EUR 850.00 For Business Accounts Only

Morningstar | UniCredit Reports 2018 Results; Italy and Turkey Resilient...for Now

No-moat UniCredit reported net profits of EUR 3.9 billion for 2018. In the results call, management struck a confident tone and pinned down a EUR 4.7 billion net profit target for 2019, slightly ahead of our EUR 4.5 billion estimate. UniCredit is exposed to two countries where the macroeconomic outlook deteriorated significantly. There is limited immediate evidence of this weakening in the 2018 results. If one scratches below the surface, however, some cracks do start to appear, especially if one isolates UniCredit's performance in the final quarter of 2017 in these two geographies. While we do not believe UniCredit is out of the woods completely in Italy and via Yapi Kredi in Turkey, it is fair to say that it has held up better than the market expected. We have increased our fair value estimate to EUR 15 per share from EUR 14 and maintain our no-moat rating. Despite the elevated level of political risk in Italy and the subsequent economic downturn, UniCredit managed to increase profits before tax by 6% in its Italian retail and commercial banking business unit (27% of attributable profits) for the 2018 fiscal year. However, the fourth quarter of 2018 was very weak, with profits before tax declining 30%. Asset quality remained sound, and UniCredit was able to continue to reduce legacy non-performing loans. UniCredit did indicate that it is building a 2020 GDP growth number of 0.5% for Italy in its loan-loss provision modelling; 2020 is also when UniCredit expects GDP growth to bottom out. This looks a bit bullish to us, and a worse-than-expected outcome could lead to higher loan-loss provisions. Revenue did pull back by 3% for 2018 and the final quarter was especially weak with a 6% decline. Net interest margins, after a sustained period of declines, seem to have stabilised in the final quarter.

UniCredit's 41% effective stake in Turkish bank Yapi Kredi (10% of attributable profits) has been the other recent area of concern to investors. In Turkish lira, Yapi Kredi recorded a 31% increase in profits before tax for 2018 compared with 2017 and a 26% increase if we compare the final quarter of 2018 with the fourth quarter of 2017. Looking at these robust numbers, investors would be forgiven for being perplexed over any concerns surrounding Yapi Kredi or Turkish banking in general. Yapi Kredi, like most of its Turkish rivals, did benefit greatly from higher interest income on inflation-linked bonds in the second half of 2018 as Turkish inflation intensified significantly. If we strip out revenue from CPI linkers, then Yapi Kredi recorded a 54% decline in profit before tax for 2018 and was actually loss-making in the final quarter of 2018. The CPI linker revenue obscured the deterioration in Yapi Kredi's asset quality. Our concern is that while inflation in Turkey has moderated, loan-loss provisions in 2019 are bound to be meaningfully higher than in 2018. As things stand at the moment, however, we think that Yapi Kredi will remain profitable in 2019 and capital will not be a problem yet.