Eager to get a piece of the troubled European banking sector? Jefferies analysts are backing Italian bank UniCredit (UNCFF) .
Shares in the Milan-based bank were recently trading 0.7% up at €2.13, but have lost more than 60% of their value over the past year.
The bank is one of many ailing Italian banks, including Monte dei Paschi, that are drowning under the weight of non-performing loans - UniCredit has about $90 billion. The bank was also one of the worst performing banks in the European Banking Authority's stress tests in July.
The EBA found that the bank had fully loaded CET1 ratio of 7.1% under the adverse scenario. That's much lower than the average 9.2% ratio recorded across the continent.
However, the bank's new CEO Jean-Pierre Mustier is working to orchestrate a turnaround.
Taking the helm in mid-July this year, Mustier sold off €1 billion ($1.1 billion) of assets in his first 12 hours on the job. He sold off part of the stake in its Polish unit Bank Pekao (he is also exploring full disposal of the unit) and a stake in online banking unit FinecoBank.
The early focus on disposals raised hopes that Mustier is intent on reducing the size of a looming capital increase needed to strengthen UniCredit's balance sheet.
The bank is taking bids for its investment unit Pioneer Investments after the sale of a controlling stake to Santander fell through.
Generali, Amundi and Poste Italiane are reportedly interested in the unit, which has $245 billion of assets under management, the Financial Times reports.
Analysts from Jefferies said, "A larger clean-up today could pay greater dividends in the future."
They predict a plan to offload non-performing loans could cost up to €11 billion. "Potential sales of Pioneer and Pekao on top would dilute that future earnings power but would bring an offsetting benefit of stronger capital," the analysts said as they initiated coverage with a buy recommendation.
"Strong capital and low NPLs would justify a substantial reduction in CoE (10% vs our base case of 12%), leaving c.50% upside. An aggressive upfront clean-up could bring incremental upside not captured in our valuation - e.g. allowing management to focus on efficiency improvement, accelerating organic growth and earlier resumption of dividends," the analysts added.