UniCredit Signals More Provision Pain After Profit Turnaround
UniCredit Swings Back to Profit After Worst Loss in Three Years
(Bloomberg) -- UniCredit SpA indicated that provisions for bad loans may climb in the second half, taking the shine off a return to profit following its biggest loss in three years.
“We will maintain a conservative stance on loan-loss provisions to anticipate the evolution of the credit portfolio,” Chief Executive Officer Jean-Pierre Mustier said on a conference call on Thursday. The bank reduced provisions in the second quarter by 26% to 937 million euros ($1.1 billion).
Lenders across Europe have revealed weakening loan books and increased provisions with the worst of the economic contraction expected to come later the year when government relief to businesses and families starts to taper off. ING Groep NV, Deutsche Bank AG and Credit Agricole SA were among lenders that increased their provisions in the second quarter compared with the first three months.
“We heard a downbeat call by UniCredit, which gave indications that imply a strong increase of loan-loss provisions in the second half,” said Fabrizio Bernardi, an analyst at Fidentiis Equities. “In the context of a very poor quarter, UniCredit posted a low quality beat driven by trading.”
After an initial rally, shares declined as much as 5.6% and were down 5.1% at 7.67 euros as of 2:32 p.m. in Milan trading, giving the bank a market value of 17.5 billion euros.
Second-quarter net income totaled 420 million euros the bank said on Thursday, as rising trading income and reduced costs offset lower earnings from lending and fees. Mustier said that he expects second-half underlying profit to be of the “same magnitude” as the first, when the bank posted 368 million euros of adjusted net income.
UniCredit said it’s starting to see a recovery in business activity after the Covid-19 pandemic hit clients and forced it to take $1 billion in virus-related provisions in the first quarter. Those were among the highest of a European bank, in what Mustier described as a prudent approach to the growing crisis. Even so the CEO plans to keep his conservative approach by increasing provisioning in the second half.
Despite the affects of the pandemic on borrowers, UniCredit reduced its non-performing loan ratio to 4.8% as of June 30, from 4.9% at the end of March.
UniCredit posted a first quarter net loss of 2.71 billion euros, as loan-loss provisions climbed to 1.26 billion euros and it booked one-time costs for job cuts and the writedown of its Turkish unit. About 900 million euros was set aside in April, specifically to deal with the impact of the virus.
The bank joined Italian competitor Intesa Sanpaolo SpA in planning to reward investors next year with capital it won’t distribute in 2020 after the European Central Bank issued a de-facto ban on payouts. While Mustier said he plans to gradually return excess of capital to investors starting in 2021, Intesa CEO Carlo Messina plans to pay out both 2019 and 2020 dividends next year.
“Capital was stronger than expected and this should provide support for capital return when allowed by the regulator,” Citigroup analyst Azzura Guelfi wrote in a note to investors.
UniCredit increased capital buffers posting a CET1 ratio, a key measure of financial strength, of 13.85% from 13.44%. The improvements come even after the ECB said it would allow banks to tap into those reserves to keep credit flowing during the virus crisis. UniCredit sees the cost of risk in a range of 100 to 120 basis points this year, falling to less than 90 basis points in 2021.
UniCredit reiterated that it can reach a goal of generating 75% to 80% of its original net income target for next year, or 3 billion euros to 3.5 billion euros. In March, the CEO said the bank isn’t setting new targets for 2020 as the uncertainty remained too high, and he’ll provide an update of the bank’s strategic plan by early next year.
Italy’s economy went into Europe’s longest lockdown to combat the coronavirus a few months after Mustier set out a new strategy to improve profitability and increase shareholder payouts.
Trading income more than doubled to 357 million euros, helped by fixed-income transactions. Non client trading income also rose on the value of UniCredit’s treasury portfolio. That helped make up for lower net interest income and an 11.8% drop in fee earnings.
Revenues were down compared with both the previous quarter and the year earlier period due to Covid-19 related restrictions, the CEO said in the statement. That was partially offset by lower costs, he said.
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