EUR 850.00 For Business Accounts Only

Morningstar | Decent Underlying Growth in UniCredit's 3Q, but Revised Revenue and Capital Guidance Disappointing

UniCredit reported net operating profits of EUR 1.5 billion for the third quarter, ahead of the EUR 1.2 billion reported during the comparative period last year as well as the EUR 1.4 billion consensus pencilled in for the quarter. However, the market will not take kindly to the reduced guidance for capital and revenue for fiscal 2019 as well as the somewhat surprising impairment of UniCredit’s 40% stake in Turkish bank Yapi Kredi. We maintain our fair value estimate of EUR 14 as well as our no-moat rating.

We are concerned about the reduction in 2019 capital guidance to a core equity Tier 1 ratio of 12%-12.5% compared with the previous guidance of a CET1 ratio of greater than 12.5%. This might not seem material, but seen in conjunction with the group’s indication that it will look to dispose of some assets to bolster capital, it does seem to point to concerns emerging around capital. The group’s CET1 ratio declined by a further 40 basis points to 12.1% at the end of September, compared with the 13.1% CET1 ratio reported at the end of March. The bulk of the decline is attributable to markdowns taken against UniCredit’s holding of Italian government bonds, with Italian bond yields rising significantly as a consequence of the Italian budget crisis currently playing out.

The EUR 846 million impairment of UniCredit’s investment in Yapi Kredi (a "below the line" item and therefore not included in the operating profit number highlighted above) comes as a bit of a surprise, considering that UniCredit was quite adamant during the previous quarter's earnings call that no impairment was required, given the strong operating result from Yapi in that quarter. Taking an impairment now would imply that the outlook for Yapi has worsened significantly enough to warrant the impairment. However, we are pleased with the indication that all group entities will become self-funded. We previously highlighted our concern that UniCredit extends liquidity to Yapi Kredi that could pose a material risk to UniCredit’s balance sheet.