Unicredito Italiano (BIT:UCG)

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Unicredit SPA also known as Unicredit, Unicredit Bank and Unicredit Group (BIT:UCG, BIT:UCGR, BIT:UCR) is a major financial institution based in Rome and Milan that operates as a banking group. Although almost all operations are in Europe where strategic positions in 22 countries (though the 19 countries within the CEE region only make up 10.2% of total net banking income) and deep market penetration has enabled it to obtain both a high market share and strong European identity, it has worldwide market access (mainly through partnerships/projects like Global Finance Export Limited with international companies).^[1][2] Its ownership of many small banks in Italy helps to give it greater market access. It operates Bulbank, Bulgaria's largest bank with over 1.2 million customers and increased its market presence in the CEE region in 2008 after acquiring Kzakhstan's ATF Bank and 94.2% of CJSC Ukrosotsbank Ukraine.

In 2009 the bank had 252 fewer branches than the year before. There were 4696 in Italy, and 5103 abroad (52% outside of Italy which is 1.2% higher than in 2008). On September 26, 2010 it had a market capitalization of €37.3 billion ($50 billion American at an exchange rate of 1.344).^[3]

Within the retail division about 60% of loans to customers are household mortgages.

Company Overview

Contents 1 Company Overview 1.1 Business & Financials 1.2 Employees by segment and region 2 Trends & Forces 2.1 Fall 2010 Exit of Bank's Chief Sparks Concern 2.2 Problems in Italy regarding Derivatives 2.3 Economic Recovery in Europe hampered by Bank Earnings Pressures 3 Competition 4 References

Operations are conducted through numerous divisions; retail, corporate, investments & markets banking, asset management, private banking. In addition businesses in the Polish and Baltic states region are separate from those in the rest of Europe. Some business segments are focussed on a specific geographical region (retail business caters mainly to customers in 3 countries) while others are distinguished by the clientele they serve (private banking targets people with a high net worth). International partnerships/operations are through corporate division Global Transaction Banking which offers products like loans and leases and services such as trade finance and cash pooling. After being approved Aug. 3, 2010 7 large Italian subsidiary companies will be merged into the parent company effective Nov. 1, 2010.^[4]

Although the banking group does very little retail business in the USA it does have a significant portfolio of assets there. The USA ranks third among all countries in terms of assets under management (AUM). In 2009 it was valued at €32.2 billion (18.3% of total) up from €29.7 billion (17.8% of total) in 2008. Though minor in terms of operating income, deposits and loans international markets outside of the largest three (Italy, Germany and Austria) contribute 26.2%, €46 billion in AUM (8.9% if the USA is not included), up from €40.3 billion, 24.2% in 2008 (6.4% if the USA is not included) reflecting the bank's expansion worldwide into non traditional markets.

In the first half of 2010 within the CEE the Ukraine and Russia had the lowest cost to income ratio's (34.1% and 35.1%) while the Baltics and Kazakhstan had the highest (129% and 121.3%). The highest revenue growths were in Russia and Romania (16.4% and 12.3%) while the worst revenue performance growth in the CEE was in the Baltics and Kazakhstan (-36% and -31%).^[5]

Retail Banking offers regular banking services to customers in Italy, Germany and Austria.

Private Banking provides services like wealth management, online banking, and trading. In Italy it is the largest private bank.^[6] Italian and international operations are separate.

Investment & Markets Banking offers services related to currency exchanges/rates (Rates & FX), Equities, Capital Markets and credit.

Asset Management runs through subsidiary Pioneer Investments whose business has international reaches. Pioneer also does business in hedge funds and mutual funds. Products include mutual and hedge funds.

Corporate & Investment Banking (CIB) is comprised of three main parts: Financing and Advisory - involved in price setting, deal structuring, and putting together the terms of deals. It also provides a supervisory role, Markets - services corporate and institutional clients in the foreign exchange, equities and capital markets (includes Global Distribution and Corporate Treasury Sales (CTS)), Global Transaction Banking (GTB) - operates in many areas of finance including trade and export, supply chain. It also provides global security services in addition to ebanking and cash management, Leasing - uses its own distribution network (which cooperates with other banking networks), to manage the pricing and selling of Unicredit's leasing production.

€ mil	2008 retail cust dep	2009 retail cust dep[7]	2008 retail cust loans	1hfy10 retail cust loans[5]	2008 retail OI	*2008 CIB loans	2009 CIB loans	1hfy10 CIB loans	2009 pvtbkg OI	2008 pvtbkg fin.assets[8]	2008 pvtbnkg operprofit	Asst Man 2009 AUM	Asst Man 2008 AUM
Italy	85,000	118,383	119,000	113,144	8066	107,660	142,607	161,660	221.3	183,200	358	95,000	89,100
Germany	31,000	31,773	39,000	33,022	1635	63,684	101,977	57,540	120.3	56,700	132	23,800	24,100
Austria	30,000	22,550	12,000	20,000	1200	45,440	46,398	41,100	62.9	13,800	32	11,000	13,200

• 2008 CIB loans is for Corporate only (there is a difference in how the annual report refers to the division, in 2009 results may include business formerly listed under another segment)

CEE which operates in 19 countries in Eastern and central Europe has 3 regional corporate offices

• • Yapý Kredi based in Turkey, ZAO UniCredit Bank based in Minsk, Belarus that does business in Russia, and Bank Pekao (WAR:PEO) in Poland and the Ukraine
  • ZAO UniCredit Bank is a wholly owned subsidiary of Bank Austria Creditanstalt AG which is owned by Unicredit Bank.
  • Unicredit Bank and its subsidiary Bank Austria Creditanstalt AG have an interest in UniCredit Bank d.d. Mostar (Public, SAJ:ZGBMR) a Bosnia and Herzegovina-based commercial bank with retail and corporate divisions and 60 branches.

The most important revenue generating countries within the CEE by 2009 operating income are Turkey (24.2%), Russia (12.9%), Croatia (12.3), Czech Republic (7.7%) and the Ukraine (7.6%).

Business & Financials

Key Metrics € mil	2007	2008	2009	1HFY09	1HFY10	Change 09/10 hlf)
Revenue	29,502	26,866	27,572	14,326	13,299	(-)7.17%
NII	17,119	19,385	17,616	9518	8090	(-)15%
net fees &commis	10,694	9093	7780	3735	4379	17.24%
EBIT	13,346	10,174	12,248	6636	5482	(-)17.39%
Cost to Income ratio %	55	62	55.6	53.7	58.8	9.5
total assets	1,022,000	1,046,000	928,760	983,000	955,000	2.85%
loans to customers	na	180,280	167,954	na	na	na
customer deposits	na	215,915	235,896	na	na	na
shareholders equity	57,690	54,999	59,689	57,893	64,428	12.67%

• Source for 2007, 2008 data^[9][10] 2009 data^[11] 1HFY09 data^[12] 1HFY10 data^[13]

In late 2009 and into mid 2010 the company was particularly impacted by a government debt crisis which affected financial markets (hedging, trading) resulting in a smaller net income. 2009 - early 2010 saw rising operating costs on account of higher variable compensation however total payroll fell especially in the second quarter of 2010 because of there being less staff and less variable compensation directly related to provisions being different.

1HFY10 net profit down 11.3% influenced by such factors as high variable compenstation (contributed to a 1.7% rise in payroll costs despite a drop in the second quarter from staff reduction), and a half billion euro decrease in trading income affected by market conditions. Trading assets rose in response to higher derivatives. The group's portion of net profit down 28.6% compared to 1HFY09 (71.5% in the second quarter) was significantly impacted by changes in goodwill impairment costs, less trading income contribution to revenue (down €318 million). A 5% higher 1HFY10 tax rate translated to €48 million more in income tax (€745 million total). Commissions from commission items (such as those within asset management) were up 15.5% (down 11% in the second quarter with regards to securities, dealing placement and other services). Operating income down 9% because the government debt crisis affected net trading, hedging and fair value income. Customer loans were about unchanged even though those from the corporate center were down. Cost to income ratio was about about 5-8 % as compared to previous periods and years while the liabilities to assets ratio remained steady at 0.99. There was also a €162 million non operating impairment cost in Kazakhstan in the second quarter of 2010. First and second quarter operating income by country was about the same with Italy recording the largest difference among major business regions (1.5% drop in revenue in the second quarter compared to the first). Goodwill impairment halved net income in the second quarter (about €162 million). Gross impaired loans up 5.9% q/q while loans provisions were 4.2% lower (down to €1716 million).

Since the second quarter of 2010 results from Poland have been included in the retail, private banking and cib sections.

Employees by segment and region

Full Time Equiv (fte)	Italy	Germany	Austria	Poland	Turkey	other
2009[14]	55,791	20,798	10,399	20,137	16,176	41,761

Shown is the number of employees by segment and number of employees by region per period. In 2010 Poland's Markets employees were listed under other divisions data for 2009 is given before and after the change. Employees considered are full time equivalent.

segment	retail	CIB	prvt bnkg	AM	CEE	Poland's Markets	parent &other	consol	mkts& invbnkg
2007[15]	53,931	11,940	4440	2466	43,647	22,249	26,874	169,816	4269
2008	52,233	15,711	3077	2165	58,066	20,270	23,321	174,519	na
2009	49,476	14,694	3002	1962	52,337	20,270	23,321	165,062	na
2009*	63,827	16,320	3112	1962	52,388	na	27,453	165,062	na
1hfy10*	62,595	15,841	3062	1913	51,736	na	26,711	161,857	na

Trends & Forces

Fall 2010 Exit of Bank's Chief Sparks Concern

Alessandro Profumo, chief of Unicredit resigned after shareholders showed lackluster support for him during a confidence vote. Shareholder concerns are numerous (Profumo showed little accountability) but most recently stem from issues regarding foreign ownership especially by Libya (and the fact that the bank was slow in getting that information out). Profumo oversaw much of the bank's expansion into the CEE nations of Europe (net interest income from there grew from 15 to 17% of total) and the bank's profit was down over 50% in the last reported on fiscal year, that could be the perfect storm for a turbulent leadership transitionary period.^[3]

Problems in Italy regarding Derivatives

Italian cities like Milan are facing an economic crisis brought on by derivative swap contracts (used by governments to reduce financing costs) and uncertain interest rates. Although Unicredit was not one of the 4 major financial institutions that directly participated many of their subsidiaries may have been affected (500 Italian banks face €2.5 billion losses) and the problem could lead to an overhaul of the way derivatives are issues something that would affect Unicredit's business.^[16]

Economic Recovery in Europe hampered by Bank Earnings Pressures

Newly introduced taxes on financial institutions have caused key banks to be more reluctant lenders in places where an economic turnaround is essential if Europe is to come out of the crises it faces. Banks operating in Eastern Europe (countries include Russia, Poland, Hungary, Austria, Ukraine, Bosnia and partly Romania) are being especially hard hit. Those new regulations have reduced growth in loans attributed in part to stagnation. In terms of multinational institutions Unicredit Group has the most assets in that part of Europe while Societe Generale ranked fourth.^[17]

Competition

The graph to the right compares the largest European banks based in the Eurozone.

Financial Data 1hfy10 unless ow stated	Societe Generale[18]	Unicredit Group[19][20]	ICBC[21][22]	Intesa Sanpaolo[23][24]	Credit Agricole[25]
Net Interest Income (€ mil)	30,545('09)	17,568('09)	15,896	10,486('09)	na
RevenueNBI	13,260	13,299	30,267('09)	$50,710('09)[26]	10,293
Operating Income	2745	5482	16,171('09)	8235	1672
Customer Deposits	300,054('09)	235,896('09)	1,059,961	858,577	634.4

References

1. ↑ UniCredit Group Partners up with Major Institutions in Project to Promote Export Finance (2009-06-25).
2. ↑ Borsa Italiana. Retrieved on 2010.
3. ↑ ^{3.0 3.1} Italian bank chief's exit sparks concern (2010-09-26).
4. ↑ Consolidation of Subsidiaries (2010).
5. ↑ ^{5.0 5.1} Unicredit Group Second Quarter 2010 Results (2010-08-3).
6. ↑ unicredit. Retrieved on 2010-08-14.
7. ↑ 2009 consolidated results and reports
8. ↑ 2008 consolidated results and reports
9. ↑ Consolidated Results 2008 (2009-03-18).
10. ↑ Unicredit Group 2008 end of year results
11. ↑ Full Year 2009 Group Results. Retrieved on 2010-08-14.
12. ↑ Consolidated Results for first half 2009 approved (2009-08-03).
13. ↑ Consolidated Results for first half 2010 (2009-08-04).
14. ↑ 2009 Annual Report Unicredito Italiano
15. ↑ Unicredit First Half 2008 Report (2008-06-31).
16. ↑ Forget Greece: Italy derivatives bomb also ticking (2010-03-11).
17. ↑ Bank stress puts E.Europe recovery at risk: study (2010-09-21).
18. ↑ Societe Generale 2009 Annual Report
19. ↑ Unicredit Group Consolidated Results for the First Half of 2010
20. ↑ Unicredit Group 2009 Annual Results
21. ↑ ICBC 2009 Annual Results
22. ↑ Industrial and Commercial bank of China 2010 Interim Report
23. ↑ Intesa Sanpaolo 2009 Annual Report
24. ↑ Intesa Sanpaolo 2010 Interim Report
25. ↑ Credit Agricole 2010 Half Year Review
26. ↑ 2010 Global 2000