Transcript UCI Group Strategy A. Profumo, CEO of

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