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BL Research Report - Unicredit

BL Research Report - Unicredit

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Published by WorldFinancier
Banca Leonardo Research Report on Unicredit just before the departure of CEO Alessandro Profumo.
Banca Leonardo Research Report on Unicredit just before the departure of CEO Alessandro Profumo.

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Published by: WorldFinancier on Oct 01, 2010
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10/10/2010

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Unicredit
May 13 2010
 
Gruppo Banca Leonardo
 
Italian Equity Research 1
NOT FOR DISTRIBUTION IN CANADA, AUSTRALIA OR JAPAN
 
2008 2009 2010e 2011e 2012e
Stated EPS (
 €
) 0,300 0,101 0,094 0,221 0,262YoY growth %
-38,7 -66,2 -7,4 134,9 18,9 
Adj. EPS (
 €
) 0,259 0,107 0,096 0,230 0,272YoY growth %
-48,4 -58,7 -10,4 139,0 18,5 
Dividend ord. (
 €
) 0,000 0,030 0,040 0,070 0,090
 
BVPS (
 €
) 4,114 3,557 3,354 3,535 3,728P/E (x) 10,6 19,1 20,6 8,8 7,4Adj. P/E (x) 12,2 18,0 20,1 8,4 7,1Dividend Yield % 0,0 1,6 2,1 3,6 4,7P/BV (x) 0,8 0,5 0,6 0,5 0,5P/Core Tier 1 Capital (x) 1,3 0,9 0,9 0,9 0,8Cost-income ratio % 63,8 56,3 57,1 54,3 52,4Net NPL ratio % 1,71 2,25 2,39 2,39 2,30ROE % 7,1 3,0 2,9 6,4 7,2Adjusted ROTE % 10,6 5,3 5,0 10,9 12,0Core Tier 1 ratio % 6,5 7,6 8,4 8,6 8,6
Source: Company data, GBL estimates 
Unicredit
Banks
Estimate fine tuning after good 1Q10 results
Unicredit’s 1Q10 results came better than we expected mainlythanks to slightly lower provisions. Management appeared cautiouson market trends, while confident on a slowdown of credit qualityworsening and on capital strength. We fine tune our FY2010-12eestimates keeping the EPS broadly unchanged (-0.2%) and confirmour
 €
2.2 target price and UNDERWEIGHT rating. There is somepotential upside (+14%) but, given the current market volatility andno relative value within the banking sector, not enough to take thechallenge in our view.Better-than-expected 1Q10 results
Unicredit reported a +15% YoY increase of the net profit in 1Q10 up to
 €
520m vs. our
 €
447m estimate (and consensus’
 €
343m) mainly thanks to-4.4% lower-than-expected provisions. The main positive surprises were netcommissions (+1.8% above our estimate) and provisions (127bps annualizedvs. our 136bps estimate), while the main negative surprises were costs (+0.8%above our estimate) and tax rate (38.6% vs. our 34.6% estimate).
Slowdown of credit quality worsening
Credit quality kept worsening but slowing down compared with the previousquarters, as we expected. Total net problematic loans rose +3.5% QoQ (after+57% YoY in FY09) to 5.7% of loans (5.5% at end-2009), mainly due to+5.8% QoQ higher net watchlist loans and +3.1% QoQ net NPLs.
Management guidance
During yesterday’s conference call management appeared cautious on markettrends, particularly on interest rates and loan volumes (hence on net interestincome), while confident on a slow down of credit quality worsening and oncapital strength. They announced to be looking for strategic options for theirasset manager Pioneer, claiming its limited size (
 €
185bn AUM) as a catalystfor change. They appeared more inclined to search for an industrial deal ratherthan a disposal.
Estimate fine tuning, valuation confirmed
Following the 1Q10 result announcement and the management guidance, wefine tune our FY2010-12e estimates, keeping net profit broadly unchanged (-0.2%) now pointing to a +44% CAGR 2009-12e. We confirm our target priceof 
 €
2.2, which implies a fair 10x adj. P/E11e and a fair 1.1x P/Core Tier 1Capital in FY10e and suggests a +14% potential upside.
May 13 2010
UNDERWEIGHT
Target price ord.:
 €
2.2
 
Current price ord.:
 €
1.934(price as of 12/5/2010)
Outstanding shares (m)
19,3325
Mkt. Cap. (
 €
m)
37,375
Avg. daily volumes (30 days)
481,036,100
Reuters/Bloomberg
CRDI.MI/CRD IM
Last 12 monthsHigh:
 €
2.6
Low:
 €
1.6
12-month share price performance
UNICREDIT
12/5/10MJJASONDJFMAM1.401.601.802.002.202.402.602.80UNICREDITFTSE ITALIA ALL SHARE - PRICE INDEXSource: Thomson Datastream
Performance ord. 1M 3M 12MAbsolute (%) -15 1 8To FTSE Italy (%) -5 1 4To MSCI Europe (%) -8 -3 -8
Source: Thomson Datastream 
Anna Maria Benassi
Tel. +39.02.72206.603
annamaria.benassi@bleo.it
 
Unicredit
May 13 2010
 
Gruppo Banca Leonardo
 
Italian Equity Research 2
NOT FOR DISTRIBUTION IN CANADA, AUSTRALIA OR JAPAN
 
Higher-than-expected 1Q10 results
Unicredit reported 1Q10 results above our (and even more consensus’)estimates, with net profit up +15% YoY and +40% QoQ to
 €
520m vs. our
 €
447m estimate (and consensus’
 €
343m) mainly thanks to -4.4% lower-than-expected provisions. The main positive surprises were net commissions(+1.8% above our estimate) and provisions (127bps annualized vs. our136bps estimate), while the main negative surprises were costs (+0.8%above our estimate) and tax rate (38.6% vs. our 34.6% estimate).The gross operating income increased +6.9% YoY (+10.9% QoQ) in excessof 
 €
2.9bn (+0.8% above our estimate), following revenues up +3.7% YoY(+4.9% QoQ) and +0.8% above our estimate, and costs up +1.5% YoY(+0.8% QoQ) and +0.8% above our estimate.Core revenues dropped -6.3% YoY (-0.7% QoQ) to almost
 €
6.1bn (+0.8%higher than we expected), dragged down by the very weak net interestincome (-15.8% YoY, -2.5% QoQ and in line with our estimate), hit by: 1)the sharp impact of the falling interest rates mainly on the mark-down (infact retail divisions suffered a -24% YoY drop of the net interest income); 2)dropping lending volumes (-6.1% YoY, -0.2% QoQ, -0.7% below ourestimate); 3) the nil contribution from maximum overdraft commissions (ca.
 €
130m in 1Q09, nil in 4Q09). Net commissions continued their positivetrend growing +17.5% YoY and +2.6% QoQ and beating our estimate by+1.8%.
Net profit up +16% YoY Gross operating income up +6.9%YoY driven by revenues up +3.7%YoY 
Table 1 - UNICREDIT: Quarterly results (
 €
m)1Q09 2Q09 3Q09 4Q09 1Q10 YoY QoQ 1Q10e Act/Est
Net interest income4,6504,7103,9274,0173,917-15.8%-2.5%3,9090.2%Net commissions1,8461,8891,9312,1142,16917.5%2.6%2,1311.8%Trading income/dividends/associates-391,133778243620nm155.1%6072.1%Other income204216202214202-1.0%-5.6%207-2.4%
Total revenues 6,661 7,948 6,838 6,588 6,908 3.7% 4.9% 6,854 0.8%
Total costs3,9213,9803,9383,9483,9801.5%0.8%3,9490.8%
Gross operating income 2,740 3,968 2,900 2,640 2,928 6.9% 10.9% 2,905 0.8%
Net provisions1,7182,5862,3182,3001,94713.3%-15.3%2,037-4.4%
Net operating income 1,022 1,382 582 340 981 -4.0% 188.5% 868 13.0%
Extraordinary income*-165-4391032184nm-98.2%-28nm
Pre-tax profit 857 943 685 558 985 14.9% 76.5% 840 17.2%
Tax charges33436318812440320.5%224.6%31129.4%Minorities76901036363-17.1%0.0%83-24.0%
Net profit 447 490 394 371 520 16.2% 40.0% 447 16.3%
* including also PPA impact, restrcturing charges, results from discontinued operationsSource: Company data, GBL estimates 
Table 2 - UNICREDIT: Divisional breakdown* (
 €
m)1Q09 4Q09 1Q10 YoY QoQ 1Q09 4Q09 1Q10 YoY QoQRevenues Gross operating income
Retail2,6652,3112,307-13.4%-0.2%877611595-32.2%-2.6%CEE (incl. Poland)1,5661,5411,508-3.7%-2.1%885814774-12.5%-4.9%Corporate/MIB2,2722,2342,55512.5%14.4%1,4401,4111,70818.6%21.0%AM/Private bnkg3874053982.8%-1.7%1331531394.5%-9.2%Other-329-4838nmnm-596-349-288-51.7%-17.5%
Consolidated 6,561 6,443 6,806 3.7% 5.6% 2,740 2,640 2,928 6.9% 10.9%Provisions Pre-tax profit**
Retail511331510-0.2%54.1%36427891-75.0%-67.3%CEE (incl. Poland)3545523550.3%-35.7%541272438-19.0%61.0%Corporate/MIB8001,27099123.9%-22.0%57114874530.5%403.4%AM/Private bnkg314433.3%-71.4%1301361364.6%0.0%Other501328774.0%-34.1%-684-214-366-46.5%71.0%
Consolidated 1,718 2,300 1,947 13.3% -15.3% 922 620 1,044 13.2% 68.4%
* based on Unicredit reclassification ** pre-PPA impactSource: Company dat
 
Unicredit
May 13 2010
 
Gruppo Banca Leonardo
 
Italian Equity Research 3
NOT FOR DISTRIBUTION IN CANADA, AUSTRALIA OR JAPAN
 
The trading income strongly recovered after the decline in 4Q09 from thepeaks of 2Q09/3Q09. It reached
 €
560m, in line with our
 €
550m estimate butmuch higher than the consensus’
 €
433m, from
 €
152m in 4Q09 and -
 €
93m in1Q09, still at a 45% discount to the 2Q09 peak. When excluding the tradingincome contribution, consolidated revenues would have fallen -6% YoY and-1.4% QoQ.The net operating income declined -4% YoY to almost
 €
1bn but exceededour estimate by +13% mainly thanks to -4.4% lower-than-expectedprovisions. In fact provisions increased only +13.3% YoY (loan lossprovisions +8.5% YoY) with the annualized cost of risk at 127bps vs.110bps in 1Q09, 146bps in 4Q09, 147bps in FY09 and our 136bps estimate.The Group is progressively improving vs. the peak of 164bps in 2Q09.
Chart 1 - UNICREDIT: Cost of risk trend (bps)
40608010012014016018020071Q082Q083Q084Q0820081Q092Q093Q094Q0920091Q10
 
Source: Company data 
The 19bps QoQ improvement of the cost of risk was mainly driven by theCEE/Polish division (97bps improvement from 278bps in 4Q09 to 178bps in1Q10), itself a result of the significant writebacks in Turkey (cost of risk from 497bps to -5bps) and the improvement in Russia (from 257bps to142bps), Kazakhstan (from >15% to 268bps) and in the Czech Republic(from 166bps to 74bps). In Poland the cost of risk slightly worsened from69bps to 72bps. On the contrary, the retail division sharply worsened from74bps in 4Q09 (but its should have been 95bps excluding a
 €
85m one-off) to118bps in 1Q10, mainly due to the deterioration in Italy from 88bps to148bps (above the previous peak of 146bps in 2Q09), explained bymanagement as a migration from watchlist to NPLs requiring more coverageand mainly affecting small businesses.
Net operating income down -4%YoY driven by provisions up +13%YoY Cost of risk by division
Table 3 - UNICREDIT: Cost of risk by division (
 €
m)2008 1Q09* 2Q09* 3Q09* 4Q09* 2009 1Q10
Corporate & investment banking 68 96 172 150 162 142 138Retail 64 108 117 91 74 98 118of which Italy 74 130 146 108 88 118 148of which Germany 18 37 7 14 9 17 14CEE** 77 175 210 280 274 231 174
Consolidated 62 109 164 150 146 147 127
*annualised **including PolandSource: Company dat

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