UNCRY - UniCredit: Q3 Expectations

Summary

• UniCredit released analysts' estimates for the Q3 in preparation for the 9M accounts plan to be released on the 26th of October.
• In Q3, UniCredit consensus estimates set profit of €1 billion versus the €2 billion achieved in the second quarter. This is due to higher problematic loans.
• The Bank's second tranche of the buy-back already purchased 1.29% of its equity capital.

Looking beyond the Sept. US inflation data (well-above expectations), Wall Street now expects an additional 0.75% hike in rates in Europe in November. In this complex environment, which derives from the high EU energy price & dependence on Russia, we find it crucial to mention the latest words of Steven Maijoor, President of ESMA and member of the ECB board, who is very much cautious in the financial institution distribution of dividends and ongoing buybacks. ESMA is the European Securities and Markets Authority, an EU body that since 2011 has had the task of supervising the financial market. As already happened in 2020, the European credit institutions had to suspend dividends (distributed the following year) due to the COVID-19 pandemic.

As we can see in the Bloomberg news , the ECB has the authority to evaluate banks' plans " on a case-by-case basis " due to differences in their vulnerability to " recessionary pressures ", emphasized the ESMA president.

The prospect of a Russian complete shutdown of gas is a likely scenario, and following these assumptions, about a third of the world economy is likely to contract next year. While bank profits will be supported by the rate hike movement in Europe and globally, the specter of the recession will weaken companies and households, increasing problematic loans such as UTP (Unlikely to pay) and NPL (Non-performing loans); and certainly, this will weigh on the accounts of credit institutions and their risk-weighted assets ((RWA)). Important to note is where UniCredit stands and what is the downside risk in a recessionary pressure.

Analysts' estimates on UniCredit

Countdown to UniCredit's (UNCFF) third-quarter 2022 results which will be examined by the board of directors on 25 October (with the data released to the market the following day); in the meantime, as previously analyzed, UniCredit is unlocking shareholder value to a continuous buyback with its second tranche.

In view of the quarterly report, today UniCredit published the analysts' estimates covering the stock. For the third quarter of this year, the consensus estimates an average net profit of €1 billion (including Russia) in line with the Q3 results in 2021. Above the Q1 results (due to the Russian provisions) and below the Q2 results. Total revenues are forecasted at €4.5 billion from the €4.43 billion achieved in Q3 2021, with higher gross operating profit. Wall Street is forecasting also a higher loan loss provision at an average of -€470 million from -€297 million in the same quarter in 2021. Going down to the P&L, EPS for 2022 is set at €1.65 in 2022 and € 1.98 in 2023. While as regards the dividend, the panel indicates €0.68 for 2022 and €0.74 in 2023.

We can also note that the average target price for UniCredit is € 15.54. Consensus expectations are drawn up on the opinions of 20 analysts who follow UniCredit. Out of these, 80% provided buy ratings (or equivalent) whereas 20% had a hold.

Conclusion and Valuation

With the Euro area inflation expectation, here at the Lab, we are increasing our hike rates assumptions with two additional hikes in February (50 basis points) and March 2023 (25 basis points). This translates our Net Interest Income estimate in the UniCredit case into a higher revenue line by 4% and 3.5%, respectively, in 2023 and 2024. Despite a likely recession scenario, we increase our provision forecast by 4% and 5% in the 2023 and 2024 period. Aside from the higher turnover expectation, asset quality coupled with cost efficiency will offer capital flexibility in an economic activity slowdown. Of course, regulatory pressure might end up with our previous conclusion: UniCredit could return its entire market cap in four years. However, UniCredit is a solid bank with a proven ability to generate cash flow to deploy on payout policy and explore M&A optionality . Despite taking into account higher provisions, we reaffirm our €14 per share target price (in line with Wall Street consensus too).

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