EUR 850.00 For Business Accounts Only

Morningstar | UniCredit's challenge is to increase profitability in the most competitive markets in Europe.

An investor who held 10% of Unicredit’s outstanding shares in 2008 would have seen the interest diluted twentyfold to 0.5%, following a series of rights issues carried out to shore up UniCredit’s balance sheet (assuming the investor did not follow any of his rights). Naturally, this does not inspire confidence among investors.However, CEO Jean Pierre Mustier has done very well to stabilise the ship since he took over in 2016. He addressed capital concerns, providing UniCredit with much-needed breathing space. The challenge now is to boost revenue and increase profitability to a level exceeding the cost of capital. This is where things get difficult. UniCredit generates the bulk of its earnings in Italy and Germany, which are historically the two least profitable banking markets in the eurozone. Its main competition is state-owned and mutually owned banks where maximizing profit is not the primary goal, leading to what we view as irrational pricing of loans. This is especially true of the Italian market, where lending spreads are the thinnest in Europe, yet Italian credit losses are the highest out of all the major European economies.Now is the time in the cycle when market commentators start to beat the drum for merger and acquisition activity and consolidation of the European banking sector. UniCredit is often touted as the standard-bearer for future consolidation activity, given its stated pan-European strategy. This does not make sense to us. Priced at a discount to net asset value, the market-implied cost of capital is still high for UniCredit. We believe UniCredit will be better served optimizing its existing operations without the distraction of a high-profile merger.