UNCRY - UniCredit: Buy Case Supported By Macro To Micro Developments

Summary

• We analysed the double CNP transaction and the new buyback sensitivity on CET1.
• We provide some support on interest rate sensitivity. BTP-Bund spread is now more manageable than in the past for Italian banks' balance sheets.
• Both ISP and UniCredit are clear buy.

After our analysis of Intesa (ISNPY) and UniCredit (UNCFF) Q2 results, today we follow up with some interesting considerations on interest rate dynamics and the Transmission Protection Instrument proposed by the BCE. Then, we will analyze the recent UniCredit disinvestment. As already mentioned, this was UniCredit's best semester since the Italian sovereign debt crisis in 2012. To sum up, the results were above analysts' expectations and UniCredit also managed to strengthen its capital position and improved its guidance for the current year, which also reviews the current bancassurance structure thanks to the agreements with the CNP.

Support from MACRO development

For the first time in 11 years, the ECB raised interest rates by 50 basis points, bringing the deposit rate back to 0%. After this move, the European Central Bank will make its next rate rulings on a meeting-by-meeting basis, based on the data analysis and inflation target of 2%. Thus, the implied forward curve predicts rates to reach 1.4% by the end of 2022.

What is certain is that rate hikes are a key factor in bank earnings. According to our calculation, for every 50 basis points of rate hikes, the expected earnings per share in 2022 banks in the Eurozone will rise by about 8% (on average).

The banks with the highest impact are the Spanish and Italian banks and also Commerzbank (CRZBF) and SocGen (SCGLF).

The ECB also provided more details on the anti-fragmentation tool with the announcement of the Transmission Protection Instrument. TPI can be activated to counter unjustified and disordered market dynamics that pose a serious threat to the transmission of monetary policy in the euro area.

The rate hike and the launch of the TPI occurred in conjunction with the Italian political storm. The resignation of Prime Minister Mario Draghi after a vote of confidence in the Senate put pressure on the Italian spread that at the time of writing trades at 232 basis points for a yield on 10-year BTPs of 3.4%.

Therefore, if on one hand, the increase in rates is good for the balance sheets of Italian banks, on the other hand, the rise in the spread represents an ongoing risk. However, Italian banks now have stronger balance sheets and less sensitivity to rising sovereign spreads, but market volatility could persist until the election.

Going to the numbers, rate hikes will provide support for further gains in consensus on European banks' earnings per share, while we see strong asset quality. We previously said that on average the earnings per share of European banks for 2022 will rise by 8% for each rate increase of 50 basis points. However, Italian banks are above average. Starting with Banco BPM with an expected rise of almost 30%, followed by UniCredit with a forecast at 17% and then Intesa Sanpaolo at 13%.

This is supportive of our buy target for UniCredit and ISP.

Support from MICRO development

1. CNP Operation
2. The second tranche of UniCredit's Buyback
3. Russia development

1. Double transaction for UniCredit in this quarter. The company sold 49% of CNP Vita Assicura (formerly Aviva) to Cnp Assurances for a price of €500 million while signed a purchase agreement to rise from 38.8% to 45.3% in CNP UniCredit Vita for a price of €70 million. The transaction completions which were approved by UniCredit's board, are subject to regulatory authorization. In numbers, we estimated a positive impact of around 10 basis points on capital requirements and around €200 million in net profit. This was already calculated in our Q2 analysis comment.

2. Today, UniCredit has finally received the green light from the European Central Bank for the second tranche of the buyback program for an amount up to €1 billion . This is also subject to approval by the shareholders' meeting scheduled for the 14th of September. The impact of the second tranche on the capital ratio (CET1) is estimated at 32 basis points. Considering the first tranche already completed, the total repurchase of treasury shares amounts to approximately €2.58 billion.

3. In the meantime, the Russian exposure was further reduced and the capital endowment would also remain extremely solid in the event of a worst-case scenario. According to our internal calculation, the CET1 pro forma would be at 14.9% from 15.7% compared to the second quarter of 2022. The sensitivity of CET1 to the BTP/Bund spread is limited (about 2bps for every 10bps of spread widening). Thanks to UniCredit's provision and the public Italian guarantees for about €24 billion, the company is in a good shape in the event of macro deterioration.

Conclusion and Valuation

The company is currently trading at compressed multiples - 4x the 2023 P/E multiple and 0.3x the tangible book value. In our opinion, UniCredit's share price does not reflect the excellent capital position and the asset quality profile. The company has also significant safety buffers to effectively deal with a worsening of the macro scenario and Russia's exposures were managed pretty well. All the above reasons make UniCredit a clear buy with a target price of €14 per share. If we look at the strategic plan - the first presented by CEO Andrea Orcel at the end of last year - UniCredit aims to distribute at least €16 billion to shareholders for the period between 2021 and 2024. Thanks to the solid Q2 results, the lower cost of risk and the positive support for the EBC exp rate hike, we reaffirm our conclusion ( UniCredit could return its entire market cap in four years ) and our buy target valuation.

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