Unicredit's New CEO's Great Start Is Only The Beginning
Jean Paul Mustier made a strong start on his first day as CEO if Italy's largest lender Unicredit (UNCFF) , as shares climbed more than 8% following a first asset sale and strong hints of further disposals to boost capital.
Mustier, the French former head of Unicredit's and Societe Generale's investment banking, will oversee a strategic review of Unicredit's costly and bloated operations. There is plenty of fat to cut. Unicredit has a cost to income ratio of about 65% against a sector average in the low 50%.
The bank also promised "a more proactive" approach to managing a loan portfolio burdened with about 15% non-performing exposures. "The strategic review will be wide ranging," Mustier said in a statement late Monday.
The new CEO made a promising debut Tuesday, where his first official act was to finalize the sale of a 10% stake in listed online banking subsidiary FinecoBank, raising €328 million ($364 million) and leaving Unicredit with a 55.4% stake. The cash will be used to increase the lenders core-ratio CET1 ratio, a key measure of bank stability, by about 8 basis point. Unicredit's CET1 fell to 10.5% at the end of March, leaving it uncomfortably close to the European Central Bank's minimum guidance level of 10% and below the traditional target level of about 12%.
Analysts expect Unicredit to launch a capital increase as well as assets sales, with cash used to boost the capital reserves and fund the write down of non-performing loans. Italian banks value their non-performing loans at about 40 cents on the dollar, while distressed debt markets tend to value them at about half that.
"Our theoretical scenario analysis would require UCG (Unicredit) to raise €6.7 billion - €9.6 billion in extra capital to support an increase in its CET1 ratio to 12% and loan losses to levels consistent with distressed bids (market price)," Goldman Sachs analysts wrote.
Most of that dilution risk is already priced into Unicredit's shares, said Goldman, which noted that post its dilution assumptions the bank would likely trade on a 7-8 times P/E, off a low net profit assumption of €2.6 billion. With a bit of loan book restructuring, and not factoring in other cost reductions, that P/E could fall to as little as 6.1 times, according to Goldman, which which ranks Unicredit a buy and has a 12-month price target of €3.50, 75% higher than the banks Tuesday trading price of €2.00.
Exane BNP also rates the stock a buy, with a price target of €4.50.
Cash from asset sales would reduce the dilution of existing shareholders and simplify the banks structure making it easier to cut costs. Assuming that the prices that Unicredit get are not in the fire-sale category, disposals are likely to act as a catalyst for positive share price movement. Mustier didn't give details of the assets that he might consider selling, though Unicredit did identify assets it considers core including its Italian operations, German unit HVB, Central and Eastern European operations and its investment bank.
The list notably didn't include its Polish and Austrian retail banking operations as well as fund management businesses.
Mustier told reporters, late Monday, he was working to find a solution to save a proposed merger of Unicredit's Pioneer Global Asset Management unit with the fund management operations of Spain's Banco Santander. The Financial Times reported earlier that a deal struck a year ago had unraveled due to complications related to the Brexit vote.
No one would claim that a Unicredit investment is a sure thing.
The bank's shares have lost about 67% of their value over the past year, falling along with the wider Italian banking sector which has been rattled by weaknesses at smaller, regional lenders, and notably Monte dei Pascha di Siena (BMDPY) which is heading for a third bailout since 2013. The terms of that bail out are still being negotiated between Rome and Brussels, with the Italian government keen to exclude a bail-in of debtors, which include many average Italian savers. Brussels wants to enforce bank restructuring laws that came into force earlier this year and which explicitly call for a bail-in of debtors. If that bail out sours then there will be nothing that Mustier can do to stop Unicredit from being engulfed in a sell off of Italian, and European, banking stocks.