Bloomberg News

UniCredit’s Khayat Wants to ‘Sweat’ Balance Sheet, Win Fees

June 21, 2011

(Updates with share performance in 11th paragraph.)

June 21 (Bloomberg) -- Olivier Khayat, who last month became the No. 2 at UniCredit SpA’s investment-banking unit, is betting he can help engineer a turnaround to boost profit from the bulging corporate loan book of Italy’s biggest bank.

“We need to make our balance sheet sweat a bit,” Khayat said in an interview at the bank’s headquarters in Milan. “Other institutions are probably better than we are in leveraging relationships.”

UniCredit’s corporate and investment-banking chief, Jean- Pierre Mustier, who previously ran Societe Generale SA’s investment-banking business, hired his former colleague to increase commissions and market share, particularly in advising on mergers, where it ranks 21st this year in its home markets, and in managing stock sales, where it ranks 12th, data compiled by Bloomberg show.

The bank has 455 billion euros ($651 billion) of risk- weighted assets, ranking fourth in Europe, the data show. It is No. 1 in organizing loans to companies in Austria, Germany, Italy and Poland, its home nations. The challenge, said Khayat, is to use those strengths to build the rest of the business.

“We have a big lending capability, but we need to complement that with a more distribution-oriented culture,” said Khayat, 47.

Combining Businesses

The firm said last month it would combine the debt and equity businesses with merger advice and lending to win more deals. Khayat also wants to challenge rivals by reallocating resources to help the bank sell securities that it’s underwritten. Investment banks find buyers of shares and bonds for companies that need funding and sell securities.

Investment banking, which contributed about 51 percent of the bank’s operating profit in 2010, absorbed about 43 percent of the bank’s risk-weighted assets in the first quarter. Khayat said that under Basel III rules on capital, the bank won’t reduce assets though it plans to sell some holdings that “aren’t yielding enough in terms of client revenue.”

Investment banks face declining profitability as stricter capital rules force lenders to set aside more capital for their riskier operations. Industry-wide, investment-banking revenue in the second quarter may decline by 16 percent because of a slowdown in trading, JPMorgan Cazenove analyst Kian Abouhossein said in a note to clients June 7.

New CEO

The investment-banking overhaul comes as UniCredit reviews its strategy, including retail lending and asset management, to increase profitability after last year’s management shakeup led Federico Ghizzoni to be named as chief executive officer, replacing Alessandro Profumo. Ghizzoni is scheduled to present a new business plan by the end of the year, which will include the review proposed by Mustier and his team.

Profit before tax at Mustier’s unit, which has about 350,000 corporate clients in 22 countries, rose to 1.3 billion euros in the first quarter from 850 million euros a year earlier, the lender said last month. Operating costs declined 2 percent to 681 million euros in the period, while risk-weighted assets decreased 10 percent amid lower market risk.

UniCredit shares have dropped 3.6 percent this year compared with the FTSE MIB Index’s 2 percent decline.

Speaking to analysts on May 13, Mustier, who led the Societe Generale division that suffered a 4.9 billion-euro trading loss in 2008, said he doesn’t anticipate the firm’s value-at-risk to increase. The measure of how much its traders could lose in a day won’t post a “massive rebound,” he said.

‘A Great Manager’

Instead, UniCredit is seeking to generate more returns from corporate clients by competing on advice and securities underwriting with global players such as Goldman Sachs Group Inc. and Morgan Stanley and local banks such as Italy’s Intesa Sanpaolo SpA’s Banca Imi SpA.

“I expect that Mustier will focus more on investment banking and less on corporate business, targeting more fees, more services and less net interest income,” said Alberto Segafredo, banking analyst at Main First Bank AG in Milan. “At SocGen, he was a great manager, able to find segments of growth where the absorption of capital was very low.”

In the reorganization announced on May 5, UniCredit named Khayat as the unit’s No. 2 and the co-head of financing and advisory along with Vittorio Ogliengo, who heads investment banking in Italy. T.J. Lim was named sole head of markets.

“Focusing on distribution is a winning strategy, but may be hard to implement,” said Angelo Drusiani, a fund manager at Albertini Syz & Co. in Milan, who manages about 3 billion euros. “The bank may not have the appropriate internal resources.”

Appointment Pending

The bank plans to name Patrick Soulard, another former Mustier colleague at Societe Generale, to head investment banking in France, according to two people with knowledge of the hire, who declined to be identified because the appointment hasn’t been approved by the board. The role, a new one, is designed to tap into clients in a number of markets the bank may pursue, said the people.

Khayat declined to comment on the appointment. Soulard, a former deputy CEO in investment banking at Societe Generale before leaving in 2009, couldn’t be reached for comment.

“In five years, we would like to be considered as one the undisputed leaders in corporate and investment banking in the countries where we’re present and committed,” said Khayat. “That will enable us to expand the business much further and access new territories.”

Plans Scaled Back

Mustier’s effort follows his predecessor’s attempt to bolster the investment bank. Sergio Ermotti, now UBS AG’s chairman and CEO for Europe, the Middle East and Africa, wanted to compete with the world’s top securities firms as mergers soared and business flourished before the subprime crisis of 2007. He later scaled back the plan to focus on corporate and investment banking in the lender’s home markets.

This time, UniCredit is seeking to boost revenue while stock markets contract and companies abandon securities sales amid concern that Greece may not receive a bailout payment next month needed to avert a forced debt restructuring. The International Monetary Fund yesterday warned that Europe’s debt crisis has the potential to crush the otherwise positive economic outlook for the region unless policy makers step up efforts to resolve it.

Investment-banking “competition is fiercely intense and the economics are very challenging,” said Sanford C. Bernstein analyst Dirk Hoffmann-Becking. “Volumes have been subdued since May 2010, and it’s not inconceivable that we might go into an extended period of low activity.”

--With assistance from Zijing Wu and Ambereen Choudhury in London. Editors: Steve Bailey, Jon Menon.

To contact the reporters on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net; Sonia Sirletti in Milan at ssirletti@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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