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OPINION

Updated February 5th, 2024 at 20:33 IST

UniCredit has ways to keep defying gravity

After 8.6 billion euros net profit, UniCredit CEO Andrea Orcel has pledged a repeat performance in 2024.

Reuters Breakingviews
Lisa Jucca
UniCredit has ways to keep defying gravity
UniCredit has ways to keep defying gravity | Image:Unsplash
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Onwards and upwards. Andrea Orcel has delivered another bombshell. The UniCredit CEO on Monday not only unveiled a record net profit of 8.6 billion euros for 2023, but also pledged a repeat performance in 2024. If he can pull it off while resisting the temptation to embark on flashy deals, there will be even less reason for his bank to trade below the value of its tangible assets.

Investors in UniCredit should feel happy about Orcel’s first three years. Since he joined the bank in April 2021 its shares have rallied more than 200%, compared to a 33% rise in the STOXX Europe 600 Banks Index. After another 10% jump on Monday UniCredit is now worth 50 billion euros, and its valuation has soared from around 30% of tangible book when Orcel took over to nearly 80% now.

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Orcel admittedly faces a few headwinds this year. Higher interest rates for longer may lead to a doubling of the average cost of risk from just 12 basis points in 2023. That would add perhaps 300 million euros of loan loss charges if the bank can cap its cost of risk at 20 basis points in 2024. UniCredit also expects 300 million euros less in net interest income contribution from Russia. And it may have to pass through a higher proportion of the interest it earns to depositors, which averaged 25% in 2023. If that average moves towards 30%, that could mean 500 million euros less for UniCredit.

Yet UniCredit’s cost base will shrink by around 1.1 billion euros, the equivalent of a restructuring charge booked this year. Meanwhile, the European Central Bank seems reluctant to cut rates, and Orcel’s assumptions on euro zone GDP growth don’t seem over-optimistic.

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In 2023 UniCredit distributed 8.6 billion euros to its shareholders, 100% of net profit, while keeping the bank’s common equity Tier 1 ratio at a healthy 15.9%. It also pledges to hand over 90% of net profit this year. Yet investors may still fret that Orcel, a seasoned M&A banker, will be tempted to use his excess cash to buy a competitor rather than do so. Potential Italian targets including Banca Monte dei Paschi di Siena, Banco BPM and even the small Banca Popolare di Sondrio all look too expensive, while a punt for Germany’s Commerzbank may result in large fair value accounting losses.

Still, UniCredit is if anything undervalued. Assuming Italian banks’ cost of capital stands at 11%, a lender making a 17% return on equity should be trading substantially above tangible book value. If Orcel gets to the end of 2024 without an impetuous deal and with another bundle of cash for his investors, there’s little reason for his bank not to bridge that valuation gap.

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Published February 5th, 2024 at 20:33 IST

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