Class of 2019: UniCredit
Italy’s biggest bank has surpassed expectations; higher dividends and share buy-backs could maintain its appeal.
It's payback timeJean Pierre Mustier embarks on a new long-term plan in the knowledge that in the old one, the bank consistently did better than the market expected.
This continued in 2019 in terms of efficiency, profitability and capital generation. Looking forward to the next three years, however, Mustier is pinning his hopes on share buy-backs and dividend pay-outs, as he tries to convince investors to look beyond UniCredit’s falling return on equity.
The question of European banks’ profitability is particularly pressing for UniCredit. Until now, according to Berenberg, analyst consensus for ROE over the coming years at Italy’s biggest bank has been just under 7%.
According to UBS, UniCredit’s expected ROE is lower than any other big European lender headquartered outside Germany, where banks at least have the benefit of lower perceived sovereign risk.
“Banks risk becoming value traps,” Mustier admits. “ROE goes down, as the ‘E’ goes up. As a standard return on tangible equity target for the industry, 8% is the new 10%.”
As lower-for-longer negative ECB rates bite and the implementation of new Basel III reforms in Europe loom, UniCredit is targeting an underlying ROTE of 8% by 2023. That compares with a target of more than 9% in its previous plan, made at the height of Italy’s non-performing loan crisis.
Mustier thinks UniCredit can nevertheless handsomely reward its investors, as it is taking more steps not just to shore up income but also to bolster its capital base. He describes €16 billion in value creation in the plan, comprising €8 billion in capital distributions and an €8 billion tangible equity increase.
For the 2019 financial year, the bank moved to a 40% profit distribution ratio (up from 20% in 2018 and rising to 50% in 2023) – 30% by cash dividend and 10% by a share buy-back, its first for more than 10 years.
In addition, UniCredit is changing in its legal structure in the plan to optimize its bail-in funding requirements – the minimum requirement for own funds and eligible liabilities or MREL.
To do so it is creating a new sub-holding for its international operations, unlisted and incorporated in Italy. As such it is not, as some assumed, moving to a multiple point of entry resolution structure, although it is seeking to further cut its intra-group exposures and holdings of Italian government bonds.
“The price-to-book value is not under my control, but the book value is under my control,” says Mustier. “Our book value will increase meaningfully.”
He seeks to pre-empt criticism about how one-off items could affect the pay-outs: “We will pay dividends on the underlying net income.”
The bank took several more steps to bolster its capital in 2019. On December 1, it said it was exiting its Turkish joint venture, instead gaining a 32% direct stake in Yapi Kredi, in a move that could facilitate a full sale of its stake in the bank. It sold 9% of the Turkish bank to local partner Koc Holding as part of the agreement. Mustier says the venture never earned UniCredit its cost of equity in euro terms.
Earlier accelerated book-building processes saw UniCredit sell large minority stakes in Italian institutions Mediobanca in November and FinecoBank in May.
Mustier says the bank is coming to the end of such disposals and could even do bolt-on acquisitions in central and eastern Europe, but he is targeting another €1 billion in gross cost cuts in Western Europe, about 12% of its 2018 cost base.
He says the approach will be less drastic compared with the previous plan, which saw larger cuts targeted – more than €2 billion in total – although the new approach may take longer to yield such clear results. The previous plan involved 14,000 job cuts, while the latest envisages 8,000.
“The first plan was very brutal; we delivered more than what we said,” he says. “Now it will be more bottom-up, more about process optimization, improving customers’ satisfaction and productivity.”
The bank is pushing more clients towards online channels. It plans to make its retail network entirely paperless, starting with Italy in 2020.
“We’re investing in the bank of the present,” he says. “We’ve cut more costs in the previous plan to invest more in technology.”