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Sunday, 22 October 2017

Back on the horse

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Like a lazy Lazarus, Italy’s banking system, and in particular its largest lender, UniCredit, is finally showing signs of life, having lain virtually dormant since the onset of the financial crisis.

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In May, the bank posted a 59% year-on-year rise in first-quarter 2014 profits to €712m (US$964m), increasing faith among investors that Italy’s economy and its financial services sector, crippled by the financial crisis, might now be on the mend.

UniCredit chief executive Federico Ghizzoni told IFR in an interview that the latest financial results “confirm the effectiveness of our strategy and demonstrate that the group is heading in the right direction”. It was, he said, a “good quarter, encouraging for future quarters”, noting that the bank’s full-year 2014 net profit target of €2bn was “now closer”.

Further signs of hope were found in the lending book, where the total stock of impaired loans fell for the first time since 2008, inching down 1.3% year on year to €1.1bn at end-March 2014. New loans to businesses and individuals jumped by 63% on an annualised basis, and by 14% quarter on quarter, to €2.7bn, spread evenly among smaller enterprises, larger corporates, retail borrowers and home buyers. Ghizzoni pointed to rising income, a “structural decline in the cost base”, a sound capital position, and a level of impaired loans now increasingly “in line with best European peers”.

The lender is still struggling to shed legacy assets. It has set up a vehicle with Italian lender Intesa Sanpaolo and US buyout firm KKR to manage bad loans stemming from the financial crisis, and is rumoured to be eyeing the sale of both its asset management business, Pioneer, and its debt collection division, Credit Management Bank.

Analysts have highlighted the need for asset sales to boost a Core Tier 1 capital ratio that stands at 9.5%, below that of its leading global and European peers. UniCredit in late March took steps to address concerns, selling its first tranche of additional Tier 1 bonds, a US$1.25bn print of perpetual non-call 10-year notes.

Ghizzoni said neither the bank, nor the broader banking sector, were yet out of the woods, warning that “caution” was needed for the next few quarters, given that “recovery fragility is still very evident”. Italy’s economy, which still lies at the heart of the lender’s operations, remains brittle, its recovery unsettled by global crises and fears of eurozone deflation. The outlook within UniCredit’s portfolio is also mixed.

The lender is a major player in the Czech Republic, whose fortunes are improving, and also in Turkey and Russia, two markets under severe strain. In Turkey, profits from its stake in Yapi Kredi slumped by more than 50% in the first quarter to €50m, on the back of political turmoil.

Russia, another market vital to the bank’s future, faces the looming threat of extended economic sanctions from Europe and the US if Moscow continues to undermine eastern Ukraine. In a May 12 research note, Deutsche Bank pointed to a trio of challenges still facing the lender, including a worsening in Italian asset quality and a deteriorating outlook across emerging Europe.

Yet despite the risks and uncertainties, this has so far been a good year for the dominant lender in a country finally emerging from crisis and showing encouraging signs of life. Data in the first three months were “encouraging” and “undoubtedly positive”, said Ghizzoni. “It is difficult to say whether this is already a trend, but I believe we are headed in the right direction.”

 

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