UNCRY - UniCredit: Record Net Profit

Summary

• The company delivered a record profit in Q4. Dividend up by 82%.
• UniCredit opened the Italian earnings season by beating analysts' estimates on sales and profit (both quarterly and yearly).
• Nearly all listed banks in Europe trade at lower valuations in relation to forward EPS. Despite a jump of 12%, UniCredit is still a buy.

Our most devoted readers know that we have a good grip on the banking sector. Today, we are not providing a buy case recap. However, we would like to emphasize that since our overweight, UniCredit (UNCFF) delivered more than 90% in stock price appreciation (including the dividend payment) and just looking at the past month's performance, the Italian bank is up by 45%. Given our strong buy case , we have covered the company multiple times over 2022 and we recommend that our followers check up on our previous articles so that they are well acquainted with the story up to now. Our supportive investment case recap was based on:

1. UniCredit Could Return Its Entire Capitalisation In 4 Years ;
2. No Gift For Russia;
3. M&A Optionality ;
4. Potentially More Gains Ahead.

Yesterday, UniCredit opened the EU bank earnings season, beating analysts' estimates on revenues and profit for both the quarter and the year (and more importantly was up by more than 12% in a single session). The hike was due to " the best full-year results in the decade ". In detail, the group closed the October-December period with revenues of €5.7 billion (+29.2% versus 2021) compared to Wall Street analyst estimates of €5.2 billion. UniCredit achieved a gross operating margin of €3.24 billion (vs €2.56 billion) and an underlying net income of €1.45 billion (vs €1.10 billion).

As for 2022, top-line sales break through the €20 billion to €20.34 billion and the bank delivered a net profit of €5.22 billion with a CET1 ratio, the capital index strength, of 16% (vs 15%). Thanks to the above results, in terms of shareholder remuneration, the Milanese group explains that is planning to carry out a buyback of treasury shares in two tranches. In detail, the first installment of €2.34 billion is expected to be launched after the approval by the shareholders' meeting on March 31, while the second, for €1.0 billion, is expected during the second half of 2023. The cash dividend of €1.91 billion, up 63%, corresponds to a payout ratio of 35% on net income excluding Russia or a dividend per share of €0.9872, up by 84% on a yearly basis.

Aside from the financial results, UniCredit is required to comply with the following capital requirements on a consolidated basis starting from January1, 2023 which indicates the minimum level of capital to be respected for the activities carried out by the group and to protect savers: 9.20% for CET1 ratio, 11.08% for the Tier 1 ratio and 13.58% for the Total Capital ratio. With the latest numbers, the Bank is fully compliant.

Important to note is also the new partnership with Azimut. This will allow UniCredit to extend its offer in the Wealth segment, including the distribution of its banking products to Azimut customers. The plan is part of the bank's strategic objective to create greater value for its asset management business. In detail, Azimut will independently set up and manage a management company in Ireland that will develop investment products to be distributed in Italy through the UniCredit network on a non-exclusive basis. The fund's launch is expected in the second half of 2023. Under the agreements, Unicredit will have the right to exercise a call option on the newly incorporated Irish management company, in five years or sooner, depending on the specific circumstances.

Conclusion & Valuation

Overall, European banks are trading at lower valuations about forward EPS. The average P/E is 5.9x including expected loan losses and capital over the ECB's minimum requirements. At this point, it can be said that the sector is trading at a discount on the price/earnings ratio of 50% compared to the market, while the long-term average settles at half. Still looking at the sector, the FCF yield is at 11.3% with an average dividend yield of 7%. Lending rates are rising, driven in particular by businesses, while the liquidity provided in recent years by the European Central Bank, a huge factor in reducing funding costs for financial groups and their customers through operations such as TLTROs, is in the closing phase. Despite these negative factors, the Net Interest Income of three-quarters of European banks is too low and we are not surprised to see positive price reactions. Thanks to a newly transformed UniCredit, implied RoTE estimates for 2023 and 2024 are 6.5% and 6.9% respectively. The bank is targeting a RoTE higher than 10%, in addition, the expected total return on the share (between dividend and buyback) is 31% for 2023. Therefore, we reiterate our buy target opportunity with a price of €19.5 per share and an expected return of almost 40% in 2023.

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