2003-2006 STRATEGIC PLAN Alessandro Profumo - CEO Investor Day – Bologna, 13 th June 2003.
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2003-2006 STRATEGIC PLAN
Alessandro Profumo - CEO
Investor Day – Bologna, 13th June 2003
2
2003-2006 PLAN: RENEWED BUSINESS LIFECYCLE AND ACCELERATION OF GROWTH PATH
g
t0 2002 2006
03-06 plan
S3 CREATES NEW OPPORTUNITIES FOR GROWTH
PLAN DELIVERING DOUBLE DIGIT EPS GROWTH AND PREPARING PATH FOR ACCELERATED GROWTH
3
EXECUTIVE SUMMARY
ASSUMED CONSERVATIVE MACROECONOMIC SCENARIO
CLIENT-FOCUSED ORGANISATION AS A COMPETITIVE ADVANTAGE
PLAN BASED ON ORGANIC GROWTH
CONTINUED FOCUS ON CAPITAL ALLOCATION AND RISK MANAGEMENT
SUSTAINED HIGH CASH FLOW AND CAPITAL GENERATION
4
AGENDA
2003-2006 economic scenario
UCI 3 years strategic plan
Risk management and capital allocation
Group targets
Strategic guidelines and operating targets
Business model
5
PLAN BUILT IN A CONSERVATIVE SCENARIO, LEAVING ROOM FOR UPSIDE
Macroeconomic scenario affected by uncertainty, with GDP growth in US and EU still lower than its potential
Expansive fiscal policy in US might crowd out private investment spending
High uncertainty even in presence of some positive signals (increasing consumer confidence and improved equity markets)
Conservative rise in policy rates forecasted in the next three years
2003 03-06 avg
US GDP, y/y % ch 1.8 2.32.4
2002
EU Inflation rate, % 2.2 1.92.3
EU ECB rates (eop) % 1.75 3.00(1)2.75
Stock Mkt MSCI Europe 2.0 4.8-31.3
US Fed Funds rates (eop), % 1.25 3.25(1)1.25
EU GDP, y/y % ch 0.8 1.60.8
(1) December 2006
Source: UCI Network forecasts
Italy GDP, y/y % ch 0.6 1.50.4
6
ITALIAN BANKING SYSTEM EXPECTED TO IMPROVE PROFITABILITY ONLY FROM 2004
Profitability forecast for the banking system still negative for this year with the operating profit down 6.2% y/y (expected decrease in net interest income partially offset by slight increase in non-interest income)
Profitability of the Italian banking system expected to recover only from 2004
Profitability will benefit from the contribution of both net interest income and net non interest income, which will be sustained by the recovery of the equity and AuM markets
Households’ financial assets expected to grow in the period by around 7% per year, in line with US and Euro countries
Pension system reform could fuel pension funds growth in Italy in the next three years
Deposits 4.2 3.0
2003 Cagr 02-06
Loans 6.6 6.9
Sh. term spread (eop) % 4.09 4.38(1)
Revenues -0.2 4.8
Costs 3.2 3.1
Operating profit -6.2 7.7
Mutual Funds stock 4.6 6.8
6.0
2002
5.9
4.35
-0.4
4.9
-8.7
-9.5
P&L Account (2) y/y % ch
y/y % ch
(2) Excluding dividends from shares and bank shareholdings
Source: UCI Network forecasts(1) December 2006
7
EU ACCESSION IS GETTING CLOSER FOR MOST OF OUR NEW EUROPE COUNTRIES IN A CONTEXT OF DECLINING RISKS AND GROWING STABILISATION
EU entryInflation 2002 eop
Moody’s Rating Upgrade
April 02-April 03
Countries with UCI presence
2007* 2.3 Baa3/stableHR
Not defined 29.7B1/negative
-TK
EU accession on track for most of the countries (i.e. results of referendum in Poland) with positive impact on economic environment thanks to:
harmonisation of legal and institutional environment to EU standards
predetermined macroeconomic convergence path (higher GDP growth) with decreasing risks
in the medium term, with EMU convergence, lower inflation and interest rates with currency stability and public deficit control
May 2004 0.8A2/stable
++PL
May 2004 0.6A1/stable
+++CZ
2007 17.9B1/stable
+RO
May 2004 3.4A3/stable
+++SK
2007 3.8B1/positive
+BG
*estimated
8
COMBINED NEW EUROPE GDP GROWTH ANTICIPATED TO OUTPACE EU GROWTH
Turkey: growth expected to consolidate at rate around 5% in 2004-05, still in a highly uncertain environment, with risks of reversal. Commitment to reforms is the most important variable to watch
Slovakia: sustained growth driven by investment (2004) and external demand (2004-05), with continued gradual downwards trend in interest rates and strengthening SKK
Romania: sustained growth propelled by consumption and investment. Stabilising macro environment, with one digit inflation expected in 2004 and both fiscal and external control achieved
Poland: gradually back to its long term growth potential, thanks to recovery of both international demand and investments. EMU convergence often seen as major target, leading to int. rate contraction and need to fiscal control
Czech Rep.: gradual growth acceleration led by continued solid household consumption and recovery in export and investment activities
Croatia: stable economic environment sustained growth track, spurred by investment, consumption and export
Bulgaria: economic growth to speed up, sustained by the catching up process. Financial and macro stability persist, supported by effective currency board
*UCI forecast
03F GDP growth*
avg. 03-06 GDP
growth*
avg 00-02 GDP growth
Countries with UCI’s presence
BG 4.3 4.94.67
HR 3.6 4.13.97
CZ 2.9 3.52.80
PL 2.1 3.72.10
RO 4.9 4.74.00
SK 4.0 4.33.36
TK 4.0 4.82.57
9
AGENDA
2003-2006 economic scenario
UCI 3 years strategic plan
Risk management and capital allocation
Business model
Group targets
Strategic guidelines and operating targets
10
UCI ORGANISATIONAL MODEL: CUSTOMER DRIVEN DIVISIONALISATION...
(1) Consumer Finance (2) Retail mortgages (3) M/l term corporate financing (4) Leasing
Pekao
New Europe division
Private & AM division
Pioneer
Xelion
Corporate division
UBM
BMC(3)
Locat(4)
Clarima(1)
TradingLab
Retail division
Zagrebacka
KFS
Bulbank
UniBanka
UC Romania
Zivnostenska
45.4% 26.2% 10.3% 18.1%
Weight on 2002 Group revenues pre Corporate Centre and elisions
Employees(5) (Dec 2002)o/w Italyo/w New Europe(5)
70,99239,98631,006
Branches(5) (Dec 2002)o/w Italyo/w New Europe(5)
4,6073,2751,332
(5) KFS at 100%
UniCredit Banca per la casa(2)
11
... 3 NEW SEGMENT BANKS WITH CLEARLY DEFINED MISSIONS...
THE RETAIL BANK:TO BE THE LARGEST LOCAL ITALIAN BANK, COMMITTED TO HELP HOUSEHOLDS AND SMALL BUSINESSES “MAKE THEIR LIFE PROJECTS REAL”
THE PRIVATE BANK:THE LEADING ITALIAN WEALTH MANAGEMENT PROVIDER FOCUSED ON PRESERVING AND INCREASING THE WEALTH OF PRIVATE CLIENTS THROUGH A HOLISTIC APPROACH, SUPERIOR SERVICE AND INNOVATIVE SOLUTIONS
THE CORPORATE BANK:TO SET THE STANDARD FOR A NEW BANKING-SMEs RELATIONSHIP THROUGH EXCELLENCE IN DESIGN & DELIVERY OF PRODUCTS & SERVICES AND CUSTOMER SELECTION, BEING RECOGNISED AS THE KEY PARTNER IN MANAGING CLIENTS RISKS
12
... DETAILED UNDERSTANDING AND MANAGEMENT OF THE DIFFERENT MARKETS AND DEEPER KNOWLEDGE OF THE CUSTOMER BASE...
Deeper knowledge of customers, with analysis of behaviour, needs, age, types, turnover, etc.
Unified strategic decision making at segment level
Increased time to market on 100% of the customer base
Integrated risk management process in all segments
Detailed understanding of competitive environment
Specialised training programs for employees
Production closer to customer needs
13
Existing customers
New customers
Efficiency Risk mgmtIntra-group synergies
PioneerUBI
UCBUPB
UBMUBI
PioneerUBMTradingLab
Revenue growth
... TAILORED STRATEGIES FOR DIFFERENT CUSTOMER SEGMENTS AND GEOGRAPHIES...
High importance
Low importance
Corporate business
Private Banking business
New Europe
Retail business
14
... AND CRUCIAL ROLE OF THE PARENT COMPANY
New Europe division
Private & AM division
Corporate division
Retail division
ROLE OF THE PARENT COMPANY
Defining the strategic guidelines for the Group and for all Group companies
Managing the strategic portfolio of businesses and Group key resources
Optimising capital allocation to the different business units
Enforcing integrated risk management and development of internal models to be extended to other Group entities
Leveraging economies of scale through centralised functions (i.e. treasury, cost management, purchases) and specialised companies (USI, UPA)
15
AGENDA
2003-2006 economic scenario
UCI 3 years strategic plan
Risk management and capital allocation
Business model
Group targets
Strategic guidelines and operating targets
16
UCI STRATEGIC BUSINESS PORTFOLIO: CONFIRMED FOCUS ON ACTIVITIES WITH HIGH GROWTH POTENTIAL AND GROUP TRACK RECORD OF VALUE CREATION
= Euro 200 mln 2006 revenues
Corporate
New Europe
Asset GatheringAsset Management
Private Banking
Consumer Finance
UBM Retail
Natural owner Non-natural owner
Va
lue
cre
ati
on
po
ten
tia
l
Relative capacity to extract value
Hig
h
po
ten
tial
Lo
w
po
ten
tial
Can add value
Cannot add value
Plan focused on organic growth, with different paths for each specific business
ITALIAN BANKING: consolidate UCI leadership and exploit the competitive advantage arising from specialisation
Retail: organic growth of market shares in the most attractive geographical markets
Corporate: improve customer penetration leveraging on innovative products and services
Private Banking: organic growth through customer attraction and improved penetration of existing customers
ASSET MANAGEMENT: further strengthening asset management core capability focussing on innovation, ALM and performance
NEW EUROPE BANKING: maintain the leadership in New Europe for risk-adjusted profitability, exploiting the growth potential arising from EU convergence
= Euro 200 mln 2002 revenues
UCI CAGR 02-06 11.4%
UCI CAGR 02-06 6.8%
17
PLAN’S GROWTH RATES AND EFFICIENCY INDICATORS OUTPERFORMING THE SYSTEM
REVENUE GROWTHEuro mln 2002 2002 2006
GROUP 10,284 8.6 GROUP 54.6 50
Retail Division 4,728 8.0 Retail Division 63.6 56
Corporate Division 2,734 9.9 Corporate Division 32.6 29
Private & AM Division 1,072 10.2 Private & AM Division 61.1 58
New Europe Division 1,830 8.8 New Europe Division 51.6 45
COST/INCOME, %
UCI Italian divisions excl. Pioneer
7,999 8.9UCI Italian divisions excl. Pioneer
52.7 46
Italian system n.m. 4.8 Italian system 64.2 60
CAGR 02-06
18
AGENDA
2003-2006 economic scenario
UCI 3 years strategic plan
Risk management and capital allocation
Business model
Group targets
Strategic guidelines and operating targets
19
GROWTH COUPLED WITH RIGOROUS RISK MANAGEMENT POLICIES... BASEL II COMPLIANCE GENERATING NEW OPPORTUNITIES FOR THE GROUP
BIS II is a great opportunity for UCI: achieving a full compliance will represent the fulfilment of the ongoing development process aimed at further improving our Risk Management tools; this will result in:
An effective control of the whole Group real risk profile (integrated control of all the categories of risks)
A more efficient and dynamic capital management aimed at value creation
Beside the three BIS II macro-categories of risks, UCI has identified a fourth one: Business risks; UCI is dealing with all of them through the internal development of evaluation models currently under implementation across each Group company
Credit risks Market risks Operational risks
UCI aims at adopting the advanced evaluation models required by BIS II regulations for Credit (IRB advanced) and Operational risks (AMA)
BIS II Risk Categories …
+
… the fourth we have identified
Business risks
20
A POWERFUL CREDIT RISK MEASUREMENT METHODOLOGY IS ALREADY IN PLACE...
Internal RATING SYSTEM1 differentiated by business segment and – if necessary - by geographic area and type of product already available and in use in the origination and monitoring processes in Italy; high levels of BIS II compliance
VaR: Portfolio model calculating VaR for credit risk and determining economic capital absorption both at portfolio and at single borrower level already in place. EL (Expected Loss) and UL (Unexpected Loss) measures used to determine EVA and RARORAC
Dedicated Credit Risk Management units within the parent company and each separate legal entity, responsible for the development and the implementation of credit risk tools, as well as for monitoring and reporting the overall risk within each portfolio
CREDIT RISKS: THE CURRENT SITUATION …
1 Based on estimated PDs (Propabilities of Default)
Business Segment Registry data
Qualitative/ Industry
data
Behavioural monitoring
By Product
LARGE CORPORATE XXX XXX
MID CORP. & SMEs X XXX XX XX
SMALL BUSINESS XX XX X XXX
RETAIL XXX X X
BANKS
GOVERNEMENTS2
DifferentiationAnalysis components
Financial data
By Country
X
XXX
XXX XX X
XXX XX
2 Including “Government Entities and Public Institutions”
LEGENDA:XXX= Very important XX= Fairly important X= Useful, but not very important
UCI’s RATING SYSTEM …… AND PROBABILITY OF DEFAULT ASSOCIATED TO INTERNAL RATING CLASSES
3 Calculated on aggregated loans (including loans to customers and banks) granted by the Parent Company, the 3 Segment Banks and UBM; New Europe Banks not included
0%
5%
10%
15%
20%
25%
1 2 3 4 5+ 5 5- 6+ 6 6- 7+ 7 7- 8+ 8 8- 9
UCI avg. PD: 1.61%
UCI median PD: 0.77%
21
… AND THE NEXT STEPS …
Focus on procedures/processes, IT systems and organisational sides:
Full implementation of credit risk tools (RATING, VAR) within processes: loan origination, renewal, and pricing, provisioning policies, bad loan recovery, reporting, budgeting
Upgrading of IT systems up to full BIS compliance in terms of quality and level of provided details
EAD (Exposure at Default) and LGD (Loss Given Default) available within each Group company with an high level of detail (i.e.: cross-breakdowns by sector, geography, type of product, ecc.)
... AND WILL BE ENHANCED THANKS TO IMPLEMENTATION OF CLEAR PROCEDURES/ PROCESSES AND MORE PERVASIVE CREDIT RISK CULTURE
… AIMED AT:
Creating a more pervasive credit risk culture across the Group, consequently increasing value creation
Being eligible to use the Advanced Approach by 2007
Decreasing cost of risk in New Europe
1 2002 data are obtained deducting from stated figure extraordinary provisions
2002 2006
Aggr. 3 Italian banks 1 51 bp 54 bp
New Europe Division 1 189 bp 158 bp
Group total 90 bp 69 bp
Net Provisions /Net customer loans
Improve the risk/reward profile in Italy
22
Full implementation of the model across the whole Group with extension to the “Banking” books
Validation of the model by Central Banks for all the Group companies
Full implementation by year end 2006 of an Operational Risk Management system in line with BIS II advanced models
Extension of the model to all net non-interest income components of all Group companies
Development of a risk integration model based on a bottom-up approach3
Evaluation of correlations among the different risk categories in order to exploit the potential benefits of diversification
ALL OTHER RISK CURRENTLY STRICTLY MONITORED; COMMITMENT TO FURTHER DEVELOP RISK MANAGEMENT TOOLS AND ACHIEVE FULL INTEGRATION OF THE DIFFERENT RISKS
Internal advanced model1 for the evaluation of Market Risks arising from the “Trading book” under implementation across the whole Group
Ongoing validation process by Bank of Italy for UBM (to be completed by the end of 2003)
MARKET RISKS:
Operational Risk Management team set up at a Group level
Ongoing development of an Operational Risk Management framework in line with BIS II advanced models (AMA)
OPERATIONAL RISKS:
OTHER RISKS: CURRENT SITUATION … … AND NEXT STEPS
1 Model developed by UBM Risk Management Department
BUSINESS RISKS:
Earning at Risk approach to analyse the volatility of some components (typically Net Commissions) of net non-interest income of some Group companies (i.e. Asset Gatherers)
2 Based, if available, on measurements of economic capital; otherwise based on estimates arising from benchmarking
INTEGRATION OF RISKS Ongoing creation of a risk integration
model based on a top-down2 approach
3 Integration of the different risk measurement arising from the specific risk dedicated advanced models
23
DIVERSIFICATION OF BUSINESS PORTFOLIO GUARANTEES STRONG GROWTH, LOW EARNINGS VOLATILITY AND ECONOMIC CAPITAL SAVING
The market already implies for UCI a benefit coming from the diversification of
the business portfolio, visible in:
A lower Beta 1,1 vs. 1,5 (competitors’ average)
A lower implied volatility 30% vs. 39% (competitors’ average)
A lower cost of equity 9,08% vs. 11,10% (competitors’
average)
Preliminary results of the internal model for integration of risks1 foresee
Economic Capital saving in a range from 4,1% to 7,2%
1 Based on the analysis of correlation between Economic Capital needed for credit and market risks taking into account 80% of the Group total consolidated assets
24
AVERAGE PAY-OUT RATIO
AROUND 65% TO STABILISE CORE TIER 1 RATIO AT
2002 LEVEL
CAPITAL ALLOCATION STRICTLY LINKED TO GROWTH TARGETS AND RISKS OF EACH DIVISIONECONOMIC CAPITAL SAVING THANKS TO BIS II STARTING FROM 2007
CAGR: 11.3
%
2002 Core Tier 1 ratio: 7.2%
Private & AMNew Europe
Corporate Centre
Retail
Corporate
14,100 mln(1)
9,207 mln
31.0%
30.6%
8.6%
8.1%
6.0%
10.3%
20062002
49.8%
2.9%
45.8%
6.8%
(1) Capital available for allocation. The capital allocated to New Europe banks is net of the excess capital attributable to minority shareholders, which is transferred to Corporate Centre for allocation to other initiatives
25
AGENDA
2003-2006 economic scenario
UCI 3 years strategic plan
Risk management and capital allocation
Business model
Group targets
Strategic guidelines and operating targets
26
2002 2006
DYNAMIC CAPITAL MANAGEMENT, ALLOWING FLEXIBILITY IN EARNINGS DISTRIBUTION AND LEAVING FREEDOM TO PICK POTENTIAL MARKET OPPORTUNITIES
SUSTAINED EPS GROWTH, SOUND EFFICIENCY RATIOS AND HIGH PROFITABILITY, WITH SIGNIFICANT VALUE CREATION FOR SHAREHOLDERS
2002
Revenue growth (mln) 10,284 8.6 Cost/Income, % 54.6 50
Core Tier 1 ratio, % 7.2 6.8-7.2
ROE, % 17.2 21
UCI Italian divisions excl. Pioneer
7,999 8.9
Italian system n.m. 4.8
CAGR 02-06
UCI Italian divisions excl. Pioneer
52.7 46
Italian system 64.2 60
Op. Income growth (mln)
4,670 11.5
EPS 0.29 14.0
UCI Italian divisions excl. Pioneer
3,783 12.4
Italian system n.m. 7.7 RARORAC, % 6.9 12
Branches(1) 4,607 5,241
Employees (1) 70,992 70,565
(1) KFS at 100%
27
SUMMING UP
The plan is built in a conservative scenario...
... but the current organisational model represents a strong advantage that UCI will leverage to reinforce its competitive positioning
Growth will be pursued through organic growth and with a low volatility, thanks to our well diversified business portfolio
Strong cash flow and capital generation, with significant value creation for shareholders
Reduction of cost/income ratio thanks to efficiency improvements in all business divisions and new initiatives reaching break-even
28
2003-2006 PLAN: RENEWED BUSINESS LIFECYCLE AND ACCELERATION OF GROWTH PATH
g
t0 2002 2006
03-06 plan
S3 CREATES NEW OPPORTUNITIES FOR GROWTH
PLAN DELIVERING DOUBLE DIGIT EPS GROWTH AND PREPARING PATH FOR ACCELERATED GROWTH
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