Note about the UniCredit Group EWC Select Committee meetings of 25 and 26 February 2009

Note about the UniCredit Group EWC Select Committee meetings of 25 and 26 February 2009

On 25 and 26 February the EWC Select Committee of the UniCredit Group met to discuss a series of topics. Specifically, on 26 February the Select Committee met with the Group’s Chief Personnel Officer (Piazzolla), the Pioneer CEO and Head of Asset Management (Frigerio) and the Head of MIB Division (Spezzotti).

During the meeting the general performance of the group was discussed in the light of the economic and financial markets crisis in recent months and the restructuring of Pioneer and the MIB Division.

With regard to overall group performance, Piazzolla confirmed the group’s stability, despite intense external problems that have led to the collapse and nationalisation of leading banks in the USA and Europe and to a crisis situation for endless industrial companies worldwide.
Profit for the year is forecast at € 4 billion (an impressive result given the current banking scenario) and the planned share capital increase has been implemented. It may be that the group will subscribe to Italian and Austrian government bonds: this not for internal reasons, but because the supervisory authorities consider a Core Tier 1 of 8% to be adequate at this stage, allowing the banks to offer stronger support to companies in difficulty.
The situation in East European countries appears to be less dramatic than the media has implied. There is no risk of collapse (even if certain countries, e.g. Ukraine and Kazakhstan, feel the pinch more than others). Development in these countries will continue, albeit at a slower rate than in recent years. The banking industry still offers ample room for growth, and in this context the risks assumed by UniCredito are under perfect control.
UniCredito has in any event suspended further expansion envisaged in the three-year plan for this area (only 75 branches will be opened, those already scheduled for some time). With regard to Group security performance, Piazzolla believes that this has been strongly penalised, as have all securities in the financial sector. Added to this are the financial operator assessments of the Group’s exposure in East European countries and uncertainty over the future structure of UniCredito top management. This uncertainty was resolved a few weeks ago when the appointment of the entire Board of Directors, Dieter Rampl as group chairman and Alessandro Profumo as CEO was confirmed.
At present the security performance, as for the securities of other companies, bears no relation to the value of the Group (representing around 25% of the “book value”).

Nevertheless, the external scenario has led to consistent changes in banking conditions. In this respect, Piazzolla sustains that UniCredito, like every other bank, will see a steep drop in revenues and will be forced, also in compliance with supervisory authority instructions for the entire system, to apply a strong increase in provisions for risks in order to face the crisis in the Corporate segment.
This will lead to a need to significantly reduce costs across the board, commencing with those not linked to personnel.
With regard to personnel, the downsizing envisaged in the three-year plan for Western Europe is essentially confirmed, whereas staff cuts of 2000 are scheduled for Eastern Europe.
At the specific request of the Select Committee, Piazzolla confirmed that there will be no collective dismissals even in the current situation, and that all staff cuts planned will be managed through social dialogue with both the EWC and local staff representatives. The 2000 reduction of the Eastern European workforce, in particular, will be managed by means of a partial block on recruitments normally connected to turnover. In Eastern European countries the Group’s natural personnel losses last year due to retirement, individual resignations, etc. was 19%. For 2009, it is estimated that the loss will be 10% – around 4000 staff – and therefore double that planned as downsizing. In any event, the situation in Eastern European countries will be discussed in greater depth at the next EWC meeting with Ghizzoni (Head of the Central Eastern Europe division) and Annunziata (Chief Economist for UniCredito).

The restructuring of Group operations will go ahead, however, with the aim of streamlining all interim group divisions (General Management, back office services, etc.) so as to shorten the “chain of command” and to safeguard and reinforce business units in direct contact with customers, to which all available resources will be deployed and restricted recruitment arranged.
In this context the divisional model is confirmed in full.
A return to a universal bank, Piazzolla said, would certainly result in cost reductions: several business units would be eliminated, automatically producing consistent staff reductions and a subsequent increase in overshoot terms. But in the company’s opinion this would be a mistake: segmentation of the customer base according to needs and the definition of dedicated specialist departments continues to offer a competitive advantage to the group, also in the current situation. Business diversification will allow the bank to serve the different needs of customers, develop a better awareness of responsibility in the customer-dedicated business units and improve the internal risk monitoring process, in addition to representing a plus point for the bank should the hoped-for recovery of the economy come about.

In response to a Select Committee request regarding the need for absolute parity in determining sacrifices Piazzolla sustained that after the elimination of CEO and deputy CEO bonuses, the varying fees of another 400 members of the Group’s top management will be reduced or eliminated, whilst the reduced resources available for this purpose will be focused on the network structures. In this same context, as Select Committee we insisted that staff cuts must also involve Group managers and in this respect the Chief Personnel Officer agreed with our comments, in particular confirming that managers that have matured pension rights are, at this point and in general, a critical factor for the Group.
The 2009 budget is currently being defined. But it is clear that given the current turbulence anyone would find it impossible to make medium and long term forecasts, and at this moment in time, such a situation naturally inhibits any update to the three-year plan. The January profit, considering the current situation, is good, though it is clearly impossible to exclude a further deterioration in the economic and markets position.

In this highly turbulent atmosphere the Select Committee called for efforts to enhance all openings for social dialogue. The Chief Personnel Officer agreed and responded positively to the Select Committee’s request to go ahead – immediately after signing the “Joint Declaration on Equal Opportunities and Zero Discrimination” planned for the next EWC Plenary Meeting to be held on 13, 14 and 15 May – with the definition, backed by the EWC Select Committee and in liaison with UNIFINANCE, of a GLOBAL FRAMEWORK AGREEMENT for all Group employees. This agreement will be expected to represent the basic “charter of rights” for group employees and will set regulatory standards for all employees, wherever they may work.
This readiness to cooperate was much appreciated by the Select Committee. Such a level of cooperation is significant not only for UniCredito but also for the entire European financial sector, which at present has only one agreement of this nature (Danske Bank). Naturally, this matter will be discussed at the next EWC plenary committee.
On this same topic, the Chief Personnel Officer also demonstrated a willingness, being confirmed the existing legislation about this matter, to deepen with the EWC the problems regarding cross-border mergers, governed by a European directive and recently approved national laws, being For UniCredito the first cross-border mergers covered by the new laws regard MIB (the HVB merger with CAIB, an Austrian company in the group responsible for investment banking) and UGIS (the merger into UGIS of other IT companies in the Group, starting with the Austrian Wave Solutions).

Also discussed at the meeting were the Pioneer and MIB reorganisations.
With regard to Pioneer, Frigerio stated that the markets crisis has severely affected asset management activities: asset values have dropped by 35% and this will lead to a similar reduction in commission income recognised to the 2009 financial statements. The sector still feels the full impact of a lack of trust and, at present, there is no sign of recovery, though it is hoped that reduced interest on state securities might, in the medium term, attract customers back to investments with a slightly higher level of risk. Nevertheless the Group will not abandon asset management business, instead opting for the reorganisation (highly complex due to the widely varying – from country to country – of regulations in this sector) of the company, based on the model illustrated in the corporate documentation circulated in recent weeks, and on the 10% staff cuts. Pioneer currently has a worldwide workforce of 2300, and therefore the cuts will involve 230 members of staff spread across the various countries, in line with guidelines provided in the above-mentioned documentation. This downsizing of the workforce will be by means of blocks on recruitment and the relocation of staff to other Group business in the countries concerned. In any event, negotiations with local staff representatives on this topic are being tabled country by country, and are progressing positively.

With regard to MIB division (which, as already mentioned, is due to be integrated into the Corporate Division as envisaged in the three-year plan), Spezzotti reported that this division, too, has been badly affected by the markets crisis. Certain division activities have practically disappeared and all of this will bear heavily on Group accounts. However, the Group does not intend to discontinue business that could benefit from an economic recovery, as and when it may happen.
Division operations will be restructured (also considering a possible disbanding of certain sections), reducing risks and with firm cuts in trading activities (trading in bank-owned securities will be eliminated completely, leaving only trading on behalf of customers).
By far the main focus will be on traditional investment banking activities in support of corporate customers.
Downsizing of the workforce will be that already planned (by around 700), implement by means of blocks on recruitment (which alone will result in a strong reduction in staff in a sector where natural staff turnover is particularly consistent) and the transfer of staff largely to other Group business units.
There will be no staff cuts in London, where Europe’s leading financial market operates (shares, bonds, exchange, interest rates, etc.) and where the Group’s key institutional customers are based, along with the specialist professionalism on which such business relies heavily. In addition, given the sector crisis and performance of the pound-euro exchange rate, London has become convenient also from a costs point of view. Bonuses paid to specialists in this sector will be strongly reduced or eliminated.
Business reorganisation will proceed as envisaged in corporate documents circulated again yesterday.
The Select Committee reported that the concentration of activities in London appears to be inconsistent with the business replanning, which gives priority to the need to support corporate customers (obviously spread across Europe), and staff cuts in certain offices will penalise departments and activities that, even now, remain profitable. Considerable worries were expressed with regard to cutting back business in countries such as Greece, France, Spain, Switzerland and Luxembourg, where staff relocation is not a simple matter in view of the minimal presence of the Group in these countries. The Group repeated the strategic importance of the London base and sustained that, with regard to the other countries, no final decision has been made as yet. We agreed upon an extraordinary meeting of the EWC Select Committee, extended to representatives of the countries concerned, to be held at the end of April, as soon as the Group has more details on the reorganisation. This meeting will also discuss the MIB reorganisation, local corporate business and, in more general terms, the overall outlook of the Group in these countries, and how to handle the staffing overshoot in compliance with national regulations.
Lastly, during the same meeting, the Group announced the launch of the winding-up of securities services still in operation within the Group, following on from the disposal of these services in Italy (2S Banca) and Germany. This business segment involves approximately 500 staff across 14 countries.

Overall this was a positive meeting, confirming the importance of the EWC and social dialogue also in a time of great difficulty for the financial markets and for the European economy.

Milan, 1 March 2009

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