EUR 850.00 For Business Accounts Only

Morningstar | UniCredit 2Q 2018 Results as Expected, but Some Warning Lights Starting to Flicker

No-moat Unicredit reported net profit of EUR 1 billion for second-quarter 2018, right on the nose of consensus expectations. The first-half earnings run rate from Unicredit is in line with our full-year growth expectations. The drivers of earnings growth for Unicredit tell a familiar story that we have seen played out at many of its European peers: nonexistent revenue growth, some cost control, but the bulk of earnings growth coming from a reduction in loan-loss provisions. Two issues are of concern to us--first, a markdown of around EUR 1 billion against Unicredit's holding of Italian bonds that bypassed the P&L; and second, an early indication that credit quality might be deteriorating. We maintain our EUR 17 fair value estimate and our no-moat rating.

As was the case with archrival Intesa, Unicredit booked a significant mark-down (we estimate EUR 1 billion) against its portfolio of Italian sovereign bonds as swap spreads widened. The markdown went directly against equity, bypassing the P&L, as the bonds are carried as available-for-sale assets. Unicredit did indicate that as things stand currently, a 0.1% shift in the swap curve for Italian sovereign bonds will reduce equity by EUR 100 million. The main impact of this is that it negates the organic capital that Unicredit is generating. Some investors would argue that these unrealised losses will reverse over the life of the bonds, but we are less sanguine. During the 2008 crisis, banks were forced to offload assets that they intended to hold till maturity and realise the paper losses recognised earlier. At best, this is a red flag that investors should take notice of.

It seems that the inflow of new nonperforming loans into Unicredit's core loan book has picked up. It is driven mainly by large single-name exposures in Unicredit's Eastern European business, and the level of NPL inflows into the Italian book has also stabilised. Once again, this is not a pressing concern yet, but investors should take note.