CEE’s best bank 2020: UniCredit

Awards for Excellence 2020

Tight labour markets and low interest rates put a floor under credit demand across central and eastern Europe last year and mitigated the effects on banking sectors of slowing economic growth, regulatory curbs on consumer lending and proliferating sectoral levies.

The region’s big banking groups all posted another set of robust results, reaping the benefits of years of painstaking balance-sheet cleansing and hefty investment in digitalization. For most, the strategic priority and the main driver of growth was once again the retail segment, where buoyant consumer confidence and relatively low household leverage ensured healthy demand for both secured and unsecured lending.

By contrast, CEE’s biggest regional lender has kept its focus firmly on its core corporate and small and medium-sized enterprise clientele.

With a full-service corporate and investment bank plugged into its 10-country commercial banking network, UniCredit positions itself as the gateway to CEE for international firms and the leading partner for local entrepreneurs.

As well as maintaining leading transaction services, advisory and markets franchises, the Italian group has shown consistent appetite for putting its balance sheet to work across the region.

At the end of 2019, its total exposure to CEE stood at a sector-best €67.5 billion, while in the awards period UniCredit once again topped Dealogic’s league tables for syndicated loan activity in the region.

Under Team 23, the new four-year strategic plan devised by UniCredit chief executive Jean Pierre Mustier, CEE has been highlighted as one of two ‘growth engines’ – along with CIB – for the Italian group.

Also top of the agenda for UniCredit over the coming years will be the SME segment, in both CEE and western Europe.

“SMEs are at the core of our strategy because they are the hard core these economies are built on and they will grow up to be the corporates of the future,” says Gianfranco Bisagni, co-chief executive of CEE commercial banking.

At the same time, he notes that UniCredit maintains a cautious approach to a high-risk segment.

“We are in no rush,” he says. “We want to help SMEs step by step to grow responsibly.”

To mitigate its own exposure to the segment, UniCredit is an active participant in European Union initiatives designed to support smaller businesses in member states and accession countries. These include the InnovFin SME Guarantee Facility, which provides financing to innovative companies, and most recently the European Investment Fund’s EaSI programme of guarantees for micro loans and social entrepreneurship.

Partnering

UniCredit is also an exclusive partner of the London Stock Exchange Group’s Elite initiative in CEE, which helps companies reshape their business models and better understand the funding options available to them.

Since 2015, 87 firms from the region have joined the programme through UniCredit.

While businesses remain its prime target in CEE, however, UniCredit has not neglected its large retail client base in the region. Excluding Russia and Turkey, the group counts 12.5% of the banking population of 40 million as customers, thanks to top-three universal banking franchises in markets including Bulgaria, Croatia, Bosnia, Serbia, Hungary and Slovenia.

During the awards period, an increasing number of these customers benefited from UniCredit’s renewed focus on digital innovation. By the end of 2019, seven of the group’s CEE subsidiaries had implemented Cross Architecture, a new digital banking solution of an omnichannel platform backed by a common core banking system.

“For historical reasons, banks were built on branch networks, then another process was added when the internet came out and a third when mobile came out,” says Niccolo Ubertalli, co-chief executive of CEE commercial banking. “We’re now taking that the other way around. We’ve taken the mobile process and used it across all our channels.”

Last year also saw the launch of digital onboarding in UniCredit’s subsidiaries in Croatia, Slovenia, Russia and Bulgaria, as well as the first mobile ticketing solution for public transport in Bucharest and digital charity donation kiosks in the Czech Republic and Slovakia.

The Czech Republic was also one of the first markets – along with Serbia – to roll out a new mobile banking app designed in partnership with Meniga, an Icelandic fintech in which UniCredit took a minority stake in 2018.

The group is also working with more than a dozen other fintech firms in CEE, but Bisagni says UniCredit’s approach to the sector is very selective: “We partner with firms that allow us to better serve the client and avoid investment that wouldn’t make sense for us.”

He adds that, on the lending side, UniCredit is keen to expand its retail portfolio in CEE – but not at any cost.

“What you won’t see UniCredit doing is pushing retail without building the right basis,” he says. “That means quality underwriting, understanding the risk, the markets where you are operating and the pricing, and then deciding what to offer. We want to develop retail, but always maintaining our very prudent approach to risk.

“We are not interested in volume lending. We wouldn’t do anything that can put our customers at risk, and if that means growing less in retail volumes we are totally fine with that. We’re not here for the short term or to milk our customer base.”

Performance

So far, this strategy appears to be paying off. Despite avoiding high-volume consumer lending, UniCredit’s CEE division expanded its loan book by 3.4% last year on the back of strong growth in the Czech Republic, Hungary, Bulgaria, Romania and Bosnia – which in turn offset a 13% deleveraging in Russia.

This boosted net interest income by 0.5% year on year and contributed to a pre-tax profit of €2 billion, making CEE the second most profitable division for UniCredit (just behind CIB).

Return on allocated capital (ROAC) was a robust 14.5%, while a cost-to-income ratio of 36.1% was among the lowest in the region. Still more impressively, the CEE division’s cost of risk fell to 68 basis points – an all-time low – while the gross non-performing exposure ratio improved by 1.8 percentage points to 4.6%.

This strong performance continued into the first quarter of this year, when CEE posted the highest ROAC in UniCredit Group at 12.7%.

How the Covid-19 pandemic will affect banks in CEE, as elsewhere, remains to be seen. What is clear is that UniCredit’s CEE division went into the crisis in excellent shape, with a strong balance sheet, a balanced business model and increasingly sophisticated digital capabilities.

As such, UniCredit is a worthy winner of this year’s award for CEE’s best bank.