Ipek Cem was recently in Milan to interview Alessandro Profumo, the CEO of the Unicredit Group which is now positioned as one of the leading financial institutions in Turkey. Profumo discusses his European strategy, expansion plans and the EU integration process, as well as the commenting on the continuing jitters in world markets.
Ipek Cem: My guest today is Mr. Alessandro Profumo. He’s the Chief Executive Officer of UniCredit Group. Welcome to Global leaders.
Alessandro Profumo: Many thanks. It’s a great pleasure to be here with you.
Ipek Cem: When we think of Italy we usually think of good food, fashion. And we think of the arts. But now here we are sitting in Milan with you and you are making us think of Finance. How is the “European Bank” going?
Alessandro Profumo: Let me say that very clearly with this market situation. There has been some slow down. Europe is performing well as an economy and the financial sector is also performing relatively well vis-à-vis what we have seen in the US. Clearly it depends quite a lot on the exposure with the investment banking business where the impact could be strong. Or could be bigger in other sectors.And for what concerns Unicretido things you were saying that you think about Italy you think about food and the culture and so on I think today we can also think about the banking sector. Because a little bit more than ten years ago there has been a full privatization of the banking system. And this is the reason why today in Italy we have two of the major European players in the banking sector. Banco Inteso and now ourself. As you know, UniCredito international so I think that today you also add the banking sector to your list of things.
Ipek Cem: How is the mind set change occurring in Italy because when you first started with Credito Italiano it was a completely different picture. It was 1994, the privatization had just taken place. And then there was a consolidation within Italy with the regional banks and now there is consolidation in Europe along with the EU project. How are the Italian citizens looking at this situation, are they questioning it, are they used to it by now, are they wanting it?
Alessandro Profumo: Partially questioning it. Because clearly the banking activities are mainly seen as a public function. So the fact that we are companies with the aim of creating values for our shareholders is not yet fully accepted. In the meantime, the consolidation you were referring to created a sort of de-privatization. I don’t know how to translate this. The people have a sense of having lost his or her own bank, because as you were saying we went through a consolidation of 7 big local banks. A savings bank, a big public regional bank, so in different cities at the beginning there has been a sense of “Oh my god we have lost our bank.” So clearly this is a process that will be relatively long. And also the fact that being so huge, the absolute value of the profitability is significant because we are talking about billions of Euros. This is not something that is not fully accepted by the citizens. I think that it is our responsibility to be able to give them a real sense of the advantages we have in having a large international bank as their bank supplier.
Ipek Cem: In the US there has been the sub prime Mortgage crisis especially since July it has hit on many fronts and most recently from Meryll Lynch the departure of Stan O’Neill the CEO is big news. Is it hitting Italy and Europe in your opinion? How are your exposures?
Alessandro Profumo: Our exposure is completely negligible. We have an exposure overall to the sub prime market which is considering on balance sheets and off balance sheets as a group of 354 million which is nothing. Also because these are performing ABS and CEO’s. The real matter is that the subprime has been a sort of trigger of a more ample event, mainly touching the topic of liquidity. So today there is an increase for the cost of funding for all the banking sector and clearly that is the same for us. And this will create higher costs for lending to our customers. This is something that we have seen all over Europe, all over the world. As I said before the real economy in Europe is performing quite well. For sure we are not growing as China or India. But we know perfectly that central and Eastern Europe are growing quite well and also western Europe is performing relatively well. This increase in interest rates for sure will slow down a little bit the growth in the real economy. Again the impact on the banking sector is relatively small.
Ipek Cem: Do you feel this is now at the contained stage or do you feel there will be more repercussions?
Alessandro Profumo: I think that the liquidity... I don’t want to talk of crises but, the liquidity reduction will continue for a certain period of time. I believe this is something that must be considered. It’s not an event that will be behind us in the short term.
Ipek Cem: We know that you have grown into Eastern Europe but in Turkey we know you mostly through your partnership with Yapi Kredi and with the Koc group. And this was finalized about two years ago. How do you see the growth in Turkey in the banking sector? Are you following it? What are your expectations?
Alessandro Profumo: If I could correct a little bit in reality we signed a joint venture with the Koc family in 2001. So it’s almost 6 years that we are there and then with them we were able to buy Yapi Kredi. Then we changed the brand of Koc Bank to Yapi Kredi. So first of all in perspective after six years it’s a very very successful story. This is due to many different factors. The first one is the country. Because it is a country that is growing quite well,where the economic policy has been really good. We know that when we invested, interest rates and inflation rates were still quite high. I remember an inflation rate close to 40 percent in 2001. Today we are in single digits. Interest rates went down. So the country in financial terms in performing well. Secondly Turkey is a young country. The demographic is completely different than all the other countries. It’s a big country. So the first positive factor is the country and the second positive factor is the partner. The Koc group is a very well managed group with a family which is completely market oriented and the partnership with them allows us to be a successful investor in Turkey with the position of Yapi Kredi. And to create a positive synergy with the commercial and industrial activities with the Koc group and with the bank. The third thing, the fact that together we have been able to buy a very well known brand Yapi Kredi and with the strengths of our banking capability, the partner and the value of the brand we have been able to grow quite significantly. Today our focus is on organic growth. We are continuously opening branches. Today we have more than 650 branches in the country. And I would say that we are quite happy, of being Turkish.
Ipek Cem:When you did the first partnership with the Koc Bank it was 50 50 and also..
Alessandro Profumo: It’s still 50 50.
Ipek Cem: I know and after the acquisition of Yapi Kredi still 50 50. Do you foresee that in the future that this could change that you would be interested in having more of a stake?
Alessandro Profumo: No no, we will remain 50 50. It is a successful story. There are no reasons for any change.
Ipek Cem: OK When you look at the geographical presence of Unicredit in Eastern Europe and the rest of Europe we see that you are missing one of our neighboring countries Greece. And there were some rumors in Greece about Alpha bank and perhaps some other banks you might be interested in. Do you have any formulated strategies to go into Greece?
Alessandro Profumo: No we don’t have any formulated strategy in Greece. There is a relatively small number of banks, very well performing and consequently expensive. So today we prefer to be focused on where we are and to grow organically where we are.
Ipek Cem: When you look at the merger with the HBV and some people have criticized afterwards that Uni credito itself is very profitable but that bank having lots of bad loss on its books. Is this exaggerated do you feel? Or is there still more work to be done to put it on par with the rest of your institution?
Alessandro Profumo: In terms of asset quality, the asset quality after two years is better than the one we were thinking before. And the numbers are demonstrating that. If you consider the real estate re-structuring portfolio, the NP’s, the cost of credit and so on are all indicating that things are moving quite positively. There is fortunately still quite a lot to be done in terms of improving the commercial performance of the bank. In the sense that we are relatively very small in Germany. We are more or less 5 percent of the market so we still have another 95 percent to take for being even more successful.
Ipek Cem: When you look at the growth of private equity, especially in the past several years as a way of companies to finance there growth and their operations. Do you feel as a banker that this is kind of taking away from the traditional loan relationships or the traditional banking relationships that you have with that your customers?
Alessandro Profumo: No, I think that first of all, as a so called ‘financial sponsor’, the private equity fund, are, as a category one of our most important customers. So I think that the cooperation with them is quite important. Statistically, the companies owned by private equity grew more than companies not owned by private equity funds. The performance in both financial terms and employment are quite positive. So I do see this work in a positive way.
Ipek Cem: When you were working to acquire Bank Capitalia we heard Mr. Prodi saying now in Italy we will have two very large, very strong banking groups. “It’s a good thing for the economy of Italy as a whole.” Do you feel the Italian economy is doing better under Mr. Prodi?
Alessandro Profumo: Clearly the performance of the economy in terms of GDP growth is higher than the one we had in the past. We also have to consider that there is a positive economic cycle world wide so it’s very difficult to say when this started and for which reasons. Generally speaking, I think that we can say that the reforms in terms of liberalization on one side and in terms of changes of the fiscal law for instance of the Prodi government have been positive. As you know, the primary debt started to go down last year and will go down next with the fiscal laws under discussion. I think that a country is like a company and so if the debt is too high, it could have a problem. And so with this perspective I think that the moves of this government have been good.
Ipek Cem: In Turkey, we are very much involved with the European Union as a project and as a prospect. Clearly we are waiting to become a full member although it looks like this will take some time. Now the concept of Europe and the European Union, in terms of its laws and regulations vis-à-vis your sector and in terms of creating one market place which emphasize also for your bank. How do you find the economic repercussions on this, on your line of business? Do you think the EU is doing a good job of improving commercial relations? Is it really helping or could it do more?
Alessandro Profumo: I think that the work has been good. In many different situations during our growth in central and eastern Europe, the E.U. commission helped us significantly. I think that we can speed up even more the full integration of the financial market in Europe. In this perspective it’s not a fault of the E.U. commission, it’s more the fact that the different countries have the problems themselves. We know that for instance there are still many local consumer protection rules that in reality are protection of the local companies more than the consumers. As Uni-credito with other big E.U. financial institutions, we are pressing more and more to have a full integration. We can give a very small example. For instance, if we want to distribute our mutual funds from different countries in Europe, for each of the countries we need a company because there is not yet a European passport. Clearly this is creating cost that in the end remains on the shoulder of the customer. So we think to have a higher integration would be quite positive for the European citizen.
Ipek Cem: Is there cooperation among the different financial institutions? I assume in terms of lobbying for issues like this…
Alessandro Profumo: Of the most international ones, yes
Ipek Cem: When you talk of mergers and acquisitions and a company growing geographically there is always the sense you are now in Europe but people ask you if you are going to China…I think you did a joint venture for an asset management company in India. Are you going to India? Will you be looking at other markets? How about thee US? So, what is your focus? When will Europe fulfill its packaging for you, so you will venture out?
Alessandro Profumo: We are European, mainly European. And I consider Turkey in Europe. I will give you an answer with one number. Bank of America in the US has close to 10 percent of the US deposits. I think that Unicredito is one of the most European banks and we have 3 percent of the European deposits. We have huge room to go. I think for us the key focus must be Europe.
Ipek Cem: And clearly the US market is very competitive, but do you see other international players approaching you trying to do something with you?
Alessandro Profumo: In the US our focus is asset management. We are there with Pioneer? As you know Pioneer, our asset management company is a real global business we have, is based in Boston, in Dublin and in Singapore. And so for us the US will remain asset management. We have a good presence in investment banking but it’s mainly focused on specific products. In investment banking, we are and we want to be specialists in Europe. So we sell mainly European products in the US. I don’t think we can add a lot of value to US commercial banks. There are fantastic banks there. I don’t understand why a European has to go there thinking he could be better than a local player.
Ipek Cem: How about some of the other markets in Europe which are more developed than some of the ones you have worked in… you have partnerships in Germany, but what about France, Britain… other more mature markets?
Alessandro Profumo: I think it’s important to have a clear idea of Unicredito. For us, today, the key focus is really to be able to be perceived by our stakeholders as a European network. Today we are perceived more as a sum of local banks. And in this European network we have a presence in 23 different countries being a strong domestic player of European and close to Europe countries. And then to leverage on what we call global business lines. Asset management, investment banking, leasing, consumer credit, cash management. To add another country and other business lines can increase the level of complexity quite significantly today and could slow down the extraction of value from what we have. So I think that really the key focus must be, for the time being, really creating the reason why the external market can perceive us as a European network with these strong global business lines. And when we have completed this process we will see.
Ipek Cem: So strategic and paced growth and not growth for the sake of growth.
Alessandro Profumo: Exactly strategic growth where we are.
Ipek Cem: In Turkey we have done a lot in the past couple of years in terms of attracting more foreign investment, in terms of simplifying procedures for other companies to operate in Turkey. You have the chance to see many emerging markets. How do you rate Turkey as opposed to some of the other emerging and eastern European countries?
Alessandro Profumo: Quite well. I would say that the main reason is that the quality of authority is quite good. We perceive them as really independent. So the ranking of Turkey is really good.
Ipek Cem: In Turkey we see both support from some European countries and also some concern from others regarding Turkey entering the European Union. What is your view as a European businessman as to whether and when Turkey could join the EU?
Alessandro Profumo: Very clearly I have a conflict of interest, because I strongly supporting the entrance of Turkey to the E.U. But I think that it will be a long process in any case. There is still a lot of consensus that must be created in two countries, France and Germany, as well as in Austria. What I think is quite important is that in Turkey there will be the awareness that the process will be long. And the awareness that in any case to adapt all the institutional frame work, to be ready to enter the European Union is something that is important per se. Because if Turkey could create an infrastructure here we are talking about authority, a judicial system, many different things which are all positive in that they create a trigger for increasing attractiveness of the country. So again I don’t know when the process can end. What I am always saying is that it is quite important to keep the perspective open. And in Turkey it’s important that there be full confidence that whenever the process is completed. Turkey will benefit from taking the necessary steps towards membership and the Acquis Communitaine.
Ipek Cem: The process is well known but we often feel it’s a cultural issue as well, even if we go through all the steps of the process. Do you see such a perception in Italy? The idea that Turkey is such a different culture and that it shouldn’t be in the EU.
Alessandro Profumo: Paradoxically, Italy, despite the fact that Italy is in theory a country more rooted to Catholicism, it is one of the countries where there is a positive perception of the accession of Turkey to the European Union. And as you know our government has always been very vocal on this issue. I think that diversity is a value. This is one of the key values of our group. Personally I can’t perceive a major problem with this perspective. I think that the problems are in other countries. So what I think all of us we have to do, what we are doing in Germany, working on our economic activity, as we did with our Italian- Turkish forum we have created a German Turkish forum. Because we think that the more the economic world puts pressure on the political world to give the message that it would be good for our internal development to have Turkey in the EU. And there will be the creation of a positive feeling. I think that all of us we have to work as much as we can to create a positive perception. I hope that the process will come to an end before I will have retired.
Ipek Cem: On that note I would like to thank you for the interview.
Alessandro Profumo: Thank you.
This transcript was typed from a transcription unit recording and not copied from an original script. Because of the possibility of mis-hearing and the difficulty, in some cases, of identifying individual speakers, NTV networks and Ipek Cem cannot vouch for its accuracy.