INTERVIEW: UniCredit reorganises but keeps faith with CEE

INTERVIEW: UniCredit reorganises but keeps faith with CEE
By Nicholas Watson in Prague January 19, 2016

Many of UniCredit Group’s core markets in Central and Eastern Europe might be struggling but – the sales of its Ukrainian and Kazakh subsidiaries notwithstanding – the Italian bank regards parts of the region as leading emerging market safe havens and ripe for expansion.

“All in all, among all the emerging markets in the world, I would say that actually the CEE EU countries are considered the best emerging market worldwide” Carlo Vivaldi, head of the CEE Division at UniCredit, tells bne IntelliNews in an interview.

The two reasons for this he cites are macroeconomic balances (budget and current account surpluses, low public debt levels) and the growing demand internally as well as in its close neighbours such as Germany. Faith in the region, Vivaldi says, was never shaken, even during the depths of the financial crisis and subsequent Eurozone crisis. “We always trusted the region and continue to invest, even though here and there we missed some investment opportunities, but in total it’s been very, very positive,” he says.

The ‘missed opportunities’ were coming late to the party in Kazakhstan and Ukraine, where the Italian bank admits it bought at the top of the market in 2007. Those unfortunate investments have since been unwound: it sold ATF Bank in Kazakhstan in 2013, and just recently on January 11 it announced it would take a stake of 9.9% in ABH Holdings – part of Russian billionaire Mikhail Fridman's Alfa Banking Group that focuses on the Commonwealth of Independent States – as part of a deal to dispose of its struggling Ukrainian subsidiary Ukrsotsbank. The sale of Ukrsotsbank will force UniCredit to book a one-off charge of €200m in the fourth quarter of 2015.

Cuts and consolidation

Alongside the subsidiary sales is a major reorganisation announced at the end of last year – a clear sign that not all has gone smoothly in the years since the financial crisis of 2008 and the last restructuring plan in 2010.

After recovering along with much of the world until February 2011, UniCredit’s shares have fallen over the past five years by 63% to €4.50 as investors questioned the efficiency of a banking behemoth that bestrides 17 countries, with all its attendant problems of inflated costs, over-staffing and duplication of departments.

“Don’t forget what UniCredit is: it’s a confederation of re­branded and formerly grand European banks. Bayerische Hypo­ und Vereinsbank, Vereins­und Westbank, Oesterreichische Laenderbank, Creditanstalt­Bankverein, Credito Italiano, Banco di Roma, Banco di Santo Spirito, Cassa di Risparmio di Roma, Bipop­ Carire, Banco di Sicilia. Remember them?” says Keith Mullin, a market commentator and editor-at-large of International Financing Review (IFR).

This has come to a head as the current crisis forced interest rates to near zero and squeezed margins. UniCredit’s return on equity is just 3.8% compared with a Central European average of 6.9% in mid 2015, according to RBI. 

As part of this ‘multi-year plan’, UniCredit is slashing its workforce by 18,200, or 14%, mainly in Italy, Germany, Austria and CEE, as it seeks €1.6bn of cost cuts by end-2016. This is part of efforts to boost its Tier 1 capital, or CET1, ratio to 11.5% after dividend payments by 2018. At end-September, its CET1 stood at 10.53%, which is below the 12% average for major European banks and the smallest capital margin among Italy’s biggest banks, according to Bloomberg.

In addition, it is looking to restructure its Bank Austria business by transferring its CEE subsidiaries, including Turkey, out of it and putting them under the direct control of the Italian parent in Milan. It will also reduce its Bank Austria retail branches to 120 from 200 by 2018, shelving an option to sell the entire retail business, which would allow its Austrian unit to make overall cost savings of €300mn by 2018. It plans on adding this year a further 1.2mn to its 20mn-strong customer base, and 4mn by 2018.

“The Ukraine sale, together with the Bank Austria restructuring plan announced in December, both confirm that the group management team is fully focused on executing the recently announced [multi-year plan] and is confident on its realisation,” says Vivaldi. “We are still studying the plan and soon in the New Year we will announce more details.”

Some analysts, however, expressed disappointment that the bank has not opted for more aggressive asset sales in CEE, and worry that rather than exiting places like Ukraine, it is merely swapping country risk for that of getting into bed with Fridman, who has a track record of falling out with his foreign partners (just ask Telenor, BP and Turkcell).

UniCredit has already come a cropper in Russia, when in 2006 it acquired the brokerage Aton Capital for $424mn, a whopping four-times its book value. The investment was a disaster that ended in 2011 with UniCredit combining the Russian brokerage with its Russian bank after writing down the broker’s remaining goodwill in the face of growing competition from state-owned lenders and shrinking margins.

Yet Vivaldi tells bne IntelliNews that, far from joining the mass exodus of foreign banks from Russia, fleeing in the face of recession, Western sanctions and mounting pressure on foreign investors in certain sectors, UniCredit is hugely satisfied with the performance of its Russian unit, which is the 10th largest lender by assets.

“We have a bank in Russia, rather small in relative terms of size, but important because it’s granting a stream of earnings which is significant despite the difficulty of the market,” says Vivaldi. “It’s a very good bank focused on large corporate customers and high net worth individuals, and it’s doing well because of our business model.”

That business model is one where UniCredit looks to attract top corporate and retail customers at regional subsidiaries that have a high degree of autonomy, while its corporate and investment banking division for each of those units offers debt, equity, M&A and project finance services to select clients.

The problems in Russia might suggest that demand for such services would be lacking in Russia, but Vivaldi claims the business is strong. “We are starting to be active on dollar-based debt capital market issuance, not only for our customers in Russia but elsewhere. It’s an important new business line for us coming out of Russia, because up to a year ago we were mainly focused on euro-denominated transactions,” he says.

Turkish delight

Another major market that is suffering its own set of acute problems is Turkey, where UniCredit has owned Yapi Kredi, the fourth largest private bank, since 2006 through Koc Financial Services (KFS) – a 50-50 joint venture between it and local conglomerate Koc Group.

Vivaldi, who knows the Turkish banking business well after working there on and off since 2002, admits that Turkey has some peculiarities, not least its dodgy neighbourhood, but sees confidence and growth returning to the market after November’s election, which has finally brought a measure of political stability.

“I think that in [Turkey] we have a very good bank, which two years ago started the organic growth process in order to transform itself to become even more capable of dealing with the market environment and producing good results. We are happy to be there and have such a good partner in the Koc family, which is an important anchor. We know we have to deal with volatility because Turkey is a market full of opportunities,” he says.

Those opportunities stem from being a young country with a growing population that has very little debt, which as a big energy importer is one of the main beneficiaries from today’s low oil prices. In addition, there are many large companies serving both the domestic and international markets, as well as widespread small and medium-sized enterprises that all benefit from the growing and stable banking sector, which enjoys one of the continent’s lowest non-performing loan (NPL) rates of less than 4%.

Russia and Turkey may be big opportunity, big risk countries, though even UniCredit’s core Central European markets have had their problems.

Case in point is Hungary, whose banking market has been targeted by Viktor Orban’s Fidesz government with punitive taxes, fines and policies since it came to power in 2010. Despite this, Vivaldi says UniCredit “never” considered exiting the market like some other foreign lenders.

“Hungary has been tough during the transformation that the government imposed. We were not happy, but in 2014 we were the only bank in profit, and in 2015 the banking system was in profit, so we are well positioned to capture the improved performance now the market has turned,” he says. “We don’t see any further risks except the very low level of rates, and we would like to lend more money to the country’s corporates, for example.”

In other core markets like the Czech Republic and Slovakia, UniCredit is looking to grow mainly organically and, when the opportunity arises, to grow through acquisition. “Not only do we like to be there, but we’d like to increase our investment. We don’t have any targets right now, but we’d be ready to consider it,” says Vivaldi, adding that it would look at acquiring banking portfolios in countries such as Romania and Bulgaria. “Whenever there is opportunity and it makes sense, then we will be there.”

In the meantime, Vivaldi concedes that UniCredit needs to continue to focus on reducing the bank’s high level of NPLs that are eating into profitability, which at €84bn are the highest of any bank in Europe. “The level of NPLs is still to high but the trend is decreasing,” he says.


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