UniCredit SpA shares jumped after Chief Executive Officer Andrea Orcel lifted full-year targets for a second straight quarter, as the bank benefits from the continuing boost to earnings from higher interest rates.
(Bloomberg) — UniCredit SpA shares jumped after Chief Executive Officer Andrea Orcel lifted full-year targets for a second straight quarter, as the bank benefits from the continuing boost to earnings from higher interest rates.
Italy’s second-biggest bank now sees 2023 adjusted profit of at least €7.25 billion ($8 billion), up from an earlier forecast of more than €6.5 billion, and investor returns at equal to or higher than €6.5 billion. Key performance metrics for the period — including net income — were all better than expected.
UniCredit rose as much as 3.6% in Milan trading, the best performer among the 45-member STOXX Europe 600 Banks Index, and was up 2.3% at €23 as of 9:10 am, giving the bank a market value of €44.8 billion.
“UniCredit reported once again a stronger than expected net profit, with also better than expected capital generation and improved guidance,” Azzurra Guelfi, an analyst at Citigroup Inc. wrote in a note on Wednesday. The stock “has been strong in recent weeks, but we expect a positive share price reaction and consensus upgrade.”
Since taking charge in 2021, Orcel has trimmed costs and shifted focus to better-performing businesses. While higher European Central Bank rates continue to boost interest margins, the bank plans an additional €500 million in cost cuts in an effort to offset higher-than-expected inflation, Bloomberg reported earlier this month.
“Although we cannot predict macroeconomic outcomes, we do know that we are well equipped for the future,” Orcel said in the statement, adding that the forecast for 2023 “serves as a baseline for what we are confident we can achieve next year as well.”
In the three months ending June, net income increased to €2.31 billion, better than the €1.9 billion expected by analysts. Revenue rose about 25% from a year earlier on higher income from lending due to higher rates, management of deposit pass-through and trading that more than offset a 1% decline in fees.
Among the changes that Orcel is undertaking is rebuilding revenue-generating ‘product factories’ to develop new services for the bank’s 7 million Italian clients. The bank has entered a partnership arrangement with Azimut Holding SpA to distribute asset-management products through its banking network, restarting the Italian lender’s offering in the sector for its domestic customers.
Costs declined 1%, “despite inflationary pressures and without constraining revenue growth or investments,” the bank said. The Milan-based lender says it is speeding up the automation of processes and cutting bureaucracy.
Lower Provisions
UniCredit booked €21 million in additional provisioning in the quarter, much less than the €280 million expected by analysts. Orcel said in a conference call with analysts that for the whole industry the cost of risk is more benign, and this adds to “the quality of our portfolio and the quality of coverage we have with significant repayments and significant moves from unlikely-to-pay loans back into bonus, that is missed by many.”
Orcel expects that the credit quality will worsen for all the banks, but UniCredit is well positioned for a period of macroeconomic uncertainty with extra provisions — so-called overlays — against potential losses confirmed at about €1.8 billion.
“The sound asset quality and the credit performance of first-half 2023 lead to the improvement of the full-year cost-of-risk guidance from the target range of 30-35 basis points to below 25 basis points, with potential upside,” he said, adding that he expects the bank can keep the cost of risk below this level “even when we are at the peak of cicle”.
UniCredit’s common equity tier 1 ratio, a key measure of financial strength, rose to 16.6% from about 16% at the end of March. The European Central Bank is set to announce the results of a region-wide bank stress test later this week. The biennial test, conducted by with the European Banking Authority, showed UniCredit ’s capital cushion shrank by 400 basis points, down from 592 basis points in the prior test, people familiar with matter have said.
M&A
Orcel reiterated he doesn’t see the right conditions for potential M&A deals at the moment as the bank is still undervalued.
The executive has often said that while the lender is focused on organic growth, he’d consider deals in the region under favorable conditions if they arise. UniCredit has a presence in 13 European countries and is one of the largest players in central and eastern Europe.
–With assistance from Chiara Remondini, Macarena Muñoz and Antonio Vanuzzo.
(Updates with CEO comment and further details)
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