Strategy

UniCredit strategic guidelines have been set in the Strategic Plan published on 14th November 2011.

The plan is centered around a core proposition, defining the banking model UniCredit targets over the Plan’s horizon and guiding the strategic actions to be implemented to get to this model. This vision sees UniCredit as a rock solid European commercial bank supported by a strong balance sheet and operational efficiency focused on core banking activities and capable of delivering sustainable returns.

Consistent with this vision, the Plan is based on four, well identified and clearly defined pillars: 

1. Balance Sheet Structure
2. Simplification and Cost Management
3. Business Refocusing 
4. Italy Turnaround

While the effects from implementation of the first three pillars benefit the Group as a whole, although in different measures across different business units, all three will come together in full in Italy, unlocking the full profitability potential of the Italian Commercial Business perimeter.

These four pillars will underpin the Group’s return to profitability over the period of the Plan, ensuring sustainable growth despite a challenging macroeconomic outlook.

The Plan reflects major discontinuities with the past (including capital increase, ring fencing, changes in asset mix), coupled with substantial organic actions (including significant cost reductions in Western Europe), with greater emphasis placed on actions that are fully within management’s control and which are aimed at further strengthening UniCredit’s solidity.

THE FOUR PILLARS

1) Balance Sheet Structure

 The Plan foresees a strengthening of Unicredit balance sheet structure and will be based on capital management and funding and liquidity actions.

Capital management
At the foundation of the Plan is a solid capital structure, with Common Equity Tier I ratio to be above 9% already in 2012, taking into account the full impact of Basel 3, and above 10% in 2015. Similarly, UniCredit is going to be EBA compliant from the outset, with pro-forma Core Tier 1 ratio as of September 2011 at 9.3%.

The main capital management actions built into the Plan include:

•  €7.5bn rights issue;
•  CASHES restructuring with inclusion in Common Equity Tier 1 of €2.4bn out of €3bn (€0.6bn to be computable as Additional Tier I capital);
•  No dividend to be paid for 2011; and
•  Focused RWA management via ring-fencing of performing, non-core assets in a €48bn RWA run-off portfolio.

Furthermore, in light of the conservative approach aimed at reducing risk associated with the Plan’s implementation, several additional capital management actions which will bring additional upside to the stated goals are not included in the Plan’s targets, including:

•  Run-off of other non-core assets, incremental with respect to what has already been identified above; and
•  Further rationalization/disposal of non-core assets and investments;

Funding and liquidity
The Plan envisages further strengthening of the liquidity position of the Group. This will be achieved through a well matched balance sheet and leveraging its diversified funding platform.

The main funding and liquidity actions to maintain a well matched balance sheet, built into the Plan include:

•  L/D ratio to decrease from 1.4 in 2010 to 1.2 in 2015; and
•  By 2015, Group to achieve positive net inter-bank position and full compliance with Basel 3 liquidity risk indicators (NSFR and LCR).

The main funding and liquidity actions to leverage our diversified funding platform, built into the Plan include:

•  Covered bonds platform. Continue to exploit our significant covered bond issuance capacity with an additional €31bn by 2015; and
•  Retail Network Bonds. UniCredit has considerable capacity and untapped potential in placing network bonds.

2) Simplification and Cost Management

Through simplification of the organizational structure, downsizing of corporate centers/ governance functions, stricter procurement criteria and real estate optimization UniCredit will be able to bolster profitability notwithstanding the current weak macroeconomic scenario.

The 2013 cost base will decrease in absolute terms vs. 2010, and only increase marginally throughout the Plan period (+0.5% CAGR 10-15, excluding bank levies). Such a broadly stable cost base results from a reduction of costs in Western European countries (-1.5% CAGR 2010-2013, -0.8% CAGR 2010-15), and a growth in CEE (+4.1% in 2010-2013 and +5.1% in 2010-2015, also impacted by expected inflation in the region).

The main simplification and cost management actions built into the Plan include:

•  Central Functions. Support functions streamlining and Headquarters rationalization;
•  Operations. Global Banking Services rationalization and Procurement’s spend optimization; and
•  Networks. Comprehensive reorganization of the branch network into a two-tiered branch model, where fully fledged branches (“Hubs”) will combine with smaller (Cash-Light or Cash-Less) outlets (“Spokes”) providing proximity services. As a result of these initiatives the percentage of fully-fledged branches will decrease to 26% in 2015 from 87% in 2011, allowing for a reduction of overlaps and inefficiencies.

3) Business Refocusing

The Plan confirms UniCredit’s unchanged commitment to being the undisputed leader in CEE, but with an increasingly focused approach aimed at pursuing profitable growth opportunities in the region on a more selective basis than in the past. Country-specific strategies are therefore driven by expected profitability and by self funding criteria.

The Plan also envisages a reallocation of capital to the core client franchise in the CIB business in order to reap the full commercial potential of a large and well diversified corporate portfolio. This strategic approach will allow optimization of RWA usage in mature markets (down to €170bn in 2015 from €185bn in 2010 despite the impact of Basel 2.5 and Basel 3) while increasing the share of RWA related to the core client franchise (up to 65% in 2015 from 55% in 2010).

The main CIB business refocusing actions built into the Plan include:

•  Reinforcing the core client franchise;
•  New KPIs. Adoption of stringent risk and profitability thresholds;
•  RWA reduction via ring-fencing. Proactive balance sheet management and ring-fencing of non-core performing assets in a €43bn (RWA) run-off portfolio. With around 80% of the portfolio expected to run-off by 2015, the ring-fencing initiative will free-up substantial capital and liquidity during the Plan’s implementation period; and
•  Front Loaded Cost Reduction. To be achieved via rightsizing of business (-8% cut in HR costs in 2012) and exit from selected subscale activities, including the creation of strategic alliances in brokerage and research.

4) Turnaround Italy

The ultimate goal of the Plan in Italy is to restore the role of UniCredit as an efficient and innovative leading commercial bank, close to and well entrenched in the territories it serves whilst offering domestic clients full access to a broader international network. Leveraging on an advanced multi-channel offer of products and services, building on well established relationships with entrepreneurs and investing in the growth of Fineco are the most relevant initiatives embedded in this key pillar of the Plan.

The main Italy Turnaround actions built into the Plan include:

•  Growth in Deposits. Deposits to increase approximately 15% from 2010 to 2015.
•  Efficiency. Costs of the Italian Commercial Business perimeter are expected to show a reduction with 2010-15 CAGR of -1.4%, FTEs to be reduced by approximately 6,500 units between 2010 and 2015, of which approximately 5,200 between Sept-2011 and 2015, equivalent to 12% of the current workforce.
•  Improving Cost of Risk. To be 83bps in 2015, reduced from 168bps in 2010, through stricter rules on loan origination (targeting best rating classes) and acceleration of both recognition and credit collection processes.