UNCRY - UniCredit: (Again) Another Target Price Upgrade

2023-05-26 00:49:30 ET

Summary

• Solid MREL requirements that will support dividend payments and share repurchases.
• Sticky interest rates (at least in the EU) and higher savings from employees' retirements will boost the company's margin.
• M&A risks might dilute shareholders' returns. However, there are too many positive pieces of news to price in. Our buy rating is confirmed, and we also increased our target price.

Today, we are back to comment on UniCredit ( OTCPK:UNCFF , OTCPK:UNCRY ). Why? there are a few important announcements to price in.

1. The company exceeds the MREL requirements set by the EU Authorities. The bank disclosed coefficients (Minimum Requirement for own funds and Eligible Liabilities) equal to 30.90% of risk-weighted assets (RWA) and 9.34% of financial leverage [LRE]. For our readers, the MREL is a requirement introduced to ensure the proper functioning of the bail-in, ensuring that banks have sufficient loss-absorbing capacity. Minim parameters are set in 20.73% of RWA and LRE of 5.9%. Starting from January 2024, the regulators will increase the requirement to 22.13% and 6.02% respectively. For the banks that will not have the combined capital buffer, the ECB could suspend dividends and buybacks. According to our estimates, UniCredit will continue to buy back shares. In detail, the Italian bank is moving on to acquiring its own treasury shares. In total, the buyback involves up to 230 million shares for a total value of approximately €2.34 billion. Based on the information provided by BNP Pariba s, the intermediary in charge of the first share repurchase tranche, UniCredit purchased 7,737,875 shares from 15 May to 19 May 2023, at the weighted average price of € 18.80;
2. After the brilliant quarterly results , well received by Wall Street, UniCredit continues to cut costs. The bank is expected to use the restructuring charges forecast for 2023 to finance voluntary exit. According to Reuters , we are talking about 1,900 employees. The bank plans to cut further jobs in its central offices and hire young people to strengthen its commercial franchise and boost its digital capabilities. UniCredit's staff is at 74,322 full-time employees at March end and was down by around 7,700 units, equal to a minus 10% of the total workforce. This supports our lower cost/income ratio over the next three-year horizon. This news is also confirmed by the fact that UniCredit rationalizes its HQ presence in Piazza Gae Aulenti in Milan. According to local news, UniCredit will sublet almost 10 floors of Tower B in coworking spaces;
3. Still related to point 1), we should recall that there is still some tension on At1 instruments following the FINMA's decision to write off €16 billion of Credit Suisse's At1. UniCredit already presented a proposal for early repayment. The institute will likely repay the At1 for an amount of €1.25 billion, and according to our calculation, this implied a potential negative impact of around minus 40 basis points on the CET1 ratio.

Our new numbers and Conclusion

As we already performed an " Earnings Upgrade Before Q1 ", today we are commenting on our 2024-2025 targets. We raised net interest income for this year to €12.7 billion, expecting that will peak and remain above 2022 levels in 2024-2025. UniCredit cost of risk decreased to 0.33% in Q1 and we are providing a 2023 guidance at 0.39%. Following a solid first quarter, we assume €7 billion pre-AT1 net profit (guidance is set at an average of €6.5 billion) with a RoTE (return on tangible equity) of around 11% and a CET1% capital ratio of 16.7% (consensus 15.3%). This will allow UniCredit to distribute a dividend of €1.41 per share in 2023 with a yield of 7.6%. In 2024, we forecast €1.47 DPS (yield of 7.9%), and in 2025, we set the dividend at €1.69 (yield of 9.1%). Looking at the total value, we forecast a potential capital distribution of approximately €20 billion to shareholders (above the €16 billion target), equal to more than 50% of the current market capitalization. This is much above our initial buy rating called " UniCredit Could Return Its Entire Capitalisation In 4 Years ". In this period, we are estimating a total return of 16% and €5.8 billion and €6.6 billion in dividends and buybacks for 2024 and 2025 respectively. Based on these changes, we (once again) increasing our target price from €22 to €24 per share, which implies a potential upside of 60% compared to the current stock price. Despite AT1, in our numbers, the bank will remain above the 15% level on the CET1 ratio. Our rating is a confirmed buy. The main downside risks include further pressures on capital deriving from the Russian closing , macroeconomic conditions deterioration, possible M&A activities that might dilute shareholders' returns, and rate slowdown with a reduction in the interest margin.

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