In the sometimes noisy banking industry, Federico Ghizzoni is a man of quiet words who acts decisively. Over the last five years, the 59-year-old chief executive has restructured UniCredit, Italy’s largest bank. Now it’s time for the second phase – cutting costs across the entire financial services group, including at Bavarian subsidiary, Hypo-Vereinsbank or HVB.
In an interview with Handelsblatt, Mr. Ghizzoni announced that HVB will lose some autonomy in the cuts. Ten years after being bought by UniCredit, some central functions at the Munich bank will move to Milan, he said.
HVB’s efficiency under its German chief executive, Theodor Weimer, leaves something to be desired, Mr. Ghizzoni said. For every €100 in income, HVB spent €75 for the year ending June 2015. That compares unfavorably with the parent company’s 60 percent cost-income ratio.
“The bank has always been able to react to the market and its clients. And that is a quality which has to be sustained,” Mr. Ghizzoni said. “But of course there are ways to make the bank leaner and centralize some non-client-related functions at a group level.”
What exactly is in store for HVB’s staff will not be known for another few months. Mr. Ghizzoni plans to announce details of the new restructuring by the end of the year.
“We have no plans to split up HVB or list it on the stock exchange,” Mr. Ghizzoni said. “That would be a mistake, as HVB is a strong bank in Europe’s strongest economy.”
Mr. Ghizzoni’s savings mandate is in line with current trends in Europe’s banking industry. After years of weak business, burdensome low-interest rates and a tougher attitude from regulators, returns at many banks have fallen short of expectations while costs remain high.
At Deutsche Bank, for example, new co-chairman John Cryan harshly criticized his bank’s “unacceptable” costs recently, and prepared employees for tough measures.
Mr. Ghizzoni did have one consolation for his German bankers, however. While HVB will have to cut costs, he also wants it to grow – and he will make sure it has enough capital to do that.
In the interview with Handelsblatt, the UniCredit chief talked more about the future of HVB and the European banking industry. Here are excerpts:
Mr. Ghizzoni, for months now the European Central Bank has been buying bonds on a large scale. But the danger of crippling deflation does not seem to have been averted. Should the central bank do more?
The ECB has indeed done a lot, and I don’t believe it can do a great deal more. I think it’s time now for euro-zone governments to act. If you take into account an impending slowdown in growth from China and other important emerging markets, then the only conclusion is surely for E.U. states to increase their domestic consumption to make up for a more difficult situation in export markets.
How big are the risks from distortions in emerging markets?
We can certainly expect a clear downward correction in China. At the moment it is difficult to say when and how the markets will stabilize – and that is causing big fluctuations on the world’s stock exchanges. But it would be wrong to regard the whole issue as a stock exchange phenomenon. The global effects of growth cooling down in China will have a direct effect on Europe and the United States. And that is why increasing domestic consumption is our only chance.
How exactly should E.U. countries boost consumption? Should they save less and take on more debt, or reduce taxes? What do you suggest?
I think Germany is a good example. With its robust budget situation, the country can afford higher wages, for example. For states like Spain, France or Italy, it is more complicated, but there are possibilities there too. For example, a few days ago the Italian government announced a reduction of real estate taxes. Budget flexibility can be created through savings elsewhere or more privatizations.
“We have no plans to split up HVB or list it on the stock exchange.”
Are reforms being made fast enough in Italy, or could the government of Prime Minister Matteo Renzi do more?
Of course, you can always do more. But after 18 months in office, I think things are moving in the right direction. Important projects have been launched, including labor market changes, improved fiscal policy and banking reforms. This year, Italy’s economy is expected to grow by nearly 1 percent. That might not be a lot, but after four or five years of negative growth, it marks a significant change. I wouldn’t say I am 100 percent satisfied, but about 80 percent nevertheless.
The European Central Bank’s stress tests took place about a year ago, and many expected that to be followed by a wave of consolidation among Europe’s banks. But not much has happened yet. Do you think that will change?
With the introduction of the European banking union a year ago, we might have expected an increase in the direction of consolidation. But now we can see that uncertainty is still too great, especially concerning regulation. For example, the problem of banks that are too big to fail, without damaging the entire financial system, is still not solved. And the pressure of regulators for higher equity capital ratios is still intense. That’s why many banks are waiting. I think bigger international mergers are unlikely. More will happen in individual countries, for example in Italy, with the credit cooperatives.
UniCredit wants to save more. How far have you progressed with your plan?
In March 2014, we announced a strategy that included cost-cutting measures. This plan will be expanded and relevant measures will be announced by the end of the year. One reason is the European banking union, which allows us to shape our group more efficiently and increase synergies. It is a chance not to be missed.
Do you want to centralize the functions of the group more in Milan?
Some business sectors are unsuitable for central management, like retail and private banking. There you need local bankers to speak to clients where they are. But there is great potential in other sectors, and all divisions of the bank have to contribute. For example, in central administrative areas: In the past, national supervision regulations led to the creation of double structures. With the banking union we aim to avoid this in future.
Can you give examples of these duplications?
There is a whole series of functions we can make leaner. I’m talking about areas like risk, accounting, auditing and others. Risk models are another example. Up to now, there was no one model for the whole group. Now the ECB is demanding that from us.
“This year, Italy’s economy is expected to grow by nearly 1 percent. That might not be a lot, but after four or five years of negative growth, it marks a significant change.”
So for Germany’s HVB, that means some of these functions will be moved from Munich to Italy?
The autonomy of the HVB board is one of the strengths of this bank. The bank has always been able to react to the market and to clients. That is an asset that we have to sustain. But of course there are ways to make the bank leaner and centralize some non-client relevant functions at a group level. As I mentioned, we are in the middle of the analysis and will announce details at the end of the year.
So you see specific possibilities for HVB to cut costs more?
Costs are an issue for all European banks. We have to improve cost-income ratios throughout the group. All parts of the group have to make a contribution – including HVB.
Are you thinking of moving capital or liquidity from Munich to Milan?
Liquidity is not an issue. We have a solid position in all sectors of the group. With regard to capital, there is no specific target for each country. But the ECB has advised us to utilize our capital more efficiently. So for me, the key question is not whether we move capital from the subsidiary to the holding company, or vice versa. It is about investing capital where it generates the highest profits. If one part of the group increases its returns, then that division receives more capital. And within our group, HVB has always generated a very high return on capital invested.
There are doubts in the market about the capitalization of UniCredit. Will the bank require a further capital increase?
When we announced our strategy last year, we had a core capital ratio of 9.36 percent, and our declared objective for the end of 2016 was 10 percent. Now, one year later, we have 10.35 percent. In the meantime, capital requirements have become stricter. But that doesn‘t bother me, because we have proved that we can generate capital quickly. So we will continue to organically expand our capitalization.
Deutsche Bank has just decided to list its retail Postbank on the stock exchange to strengthen its capital. Is that a model for UniCredit and HVB?
We have no plans to sell HVB or list it on the stock exchange. That would be a mistake, as HVB is a strong bank in Europe’s strongest economy. It just wouldn’t be logical to leave this market. Our plan for the HVB is more about growth. We want to invest in Germany.
Mr. Ghizzoni, your contract was recently extended for three years. After that, would you be willing to take over the position of chairman of the supervisory board from Guiseppe Vita?
I have never thought about it, and it is not within my power. It is a matter for the board of supervisors and stockholders to decide. In any case, I am very happy to continue working with Guiseppe Vita.
Have banks done enough to restore confidence in the industry?
Some banks have done more than others to improve the industry’s reputation. But overall the situation is improving and confidence is coming back. At UniCredit we have seen that a clear focus on our clients and the real economy serves to improve the bank’s reputation. Any player with that kind of strategy will see public recognition for their role.