Western Europe: UniCredit strategy review prompts drastic cuts

Federico Ghizzoni, CEO of UniCredit

UniCredit has unveiled its much-anticipated strategic review, setting out what chief executive Federico Ghizzoni says are “challenging but achievable targets” to bring down costs and boost fees. 

The strategy needed updating, according to Ghizzoni, because the economic outlook has soured and rates are unlikely to rise above zero within the next three years. Perhaps more to the point, the bank’s share price is well below its level in March 2014, when the board approved its last strategy document. By contrast, stock in Intesa Sanpaolo, Italy’s second biggest bank, has risen almost 40% in the same period.

UniCredit aims to bring its cost-to-income ratio down to 50% by 2018, compared to 56% in the previous plan and (according to Mediobanca) around 60% in 2015. It is targeting savings of €1.6 billion by 2018, including a reduction of the workforce by 18,000 people, about 14% of the total. 

The axe will fall most heavily on Italy, Germany and Austria, and especially on the corporate centres, where UniCredit will try to erase lingering duplications in support functions, for example, between HVB’s head office in Munich and the group head office in Milan. In commercial banking in Germany and Austria – where the efficiency ratio is worst (75% and 84%, respectively, according to Mediobanca) – it will cut other administrative expenses by 46% and 13%, respectively.

Ghizzoni said “the executive population” will feel a “more than proportional” hit. In Italy, senior executives will be 1.9% of the total by 2018, according to Ghizzoni. That compares to 3.3% of the total when he became CEO in 2010, a drop of around 1000 senior bankers.

Alongside another 800 group branch closures, the bank will invest €1.2 billion in the digitalization of retail banking. Meanwhile, it will “exit or profoundly restructure” its struggling businesses in Austrian retail (about 1.7 million customers) and Italian leasing by 2016 – an effort “to optimise capital allocation and the profitability of the group”, in Ghizzoni’s words. Other units could follow “if needed”.

“Retail banking in Austria has already been through some restructuring – closing branches and reducing the workforce – but in a context of very low rates, it needs a further step,” says Gianni Franco Papa, deputy general manager supervising the international activities, and head of corporate and investment banking.

Investors might hope all this will narrow the embarrassingly wide discrepancy in valuation with Intesa Sanpaolo, a smaller bank with a much lower cost base. However, they appear unconvinced. UniCredit’s share price sank another 5% the day after the announcement. Despite press reports of talks with Austrian bank BAWAG, sales of the Austrian retail or Italian leasing units could be “difficult to execute”, according to KBW. The market “will likely take a ‘show me’ approach”, Mediobanca agrees.

Investors have nagged UniCredit to take more action on its high cost base, so the market welcomed the efficiency measures. Alongside encouraging falls in bad debt in the third quarter, it warrants a re-rating of the stock, says Morgan Stanley. Analysts further welcome a move to what Ghizzoni calls “a simpler bank” in a planned shift of the central and eastern Europe subsidiaries from Bank Austria to UniCredit Holding. 

But the main sticking point is capital. Analysts fear its 11.5% capital target by 2018 is still not high enough, given regulatory uncertainty and what Ghizzoni wryly terms “the famous Basel IV”. UniCredit expects to generate €4.8 billion on top of the target, which it could distribute as cash dividends, corresponding to a 40% pay-out ratio. Its hesitance to commit to a dividends target, however, suggests a lack of confidence in the capital or earnings targets, or both, according to KBW.

On the revenue side, just as implied net interest margin targets were likely to disappoint, the target for 6% annual growth in fees to €9.6 billion – including an additional €2 billion of asset and wealth management fees by 2018 – is “too ambitious”, in KBW’s view.

In corporate and investment banking, according to the new plan, fees will increase to 50% of revenues. Papa hopes to increase market share in Germany – where he says UniCredit is the second largest Mittelstand lender – in cash management, rates and currency hedging, and structured trade finance in particular. According to Ghizzoni, UniCredit’s German franchise should double its market share in trade finance

“We want to be Europe’s trade finance powerhouse,” says Papa. “We will be playing a role in the expansion of the credit cycle in Germany, but we don’t have our natural market share in these areas compared to the share we have on the lending side.”

The bank is also stepping up efforts to sell investment banking-type products to medium-sized corporates in Italy, where Ghizzoni says earnings from corporate treasury sales (CTS) doubled in the first nine months of 2015. In addition to helping mid-caps internationalise outside mainland Europe, Ghizzoni pointed to more than 350 firms in Italy interested in issuing debt or equity.

In Germany, the bank is replicating a project started in Italy earlier this year, which moved around 65 capital markets, CTS and advisory bankers to a joint venture with the commercial bank. By 2018, UniCredit hopes these joint ventures will bring in €3 billion in revenues on top of €4 billion from the 600-odd clients covered by the corporate and investment banking division.