UniCredit Widens Gap With Rivals as CEO Focuses on Execution

(Bloomberg) -- Six months after completing a life-affirming $13 billion-euro ($15.4 billion) capital increase, UniCredit SpA is starting to widen the gap with Italian rivals.

Chief Executive Officer Jean Pierre Mustier defied expectations that the bank couldn't keep up earnings growth in the second quarter, posting net income of 945 million euros that far exceeded analyst estimates for profit of 587 million euros. That followed first-quarter profit that more than doubled, which prompted some analysts to question whether the growth could be sustained.

“The extremely strong results show that a turnaround is possible and this is positive for the whole banking industry in the country,” said Jacopo Ceccatelli, CEO of Marzotto SIM SpA, a Milan-based broker-dealer. “The exceptional work done by UniCredit encourages and puts pressure on other Italian banks to do better.”

Just one year into his tenure as CEO of Italy's largest bank by assets, Mustier is starting to clear a path for the lender to achieve its target of annual net income of 4.7 billion euros within the next two years. He's focusing on creating a leaner business and fatter fees while rivals such as Intesa SanPaolo SpA are distracted with the integration of troubled rivals and smaller lenders gird for what could be a fresh round of restructuring.

The sale of Poland-based Bank Pekao SA, which was completed I the second quarter, a reduction of risk-weighted assets and higher income helped boost the bank's common equity Tier 1 ratio, a measure of financial strength, to 12.8 percent from 11.45 percent at the end of March.

“Solid revenue trends, improving asset quality and another quarterly beat on capital generation,” Benjie Creelan-Sandford, an analyst at Jefferies, said in a note. Revenue beat consensus and asset quality showed more progress, he said.

Analysts praised the results and brokerage Fidentiis Equities brokerage upgraded its recommendation on the stock to buy from hold, citing improved visibility on the execution of its business plan, “which is proceeding well above our expectations.”

The progress hasn't gone unnoticed by investors. UniCredit rose as much as 6.5 percent in Milan trading, the most since April 24, and was up 6 percent at 17.63 euros as of 4:24 p.m. The shares have gained more than 28 percent this year. In the 12 months before Mustier took over in July 2016, the stock had declined 66 percent.

Provisions Drop

Loan-loss provisions in the second quarter declined to 564 million euros from 884 million euros a year earlier. UniCredit, which sold a big slice of its bad loans last year, plans to dispose of more bad debt in coming months, the CEO said last month. The bank has started a process to sell non-performing loans with a face value of about 1 billion euros, people familiar with the matter said this week and last month closed a deal to sell 17.7 billion euros of bad loans to Fortress Investment Group and Pacific Investment Management Co.

“The engine is working very well,” Mustier said on a conference call on Thursday. “In the first quarter we reorganized our network, we're keeping control of our costs and there is a positive environment that has helped boost our second-quarter earnings. ”

Earlier this week UniCredit's main Italian competitor Intesa Sanpaolo SpA reported second-quarter net income of 837 million euros -- excluding a state contribution related to its absorption of two Veneto-based banks. While the figure beat analysts' estimates, it was 7 percent down from a year earlier. Last year, Intesa generated more than 3.1 billion euros of profit, rewarding shareholders with a cash dividend payout of almost 100 percent of earnings. UniCredit posted a 11.7 billion-euro loss in the period, with no reward for investors.

Finally Competition

“So far, Intesa has played alone, Marzotto's Ceccatelli said. “Finally it has a competitor, a tough competitor, and in the medium term this can only be seen as a good thing.”

New exposure to non-performing loans grew at the slowest pace in six quarters thanks to higher recoveries, write backs and a better economic outlook, in particular in Italy, the CEO said. UniCredit revised down the cost of risk guidance for this year “to low 60 basis points” and confirmed a 49 basis points target for 2019.

The central and eastern Europe division was the largest contributor to second-quarter profit, with net income up 9 percent to 495 million euros. Operating costs declined 4 percent to 2.86 billion euros. Revenue fell 8 percent to 4.85 billion euros as lower income from trading and lending offset higher fees and commissions.

Currency effects related to the the Bank Pekao sale reduced quarterly net income for UniCredit. Net income excluding the impact of the sale was 1.3 billion euros, the bank said.

UniCredit last month said hackers took biographical and loan data from 400,000 client accounts in one of the biggest breaches of European banking security this year. The bank said the hackers were blocked after the breach was discovered.

“We have reviewed procedure and closed the loophole, so we are absolutely confident it will not happen again,” Mustier said.

--With assistance from Francesca Cinelli and Chiara Remondini

To contact the reporter on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net.

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Paul Armstrong