Company Reports

After growing preprovision profits by nearly 50% year on year for the first nine months of 2023, no-moat UniCredit booked a more pedestrian 8% year-on-year increase for fourth-quarter 2023. The benefit of higher interest rates is clearly in the base now and revenue growth will become a more challenging prospect for UniCredit, especially in an environment where we expect interest rates to decline in second-half 2024. Loan-loss provisions increased sharply in the fourth quarter and this, combined with elevated integration, led to profit before tax declining to EUR 2.3 billion compared with the approximately EUR 3.2 billion run rate UniCredit achieved in the previous two quarters. UniCredit guided that it expects broadly stable net income for 2024, while we anticipate a decline of around 15%. If UniCredit can find a way to offset the impact of lower interest rates and maintain credit quality, it would represent upside risk to our earnings forecast and fair value estimate. We highlight that UniCredit's dividend guidance implies a forward dividend yield of around 10%, augmented by significant share buybacks. Material shareholder returns make UniCredit an attractive option for yield-hungry investors. We maintain our EUR 32 per-share fair value estimate.

The transformation of UniCredit in two years from a perennial underperformer to one of the most profitable banks in Europe has been astounding. While the new management team has made good strategic decisions, the return to positive interest rates after a decade of zero or negative interest rates played a significant role in its transformation.

We are dropping coverage of some of our European banks and asset managers. We will no longer be reporting on Santander, Credit Agricole, Julius Baer, Unicredit, Intesa Sanpaolo, Mediobanca, Amundi, KBC, DWS Group, BBVA, and Schroders. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

The direct exposure of European banks to Russian and Ukrainian clients is insignificant. According to the Bank for International Settlements, claims on Russian counterparties from the major developed European countries' banks amount to 0.7% of the European banks' total claims reported to the BIS.

No-moat UniCredit reported a net loss of EUR 1.4 billion for fourth-quarter 2021, compared with a EUR 1.1 billion net loss for fourth-quarter 2020. The result was distorted by some items UniCredit believes to be nonrecurring. On an underlying basis UniCredit reported a EUR 1.3 billion net profit compared with EUR 0.2 billion a year ago. A nonrecurring gain supported revenue growth of 5% year on year, including robust growth in fee income of 12%. UniCredit will be very pleased with the fee income result as it is in line with its newly unveiled strategy. Expenses were flat year on year and sequentially, another pleasing outcome in an inflationary environment. Loan-loss provisions came in 61% lower than a year earlier but increased by almost fourfold compared with third-quarter 2021. UniCredit attributed the higher provisions to seasonality and regulatory headwinds. UniCredit’s 2022 guidance of flat net interest income, a slight increase in fee income, flat cost growth and stable loan-loss provisions points to upper-single-digit net profit growth, according to our estimates.

No-moat Unicredit's recent capital markets day was well received, with its share price rallying by 11% on the day. The capital markets day gave much-needed clarity on new CEO Andrea Orcel's strategic thinking. Orcel has been Unicredit CEO for seven months. Unicredit's drawn-out, aborted takeover of fellow Italian bank Monte dei Paschi di Siena has previously prevented him from outlining his strategy for Unicredit. Unicredit now targets a 10% return on tangible equity by 2024, with a target common equity Tier 1 base of 12.5%-13%. Unicredit intends to distribute EUR 16 billion to shareholders between 2021-24. We are likely to increase our current EUR 12 per share fair value estimate when we include the new guidance into our model.

Since 2011 UniCredit has booked a cumulative net loss of EUR 20 billion and was loss-making in four of the 10 fiscal years over this period. UniCredit has not generated double-digit returns on equity since 2007, while we estimate its cost of equity to be around 12%. Unless this changes, UniCredit will continue to trade at a substantial discount to its own net asset value as well as the rest of the European banking sector.

No-moat Unicredit reported a net attributable profit of EUR 1 billion for the first quarter of 2021, more than double the EUR 420 million net profit it booked for the same period a year ago. The consensus of analysts collected by the company itself expected a net profit of EUR 736 million for the quarter. The earnings beat was driven by lower-than-expected loan loss provisions, a lower-than-expected tax rate, and higher-than-expected income from the trading of securities. The earlier announcement that Unicredit has entered into negotiations to take over troubled state-owned Italian lender MPS, however, overshadowed the results. We believe that the transaction could be beneficial to Unicredit shareholders, provided that the terms exclude the MPS bad-bank and that it is capital neutral. We maintain our EUR 11.50 per share fair value estimate and our no-moat rating.

No-moat Unicredit had a mixed performance under the recent European Central Bank stress test. Its 2023 common equity Tier 1 ratio under the adverse scenario of the test came to 9.2%, just above the 9% regulatory minimum it needs to keep paying dividends. Under the adverse scenario, Unicredit’s common equity Tier 1 ratio shrank by 592 basis points from the 15.1% it reported at the end of 2020. Only three other European banks we cover suffered a steeper decline. Credit quality held up well if we compare Unicredit’s operational performance under the base and adverse scenarios. The decrease in Unicredit’s revenue was somewhat higher than its peers. Unicredit’s high cost base does, however, lead to increased operational leverage that magnifies the revenue decline. We maintain our no-moat rating and EUR 11.50 fair value estimate.

Since 2011 UniCredit has booked a cumulative net loss of EUR 20 billion and was loss-making in four of the 10 fiscal years over this period. UniCredit has not generated double-digit returns on equity since 2007, while we estimate its cost of equity to be around 12%. Unless this changes, UniCredit will continue to trade at a substantial discount to its own net asset value as well as the rest of the European banking sector.

The head of supervision at the European Central Bank, or ECB, Andrea Enria recently confirmed the bank would lift the ban on dividends and share buybacks that it imposed on eurozone banks in March last year. Eurozone banks will now be able to resume returning capital to shareholders at the end of third-quarter 2021. The market widely expected the lifting of the ban, so we do not believe it will have a material near-term impact on the valuation of eurozone banking shares. As banks start reporting second-quarter earnings and the market gets a better idea of the extent of capital returns there may be more support for share prices. The European banking authorities will announce the results of their stress tests at the end of July. This will also provide investors with a better idea of which banks are best placed to return capital to shareholders.

No-moat UniCredit reported a net attributable loss of EUR 887 million for the first quarter of 2021, compared with the EUR 2.7 billion loss it booked for the same period a year ago. The base was heavily distorted by non-recurring items, but the current quarter was mercifully free of distorting items. It was the first set of results reported by new CEO, Andrea Orcell, but the groundwork was laid by his predecessor, Jean-Pierre Mustier. Loan-loss provisions declined sharply, with a 15-basis-point credit loss ratio far below the 104 basis points UniCredit provided for the same period a year ago. UniCredit’s full-year guidance of a 60-basis-point credit loss ratio looks conservative, but the outlook is uncertain once government support measures are withdrawn. Quarterly revenue grew by 7% year on year largely due to a fourfold jump in revenue generated from the trading of securities. Net interest income declined by 13% year on year as negative short-term rates continue to bite, exacerbated by ballooning deposit accounts as clients benefit from high levels of liquidity in the market. We maintain our EUR 11 per share fair value estimate and our no-moat rating.

No-moat UniCredit reported a net attributable loss of EUR 1.2 billion for fourth-quarter 2020, compared with the EUR 835 million loss it booked for the same period a year ago. Both numbers are, however, heavily distorted by items that are not expected to recur. Underlying net profit for the quarter came to EUR 204 million compared with the EUR 1.4 billion profit UniCredit booked for fourth-quarter 2019. We maintain our EUR 11 per-share fair value estimate and our no moat ratings. UniCredit is currently trading in 4-star territory and if it can hit its EUR 3 billion net profit target for 2021 the share is not expensive--this implies a forward price/earnings multiple of 6 times. We would, however, wait until the uncertainty surrounding a potential government-sponsored takeover of struggling Italian peer Monte dei Paschi di Siena is removed before becoming aggressive buyers.

For all intents and purposes, the European Central Bank has extended its shareholder distribution suspension for European banks until September 2021. Supervisors did give a small concession in the form of reduced dividend distributions for 2020, but essentially the suspension remains in place. We think the ECB has struck middle ground in its decision, trying to appease banks and their shareholders as well as securing financial stability in uncertain times. We also believe the distribution limit has been set to such a level that all banks could stomach it. This is important from a supervisory standpoint as it avoids any potential signaling of which bank is currently under higher capital constraints. Because of this signaling effect, we expect banks to bend over backwards to pay the maximum allowed dividends in 2020 if permitted by supervisors. With the exception of the banks we anticipate to be loss-making this year, and therefore not eligible to pay dividends under the new guidance, we estimate that all banks under coverage have the capacity to pay up to the maximum amount allowed. Our fair value estimates and moat ratings across the board are unchanged.

No-moat UniCredit reported net attributable profits of EUR 420 million for the second quarter, only 23% of the EUR 1.8 billion net profit it reported during the second quarter of 2019, but a major improvement on the EUR 2.7 billion loss it reported for the first quarter of 2020. Revenue declined by 7% year on year, while costs were flat and the 33% increase in loan-loss provisions increased by 33%, actually a decent outcome in the current environment, helped by the significant provisions UniCredit took in the first quarter of 2020. We update our model to incorporate the recent results and reduce our fair value estimate to EUR 11 per share from EUR 12.

CEO Jean Pierre Mustier has done very well to stabilize the ship since he took over in 2016. He addressed capital concerns, providing UniCredit with much-needed breathing space. The challenge now is to boost revenue and increase profitability to a level exceeding its cost of capital. This is where things get difficult. UniCredit generates the bulk of its earnings in Italy and Germany, which are historically the two least profitable banking markets in the eurozone.

European banks have never been this cheap. Ever. Even at their 2008 nadir, investors believed European banks were worth more than they do today. The average multiple of European banks fell by half after the 2008 global financial crisis, which was justified as their profitability was also halved. There is no indication of such a step change in profitability happening now. It seems investors are fretting about the prospect of large-scale asset impairments, which may force banks to once again pass the cap around for a capital injection. We published an Observer, "Impact of Coronavirus on Credit Quality, Capital Adequacy, and Profitability Is Manageable; European Banks Remain Undervalued" on July 6 to explore the valuation, credit quality and capital adequacy of European banks in more detail.

No-moat UniCredit reported a net attributable loss of EUR 2.8 billion for the first quarter of 2020 compared with the EUR 1.2 billion profit reported for the first quarter of 2019. Even excluding non-recurring items, mainly the loss on disposal of a portion of UniCredit's interest in Turkish bank Yapi Kredi and retrenchment costs in Italy, UniCredit still made a EUR 58 million loss for the quarter. The loss was greater than the average consensus expectation--as polled by UniCredit itself--of a EUR 1.5 billion net loss for the quarter. Loan loss provisions nearly trebled and revenue was under pressure due to some markdowns taken against UniCredit's trading book. We will update our model in due course, but we do not anticipate an impact on our fair value estimate that exceeds 10%. For the time being we maintain our no-moat rating and EUR 12 per share fair value estimate for the firm.

No-moat UniCredit updated the market that it now anticipates to book loan-loss provisions equal to 1%-1.2% of its lending book for fiscal 2020 and it anticipates a credit loss ratio of 0.7%-0.9% during 2021. Currently we estimate a credit loss ratio of 1% for 2020 and 0.8% for 2021, which falls within the ranges provided. The estimated consensus, collected by Visible Alpha, credit loss ratios of 0.8% for 2020 and 0.7% for 2021 seems optimistic. Forward-looking reserving, in line with the expected loss methodology introduced by the accounting standard IFRS 9, accounts for the bulk of the increase, and UniCredit indicated it anticipates actual defaults on loans only to pick up in second-half 2020 when the moratorium on loan repayments falls away. UniCredit uses a 13% decline in European gross domestic product for 2020, followed by a 10% rebound in 2021 as inputs in its loan-loss provisioning models.

We have recently updated all our European banking models to incorporate the effects of the coronavirus. We now forecast that the median bank that we cover will book a 38% earnings decline in fiscal 2020 compared with 2019. We then, however, forecast a solid recovery in 2021 and 2022, with median earnings growth of 31% and 17% respectively. A sharp median increase of 125% in loan-loss provisions is the main driver of the expected decline in earnings, but we also anticipate that median revenue will decline by 4%. Importantly, we do not believe that any of the European banks we cover, with the exception of Deutsche Bank, will record a loss for 2020.