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2003-2006 STRATEGIC PLAN Alessandro Profumo - CEO Investor Day – Bologna, 13th June 2003 2003-2006 PLAN: RENEWED BUSINESS LIFECYCLE AND ACCELERATION OF GROWTH PATH g 0 03-06 plan 2002 2006 t S3 CREATES NEW OPPORTUNITIES FOR GROWTH PLAN DELIVERING DOUBLE DIGIT EPS GROWTH AND PREPARING PATH FOR ACCELERATED GROWTH 2 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 3 AGENDA 2003-2006 economic scenario UCI 3 years strategic plan Business model Strategic guidelines and operating targets Risk management and capital allocation Group targets 4 PLAN BUILT IN A CONSERVATIVE SCENARIO, LEAVING ROOM FOR UPSIDE 2002 2003 03-06 avg US GDP, y/y % ch 2.4 1.8 2.3 EU GDP, y/y % ch 0.8 0.8 1.6 Italy GDP, y/y % ch 0.4 0.6 1.5 EU Inflation rate, % 2.3 2.2 1.9 US Fed Funds rates (eop), % 1.25 1.25 3.25(1) EU ECB rates (eop) % 2.75 1.75 3.00(1) Stock Mkt MSCI Europe -31.3 2.0 4.8 5 Source: UCI Network forecasts (1) December 2006 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 ITALIAN BANKING SYSTEM EXPECTED TO IMPROVE PROFITABILITY ONLY FROM 2004 Cagr 02-06 2002 2003 Deposits 6.0 4.2 3.0 Loans 5.9 6.6 6.9 Sh. term spread (eop) % 4.35 4.09 4.38(1) Mutual Funds stock -9.5 4.6 6.8 Profitability of the Italian banking system expected to recover only from 2004 4.8 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 y/y % ch P&L Account (2) y/y % ch Revenues Costs Operating profit -0.4 -0.2 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 noninterest income) 4.9 3.2 3.1 Households’ financial assets expected to grow in the period by around 7% per year, in line with US and Euro countries -8.7 -6.2 7.7 Pension system reform could fuel pension funds growth in Italy in the next three years Source: UCI Network forecasts (1) December 2006 (2) Excluding dividends from shares and bank shareholdings 6 EU ACCESSION IS GETTING CLOSER FOR MOST OF OUR NEW EUROPE COUNTRIES IN A CONTEXT OF DECLINING RISKS AND GROWING STABILISATION Countries with UCI presence EU entry Inflation 2002 eop Moody’s Rating Upgrade April 02-April 03 BG 2007 3.8 B1/positive + HR 2007* 2.3 Baa3/stable CZ May 2004 0.6 A1/stable +++ PL May 2004 0.8 A2/stable ++ RO 2007 17.9 B1/stable + SK May 2004 3.4 A3/stable +++ TK Not defined 29.7 B1/negative - 7 *estimated 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 COMBINED NEW EUROPE GDP GROWTH ANTICIPATED TO OUTPACE EU GROWTH Countries with UCI’s presence avg 0002 GDP growth 03F GDP growth* avg. 03-06 GDP growth* Bulgaria: economic growth to speed up, sustained by the catching up process. Financial and macro stability persist, supported by effective currency board Croatia: stable economic environment sustained growth track, spurred by investment, consumption and export BG 4.67 4.3 4.9 HR 3.97 3.6 4.1 CZ 2.80 2.9 3.5 PL 2.10 2.1 3.7 RO 4.00 4.9 4.7 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 4.3 Slovakia: sustained growth driven by investment (2004) and external demand (2004-05), with continued gradual downwards trend in interest rates and strengthening SKK SK TK 3.36 2.57 4.0 4.0 4.8 Czech Rep.: gradual growth acceleration led by continued solid household consumption and recovery in export and investment activities 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 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 8 *UCI forecast AGENDA 2003-2006 economic scenario UCI 3 years strategic plan Business model Strategic guidelines and operating targets Risk management and capital allocation Group targets 9 UCI ORGANISATIONAL MODEL: CUSTOMER DRIVEN DIVISIONALISATION... Weight on 2002 Group revenues pre Corporate Centre and elisions 45.4% 26.2% Retail division Corporate division 10.3% 18.1% Private & AM division New Europe division Pekao Clarima(1) UBM Pioneer Zagrebacka Bulbank UniCredit Banca per la casa(2) BMC(3) TradingLab Locat(4) Xelion KFS UniBanka UC Romania Employees(5) (Dec 2002) 70,992 o/w Italy o/w New Europe(5) (1) Consumer Finance (3) M/l term corporate financing (5) KFS at 100% 39,986 31,006 (2) Retail mortgages (4) Leasing Branches(5) (Dec 2002) 4,607 o/w Italy o/w New Europe(5) 10 3,275 1,332 Zivnostenska ... 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 CORPORATE BANK: TO SET THE STANDARD FOR A NEW BANKINGSMEs RELATIONSHIP THROUGH EXCELLENCE IN DESIGN & DELIVERY OF PRODUCTS & SERVICES AND CUSTOMER SELECTION, BEING RECOGNISED AS THE KEY PARTNER IN MANAGING CLIENTS RISKS 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 11 ... DETAILED UNDERSTANDING AND MANAGEMENT OF THE DIFFERENT MARKETS AND DEEPER KNOWLEDGE OF THE CUSTOMER BASE... Detailed understanding of competitive environment Production closer to customer needs 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 Specialised training programs for employees Integrated risk management process in all segments 12 ... TAILORED STRATEGIES FOR DIFFERENT CUSTOMER SEGMENTS AND GEOGRAPHIES... High importance Low importance Revenue growth Existing customers New customers Efficiency Risk mgmt Intra-group synergies Retail business Pioneer UBI Corporate business UCB UPB Private Banking business UBM UBI New Europe Pioneer UBM TradingLab 13 ... AND CRUCIAL ROLE OF THE PARENT COMPANY Retail division Corporate division Private & AM division New Europe 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) 14 AGENDA 2003-2006 economic scenario UCI 3 years strategic plan Business model Strategic guidelines and operating targets Risk management and capital allocation Group targets 15 UCI STRATEGIC BUSINESS PORTFOLIO: CONFIRMED FOCUS ON ACTIVITIES WITH HIGH GROWTH POTENTIAL AND GROUP TRACK RECORD OF VALUE CREATION = Euro 200 mln 2002 revenues Value creation potential Low High potential potential = Euro 200 mln 2006 revenues UCI CAGR 02-06 11.4% Plan focused on organic growth, with different paths for each specific business Consumer Finance Asset Gathering Asset Management UBM Private Banking ITALIAN BANKING: consolidate UCI leadership and exploit the competitive advantage arising from specialisation Retail Retail: organic growth of market shares in the most attractive geographical markets New Europe Corporate: improve customer penetration leveraging on innovative products and services Corporate UCI CAGR 02-06 6.8% Cannot add value NEW EUROPE BANKING: maintain the leadership in New Europe for risk-adjusted profitability, exploiting the growth potential arising from EU convergence Can add value Non-natural owner 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 Natural owner Relative capacity to extract value 16 PLAN’S GROWTH RATES AND EFFICIENCY INDICATORS OUTPERFORMING THE SYSTEM REVENUE GROWTH 2002 CAGR 02-06 10,284 8.6 7,999 Italian system Euro mln COST/INCOME, % 2002 2006 GROUP 54.6 50 8.9 UCI Italian divisions excl. Pioneer 52.7 46 n.m. 4.8 Italian system 64.2 60 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 GROUP UCI Italian divisions excl. Pioneer 17 AGENDA 2003-2006 economic scenario UCI 3 years strategic plan Business model Strategic guidelines and operating targets Risk management and capital allocation Group targets 18 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 BIS II Risk Categories … Credit risks Market risks Operational risks … the fourth we have identified + Business risks UCI aims at adopting the advanced evaluation models required by BIS II regulations for Credit (IRB advanced) and Operational risks (AMA) 19 A POWERFUL CREDIT RISK MEASUREMENT METHODOLOGY IS ALREADY IN PLACE... CREDIT RISKS: THE CURRENT SITUATION … 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 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 … AND PROBABILITY OF DEFAULT ASSOCIATED TO INTERNAL RATING CLASSES UCI’s RATING SYSTEM … Analysis components Business Segment Registry data LARGE CORPORATE Differentiation Financial Qualitative/ Behavioural Industry data monitoring data By Product XXX XXX X By Country X XXX XX XX SMALL BUSINESS XX XX X XXX XXX X X XXX BANKS XXX XX X GOVERNEMENTS2 XXX XX LEGENDA: XXX= Very important UCI avg. PD: 1.61% 20% 15% MID CORP. & SMEs RETAIL UCI median PD: 0.77% 25% 10% 5% 0% XX= Fairly important X= Useful, but not very important 1 2 3 4 5+ 5 5- 6+ 6 6- 7+ 7 7- 8+ 8 8- 9 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 20 Based on estimated PDs (Propabilities of Default) 2 Including “Government Entities and Public Institutions” 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 1 ... AND WILL BE ENHANCED THANKS TO IMPLEMENTATION OF CLEAR PROCEDURES/ PROCESSES AND MORE PERVASIVE CREDIT RISK CULTURE … AND THE NEXT STEPS … … AIMED AT: Focus on procedures/processes, IT systems and organisational sides: Creating a more pervasive credit risk culture across the Group, consequently increasing value creation 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 Being eligible to use the Advanced Approach by 2007 Decreasing cost of risk in New Europe Improve the risk/reward profile in Italy 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.) 2002 data are obtained deducting from stated figure extraordinary provisions 2002 2006 Aggr. 3 Italian banks 1 51 bp 54 bp 189 bp 158 bp 90 bp 69 bp New Europe Division Group total 21 1 Net Provisions / Net customer loans 1 ALL OTHER RISK CURRENTLY STRICTLY MONITORED; COMMITMENT TO FURTHER DEVELOP RISK MANAGEMENT TOOLS AND ACHIEVE FULL INTEGRATION OF THE DIFFERENT RISKS OTHER RISKS: CURRENT SITUATION … … AND NEXT STEPS MARKET 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) 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 OPERATIONAL 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) Full implementation by year end 2006 of an Operational Risk Management system in line with BIS II advanced models 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) Extension of the model to all net noninterest income components of all Group companies INTEGRATION OF RISKS Ongoing creation of a risk integration model based on a top-down2 approach 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 22 Model developed by UBM Risk Management Department 2 Based, if available, on measurements of economic capital; otherwise based on estimates arising from benchmarking 1 3 Integration of the different risk measurement arising from the specific risk dedicated advanced models 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% 23 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 CAPITAL ALLOCATION STRICTLY LINKED TO GROWTH TARGETS AND RISKS OF EACH DIVISION ECONOMIC CAPITAL SAVING THANKS TO BIS II STARTING FROM 2007 14,100 mln(1) 6.8% 6.0% 10.3% 9,207 mln Corporate Centre Private & AM New Europe Retail 2002 Core Tier 1 ratio: 7.2% 2.9% 8.1% 8.6% 31.0% 30.6% 45.8% Corporate 49.8% 2002 2006 24 (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 AVERAGE PAY-OUT RATIO AROUND 65% TO STABILISE CORE TIER 1 RATIO AT 2002 LEVEL AGENDA 2003-2006 economic scenario UCI 3 years strategic plan Business model Strategic guidelines and operating targets Risk management and capital allocation Group targets 25 SUSTAINED EPS GROWTH, SOUND EFFICIENCY RATIOS AND HIGH PROFITABILITY, WITH SIGNIFICANT VALUE CREATION FOR SHAREHOLDERS 2002 Revenue growth (mln) UCI Italian divisions excl. Pioneer Italian system Op. Income growth (mln) UCI Italian divisions excl. Pioneer Italian system EPS 10,284 CAGR 02-06 8.6 Cost/Income, % 2002 2006 54.6 50 7,999 8.9 UCI Italian divisions excl. Pioneer 52.7 46 n.m. 4.8 Italian system 64.2 60 4,670 11.5 Core Tier 1 ratio, % 7.2 6.8-7.2 3,783 12.4 ROE, % 17.2 21 n.m. 7.7 6.9 12 0.29 14.0 4,607 5,241 70,992 70,565 RARORAC, % Branches(1) Employees (1) DYNAMIC CAPITAL MANAGEMENT, ALLOWING FLEXIBILITY IN EARNINGS DISTRIBUTION AND LEAVING FREEDOM TO PICK POTENTIAL MARKET OPPORTUNITIES (1) KFS at 100% 26 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 Reduction of cost/income ratio thanks to efficiency improvements in all business divisions and new initiatives reaching break-even Strong cash flow and capital generation, with significant value creation for shareholders 27 2003-2006 PLAN: RENEWED BUSINESS LIFECYCLE AND ACCELERATION OF GROWTH PATH g 0 03-06 plan 2002 2006 t S3 CREATES NEW OPPORTUNITIES FOR GROWTH PLAN DELIVERING DOUBLE DIGIT EPS GROWTH AND PREPARING PATH FOR ACCELERATED GROWTH 28