November 12, 2009

Unicredit Group (Hold, TP=€2.40) - Quarterly results - Mixed set of results, sound core tier 1 (5p)

Please find below our latest publication:

Unicredit Group (Hold, TP=€2.40) - Quarterly results - Mixed set of results, sound core tier 1 (5p)

UCG reported weak core revenue (NII + net fees), 3% below market consensus and 5% below SGe. NII was weak (4% below consensus and 7% below SGe) on: 1) lower trading related income, 2) 3M Euribor drop (-45 bps qoq, and 3) a loan book reduction (-3.4% qoq). The overdraft fee impact on NII was negative by €131m, of which 50% was recovered in net fees. All divisions, but CEE and Poland, were sharply affected by the NII drop. Net fees were a touch below expectations, while trading income came in well above market consensus and SGe, thanks to the robust contribution of Rates & FX, Credit related business (former MIB division). LLP came in a touch better, at 150 bps (vs. 154 bps SGe - adjusted by the shrinking lending volumes). Without the one-off charge in Kazakhstan, LLP stood at 134 bps. LLP was better in all divisions, but CIB (148 bps vs. 144 SGe). The CEE LLP stood at 344 bps (vs. 388 SGe). Gross impaired loans grew by 8% q-o-q, with new inflows declining qoq. NPL coverage fell from 64.2% to 62.7%. Good news was the core tier 1 jumped by 70 bps qoq to 7.55% thanks to 1) earnings, 2) increasing AFS reserves, and 3) a sharp reduction in RWA (-6% qoq). The core tier 1 does not embed any dividend accruals. Net borrowing from banks was down 46% qoq.

De-leveraging actions and the reduction in the risk profile are the UCG short-term priorities, but this puts the P&L under pressure. Management is confident that the peak of LLP was touched in Q2 and that NII has bottomed, adding some ‘through the cycle' guidance: 1) €500m positive impact to NII – 1.7% of 2010e revenue- for a 100 bps parallel shift of the yield curve), 2) improving asset management mix, 3) 3,800 headcount cuts in 2010e, and 4) CEE GDP up 1% in 2010e.

Target price & rating
With €1.33bn earnings in 9M09, our €1.94bn net profit 2009e target could be demanding, but not impossible; 2010 will be another tough year if the cycle does not recover and rates don't rise: NII is the main issue. Our estimates and SOP €2.4 TP are unchanged. Hold.

Next events & catalysts
€4bn rights issue early 2010e. The lower visibility of the divisional reporting is a negative.

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