European banking firm UniCredit to introduce cloud in its datacentres

European banking and financial services firm UniCredit has signed a multi-billion dollar agreement with IBM to introduce cloud-based infrastructure within its datacentres and to create new IT service models.

The 10-year deal also involves the creation of a joint venture firm between the two companies, which will sell cloud-based IT services to other European companies and institutions.

The long-term IT agreement is aimed at transforming UniCredit’s IT infrastructure that supports all its commercial and private banking activities in Europe. By introducing cloud-based services to its datacentres, UniCredit will gain dramatic IT efficiency and flexibility, according to the financial services firm.

As part of the agreement, a joint venture between UniCredit Business Integrated Solutions – the global service company of UniCredit – and IBM will market and deliver IT infrastructure services to other European companies and institutions.

The joint venture will have employees in Italy, Germany, Austria, Slovakia and Czech Republic representing both companies.

Together, IBM and UniCredit will establish a “Value Creation Center” that will aim to harness innovation to provide superior service and drive success for clients on a continuous basis. The centre will monitor trends in the banking and IT industries and identify emerging disruptive technologies to be rapidly introduced into UniCredit’s infrastructure, according to the financial firm.

Cloud-based analytics will enable UniCredit to better predict and understand trading in financial markets, manage spending and provide innovative services to its customers, according to IBM.

“UniCredit’s innovation-driven approach to sourcing reflects changing motivations in the strategic sourcing marketplace,” said Erich Clementi, senior vice-president of IBM Global Technology Services.

“When making sourcing decisions, organisations like UniCredit are moving beyond basic needs, such as cost-cutting, to higher-order business outcomes, such as growth, competitive advantage and, of course, innovation.”

According to the IBM Center for Applied Insights study, Why partnering strategies matter, which questioned more than 1,300 business and IT sourcing decision-makers worldwide, organisations that have made that shift are outperforming on a host of financial measures, including revenue and gross profit growth.

UniCredit operates in 20 different European countries. Its deal with IBM comes as the blue chip reported second quarter revenues of $24.9bn, missing market estimates. IBM’s $3.23bn profit was down by 17% compared with the same period in 2012, but its cloud revenue was up 70%.

In the previous quarter too, IBM's revenue and profit fell short of analysts' forecasts – for the first time in eight years. As a result of the poor first quarter, the company cut 3,300 jobs and turned its focus on cloud computing and data analysis to revive its business.

As part of its focus on cloud computing, IBM bought Israel-based virtualisation management provider CSL International to expand its cloud offerings by adding management capabilities.

It marked IBM’s second acquisition in two months as the company aims to achieve its objective of reaching $7bn annually in cloud revenue by the end of 2015. In June, it acquired cloud computing infrastructure provider SoftLayer Technologies for a reported $2bn.

China's banking mess: It's the politics, stupid

By Minxin Pei



FORTUNE -- The worst credit squeeze in China in recent memory seems to be over. After the People's Bank of China (PBOC), the country's central bank, issued a reassuring statement on June 25 that dispelled investors' worries about the lack of liquidity in China's interbank loan market, Chinese stock markets halted their plunge, and the rates of China's interbank loans fell from over 20% to around 6% (still two to three times greater than the average rate before the recent panic). China's Lehman moment, for now at least, appears to have been averted.

However, many questions remain, both about the causes of the recent turmoil in China's banking system and the implications for the Chinese economy.

As for what prompted the recent seizing-up of China's interbank loan market, there is no shortage of theories. The PBOC, widely perceived as having engineered an artificial credit squeeze to crack down on China's shadow banking sector, has come out with innocent but not very credible explanations. It blames the panic on a set of coincidental factors, such as the June deadline for banks to report their numbers (a requirement that forces many banks to reduce outstanding loans and embellish their risk profiles), tax due dates at the end of May and middle of June (tax payments suck cash out of the circulation), and increased demand for cash before a traditional Chinese holiday.

An alternative explanation, popular mainly among economists and investors, is that the PBOC was engaged in a high-stakes game with players in China's shadow banking system, all with the blessing of China's new political leadership. Because interbank loans constitute the bulk of funding for borrowers in the shadow banking system, making such loans less available sends a powerful message that the central government will no longer tolerate risky behavior and keep inflating China's credit bubble. Some analysts went so far as to suggest that this is the first shot fired by the Chinese government to signal the start of a deleveraging process.

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There is a third explanation, which is simpler and perhaps more reasonable. This incident is most likely a botched response by the Chinese monetary authorities to a problem that has been long in the making but exploded without warning and caught them completely by surprise.

The growth of China's shadow banking system (with estimated outstanding credits equaling roughly 10-15% of the balance sheet of the formal banking sector) has long been flagged as a source of risk in China's financial sector. Chinese policy-makers are fully aware of the risky activities within this sector but have opted to do nothing because the system serves several useful functions and has powerful interest groups. Local governments, real estate developers, and private entrepreneurs unable to obtain loans from the state-owned formal banking sector can tap this system for funding by paying a higher interest rate. State-owned banks and investment companies pocket lucrative transaction fees by peddling wealth management products (WMPs) issued by borrowers to depositors chasing high yields. When this game is going well, a lot of rich and powerful people make money while risk builds up in the financial sector.

As with similar instances of financial recklessness, confidence can evaporate quickly, setting off a panicked exit from the market. Even sophisticated and capable regulators are often ill-prepared for such unforeseen and highly disruptive events. If we analyze the recent gyrations in China's interbank loan market from this perspective, we may gain a better understanding of the causes behind the short-lived panic and avoid overreacting to or over-interpreting this event.

Granted, the opacity of the decision-making process, the lack of a free press, and the insensitivity of policy-makers to the need to communicate their intentions to market participants all contribute to the difficulty in making the right call on China. To avoid making mistakes in the future, analysts should do themselves a favor by focusing more on political factors than on economics. In the case of the recent upheaval in China's financial system, the idea that the squeeze was deliberately engineered by the PBOC to crack down on the shadow banking system makes little political sense. Only the Politburo Standing Committee, the ruling Communist Party's most powerful body, could have made such a decision. But the Politburo would not likely authorize such a move at this delicate moment.

The Communist Party is scheduled to hold its third central committee plenum in the fall, when its most important economic initiatives will be unveiled. It is inconceivable that the party's leadership would risk economic turmoil and disrupt its plans with a bold move on the shadow banking system before they head to the beach for the summer.

To implement any kind of meaningful reform to the shadow banking system, Chinese leadership will first have to reach a consensus at the top, overcome resistance from interest groups, and devise complex plans to address the consequences of reform. All this takes time and fierce bargaining. Based on the quick retreat sounded by the PBOC, it is quite obvious that the top leadership has no such plans in place for now.

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However, this does not mean that Beijing can delay dealing with the massive risks in the banking system for very long. If anything, the recent bloodbath in the Chinese financial sector should prompt China's top leaders that they must have a more comprehensive plan for financial deleveraging when they meet in the fall. Otherwise, they are almost certain to face a bursting of China's credit bubble that will make last week's turmoil look insignificant.

Minxin Pei is the Tom and Margot Pritzker '72 Professor of Government at Claremont McKenna College and a non-resident senior fellow at the German Marshall Fund of the United States

Follow me on Twitter @sajilpl