Why UniCredit is a victim of its own success
The main reason why HVB has struggled this year is because of the difficulties faced by the markets and investment banking division. Although the business achieved a healthy pre-tax profit of €356 million in the second quarter, that must be set against a loss of €640 million in the first quarter.
It is within HVB that the investment banking operations of most, though not all, of the legal entities of UniCredit are grouped together, under the UniCredit MIB brand. Not surprisingly then, the performance of the entire MIB division within UniCredit tells a similar story. In the second quarter the business recorded a pre-tax profit of €402 million, much more than analysts expected. In contrast, in the first quarter it posted a loss of €696 million.
The net effect of the markets and investment banking division’s woes on the group has been significant. Tellingly, for the first six months of this year, if the MIB division’s results were stripped out, UniCredit would have achieved growth in net profit of 4.2% year on year pro-forma, instead of a decline of 30.4%.
The problems within the division are largely attributable to its investments in structured credit. The bank recorded €1.7 billion losses on structured credit exposures between the third quarter of last year and the first quarter of this, netted by €200 million in write-backs. The main culprit was an asset-backed securities portfolio comprising mainly European RMBS, CDOs/CLOs and, to a lesser extent, CMBS. The portfolio was worth €15.8 billion in the fourth quarter but its market value is now €11.6 billion as UniCredit seeks to cut its exposure. That exposure should fall further to €9.6 billion by the end of the year.
“Clearly, and unfortunately, we made a mistake in having this portfolio,” says Profumo.
On the surface the portfolio seemed sound. There was minimal exposure to US sub-prime mortgages. Indeed, overall exposure of the portfolio to US assets has never been much more than 10%, and is now 9% – a relatively low level compared with many of UniCredit’s competitors. Moreover, of the total ABS exposure, 98% is of investment grade. “The quality of the portfolio was and is good,” says Profumo.
“In fact,” he adds, “we have had no credit losses in the portfolio but [have suffered from] negative mark to market. That is different. In some cases we have had an income loss because we decided to sell part of the portfolio but we have not had any credit loss.”
