EUR 492.40 For Business Accounts Only

Etude de l'AG du 20/04/2017

During the last round of TLTRO II in March 2017, 474 European financial institutions bid for € 233 billion in loans far exceeding the expected amount of € 110 billion. UniCredit confirmed the borrowing of € 24.4 billion (equivalent to 46% of its balance sheet funding from covered bonds, senior bonds, and other wholesale loans). These loans have a four-year maturity and carry a 0% interest rate (which could be revised down to - 0.4%). Shareholders should note that UniCredit's net interest income declined 5.6% in 2016 partially due to a 39 basis point drop in market rates (a drop of € 615 million). In this context, TLTRO II should help reverse this trend by expanding spreads.

In December 2016, UniCredit had € 56.3 billion in gross impaired loans (includes € 31.8 billion in high-risk "sofferenze"), or 11.8% of its gross loan book. In December 2015, the bank reported over € 77.8 billion in gross impaired loans. Coverage ratios increased from 52.4% to 55.6%.

UniCredit reported a net loss of € 11.8 billion largely reflecting the huge loan loss provisions it took under its Transform 2019 plan. The massive provisions brought the fully-loaded CET 1 ratio to a dangerously low 7.54% before it received a 330 basis point boost from a rights offering in December 2016, which brought the ratio to 11.15%. In 2016, Italian banks doubled their write-downs to reach € 26.2 billion; an astounding € 8.1 billion of those came from UniCredit alone. Although the Bank classified these provisions as one-time items to be "adjusted" for, they essentially reveal a track record of failed risk management practices at one of the world's most important and fragile (according to V-Lab statistics) systematically important banks.

More troublingly, the Bank's capital ratios could have been much higher had it opted not to (or had the authorities prevented it from) paying dividends since the financial crisis. UniCredit paid almost € 2.9 billion in dividends since 2009 (2011 and 2016 were the only two years were the dividend was suspended). Since 2011, the Bank paid almost € 2.49 billion in dividends, which would have added 0.634% to its CET 1 ratio at the end of 2016.

The executive remuneration policy was significantly revised after the appointment of the new CEO Mr. Mustier and the approval of the 2017-2019 Business Plan in December. Main changes are related to:

- Fixed remuneration: the new CEO's base salary has been decreased by 40%, to € 1.2 million.

- Variable remuneration: the new CEO's variable remuneration will be exclusively based on the 2017-2019 performance share plan, which will depend on the level of achievement of disclosed targets in terms of Return on Allocated Capital (weighing 50%), Cost/Income (25%) and Net Non-Performing Exposure (25%).

- Severance payments: the new CEO will not receive any severance payments. The policy for all other executives has been revised, by providing that severance payments shall be capped at 2 years of remuneration including any notice that may be required under local legislation or national labour agreements (until 2016, severance payments were added to indemnities in lieu of notice).

We welcome the changes made to the executive remuneration policy, which are all aimed at aligning the CEO's remuneration with the creation of sustainable value in the long term. Also taking into account the very high quality of disclosure, we recommend that shareholders approve the 2017-2019 Incentive Plan (item 4), the new termination payments policy (item 5) and the Bank's remuneration policy (binding vote in item 6).