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Interview of Gianni Papa, Head of CEE Division of UniCredit, to “Zerkalo Nedeli” business edition

23.01.2012

How serious are the problems, caused by debt crisis, for the Group business, in the epicenter of which Italy now is?

I would say that Italy is not really the epicenter of the crisis. It is one of the countries that have been affected by it. Crisis, as you know, started in Greece and later reached our country, besides the situation has considerable speculative value.
It should be noted that if you look at the UniCredit Group as a whole, we have 1/3 of our assets in Italy, 1/3 – in Germany and Austria (these are countries of triple A and double A), and another 1/3 of the assets – in CEE. As you can see, we are very well diversified Group in terms of risks. The Group is structured in such a way that CEE except Poland is under the umbrella of subordinate of Austria – Bank Austria. Austria, as you know, irrespective of recent drop of its rating by one rating agency, is a strong rated country. CEE region is also not affected very much by crisis.
So, in view of the aforementioned, I don’t see really huge problems coming today for UCG, in particular, because the risks are very well diversified and not only in terms of area but in terms of deposit structure.
If you talk about Italy, the new government will take all the measures that have been requested in order to solve the situation. The downgrading has been unfortunate, but we believe that country will be able to solve it.

What gives you that confidence? As many observers say, nature and depth of further problems of region on the whole depend on how Italy will be able to cope with the crisis.

I am Italian and I continue to believe in Italy and strength of its positions at the international level. I do believe that Italy has some weaknesses, which are caused by high public debt. This situation was in process and existed for many years, so there is nothing new I would say.
For sure, the recent fiscal package developed by government will reduce this aspect. As a matter of fact, if we look, for instance, at the ratio of public debt to GDP it reduced within the first three quarters of the last year by 4.6-4.3 percentage points.
I also think the Italy will see its GDP improve in the next quarters.
However, Italy has many strong positions. For instance, if you look at the individual wealth in Italy, it exceeds 4 to 5 times the debt of the country. Thus, if the debt of the country is 1.9 Trillion Euro, equivalent to 119 % GDP, wealth of the individuals in Italy is about 9 Trillion Euro. This, I think, is a good indicator of country financial wealth, by the way. So, from this you can see that Italy is a rich country in a sense that it has strength to overcome the situation. Italy is the 3rd largest economy in Eurozone, and I think that it is the 2nd largest in terms of industrial production. As you have noticed it has large value in the general European and global context.
Therefore, it is clear that the resolution of the Italian problems is of paramount importance for the European Union. Nevertheless, nobody has doubts that Italy has the capacity to solve and it will solve the problems. Besides, Mrs. Merkel came out couple days also stating that she has no doubt about it.

If we talk about downgrading, unfortunately, this has been surprising to certain extent due to action taken by rating companies which was affecting not just Italy, but many other European countries. I don’t want to enter into the specific, but you have been reading more in European newspapers and you can see how much this action has been criticized by the European Union, and local governments throughout Europe.

What will help the Group to overcome this situation? Recent dropping of UniCredit shares made the problem of capital adequacy topical, which can be solved in two ways. One of the ways is attraction of new resources to the capital, which can be problematic in view of the current situation, and cannot last forever. Alternative is reduction of operations, in particular, in the most risky countries of the CEE region (including Ukraine).

Сapital increase is going very well and on the 27th of January we will have the final outcome So, after the initial (which was one day, basically, on Monday morning last week shares dropping – auth.) we have seen the rebounding. Thus, after successful termination of the current capital attraction, we will have capital adequacy at approximately 10 %, which makes us one of the best capitalized group in Europe. This will enable us to keep performing the activity in every country including CEE. CEE has been confirmed by the Group as an engine for the growth of the Group. So, the capital will be deployed to CEE. Thus, we will maintain our presence here and develop business, so the capital attraction will also expand to this region.

What will be policy regarding Ukraine? To maintain presence, gradually reducing it to the minimum level, and develop business, opening new branches and increasing credit volume, are different approaches…

The Group is presented in Ukraine by 2 banks. If we talk about Ukrsotsbank, the bank was always profitable even in 2008 and 2009, which were the peak of the crisis. The situation was particularly serious in 2009, when at the end of the year GDP was 15% down.
Bank market was also reduced and suffered considerable losses. I’d been working in Ukraine for 3 years, so I know it pretty well. Year 2011 was also good for Ukrsotsbank.
That is why we are not going to reduce our activity in Ukraine to the extent larger that it will be determined by market circumstances. We increase efficiency of our business in Ukraine and not only in Ukraine but throughout the region. We considerably invest this field at present. In Ukraine, for instance, we’ve changed the IT-system. It was a very large investment. The final roll out is June-July this year.
We became more conservative regarding risk assessment, but the Bank still remains at 4-5 places at the market as it was in pre-crisis years and we are going to remain stable at our places. Talking about increase of operations it is not the matter of lack of offer from the Bank, but deficit of adequate credit demand in Ukraine.

So, rumors about possible sale of your subsidiary in Ukraine are groundless?

The rumors about selling the banks in Ukraine and Kazakhstan are groundless, although they’ve been around for more than a year. I think, there are interested parties who want to distribute this information for different reasons. I don’t want to speak in detail, but it can be clear if we look at bank profitability, depositing to restructuring of its business, management strength, improvement of IT-systems etc.

You mentioned about your three-year experience in Ukraine. How do you think, what are the main problems, which interfere with development of bank business and attraction of investments in our country?

I think that the problem of banking industry in Ukraine is very much related to the situation in neighboring countries: we talk about worsening of economy conjuncture, reduction of business and consumer activity. Talking about peculiarities I can state that development of bank industry is restrained by problems of protection of creditor rights and proper fulfillment of contract obligations. So, it is difficult for banks to return invested funds, when granted credits cease to be served. It is obvious, that the country needs more transparent regulatory basis in the field of credit relations. However, there are problems of unprejudiced consideration of legal relation of degrees of jurisdiction, more thorough compliance with the effective laws and executive services as well as law-enforcement services.

I think it is important to work more closely with international investors and banks. By doing this, we can see that new measures make sense, the government becomes more open . So I think it’s a right step.

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