Unicredit 2020-2023 Strategic Plan

The Board of Directors of UniCredit S.p.A. has approved the 2020-2023 strategic plan, Team 23, which will be presented to analysts and investors at a Capital Markets Day in London today.

The successful delivery of Transform 2019 demonstrated UniCredit’s clear commitment to deliver and its proven ability to execute a strategic plan despite a worse than expected macroeconomic environment. Key targets including the de-risking of the balance sheet, cost reduction and capital distribution were exceeded. UniCredit is transparent in what it does, it aims
to do the right thing for all stakeholders, and it favours sustainable long-term outcomes over short-term solutions.

In the same spirit, Team 23’s targets are pragmatic and achievable. They are based on a realistic set of macroeconomic assumptions, being more conservative than those assumed by the market. The plan itself is based on four, clearly defined strategic pillars:

  • Grow and strengthen client franchise
  • Transform and maximise productivity
  • Disciplined risk management & controls
  • Capital and balance sheet management

Grow and strengthen client franchise

Whereas Transform 2019 focused on making the Group more efficient and de-risking the balance sheet, the new strategic plan’s key priority is to grow and strengthen the pan European franchise, both by widening and deepening relationships with customers. Examples of initiatives underway include:

  • Building on UniCredit’s position as the “go-to” bank for European SMEs. Key success factors include the bank’s long established, local presence in its markets, a single groupwide service model across the Group’s unique pan European network, and the full range of corporate products and services delivered by a fully plugged-in CIB. Revenues from
    SMEs of € 2.3 bn in 2023, a +3 per cent CAGR in Western Europe12 and in CEE13.

Redesigning the product and service offering for individuals through enhancements to the service and distribution models, including a continued migration of transactions towards direct channels. The use of digital channels is expected to increase during the plan from 45 per cent of all customers14 in 2018 to 60 per cent in 2023. Over time, the customer’s experience in the branch will improve and will increasingly converge towards the digital one.

  • Fully exploiting the CEE leadership position and economic potential with a strengthened commercial strategy, driven by a clear customer focus and leveraging on the enhanced digital processes and international franchise. CEE is expected to deliver growth of core revenues of +2% CAGR 2018 to 2023.
  • Delivering the fully plugged-in CIB’s complete product offering to all customers across the Group’s pan European network including SMEs, Corporates, Private Banking, Wealth Management and Financial Institutions. CIB client-driven revenues will grow by +3% CAGR 2018 to 2023.

Complementing this clear commitment to grow and strengthen the pan European client franchise, is a strong focus on improving the customer experience in the new plan. This involves a multi-faceted approach including:

  • Digitalisation to streamline processes and simplify the customer journey. Examples include a significant reduction in the number of signatures required and time taken to open a current account.
  • Leverage on customer insights (via net promoter scores) to better prioritise initiatives to enhance dedicated customer journeys. In addition, client feedback and data analytics will be used to address customer needs and expectations proactively.
  • New, flexible ways of working to reduce time to market.

The growth in and strengthening of the pan European client franchise is expected to deliver resilient revenues despite a negative interest rate environment, with revenues of €19.3bn in 2023, a CAGR of +0.8 per cent 2018 to 2023. Within Western Europe3, revenues are expected to grow with a CAGR of +0.5 per cent while in Central and Eastern Europe, revenues will grow with a CAGR of +2.0 per cent 2018 to 2023.

Team 23’s revenue targets are based on pragmatic assumptions including more conservative interest rate assumptions than the market. The plan assumes a 3-month end of period Euribor rate at about -50bps between 2019 and 2022, rising to -40bps in 2023.

Transform and maximise productivity

Reducing costs formed a core part of Transform 2019’s success. Operating costs were reduced from €12.2bn16 in 2015 to €10.1bn17 in 2019, the latter comparing to an initial target of €10.6bn at the 2016 Capital Markets Day.

Controlling costs combined with improving the customer experience remains a key focus in Team 23. Building on the work begun in Transform 2019, the bank is launching a permanent optimisation of work processes across six customer journeys: current accounts, investment products, residential mortgages, consumer finance, cards and SME banking. Teams drawn from different functions within the Group, including business, IT and support, will work together in so called “end-to-end rooms” in order to deliver new products and services to our customers in a faster and leaner manner.

Through this continuous transformation and simplification of processes, the Group will meet three key objectives:

  • Enhanced customer experience
  • Improved productivity across the value chain
  • Reduced operational risks

Demateralising processes, the paperless retail bank, will deliver cost savings for the Group in excess of €150m18 annually by 2023. Eliminating paper will allow the bank to implement straight-through processing, resulting in faster transactions, enable the exchange of digital documents between the bank and its customers, and provide a wider set of digital-ready
contracts facilitating the increased use of digital signatures. The roll out of the paperless retail bank begins in Italy in mid 2020, to be followed by Germany and Austria in 2021 for core products, and CEE by 2023.

Significantly exceeding the original cost targets within Transform 2019 has allowed the Group to increase its investment in IT. Under the new plan, total IT investments will increase by 17% compared to the prior plan, with an average annual investment of €900m, on a cash-out basis. The mix of IT spend will also pivot in the new plan with an increased share allocated to investment in cost and productivity initiatives19 such as the redesign of work processes in the permanent end-to-end rooms. The total cash spend on all IT over the four year plan is €9.4bn including the IT investments as well as HR, maintenance and cyber security costs, and consultancy spend.

Under the new plan, total costs will be €10.2 bn in 2023, a CAGR of -0.2 per cent 2018 to 2023. Continuous process optimisation supported by the increased IT investments will allow the bank to deliver gross savings in Western Europe of € 1 bn, representing 12 per cent of the 2018 cost base. These cost savings will in part be achieved through further FTE reductions of around 8,00021 over the plan period while the ongoing optimisation of the branch network will see  additional closures of about 500 at a Group level between 2019 and 2023. The associated integration costs for Western Europe3 total €1.4bn, net of tax, to be booked in 2019 and 2020.

With the revenue initiatives in place and the continuous optimisation of costs, the bank expects to deliver positive operating leverage23 of 5.2 p.p. between 2018 and 2023.

Disciplined risk management & controls

A strict focus on credit risk and asset quality was another core part of Transform 2019’s success and remains a key focus in Team 23. The Group will maintain its discipline in origination, targeting the best rated clients. The monitoring and management of credit risk will be further strengthened through the use of new technologies and data sources. Automatic risk approval will be used for selected segments and products using enhanced data analytics during the preevaluation phase.

Building on the experience gained in Transform 2019, the bank will continue to manage NPEs proactively to optimise value and capital. Group gross NPEs are expected to be below €20bn at the end of 2023, representing a substantial reduction of almost €60bn from the end of 201524. The full rundown of the Non Core by end 2021 is confirmed with gross NPEs below €9bn by the end of 2019, significantly beating the original €19.2bn Transform 2019 target, and below €5bn by the end of 2020. The Group gross NPE ratio target is to be below 3.8 per cent by the end of 2023 while the cost of risk is expected
to be 40bps in 2023.

Operational risk remains a significant focus for the Group, with reinforced controls of business and governance processes across all legal entities. An enhanced focus on Anti Financial Crime controls and KYC includes improving oversight through strengthened, centralised compliance requirements, as well as rotating people between business and control functions. Employees remain the first line of defence against operational risk. The Group therefore continues to invest in and promote its strong culture, defined by the “Do the right thing!” principle.

Capital and balance sheet management

Transform 2019 delivered a significant strengthening of the Group’s balance sheet, with € 21bn of CET1 capital raised, resulting in a CET1 ratio of 12.6 per cent as at 3Q 2019, an increase of 2.2 p.p. from the end of 201526. A CET1 MDA buffer of 200-250bps will be maintained in every year of the Team 23 plan27 regardless of the environment while the TLAC/MREL MDA buffers will be at the upper end of the 50-100bps range. The SREP Pillar 2 Capital Requirement (P2R) has been
lowered by 25bps to 175bps.

Capital allocation is an important part of how the Group manages its balance sheet. Capital is allocated proactively based on financial performance at a country28, segment28 and individual client29 level. This approach was demonstrated with the recently announced unwinding of Koç Financial Services, the joint venture with Koç Group through which the stake in Yapi ve Kredi Bankasi A.Ş (Yapi) was held. By dissolving the joint venture and selling an approximately 9 per cent stake in Yapi, UniCredit has created flexibility to manage the remaining, directly held stake in Yapi.

The strengthening of the balance sheet will continue with the ongoing, gradual alignment of the domestic sovereign bond portfolio with those of Italian and European peers, and the reduction in intragroup exposures. The tangible benefit of these actions was acknowledged with the upgrade of UniCredit S.p.A’s ratings by S&P and Moody’s announced in July earlier this year.

With a significantly strengthened balance sheet and continued disciplined risk management, the new plan will deliver enhanced capital returns for shareholders:

  • capital distribution equal to 40 per cent of underlying net profit for 2020 to 2022
  • comprising 30 per cent cash dividend and 10 per cent share buyback
  • capital distribution equal to 50 per cent of underlying net profit4 in 2023 comprising 40% cash dividend and 10 per cent share buyback.

The new plan will therefore generate significant value for shareholders, a total of €16bn1 for the plan, comprising:

  • €6bn of cash dividends
  • €2bn of share buybacks
  • €8bn increase in tangible equity

In addition, the proposed capital distribution2 for 2019 is increased to 40 per cent of underlying net profit4, including 10 per cent via a share buyback5. The revised distribution is double the initial target of a 20 per cent cash dividend7 communicated at the 2016 Capital Markets Day.

In order to optimise its MREL requirement in the medium term, UniCredit keeps working on a project to create a subholding, incorporated in Italy but not listed, for UniCredit Bank AG, UniCredit Bank Austria AG and the legal entities of the CEE banks. UniCredit S.p.A. remains the operating holding and the resolution strategy remains Single Point of Entry, which is the basis
for the multi-year funding plan.

Team 23 to deliver resilient profitability

Transform 2019 delivered a sustained improvement in profitability, with Group RoTE10 more than doubling from 4 per cent in 201516 to above 9 per cent30 in 2019. Team 23 builds on this foundation with a commitment to deliver resilient underlying profitability. Despite the material increase in capital required by regulators, the new plan will deliver sustainable returns, with a RoTE10 at or above 8 per cent throughout the plan period. The underlying net profit4 will be €4.3bn in 2020 increasing to €5bn in 2023 based on an underlying tax rate between 18 and 20 per cent throughout the plan.

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