UNCRY - UniCredit: Again A Buy

2023-03-28 18:50:57 ET

Summary

• Additional Tier 1 early redemption might be a positive catalyst for UniCredit S.p.A.
• The Russian exit is moving forward and the Italian bank has further reduced its cross-border exposure.
• Best-in-class cost/income ratio, low cost of risks, and a solid balance sheet make UniCredit a solid buy with a potential total return of 30% in 2023.

Once again, our team is looking at the European banking environment, and in conjunction with the Intesa Sanpaolo publication, today we are also analyzing UniCredit S.p.A. ( UNCFF ). Since our overweight call in "UniCredit Could Return Its Entire Capitalization In 4 Years," the second Italian bank has recorded a remarkable stock price appreciation; however, due to the recent SVB Financial Group (SIVB) and Credit Suisse Group AG (CS) development, UniCredit has lost almost 10% of its market cap, underperforming the S&P 500 (SP500) returns (Fig 1).

Despite that, the sector is robust and well-equipped to deal with an economic slowdown. There are multiple reasons why we are overweighting the Italian financial sector:

1. European banks, unlike U.S. ones, are subject to the same rules regardless of asset size. They all have the same regulatory obligations, the same supervision, and the same level of transparency;
2. The regulatory capital is at the highest levels, with the level of non-performing loans on the total assets having gone from over 20% in 2014 to around 2%;
3. Finally, with interest rates rising from negative levels, the banks have finally seen an improvement in profitability, which helps to further protect the balance sheet in the event of exceptional losses;
4. The indiscriminate selling of securities on both equity and fixed income certainly presents opportunities, especially for the largest names. The systemic national banks that are more diversified, profitable, and capitalized are a clear buy (and UniCredit is definitely within the parameters);
5. In addition, Italian banks have managed to obtain a more balanced mix of the intermediation margin. In detail, looking at the revenue split, fee & commission income is at the top of the sector both in terms of incidence (40% compared to 25% of European peers) and assets (88 basis points compared to 49 basis points). The Italian institutions have also achieved credit quality in line with the levels of the Old Continent banks, reducing the gross NPL ratio (i.e., the ratio between non-performing loans and total loans) from 3.9% in 2021 to 2.8% in 2022. For European banks, the percentage fell from 3.2% in 2021 to 3% in 2022. In numbers, Italian banks have decreased NPL by €170 billion in the last 7 years (Fig 2);
6. The cost of risk is also substantially in line with European banks, also considering that the provisions of the Italian banks include a significant weight of extraordinary write-downs;
7. As already emphasized in the Intesa Sanpaolo follow-up note, the Italian banks are currently trading at a 30% discount versus the average of European banks (0.58x vs 0.80x).

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