Andrea Orcel - CEO of UniCredit | Podcast | In Good Company | Norges Bank Investment Management

Thank you very much. I'm very happy to be here.

Scale and transformation. I think they combine scale because without scale you don't have enough innovation. You don't have enough ability to invest in technology and in all the things that you should invest to then transform and transformation because we tended to look at legacy banks on one side, fintech on the other side. We looked at them, we didn't consider them. But if you take the next five years, five, seven years, they're going to converge. And therefore, you need to ask yourself, can I offer the same level of client journey, the same level of client experience with the same level of efficiency and beat them on what they don't have, which is the clients that we start with, primary clients, and secondly, the ability to deal with multiple products and complexity.

Well, I think local authorities want local competition and the European Union, the competition authorities are looking at that. By and large, if you get close to 25% market share in any area, you get blocked. So that is to prevent anyone from reducing that level of competition. I don't think that that is changing actually. You have some markets, Germany is one of them, where the market shares are way lower than everybody else. And it's like everything in life, it's a balance. Too much market share, too much size does not support competition and a good service, etc. Too little market share and too little size prevents you from offering the clients what they want because...

I think a midpoint. I think for me it's a midpoint where you have enough competition depending on the market and the client segment. It changes, but I do agree by and large that once you move over 20% market share in any place, you need to start asking yourself if there is enough competition. Because competition pushes you to be better. Lack of competition pushes you to sit and...

And it depends again on which market segments. Because if you take the entire industry from a retail market standpoint, so individual, I think they're okay given all the banks that they have. When you start moving on small and midcaps and large caps, so the corporate sector, that level of competition declines because of how strong UBS with Credit Suisse facilities.

Look, the parallel I always use is, if the industry which we always talk about is the engine, financial services, banks and capital markets are the gasoline. So now Europe has two things. One, it is trying to transform itself because we have never been faced with such a challenge in terms of the structure of our industry, the leadership of our products. I mean, if you travel to Spain today or if you travel to Italy, I would say in Spain, it's an extreme. Most car dealers from European producers are empty and most car dealers from Chinese producers are full. And so this for us is a shock as Europeans because we had the leadership in that. And there are other industries where Germany or Italy or France had the leadership before that we don't have anymore. We need to transform that. In addition to that, if you take Europe in the last 15 years, we've been always lagging growth of US and China and we need that growth. So in order to do those two things, you need new policies and then you need to finance them. And I think some countries feel that they can finance them as they have done so far through government budgets. But government budgets are not enough. They need the leverage of banks and capital markets and our investors to be able to do that transformation and that financing. And I do think that at the moment the environment, the regulation, the framework in which we operate does not allow us to do that.

Yes, I did.

Yes.

The working for all this time in the same thing. Maybe I'm not as creative as people think. I am one of those very lucky individuals that identified earlier what they love to do and takeovers. No, I would say well at the beginning for sure I used to say that you know if I wanted to be a bean counter I would have gone in management and now I am in management. But at university I was reading so much about hostile takeovers and the attacks on Nabisco or all of these things that I wanted to do the same thing. I convinced a professor who was awesome to let me do a thesis on something that in Italy was not even understood and then I got myself through doing exactly what I wanted. I never regretted it. But in life you evolve and then your job evolves and that's where I am now. On Commerzbank I think lots of questions about that and usually M&A is viewed like an end in itself. I think after 35 years of M&A, M&A can be a fantastic tool to strengthen a company, to catapult it further, but it can also be a doom or a bad thing because you don't do it in a disciplined fashion. M&A is a tool to your strategy. Your strategy decides what it is. You have a vision, you have a plan, you have a strategy, you're doing it organically. M&A can accelerate it if it fits and if it's done at the right terms.

So let's say, how can I put it? The night before announcing the famous 5% stake that we bought from the German government. It was something that totally fit in our strategy. Germany, we believe in Germany. Poland. We want to strengthen that area from a client standpoint. SMEs, this is our bread and butter across Europe. Affluent, bread and butter across Europe. And we felt we had implicit support by the government and implicit support by the then leadership of Commerzbank.

But that changed in the morning. We woke up to a very different world. I think we were discussing before this call on volatility and change. And every morning you wake up and you find a different reality. We found a different reality. And at that point the choice for us, and this is one characteristic of M&A, was one: not go forward and therefore reverse course. We felt at the time that that would be an admission that we had done something incorrect and we didn't think we had. Two: stay as is and bob around. Or three: get to the maximum we could get without launching a bid and then sit and see how the situation would map. And we chose the third course. That's exactly what we did. Between the end of 24 and the end of 25, in my opinion and in the opinion of my board, it has been a success. Today, that stake will generate close to 800 million euros a year post tax, growing assuming they make their plan. And maybe in an undefined period of time there will be the possibility to convert that into a combination that would make, in my opinion, us the most truly pan-European bank in Europe because let's say east of... would have market share everywhere in leadership across Germany, Italy, Austria and...

I think a number of... I usually have learned in life to focus on what I control and not to speculate on what others do. I would say the following though. I think one of the things that have changed, and many things have changed in Europe, is we now almost always deal with coalitions. Coalitions are not uniform. This happens in Germany. It happens in Italy. It happens in Spain. I can take almost every country that I am active in. They're coalitions. And I would say that the part of the government that we were talking to at the time was much more liberal and market friendly. The rest of the coalition was less. And maybe within the government, they were less aligned than one would have thought. And when everything came to bear and there was a lot of noise about it, they took at majority a position that was against the position of what anyone's side had taken vis-à-vis.

Yes, we did.

For us it was the following consideration. The first consideration is that by the time BPM emerged, we were absolutely convinced that while we would convert our derivatives and everything else into a 30% stake, we would not launch a bid in Commerzbank in the foreseeable future. So while there was all the financial planning of getting to 30% and converting the stakes, there was no integration, nothing industrial. We would just sit on a financial participation. So it wasn't boxing with two, it was boxing with one. And then we said, if actually now we launch BPM, by the time we close the transaction and then we integrate it, we will be able to go on the second. Because in Italy, differently from Germany, we felt we would close the transaction in 9 months, integrated in 11, and it was in Italy. This is one of the advantages of UniCredit. We are active in 13 markets. So 13 legal entities, 13 boards and 13 everything. So the Italian leadership team would run the other 12 markets would not even notice. And sequentially, if the conditions were then right, we would be able to box the second boxer as you call it in another market with another team with another framework and that was possible. So one it was that. Two, it was frankly shareholders, we could not not at least try to participate in Italian consolidation which is one of our two main markets if it was going on and just say well because I'm busy there I haven't done that and the market has consolidated away from me. At least we needed to try. And therefore we tried. And so these were the... And at the time we had waited for three and a half years. The terms, the financial terms were aligned. So we could do a transaction which at the time, even if we reviewed up for premium, we could bring in and look at our shareholder and say well strategically you know it is because you always wanted me to do it and term-wise it could return on investment 15% which at the time was about two points above my share back to adjust for risks and it would strengthen our business in Italy. So that's why we brought it in.

So that's why we brought it in.

I think as we started with this, banks will morph. So let's say that the business model is changing, the way we do business is changing. Translated in financial terms. Maybe 10 years ago, you saw a bank, commercial banks, legacy bank, 50% cost income ratio. They're solid. They're good. 12, 13% return on equity. They're solid. They're good. Today, the same terms would be 40. In my opinion, if you 40% cost income ratio and that means that the cost of 40% of your income... and the return on equity which was about 12%. I think today you need to have an ambition to be in the high teens, so 18s etc. So the industry, if you want to look at it positively, is becoming more appealing but it requires rethinking how you do things. If you're not sitting back and continuing to operate on the business model you did 50 years ago, 30 years ago, 20 years ago, you need to rethink the organization, the process, the way of working, the technology, the AI and change and change and change.

Well, if you look at it from a client standpoint, and for a second, let me take individuals, families. I always say that to our people. If you have a session on Netflix or on some other of those platforms that we're so accustomed to be on, and then for any reason you need to switch off that and move on your bank. Do you have the same experience? Because if you don't, you will not survive in five years. So the client experience needs to evolve to what now in many other facets of our life we consider the requirement, the bar, the expectation. And that requires a complete rethink of the way we operate.

So I think it's block by block. Obviously banks are regulated, I can't just change, it needs to make sense, the regulator needs to approve it. But for instance, in my opinion, you know, you start and everybody says they do that, but they don't. The client needs to be at the... you need to flip the organization. That's what we did. The client needs to really be at the center of everything you do. So when you think about the way you do an onboarding of a client, when you think about how you grant a loan to a client, you need to start by thinking how will the client react to that. I'll give you a very example. Consumer finance. You go in a shop, you want to buy something at UniCredit. If you were not preapproved, and we didn't pre-approve many people, it would take seven days. Is that an effective way to support a client? It's not. Today, it takes 13 minutes. If you're not approved before, and most of our clients are pre-approved before, so it doesn't take 13 minutes. They know their limit. They can spend and they can go. In order to do that, it means my process which was 23 steps needs to become two. My credit models need to be online all the time to assess the risk of that particular client segment etc. My product needs to be targeted to what they want and I need to be in a position to react that quickly because otherwise I can do it fast but everything will blow up at the back. In order to do that, the entire thinking of how we do consumer finance has changed top to bottom. It has taken us three years. And the same will apply to mortgages. Mortgages, for example, you as a client, you don't need an answer in seven minutes. But you do want an answer in a week. If you are really keen to buy a house, you want to know if you have a financing or not in a reasonable period of time to move. And I can combine that. Let me see another one. I give your consumer loan seven minutes and I know from where you're spending that you're buying a trip to Egypt. Do I offer you flight insurance, travel insurance in general? Do I offer you discount at my clients who are all supermarket chains or whatever to get I don't know boots or the right casual wear? Can I do that? Because if I can do that then I have financed your dream and I am suggesting to you other things to close the experience.

Well, AI changes that by accelerating things. So, number one, what AI does and this is what everybody's focused on is it reduces cost massively. So, I'll give you one example.

I think what I would say honestly, certainly for Europe, I'm not in the US, most banks with very, very, very few exception if any, if you ask that question at the end of 24, they would tell you something about AI but the reality is it was a curiosity. If you ask them today or at the end of 25, they all talk about it, they all know it's a big, big critical item. But now the question is how do we harness it. And the first reaction that you see in many places is, and I read it all the time, I gave co-pilot to every one of my employees, I sent everybody to a course, I did this. But that AI, while it will make the life of your employee easier, is that changing the way you work and is that transforming and extracting synergies? Oh, that's what I wanted to say. So now some banks and some are ahead of us, but we're trying to catch up quickly. So if you look at a credit file, very simple. You're a big company. You want a loan from us. I need to gather information from your accounts, from the internet, from a number of sources, create a credit file, all of that data, reclassify it into my spreadsheets, and then apply my metrics and tell you if you fit or if you don't. I'm simplifying, but that's that. Usually, it takes six weeks for one experienced credit officer to do that from zero to the end if all the data is available. We did a pilot together with one of our partners. We developed an AI engine to do the same. It took us one week to develop the engine. And they could do on one where we had taken six weeks to prepare the file. They could do it in 14 minutes with 98% accuracy. And this is the first trial. It will become 100% very, very quickly. So what does that tell you? It tells you that if I take the credit process of a bank, 80% if not 90% of the people in the large caps prepare files. So what are you going to do? Because now what are you eliminating? 90% of the people. The way of working changes. You need to manage the social impact. In many countries where I am, I cannot do that if I don't reskill them. So it's progressive. So what do you do?

And so it's that. So for example, we have since 22, end of 22, started a reskilling unit. Usually we have about, well since then we've done about 650, 700 people. People that are not leaving but that are good professionals but just their areas are getting disintermediated.

To move to other things where we need more of them.

I think for example, in my opinion, banks have curtailed too much the human touch to the client. So I may want everything online but if I'm taking a mortgage of 250k, I want to see a person in front of me.

I think if you don't in five or six years, you're not here.

I have been pleasantly surprised at UniCredit.

But it is not you get on a podium, you do a presentation that probably some very intelligent consultant has prepared for you. You pontificate for an hour and then you step off and they're all going to do it. It doesn't work that way. Firstly, you need to co-opt them in realizing that this is going to happen with them or without them. So the choice is if we do it at the beginning, we have time to reskill you, we have time to change and we can manage our pace. If you wait to hit the wall, you're all on the street because this is happening one way or the other. It is happening. Once you have that conviction, then how do you manage and over how long in order to be able to manage at best the balance between being fast enough but on the other hand not doing things that trade unions and honestly society will not allow you to do. So can that be done? I think it can be done. We have done it again and again at UniCredit and I find that over time if you provide alternatives and if you treat people correctly, the outcome is more positive than people expect.

Well, you know, if you had asked me three years ago, I would have said I don't really know. Today, I think we are... I think it is a priority. I think if you look at the modernization of markets, is it bonds? Is it equity? Is it contracts for mortgages? Is it this? It's just a change in technology eliminating intermediaries, blockchain. That's what it is. You need to be at it. And the other thing is if you're on blockchain, you need a means of payment and it's either a cryptocurrency which we only get involved to the extent that our clients want to do it because we think it's too speculative for a commercial bank like us. So we support it but we're not using it. Stable coin is fundamentally because it is a lot more stable. That's why we joined a consortium of banks in Europe, to launch stable coin based on euros because that's another threat for Europe at the moment. If you look at stable coin, only US dollar, so that would mean that if you go on blockchain and you need a means of payment, you're risking to be completely disintermediated by US dollar. And the Americans love stable coin because what is backing them is the dollar and US treasuries.

We are aiming to be out with a first stable coin, meaning that it's working, by the third quarter of this year.

No, I do think maybe one thing and we were discussing it at the beginning. If you come from having lived the pre-COVID era especially in Europe, you're talking stable interest rates and low, you're talking cost of risk so defaults which are very low because interest rates are so low that they are very low. You're talking very limited to no inflation. You're talking you can look at the next three years and very easily be within one standard deviation in terms of projection. So you budget, you break down the budget in pieces, you have processes, you tell everybody what to do and you track that. Today, diametrically opposite.

I remember that we launched UniCredit Unlocked in December 2021. Our stock price reacted very positively, very detailed plan. It had taken us nine months to do it. A months later, Russia invaded Ukraine and the entire plan went in the bin. And since then it's the same. We have interest rates which are volatile, geopolitics that are volatile, technology and AI that are changing the way we work. All the assumptions that we make, we wake up the next morning and they are changing because we see new things that we didn't expect. So now in my opinion to run a company, to compete, you need to understand what is the general direction of travel and have such a deep understanding across your organization top to bottom of what is your vision, your strategy, your plan and that direction of travel that these sub teams, be country or subset in countries, retail, corporate etc., can constantly adapt and rejig what was the original plan to get to the same direction but adapting to a changing environment. And the style of management is diametrically opposite because you're constantly looking at how they have adjusted and seeing if it's going in the right direction rather than monitoring if they are applying what you thought they would apply at the beginning. And that adjustment is absolutely critical and unless the volatility we see around us goes down, and I don't think it does, I think this is a completely different way of running things and if you don't do that, the repercussions are very difficult.

But to do that, the level of empowerment, the level of trust, the culture that gels together your individuals and the understanding of where we're going, why we're going and what are the levers that they can use and the comfort of your institution that if they fail within staying in the metrics you gave them, it's okay. They just need to flag it, regroup and start rather than I'm going to penalize you is massive. And this is a cultural shift that for banks which are very sclerotic is very difficult to do.

Very important.

It is probably at the essence of what I have always believed. I think some people, not everybody's equal. Some people are born more gifted than others and we see that every day. But by and large, I think that in a number of situations, I would say in a majority of situations, people that are at a certain level, maybe not the most talented in the class, that learn, that fail and learn how to deal with failure. They learn how to learn from failure, how to pick themselves back up and how to go further. I think we share a favorite book, Grit by Angela Duckworth.