UNCRY - UniCredit: Earnings Upgrade Before Q1

2023-04-21 12:53:22 ET

Summary

• We believe UniCredit results will be supported by higher net interest income, modest deposit outflows, and low levels of provision.
• ECB approved the bank's €3.34 billion buyback.
• With an estimated yield of 16%, we decided to raise UniCredit EPS estimates, confirming our buy rating.

Here at the Lab, we have always been conservative in our target price estimates. UniCredit ( UNCFF , UNCRY ) was a clear buy and our title could not be more effective (the Bank Could Return Its Entire Capitalisation In four Years ). Since our Q3 expectation release in mid-October , the company stock price is up by almost 98%, and today, we decided to provide our Q1 2023 expectation (and we hope to be right this time too). We recently performed the same exercise on Intesa Sanpaolo ; however, we believe that UniCredit might offer more capital upside appreciation.

All in all, Italian banks' Q1 2023 results should be supported by an increase in net interest income and low levels of provisions that will offset the weaker AuM fee performance due to the recent difficulties in the financial markets. Despite modest deposit outflows, Italian banks' balance sheets and funding should remain constructive, with no signs of deterioration in credit quality and with a deposit beta still below 10%. We should recall that, in a worsening macroeconomic situation, Italian banks had already started to be more selective with SMEs funding. At the aggregate level, loan volume to the private sector continued to decrease at a rate of -3.2% in February, mainly due to lower business loans which signed a -7.5% compared to last year.

Going to UniCredit, the key is to assess the beta deposits' development. Indeed, deposit costs increased by only 10 basis points in January and February, reaching 54 basis points of total outstanding deposits, against 31 basis points a year ago. This is supportive of the UniCredit investment case. In our Q1 estimates, top-line sales reached $5.3 billion, up from $4.787 billion in Q1 2022 (including Russia) and this follows a further improvement linked to interest rate recovery. Going down to the bank's P&L, having cleaned up the UniCredit balance sheet after the Russian crisis, we are estimating a clean net profit of €1.35 billion, compared to the adjusted net profit of €1.2 billion reached in Q1 2022. UniCredit is raising net interest margins at a much higher rate than its deposit accounts' interest expenses. Therefore, in 2023, we are forecasting an interest margin guidance of over €11.6 billion (with a conservative ECB rate of 3%). On a negative note, after having analyzed Assogestioni data released in February, AuM flows are down 1% year-on-year and net flows returned negative. Therefore, we expect fees to remain under pressure, with a significant year-over-year decline.

As for the cost of risk, generally speaking, the first quarter tends to be the lowest. We expect no difference and forecast a cost of risk between 30-35 basis points for the whole of 2023. Italian banks also benefit from general provisions, and UniCredit had a record €1.8 billion additional reserve (while ISP has €0.9 billion). This should help cover any negative surprises from the commercial real estate, energy, and construction sectors. Default rates are expected to remain at around 1% with the migration from unlikely to pay to NPE still below pre-pandemic levels.

Conclusion and Valuation

Since 2016, UniCredit has undergone significant changes and is now showing benefits on capital combined with a de-risking strategy aimed at a more cautious approach to credit quality. Here at the Lab, we expect NII to grow 20% year-over-year in 2023 and remain robust in 2024. Higher profitability and better provisions will allow the bank to absorb potential macro deterioration and worsening cost of risk. Here at the Lab, we expect a dividend yield of around 16% in 2023, one of the highest among European banks, with an expected dividend of €1.26 per share thanks to a yearly net profit of €5.9 billion (it was 4.15 billion in 2022). The ECB recently approved the entire 2022 share buyback program, and UniCredit will carry the share repurchase in two tranches. Given the fact that the company is trading at a 2023 price/tangible book value of 0.6x, this is a key positive catalyst. The implied market valuation on a RoTE basis is set at 10% in 2024, lower than our estimate of 11.5%. Therefore, after having reached our target price , we decided to revise upward UniCredit EPS estimates by 12% for the period 2023-2025, and we derive a valuation of €22 per share.

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