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Ability to further attract international investments is a key factor of Ukrainian growth

09.08.2010

International UniCredit Group CEO Alessandro Profumo is one of most reputable and powerful European bankers heading the European Banking Federation. Mr. Profumo has been a permanent UniCredit Group CEO for thirteen years. Within that time UniCredit has developed from a regional bank into one of the largest European financial groups and the most active cross-border player in CEE banking.

At the beginning of 2008 the Group finalized the acquisition of Ukrsotsbank which is until now the biggest purchase of Ukrainian financial institution (USD 2.2 bill. worth). The same year (February 2008) Mr. Profumo visited Ukraine. That was the time of big and ambitious plans, but a lot has changed since then. As the result of global financial crisis, the Ukrainian economy and banking system have suffered most painfully among the neighboring countries and all over Europe.

How do the Italian investors assess the prospects of their banking investments in Ukraine? Is there a possibility for a double dip in Europe? And what are the prospects of further all-European economic integration? Find the answers to these questions in Mr. Profumo’s interview with Dzerkalo Tyzhnia Weekly.

— Mr. Profumo, how much are you disappointed with your two-year investment here and how big is your disillusionment with banking activities in Ukraine?

— First of all, the world has significantly changed over the last two years, and since then all banking business has become different. So, it is not correct to speak about disappointment in Ukraine, as the crisis has certainly affected all of us. Surely, it mostly affected such countries as Ukraine which had been growing quite a lot during the previous years but then most painfully suffered from the financial crisis and global economy slowdown.

But despite that, our Ukrainian bank (Ukrsotsbank – auth.) had been performing quite well within that period. In the course of all quarters and even months, its financial performance remained positive. So, I would say that in the way the things happened abroad or externally to us, we should be quite satisfied with the acquisition.

We are convinced that this investment is of immense potential for development and growth. The Bank and its procedures were significantly restructured during the crisis. The business processes and procedures were optimized, costs reduced etc.

We think we are ready to profit from the forthcoming recovery. As you know, the main world economies are growing again; we have been witnessing quite a lot of positive signals for better business and consumer activity. So, we think we are well positioned to benefit, when the world economy growth is on the run.

We also know that we could have achieved better results in some areas. In particular, better management of troubled assets with more favorable external environment. As other banks in Ukraine, we need strengthening the creditors’ protection rights. This has more to do with the problems resulting from the legal framework, law enforcement and judicial system of Ukraine, rather than with our own risk management.

— Some of you rivals have already declared the opportunity to sell their banking business or a part of it here in Ukraine. If you consider that your Bank is well positioned, then do you plan to make your market share bigger, for instance, due to new acquisitions? And what are the main points of the Bank strategy here for the next, let us say, three years?

— Due to our assessment outcome, our market share has already been increasing. The key strategy element is to be perceived as a high quality service bank by our customers, so the customer satisfaction is, certainly, a key driver for us. We are quite strong in both retail and corporate sectors. We have a good branch network all over the country, and, surely, plan to continue organically grow on this basis.

In our opinion, the organic growth is the most reasonable market strategy now. As I know, this is not only our Bank’s position but also that of all banking community in Ukraine. We remember the times of fast growth, opening of hundreds branches etc. Now we see other processes dominating worldwide, such as recovery, rethinking, modification, cost optimizing etc. In such circumstances, the organic growth is the best recipe for the next three years.

— You told about the renovation of solid growth all over the world. Can you forecast any specific terms, when will it happen? Also, there are many talks about possibility of the double dip in Europe this autumn. There are a lot of problems in such countries as Greece, Spain and Portugal which can be contagious for Italy, Germany and other European countries as well. What is your opinion about situation in Europe and the prospects of economic growth and banking business in Europe in the nearer future?

— First of all, I would admit that we are not expecting the double dip recession in Europe. The real economy, also thanks to the increasing export activity, is doing relatively well. Apparently, there are quite strong countries like Germany, but export activities in Italy, by the way, have also significantly improved.

When you talk about Greece, Spain, Portugal, you refer more to their financial side and sovereign debt. However, the auctions of bonds held during last few weeks in these countries went on relatively well.

I think we will not see a spectacular growth in the nearer future but we will not get back to recession as well. The real economy is expected to perform relatively well compared with two most recent years.

So, it is clear, as I said before, that present recovery is based on the increasing demand for European export (and it is quite important) mainly in Asia and partly in the USA. The world growth is going back to 4% which is not so bad.

I think that the way to foster the long-term economic expansion is a key challenge for Europe now. One negative factor is weak European demographic trends. There is an impressive demography in the USA due to the rapid increase in population via immigration and high birth rate. So, the US population increase is similar to that of developing countries, and, according to forecasts, such tendency will be on till 2050.

Asia also has, as we know, a significant demographic growth, and, though it is untypical of China, its population is huge. Russia said the demographic situation would be its long-term problem, and I think this is also the case for EU.

So, we have to understand what to do in this area and also in many other cases in the long-term perspective. We cannot finance the growth with debt increase anymore, because, as we see, the countries all over Europe need to dramatically improve their debt sides by repaying the former sovereign debts.

So, I think the key topic is the way to foster the growth with structural reforms and further leverage on the single European market. These are the key challenges in each country and immense business area on all-European level.

— What are the main points of these structural reforms?

— Every country has different needs. We need more Europe for Europe as a whole, I think, which means more integration among European countries. For instance, a very impressive study was published by former European Commissioner Mario Monti in May which showed that, due to further integration of the single European market, we can speed up the annual economic growth by 1% within the next few years. It is quite a lot. So, I think we need further integration of the European market.

— So, you are the supporter of the European integration, though there are a lot of talks about all-European project weakness and even eventual collapse of the Monetary Union. What would you say about that?

— I am an optimist here. Today’s Europe is at the crossroads: either it becomes more fragmented, or more integrated. I think we are unlikely to go back to more fragmented Europe. There are higher chances that we move to more integrated Europe. A proof of that is the discussion currently going on in EU about the pan-European financial market regulation, which should lead to creation of three common European financial regulators. There is clear signal in direction of further European integration.

As an example, we can also talk of discussions on how to analyze and agree on the national economic policies, improving fiscal discipline among EU states. There are the countries which are already moving forward in that direction. Germany is pushing quite a lot and moving towards stricter budget stance. There are perceptible steps to enhance the coordination and closer integration of economic policies among EU states.

So, all these things are changing, and European institutional system is moving towards higher integration. And I think at the end of this crisis we will get not less, but more Europe.

— Can you provide more details about your initiative to establish the private 20-billion “European Recovery Fund” for banks? Why has it not been perceived more enthusiastically among, for example, your German colleagues?

— First of all, this is a proposal which is a sort of contributing piece in a mosaic. As the crisis showed, we need effective instruments of interventions to react forcefully to stop the panic and manage other negative disruptive effects. There is a strong pressure from the politicians and authorities in order to have a reaction of the banking community in this connection. And we think that the banking community should take the leading position in finding its own contribution to the solution of the problem.

So, we have proposed to set up the European Recovery Fund, because we have seen that many banks had problems with medium- and long-term funding side, rather than with solvency, in the early stage of critical situation. Because of the market disruptions, many sound, profitable banks became distressed and risked insolvency. They simply could not access medium-term funding despite the fact that they held sufficient assets to post as collateral.

If you have long-term assets, you need a long-term liability. If you are not capable to find long-term cover funds and liability, you are forced to sell your medium- and long-term assets with such a discount that you start entering into the solvency problem.

Central banks were able to provide adequate short-term liquidity, but the authorities lacked tools to manage longer-term market disruptions. This issue is still on the table. Governments needed to use the public funds to raise the necessary medium-term funding for the banks.

If the largest European banks create this fund, they will be capable to take advantage of these long-term assets to provide the necessary long-term liquidity to banks, which are in a difficult situation but still solvent.

This fund must be under the supervision of independent European banking regulator, such as the Cross-border Stability Group or, in future, the planned pan-European regulator. The fund is involved only in case when the regulator decides on necessary support for this or that bank and its funds must be provided on market terms.

It is not the matter of self-defense but the matter of creation a reliance instrument where the private sector would be participating. I think it should be a good contribution in order to solve the piece of the problem.

As for your second question, there are quite different positions in Germany, and not all of them are negative. Their worry is not to create a restructuring fund (for troubled banks). But they are not so negative on the idea of the recovery fund. The proposal is now being discussed with many different players. Hopefully we will finally be capable to find the agreement to implement.

— How do you assess the probability of introduction of additional taxes and charges on banks to recover the public money spent to rescue the banks?

— For the time being the taxes proposed by some governments are not meant to create the fund to rescue banks, but are rather meant to be collected in order to help finance budgetary deficits. We think this is a mistake. Banks are already paying taxes as all other industries. And they are also required by regulators to hold more capital in future. So, if you need to increase your capital ratios and on top of that you are asked to pay more taxes, the situation could become very difficult at the end restricting the banks’ ability to lend to the economy.

I also think that applying a special tax on all banks is unfair: some banks did ask for the government support, some other, like UniCredit, did not receive any budgetary funds.

To sum it up, if an eventual tax is introduced in order to fund a restructuring or a recovery fund, we can discuss that. But if this is the tax to reduce the budgetary deficit, we think it is a mistake.

— Could you compare the reaction of Italian and Ukrainian authorities on crisis events? Here in Ukraine, we heard a lot about European parent companies being dissatisfied with some decisions made by National Bank of Ukraine. Do you lay any claims to the NBU policies?

— In this crisis period, the banking authorities in all countries within our perimeter, in my opinion, reacted quite well. We did not face a crisis, figuratively speaking, we faced a hurricane. Finally we are still here and doing business. Therefore, I think the overall community of regulators and central banks have done a great work. This is my opinion. Because, and I say it again, the world stays alive and we have not had the collapse of 1929 and the 1930s.

There are two main differences between the recent crisis and events of the 1930s. Firstly, a very strong intervention of central banks in providing liquidity, and this soft policy was maintained for a long period of time. Secondly, we kept economies open during this crisis. That means there were no huge barriers to foreign trade. And this is helping the recovery today.

So, the overall judgment of the authority reaction is quite positive. I think we should move on in this direction. The most critical issue placed nowadays for Europe and the USA is when to withdraw the liquidity from the market.

However, we have more important challenge, as I mentioned, which consists in our focusing on how to foster the growth in the region.

Talking of Ukraine, the key factor for it is to be able to further attract foreign investments, to create friendlier environment in terms of business activities, which means introducing many structural reforms into many different areas. I think this a key challenge.

— What are your impressions about the post-crisis Ukraine? What is the difference between what we had 2 years ago and what we have now? Has the country become different or not?

— Today, there is more political stability which is always an advantage and quite important condition for investors. I also think there is a good awareness of the internal problems of the country. Now the key is to move from the awareness to action and this is always the most difficult part of the story.

NOTE

Ukrsotsbank is one of the largest universal banks of Ukraine, operating in the local market since 1990. The bank offers full range of services to individuals and corporate clients.

The renovated Ukrsotsbank emerged on 31 October 2016 as a result of strategic deal whereby 99.9% of Ukrsotsbank shares have been transferred from UniCredit Group to ABH Holdings S.A. (АВНН) in exchange for a minority 9.9% stake in ABHH. Thus, the bank has combined 26-year-old traditions of Ukrsotsbank’s client-centric attitude, European quality of service inherent to UniCredit, as well as international banking expertise of ABHH in a number of European countries including CIS. Thanks to the successful synthesis and synergy of the two assets of ABHH in Ukraine, Ukrsotsbank and Alfa-Bank, the banking market of Ukraine will see the rise of a new stronger financial institution. This, in turn, will spur up technological advance, increase efficiency, improve quality of service for the clients, reduce cost of banking services whereas their range will inevitably expand.

The extensive retail network of Ukrsotsbank consists of 237 branches, its headcount reaching nearly 5 thousand employees.


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