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"Business" magazine. CEO of UniCredit Bank about the peculiarities of M&A in banking sector.
26.10.2007
In early May 2007 the Italian UniCredit Group, the biggest banking group at the CEE market, declared the purchase of Ukrsotsbank’s shares, which are under Viktor Pinchuk’s control. The price of the deal made up the all-time for Ukrainian market price - 2 billion USD. By the way, UniCredit Group possesses in Ukraine the subsidiary UniCredit Bank, which has recently merged with HVB Bank Ukraine, which was under UniCredit Group control. For completing of the deal concerning Ukrsotsbank purchase the Italians should get four permissions – of the Italian Bank, the Austrian controller of financial markets – FMA (the official buyer is the Austrian UniCredit branch), AMKU and NBU. According to the Ukrsotsbank press-office, the permission of neither of these authorities wasn’t obtained for today. However, according to Boris Timonkin, the CEO of Ukrsotsbank, the deal could be completed in November of the current year. It will be recalled that the process of Ukrsotsbank sale to Italian Banca Intesa took place a year ago. Under various causes the negotiations protracted for more than a year. All in all, the deal wasn’t completed, that let Viktor Pinchuk to increase the price of the financial institution for more than 60%. It is remarkable that the delays in the process of sale play into Ukrsotsbank owner’s hands, as its final price, according to arrangement, will depend on the amount of net assets at the moment of deal completing. If the deal is successfully completed, the Italians will face with the dilemma – should they sell UniCredit Bank or merge it with the purchased asset. The same situation took place at the Ukrainian market, when Raiffeisen International Group attempted to merge the purchased Aval bank with its Ukrainian branch. The attempt wasn’t a successful one, and the Austrians had to sell Raiffeisen Bank Ukraine.
Federico Russo, the CEO of UniCredit Bank, has told in the interview with BUSINESS about the peculiarities of banking mergers and takeovers, and about the business development in Ukraine as well.
Business’ dossier
FEDERICO RUSSO, the CEO of UniCredit Bank
WAS BORN: on the 22th of March 1955 in Catania (Italy).
EDUCATION: University of Catania, degree of Doctor of Law (1980); has lawyer license (1982).
CARRIER: 1982-1988 – economist, specialist at the bank “Credito Italiano” (Catania Branch); 1988-1989 – specialist of the international department of the Head office of the bank “Credito Italiano”;
1989-1993 – specialist of international financing department of the Head office of the bank “Credito Italiano”;
1993-1995 – specialist of markets of capitals department of the financial board of the Head office of the bank “Credito Italiano”;
1995-1998 – deputy chief of the London Branch of the bank “Credito Italiano”;
1998-1999 – deputy chief of international financing department of corporate banking division of UniCredit Group;
1999-2001 – chief of foreign commercial business department of corporate banking division of UniCredit Group;
2001-2002 – chief of Special projects of New Europe department of UniCredit Group;
2002-2006 – the first deputy CEO of the Bank Pekao Ukraine;
June 2006 – acting CEO of UniCredit Bank,
April 2007 – CEO of UniCredit Bank.
MARITAL STATUS: married
HOBBIES: reading, driving the motorcycle
“Merger is a new organizational structure which means new distribution of authority”, points out the Chief Executive Officer of UniCredit Bank Federico Russo.
ABOUT MERGERS
How was the process of merger of HVB Bank Ukraine and UniCredit Bank held?
Comparing the similar deals that have taken place in the history of UniCredit Group, this deal is one of the best examples. The merger was managed to complete in 9 months, though it was planned to realize it in 12 months. That is a very good result.
And what problems in general have appeared during the process of merger? After all corporate and retail banks have merged.
First of all, the merger of two banks means an integration of the teams, and it is extremely important for the first stage to overcome the so called psychological barrier. Wide experience of UniCredit Group in the field of merger enabled us to work out the certain scheme of such process. At the beginning the working team is established for the process management. This team is developing detailed merger plan that is discussed by all the subdivisions of the merging banks. In the process of discussion is worked out the common understanding of the goals and the instruments for their implementation are searched. Two banks mean two teams, two visions of the future, two ideologies of the development. The merger – is a new organizational structure which means new distribution of authority. Besides, the banks we have merged in Ukraine used to follow different strategies. As for UniCredit, the Bank had the Strategy of intensive development and market penetration. At the same time HVB Bank followed the stable business strategy, working qualifiedly in its sphere. It is not so easy to merge such polar business philosophies. Moreover, it should not be forgotten about the necessity of integration and about so called business-machine – IT department, accounting, internal (management) accounts system etc.
Usually the difficulty of merger is that it is necessary to dismiss employees. How many people were fired during the merger?
In our case nobody was dismissed.
What advantages has the merger of two banks, for the clients, for instance?
You should understand that the more effective the bank operates the better qualitative service it may offer. Therefore, if in the process of merger the more effective structure is developed, it will definitely provide a benefit to the clients. Besides, a large bank is able to offer better choice of products, give larger credits etc. If in short-term perspective such advantages may not be so evident, in middle- and long-term perspective they could be felt by each client.
By which characteristics you will evaluate that the merger has provided an additional benefit to the bank?
The best indicator of the success of the process is the number of satisfied and unsatisfied clients. If a bank looses many clients after the merger – it means that it is an unsuccessful merger. For example, there were cases that the clients because of the technical problems could not get the info balance on their current account on their balance of the account for weeks. Therefore, if such difficulties do not appear, the merger may be considered to be the successful one. One more indicator of the success is when the integrated bank achieves after the merger prospected results of its activities and ability to fit into the budget.
What will the integrated bank specialize in: retail or corporate business?
It will be the universal bank that will develop both corporate and retail businesses.
ABOUT NEW ACQUISITIONS
You said you are completely satisfied with the development of UniCredit Bank in Ukraine. Why was the decision to purchase Ukrsotsbank taken?
UniCredit Group estimates the Ukrainian market as a strategic one. The target of the Group is to be among the top three at the market of any country it presents at. UniCredit Bank in Ukraine has really achieved good results, but even after the merger with HVB Bank Ukraine the share of the integrated bank in the market is 1,5 %. Continuing the development on the existing basis, the goal achievement will take several years. The purchase of the retail bank will help us to economize the time. Moreover, though we have started to work in Ukraine from the scratch we have never denied that we are ready to overview merger possibilities in the market.
What do you think, why has Banca Intesa rejected the purchase of Ukrsotsbank though has studied the bank from within for more than a year? Did not this circumstance warn you as potential buyers?
UniCredit Group follows the principle not to comment on the activities of the competitors. I am not aware of all the details of the negotiations because I do not work for Banca Intesa. Therewith I am responsible only for UniCredit Bank in Ukraine and I am not involved in the purchase of Ukrsotsbank deal. As soon as I started to work in UniCredit Bank, Ukrsotsbank became a competitor for me. And in order to remain unprejudiced I can not be involved in this process.
Strangely enough, the management of any large banking group before purchasing of the bank usually consults the country-managers. As it was, for instance, with Raiffeisen International and Credit Agricole.
UniCredit Group receives from us the full analytical information about Ukrainian market, about its tendencies etc. It regards the problem, which of the banks best suits for acquisition. For decision-making process concerning the offer-making as for purchasing of the bank, the separate group of experts that studies the purchasing asset is involved. Moreover, everything is done strictly confidentially – only a few people are involved in the process. The rest of the managers of the Group find out about the deal only after its official announcement.
How objective is the offered by UniCredit Group price for Ukrsotsbank purchase?
In my opinion, the price is in line with the present market condition.
What do you think is it possible that the UniCredit Group deal on Ukrsotsbank purchase will be broken because of the same reasons as it was in the case with Banca Intesa? Moreover, the CEO of Ukrsotsbank, Boris Timonkin has already noted that if this deal breaks the Bank can be sold at the higher price?
Why should we make any assumptions or comment on the rumors if there are facts that I rely on and which say the following: the agreement is signed, but the deal is not competed yet. I hope that the deal will be successfully completed.
As far as I understand your shareholders are planning to merger both banks. At the same time the present management of Ukrsotsbank is in favor of selling the UniCredit Bank. Will this opinion of present management of Ukrsotsbank taken into consideration?
It is too early to comment on the merger or sale, as the deal is not completed yet. But if we observe the history of UniCredit Group mergers, we’ll see that the Group has sold the bank only once. It was in Croatia and only because of the insistence at Antimonopoly institution of the country. This order was caused as a result of the purchase of the second bank in Croatia, UniCredit Group had exceeded the acceptable concentration at the market. Talking about the opinion of the present management of Ukrsotsbank, I suppose that all the opinions will be respectively evaluated by the people which control process directly and have the right to take such decisions.
How long could it take to merge UniCredit Bank and Ukrsotsbank?
It is a good question. We can take into consideration the time we have spent to merger HVB Bank Ukraine with UniCredit Bank. As I’ve already told you, this process lasted 9 moths. Of course, it should be taken into account that these ones were the relatively not large banks. But even considering the network dimensions of Ukrsotsbank, I think we could manage in 1 year period (quite optimistic forecast. - edit.)
Why, in your opinion, UniCredit Bank should not be sold?
Today UniCredit Bank is a financial institution that is built by the European standards with branches of a new format which are located at the very advantageous places. Moreover, we have a good team. If we abstract from the price and money, why should we give all this to our competitors?
An attempt to merge Raiffeisen Bank Ukraine with Aval bank failed under not only the objective circumstances, but also the subjective ones. What founds you to hope for success in your own case?
Yes, the precedent exists but why do you think we will follow this practice?
But today Ukrsotsbank does not probably correspond to the standards of UniCredit Group…
It is difficult for me to answer this question because I do not work in Ukrsotsbank, but as far as I know they have quite a good system of internal accounts and risk-management (it isn’t probably enough to correspond to the west bank standards. – edit.).
There was info in mass media about the possible sale of some of the Ukrsotsbank branches in the process of merger. How do you represent it?
UniCredit Group, for instance, will sell its branches in Italy after the merger with Capitalia Bank and in Poland after the merger of Bank Pekao SA with BPH. It is done only by demand of corresponding offices. The fact is that in some regions UniCredit Group has the monopoly status at the market and has to decrease its presence by selling some of the branches. The presence and concentration level in Ukraine is not so high.
ManyinternationalbankgroupsbuyingUkrainianbanksforbidtheirowners to register new financial institutions or oblige them to sell the rest ones, if any. Was something of the kind specified in your case, considering that Mr. Pinchuk possesses one more bank – “Credit-Dnepr”?
I can not answer this question as I have not seen the agreement.
How do you think who will become CEO of the integrated bank?
UniCredit Group will decide.
ABOUT RATES
According to the Annual report, last year your bank used the credit line of Polish Bank Pekao SA for 100 million USD. How did the global financial crisis reflect on your bank’s funding?
Bank Pekao SA, as well as our bank, is a member of UniCredit Group and provides us with the resource support if necessary. The amount of funding depends on the business needs we carry on in Ukraine. Of course, we follow the events development at the international capital market, but our parent company provides us with funding at the best market conditions.
What is the resources share of the parent company in liability of UniCredit Bank?
Funding of the parent company amounts ca 90% of all the liabilities before financial institutions. So far our funding strategy consists in attracting of the resources from the very parent structure. At the same time I may say that we study the possibility of placing the internal bonds in UAH for the amount of minimum 400 million UAH.
What about the active attracting of population and companies deposits?
Today the share of such resources is around 18-20% of all the liabilities of the bank. Such indicators are explained by the fact that we have started to open branches only a year ago. Now we have 40 branches, and 36 of them have been already operating, the rest are ready for opening. Together with the development of network the share of deposits of population will increase in our resource basis.
Recently a few big banks have announced about the decrease of credit rates in UAH. Whatdoyouthinkwhatitiscausedby?
I would not say that this process has started only now, the rates have gradually been decreasing during the last three years. Just in particular moment Ukrainian banks have faced difficulties in attracting the currency; therefore they are trying to promote the products in UAH, including the credits. In the future we will observe the further convergence of UAH and USD credit rates.
Will your bank decrease the credit rates in UAH?
To my mind our rates are even now quite competitive, and we follow the market tendencies.
How do you evaluate the growth rate of the market share of UniCredit Bank in retail business?
As it is known we have started to develop retail business from the scratch, and now we have more than 50 000 clients. I think it is a very good result. Our most successful products are credit and debit cards. Now we work at implementing Internet-banking for retail clients.
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