparty risk managers. This was all the more worrying, given that 83% of its volumes in last year’s survey came from bank clients.
Reducing risk
Around the same time, the bank’s global head of trading Nick Crawford resigned, and the global head of sales Steve Turner exited shortly after – though the bank says he hasn’t yet officially left. One source close to the bank tells EuromoneyFXNews that Crawford had become frustrated by the fact the bank had become “terrified” of taking on risk. Crawford joined Commerzbank in January as global head of trading.
UniCredit says it has reduced its VAR limits to be more in line with current usage and believes it can grow revenues without growing risk substantially. It says it will do this by using capital more efficiently and growing customer market share, and then, as that business grows, it will allocate more VAR to the business.
The bank is now realigning its focus away from more mature markets to refocus on Central and Eastern Europe. In its latest strategic plan, it states its objective to become the “undisputed leader in CEE” across all products. Here the bank is on more familiar ground, though it still has the potential to be a double-edged sword.
Whilst the bank’s core competency is in currencies that exhibit wide spreads, frequent volatility, infrequent illiquidity and who register as some of the worst-performing currencies during the past 12-months – making them ripe for hedging activity – there are also risks.
The CEE sits in the backwash of the crashing wave of the eurozone. A protracted slowdown in Europe would be particularly harmful to the export-driven countries in Eastern Europe, whose main markets lay to the west, while also discouraging new investment in the region.
CEE dominance – a work in progress
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| “There’s no doubt UniCredit can leverage what it offers on the corporate side to other client segments" Bernd Bröker, global head of G10 FX |
Nonetheless, it’s one area where the bank has made progress in recent years. In 2011’s survey, it jumped from 21st place to fifth position with non-financial corporations in Central and Eastern Europe, excluding Russia, with a market share of more than 5%, up from less than 1% the previous year. Bröker says this area of the market has yet to be fully exploited. By contrast, its ranking in Western Europe virtually fell off a cliff last year, gapping from 15th in 2010 to 31st, which represented a four-fold drop in volume.
And while Bröker’s predecessors might have made a limited impact on penetrating the institutional client base, he hasn’t given up on the prospect of making inroads with real-money investors.
“There’s no doubt UniCredit can leverage what it offers on the corporate side to other client segments,” says Bröker. “Many of the large caps and multinationals UniCredit deals with require very similar FX services to institutional investors and so the door is very much open to expand here.”
However, rather than apply a blanket approach to acquiring new clients in this sector, UniCredit is taking a more selective approach, looking at institutions through certain currencies where they are running large books and have a strong competitive advantage. These are euro crosses, particularly in the CEE currencies as part of the bank’s multi-asset class approach.
Tomasz Pialucha was hired in November as global head of CEE Trading, based in London and responsible for strengthening UniCredit’s trading capability commensurate with the bank’s core strength and footprint in the region.
After the departure of Turner, UniCredit reorganised its sales structure and split institutional sales from corporate sales. Jakob Groot, head of institutional distribution, is managing all institutional accounts across asset classes, while corporate sales is now managed by Kevin Krespi across asset classes – ranging from very small corporates to multinationals.
The new sales organization bundles the regional activities to strengthen the product focus and is organised by rates, credit, cross-asset CEE, FX and cash equity sales.
“A multi-asset class approach goes through the DNA of the company,” says Bröker. “It’s a firm-wide strategy on markets that makes sense for our growth strategy.”
By focusing on CEE, UniCredit may be relinquishing its ambitions to be a global player in FX, but that doesn’t mean to say it cannot succeed, certainly from a profitability perspective. With CEE currency markets becoming more active, and with its large captive corporate client base, there is no reason why it cannot carve out a regional niche, just as the Canadian, Australian and Nordic banks have done in their respective regions.
To do that, however, the bank must close the loop on what has been seen as a protracted and sometimes messy integration of its many parts, and it must be comfortable within its own new shell. Only then will outsiders really understand the misunderstood bank.