UniCredit Profit Gains Momentum as Capital Buffers Improve

(Bloomberg) --

UniCredit SpA may accelerate its plan to share a bigger proportion of profit with investors as the Italian bank’s strengthening capital gives Chief Executive Officer Jean Pierre Mustier room to reward shareholders.

The payout from 2020 earnings may rise to 50% of underlying profit and will be delivered through a combination of buybacks and dividends, the bank said on Thursday. In December, UniCredit said it expected to reach that level in 2023. Its key capital ratio climbed in the fourth quarter, helped by a revaluation of its real estate assets, while revenue and costs were better than expected.

“Thanks to our strong CET1 ratio, we will consider increasing the capital distribution to 50% for 2020, paid in 2021, and for the remainder of the plan” through 2023, Mustier said in the statement. “As we have said before, we much prefer share buybacks over M&A.”

UniCredit also said that it could provide an “extraordinary capital distribution in 2021 and/or 2022” based on the bank’s estimate for its capital buffer through 2023. The plan had called for 40% of underlying earnings to be shared with investors from 2020 to 2022 with the proportion rising to 50% in the final year.

Faster Cleanup

Mustier is seeking to boost investor returns while accelerating the cleanup of the balance sheet and cutting about 8,000 jobs. The CEO’s strategic plan called for the return of 8 billion euros ($8.8 billion) to investors through dividends and buybacks, as the executive focuses on further simplifying the bank’s structure and improving the way it allocates capital.

UniCredit rose as much as 5.7% in Milan trading and was up 4.9% at 13.45 euros as of 9:05 a.m. making it the best performer on the benchmark Stoxx 600 Banks Index. It’s also the second best performer on the index over the last 12 months.

The bank’s fourth-quarter loss of 835 million euros was due to several charges the bank has already announced, according to Morgan Stanley. That beats estimates for a 1.14 billion-euro loss.

“The beat was driven by trading, costs and lower underlying loan loss provisions,” Morgan Stanley’s Antonio Reale and Tais Correa said in a note. “Capital was the highlight of the quarter,” which will allow management flexibility to increase capital distribution, they said.

The bank wrote down loans to accelerate the balance sheet improvements and booked restructuring charges, impairments on intangible assets and costs to unwind its joint venture in Turkey. Underlying net income stood at 1.4 billion euros, boosted by higher revenue and lower costs.

The CEO said UniCredit is reconsidering its payout plan after the European Central Bank last week announced guidelines on capital buffers that were less stringent than the bank had expected, potentially freeing more capital for distribution. On 2019 earnings, the lender proposed a cash dividend of 63 cents per share and a share buyback of 500 million euros.

Turkish Business

The lender completed the sale of a stake of about 12% in Turkey’s Yapi ve Kredi Bankasi AS, raising about 440 million euros. The sale follows the completion of a deal signed with Koc Holding AS last year to unwind the joint venture that owned the Turkish bank, clearing the way for UniCredit to sell its holding.

UniCredit plans to keep its Yapi Kredi stake at the current level for the rest of 2020. The sale is expected to boost the CET1 ratio by 0.5% in the first quarter.

UniCredit joined its main competitor, Intesa Sanpaolo SpA, in posting fourth quarter trading gains and higher fees and commissions, helping overcome the impact of negative interest rates and sluggish European economies on their main lending business. Italy’s economy unexpectedly shrank at the end of 2019, putting pressure on the bank’s core business.

The bank’s CET1 ratio rose to 13.09% in the fourth quarter from 12.6% at the end of September. Despite tougher regulation in the coming years, UniCredit plans to keep its ratio at 200-250 basis points over regulatory requirements throughout the plan.

UniCredit set aside 1.64 billion euros for bad loans as it plans to reduce gross soured debt below 5 billion euros by the end of the year and cut the non-performing loans to 3.8% of the total by 2023 from 5% in December.

--With assistance from Flavia Rotondi, Macarena Munoz and Lukas Strobl.

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, Vernon Wessels

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