Company Reports

No-moat UniCredit delivered its most impressive performance to date, reporting a net profit of EUR 2.6 billion for the first quarter of 2024, which was 24% year-over-year growth. Despite the prevailing trend of shrinking margins, the bank maintained robust net interest income, experiencing a notable 9% increase compared with the previous year. UniCredit showed commendable cost discipline, with operating expenses remaining essentially flat over the last two years. Historically active in mergers and acquisitions, UniCredit discloses integration costs below the operating line, while we see these costs as being more recurring in nature. However, amid fluctuations in integration costs, the bank decreased its total noninterest expense by 20% when comparing the past two-year results to its 10-year average. We slightly increase our fair value estimate by 3% to EUR 33 from EUR 32 per share. We believe that UniCredit’s strategic focus on fee and commission income, coupled with its sound cost management, could shelter it from lower future interest rates.

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.

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.

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.

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.

Turkey's rapid economic growth was fuelled by a surge in credit, and the recent collapse in the value of the lira threatens to topple this house of cards. Banco Bilbao Vizcaya Argentaria, Unicredit, ING, and BNP Paribas respectively derive 14%, 10%, 5%, and 3% of their profits from Turkey, which is at risk.

No-moat Unicredit reported net profit of EUR 1 billion for second-quarter 2018, right on the nose of consensus expectations. The first-half earnings run rate from Unicredit is in line with our full-year growth expectations. The drivers of earnings growth for Unicredit tell a familiar story that we have seen played out at many of its European peers: nonexistent revenue growth, some cost control, but the bulk of earnings growth coming from a reduction in loan-loss provisions. Two issues are of concern to us--first, a markdown of around EUR 1 billion against Unicredit's holding of Italian bonds that bypassed the P&L; and second, an early indication that credit quality might be deteriorating. We maintain our EUR 17 fair value estimate and our no-moat rating.

We complete the relaunch of our Italian banking sector coverage with fair value estimates of EUR 19 for UniCredit and EUR 11 for Mediobanca. This implies price/fair value ratios of 0.95 for UniCredit and 0.9 for Mediobanca compared with 1.4 for Intesa.

No moat Unicredit reported a seemingly very strong 86% increase in adjusted net profits for the third quarter of 2017, compared with the third quarter of 2016. We do however highlight that the increase resulted entirely from a 39% decline in loan loss provisions, with preprovision profits flat for the quarter. We will increase our earnings estimates for the full year, which could lift our current fair value estimate by around 5%.

After the rights issue in the first quarter of 2017, UniCredit is moving ahead with its "Transform 2019" strategic plan. The fully loaded common equity Tier 1 ratio grew 2.5% year over year, supported by the disposals of Bank Pekao and Pioneer, while the asset quality further improved thanks to derisking efforts. Nonperforming exposures declined 30% versus last year and 4% compared with the prior quarter. We plan to maintain our fair value estimate of EUR 18, along with our no-moat rating.

UniCredit's transformation is taking shape as the group finalized its EUR 13 billion rights issue to regain a manageable capital position after taking a heavy hit in provisions and write-offs in the previous quarter. The fully loaded common equity Tier 1 ratio stands at 11.5% after the rights issue, which excludes asset disposals of Pioneer and Bank Pekao. Now, UniCredit looks ahead toward the task of reorganizing the group's asset quality and cost structure, which showed improvements in this quarter. Non-performing exposures decreased EUR 1 billion to EUR 55.3 billion, resulting in a gross NPE ratio of 11.4% versus a targeted 8.4% in 2019. Cost-cutting initiatives are well under way with above 30% of the targeted branch closures and employee count reductions already completed, reducing the cost/income ratio to 59.7% from 63.7% last year. Still, an adjusted return on tangible equity of 7% excluding asset disposals remains underwhelming. As a result, we maintain our fair value estimate of EUR 18 and no-moat rating.

UniCredit’s fourth-quarter results were predictably poor, as the numerous charges the firm outlined at its capital markets day in December pushed the firm to a net loss of EUR 14 billion. We plan to maintain our EUR 18 fair value estimate, which reflects the bank’s recent reverse stock split and in-process capital raise, as well as our no-moat rating. Excluding the variety of charges, the bank’s adjusted profit was EUR 1.3 billion, reflecting modest improvements from lending more than offset by lower investment income and fee income.

The private plan to rescue Monte dei Paschi di Siena has failed, and the Italian government has moved to nationalize the bank while also arranging reimbursement for Italian savers who would otherwise suffer losses. We plan to maintain our fair value estimates and moat ratings for the Italian banks we cover. MPS was only able to raise about EUR 2.5 billion in private capital, short of the EUR 5 billion needed, after Qatar backed away from being an anchor investor. The still-in-process sale of EUR 28 billion in nonperforming exposures may also fail to find enough private capital and need to be funded by the government. In response, the Italian government has arranged for a EUR 20 billion bailout and will use the funds to recapitalize the bank as well as other weak Italian banks (notably Veneto Banca and Banca Popolare di Vicenza). Holders of Tier 1 and Tier 2 bond securities, who are mainly retail investors, will receive senior bonds worth 75% and 100% of the nominal value, whereas institutional investors will be forced to take losses. The Italian government bailout is allowed under European Union rules as it is being called a "precautionary recapitalization" and is essentially an emergency measure, in our view. Broadly, the plan is a decent one, as it allows the Italian banks to obtain needed capital while staying within broader EU rules on bailouts.

UniCredit’s long-awaited strategic plan for 2016-19 addressed many of the key issues on costs, nonperforming exposures, and capital that we have been concerned about, and the EUR 13 billion capital raise is scheduled for January. We plan to maintain our no-moat rating for the bank, and will adjust our EUR 3.50 fair value estimate as pricing for the raise becomes clearer, but we do not expect a material move, as our model assumes a EUR 10 billion raise and asset sales to close a EUR 15 billion capital gap. Virtually all of the key aspects of UniCredit’s plan matched our explicitly laid-out forecasts in terms of employee reductions, capital raises, branch closures, cost/income ratio goals, and the involvement of alternative capital in the plan. The plan also supports our view that 2016 will be the peak year for nonperforming exposures in the Italian banking system, given that UniCredit’s large balance of NPEs will be cut in half in the coming years. Ultimately, we view as achievable the strategic plan that focuses on boosting return on equity to around 9% in 2019, given that the bank recognizes that the Italian economy is unlikely to improve significantly (revenue growth is expected to be 0.6% over the next few years), and thus the changes need to come from the bank itself. The major risk we see is that disposing of the remaining nonperforming exposures takes longer than expected due to the weak Italian economy and lack of needed legal system reforms, pushing out the 9% target to the early 2020s.

Italy voted no by a 20-point margin in Sunday’s referendum on constitutional changes. Given the magnitude of the loss, Prime Minister Matteo Renzi said he would resign. We see this as neither a Brexit nor a Trump moment for European investors, as Italian politicians have been aware of this possible outcome since the summer, and they have been clear on the next steps needed. Given the reduced uncertainty and expectation that the Italian status quo will be maintained (Italy has had 63 governments in 70 years), even if we see it as less than ideal, we would encourage the banks and investors to move forward with planned capital raises and undertake much-needed banking system reforms. Mediobanca remains our most compelling and undervalued (by about 30%) idea in the system thanks to its its clean balance sheet. While we expect market volatility in the coming days, we plan to maintain our fair value estimates and economic moat ratings for the Italian banks.

Italians are poised to vote on Dec, 4 on reforms to the country’s constitution, with the idea of simplifying the parliamentary system to reduce bureaucratic delays while also centralizing power with the government versus regional powers. Broadly though, no matter the outcome of the vote, our central thesis for the Italian banking system remains unchanged: the current system is broken, but events are encouraging the banking system to reform, benefiting all participants over the long run. We see Mediobanca as the best positioned and most undervalued bank in the system, and we plan to maintain current fair value estimates and moat ratings for all Italian banks. While there are a wide range of outcomes, we expect Italian prime minister Matteo Renzi to remain in place for the time being pending 2018 elections no matter what the outcome of the vote, and while we would prefer a “Yes” vote to encourage positive reforms sooner in Italy, we believe the banking sector will move forward with changes even in the case of a “No” vote.

UniCredit’s third-quarter results show minimal progress in terms of right-sizing the bank. However, we would expect with a EUR 10 billion to EUR 13 billion capital raise coming in December after the referendum, plus the likely sale of Pioneer Asset Management for around EUR 3 billion to EUR 3.3 billion, the pace of reform should pick up shortly. We would expect to see a slimmer UniCredit focused on Italian banking, as shedding much of its complex international operations would be ideal.

The European Banking Authority’s stress-test results were as we expected, and they clearly laid out the fault lines in the European banking system. We plan to maintain our fair value estimates and moat ratings for the banks we cover. The tests clearly have shortcoming, as they stressed banks under an “adverse economic scenario” but did not include pass/fail ratings or reflect the impact of negative interest rates or Brexit, and they generally used more optimistic assumptions than U.S. regulators used for the CCAR tests in June. Broadly, the tests laid bare how slow and ineffective European regulators have been in recapitalizing European banks in the aftermath of the crisis. However, by use of moral suasion, we do think the EBA will be able to push banks into addressing some capital concerns. Overall, the results support our banking system framework, as the weakest systems include Italy, the United Kingdom, and Germany, which we rate poor, fair, and fair, some of the lowest ratings among the banking systems we cover.