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UniCredit 3Q12 Group Results

Net profit up supported by cost cutting, strong balance sheet confirmed

  •  Net Profit up both Q/Q and Y/Y, reaching €1.4billion year-to-date
  • Cost management actions resulted in a 2.9%decrease in total costs (9M12/9M11), with positive impact both on Staff (-2.8%) and non-HR expenses (-3.1%)
  •  Core revenues(net interest income and fees) at -2.0% Q/Q (-4.3% Y/Y)holding up despite a deterioratingmacroeconomic environment and thanks to geographical diversification, with revenues in CEE & Poland up by 4.4% Q/Q
  •  2012 Funding Plan completed through high quality and diversified issuances, thanks to continued access to wholesale markets and a strong retail franchise
  • Successfully issued €1.25 billion of Lower Tier 2, which was 3.5x oversubscribed
  • Ongoing business refocusing in CEE: merger of Czech and Slovak subsidiaries approved in line with the Strategic Plan
  • Sound capital position: Core Tier I ratio at 10.7%; fully loaded Basel 3CET 1 at 9.3%, above the previous 2012 guidance of 9.1%


3Q 2012 Key Figures


  • Group Net Profit: €335million of which €39.5 million from ABS buy-back, versus -€474 million in 3Q11 net of one-offs, and €169 million in 2Q12
  • Revenues: €6.1 billion (+6.9% Y/Y, -2.1% Q/Q),of which €58.9 million from ABS buy-back
  • Operating Costs: €3.7 billion (-3.7% Y/Y, -0.4% Q/Q)
  • Cost/Income ratio at 61.7% (-6.2 p.p. Y/Y, +1.6 p.p. Q/Q) net of ABS buy back
  • Gross operating profit: €2.4 billion (+29.5% Y/Y, -4.7% Q/Q), of which €58.9 million from ABS buy-back
  • Loan Loss Provisions: €1.8 billion (-1.8% Y/Y, -5.2% Q/Q)



9M 2012 Key Figures


  • Group Net Profit: €1.4billion (versus €847 million in 9M11 net of one-offs), of which €517millionfrom buy-back of Tier I and Upper Tier II bonds in 1Q12and ABS buy-back in 3Q12
  • Revenues: €19.5 billion (+2.0% Y/Y),of which €756 million from buy-backs
  • Operating Costs: €11.4 billion (-2.9% Y/Y)
  • Cost/Income ratio at 60.6% (-0.6 p.p. Y/Y) net of buy-backs
  • Gross Operating Profit: €8.2 billion in 9M12 (+9.6% Y/Y, -0.5% net of buy-backs)
  • Loan Loss Provisions: €5.1 billion (+13.2% Y/Y)


The Board of Directors of UniCredit approved the 3Q12 results on November 13th.

Federico Ghizzoni, CEO of UniCredit, says: 'A year after the launch of UniCredit's Strategic Plan we see meaningful positive impacts with lower costs supporting net profit and a significant drop in RWA strengthening our capital ratios. Our revenues remain resilient in spite of a continued difficult economic environment, particularly in Italy, thanks to our geographical diversification and our strength in the CEE. We have completed our 2012 funding plan through a mixture of retail network bonds and by very successfully tapping the wholesale market, through covered and senior unsecured bonds, and will continue to do so opportunistically.'





The Group's quarterly results showed resilience, despite a continuously deterioratingmacroeconomic environment. Net profit amounted to €335 million in 3Q12 (€39.5 million from ABS buy-back),improvingconsiderably from €169 million in 2Q12. UniCredit has implemented cost management measures asstated in the Strategic Plan:costs have been reduced across the Group, with Staff expensesdown by 0.8% Q/Q at €2.3 billion in 3Q12 (and down by 4.4% Y/Y).Non-HR costs at €1.5 billion are virtually stable Q/Q but down by 2.7% Y/Y. These efforts allowed to partiallyoffset unfavorable trends in revenues (-2.1% Q/Q, - 3.1% Q/Q net of ABS buy-back), in an environment of declining interest rates (with 3M average Euribor down by 34bps Q/Q to 0.36%) and low commercial loan demand in Western Europe. Still, core revenues (net interest income and net fees) decreased by only2.0% Q/Q (-4.3% Y/Y), holding up mainly thanks to the contribution of Central and Eastern Europe (CEE) and Poland, where revenues experienced a steady4.4% Q/Q increase (+4.5% Y/Y), and is poised to benefit from better growth prospects in the Group's expansion countries in CEE(Poland, Turkey, Russia and Czech Republic). The persisting unfavorable macroeconomic conditions causedloan loss provisions to remain at high levels: €1.8 billion in 3Q12.






As of today, funding needs have beenmet with 2012 funding plan ahead of schedule thanks to high quality and diversified issuances, includingin Italy. Building on this strong position, the Groupwill continueto takeadvantage of any potential opportunities to access the funding market.

The Funding Plan has been implemented thanks toa strong retail franchise and continued access to the wholesale markets. The Group raised approximately €11 billion year to date through the issuance of retail network bonds; at the same time, UniCredit has tapped the wholesale markets, with a variety of products, including benchmark issuances for more than €7.0 billion year to date, mostly in Italy. With a good diversification in terms of funding instruments, geographies and currencies, UniCredit's issues have consistently been positively received by investors. Here are some examples of the latest issuances asto date:

- 5.5Y Italian covered bonds for €750 million in August: UniCredit successfully placed a covered bond priced nearly 100 bps below the Italian underlying Government curve, at +290 bps over Mid Swap (MS). UniCredit placed an additional €250 million of the same issuance in October at a lower spread of +190 bps;

- 3Y Italian Senior €1 billionin September, before the ECB announceddetails of the OMT:orders totaled €2.3 billion, at +395 bps over MS. In October another €350 million tap were issued at a lower +315 bps spread;

- 10Y Italian Lower Tier 2 €1.25 billionin October:UniCreditsuccessfully issued a subordinated bond at the tightest sub/senior cash spread ratio for UniCredit, at +510 bps spread over MS. The bond was 3.5xoversubscribed.




One year afteritsannouncement, the pertinence of the main Strategic Plan actions is confirmed, particularly considering the deteriorating macroeconomic conditions. Achievements to date include:


Simplification & Cost Management

The Group is actively implementing a strict cost control policy across the board, supporting the achievements of the relevant Plan targets: in Western Europe total costs decreased by 3.9% in the period 9M12/9M11, whileacross the whole Group they decreased by 2.9%. There was a strong contribution both from Staff expensesand non-HR costs. As to Staff expenses, the decrease was supported by a reduction of about 3,400 FTEs, with the overall Group number reaching 157,190 FTEs. 


Underpinning a planned reduction of non-HR costs, there are a number of actions underway. The first pillar isthe proposed rationalization of the holding company, moving from a divisional to a regional structure, reducing the number of divisionswhile maintaining a global approach on selected cross border businessessuch as in CIBand in Global Banking Services (GBS), bringing value added to our clients. The second pillar is a set of actions related to the optimization of operations: consolidation of banking services factories and migration of IT systems into the unified European IT platform. Following this migration, almost 60% of the Group's branches (Italy, Germany, Austria and Czech Republic) have converged towards a single IT commercial banking platform. Finally, Italy is proceeding with the reorganization of its branch network (Hub & Spoke project), transforming branches from fully fledged to Cash Light and Cash Less.  As of September, out of the 3,648 branches targeted by theHub & Spoke project, 967 were Cash Light and Cash Less, compared to288 in January 2011.


In order to mitigate the negative impact of the macro environment and the effects of the recent Italian pension reform, UniCredit has activated a number of levers to optimize both Staff expensesand non-HR costs. By means of an agreement with Trade Unions reached in 2012, the departure of all employees eligible for early retirement (2,600 headcount by 2015) has been confirmed.The workforce productivity will be enhanced by achieving full flexibility of the internal labor market, leveraging on the insourcing of activities to redeploy employees and on a ManPower planning tool to move employees within the Group in Italy. In addition, further efficiency is being reached outsourcing the HR administration activities and via other outsourcing transactions currently under assessment. Finally, additional HR initiatives, such as a hiring freeze coupled with an internal re-qualification process, the constant alignment of HR costs to Group's results and the rationalization of executives costs allow UniCredit to be fully on track on the implementation of the Strategic Plan HR actions.


Business Refocusing in CEE


As part of the implementation of the Strategic Plan, the Board of UniCredit approved todaya project to combine its subsidiaries in the Czech Republic and Slovakia into a single cross border bank. This is part of the rationalization of the Group's presence in CEE. The integration, still subject to the relevant nationalauthorities' approval, is expected to be completed by end 2013 and bring synergies from 2014 onwards in terms of efficiency, balance sheet and liquidity management. 


In CEE, UniCredit is pursuing a diversified approach on the basis of the attractiveness of each country, focusing on its four 'expansion countries' (Poland, Turkey, Russia and Czech Republic), where revenues in 9M12 grew by a strong3.5% Y/Y. 



Group RWA Reduction and CIBRun-Off Portfolio/Business Refocusing


UniCredit's balance sheet optimization has led to a significant RWA reduction of €23.6 billion since December 2011, mainly thanks to a reduction of Markets and Credit risk weighted assets.  As part of the Strategic Plan actions, the Group identified and ring-fenced a portfolio of €48 billion risk weighted assets, mainly composed of non-strategic assets pertaining to the CIB division. The run-off of theCIB portfolio is well on track: as of September 2012 assets included in this portfolio were down by €16.3 billion with respect to a year before.


The ongoing business refocusing in CIB is bringing good results in terms of risk adjusted profitability (RACE), which is recording a positive development in all countries. In Germany and Austria, the share of revenues generated thanks to clients with a RACE higher than 3% is increasing, and well above 80%. A continuous increase of risk adjusted profitability is also confirmed in new business, with focus on investment grade customers.


In order to focus on core activities, in November 2011, UniCredit decided to outsource its European equities sales and trading business, under a strategic alliance with brokerage Kepler Capital Markets which has been very successful.



Balance Sheet Repositioning


The Balance Sheet of the bank is characterized by well-matched residual maturities, with a strong component from the commercial bank customer base.


Even in this difficult external environment, UniCredit recorded an increasing trend in customer deposits, confirming the strength of its core commercial franchise, with total deposits of €420.4 billion at the end of September 2012, increasing by 7.1% since the launch of the Strategic Plan. At the same time loan demand has been weaker, especially in Western Europe, leading to an overall improvement in the loan to direct funding [1]ratio, benefiting from an increase of €3 billion Q/Qin customersecurities anddecreasingto 113% as at the end of September 2012 from 124% one year earlier.


Consistently with the above mentioned trends, the Group's funding gap [2]has improved substantially since the launch of the Strategic Plan. At the end of September 2011, the funding gap totaled €108 billion, whereas, at the end of September 2012, it had improved to €65.6billion, with Italy being the main contributor.


At the end of September 2012 the Group's Core Tier I ratio isequal to 10.7%, improving by 28 bps versus June 2012, mainly thanks to the reduction of credit and market RWAand to retained earnings. Fully loaded Basel 3 Common Equity Tier 1 ratio (CET 1) is equal to 9.3%, above previous 2012 guidance of 9.1%.


In October 2012, the European Banking Authority published the results of the final assessment of its capital exercise, which showed that UniCredit is well above the 9% Core Tier 1 ratio requirement, including the Sovereign buffer as stated in the EBA  December 2011 Recommendation.


The Group is continuously looking at opportunities to preserve its capital strength; in this context, at the beginning of October 2012, UniCredit finalized the buy-back of Asset Backed Securities for a total outstanding amount of €667.8 million at an aggregate purchase price of €569.4 million, realizing a gross profit equal to €98.5 million (€66 million net of taxes). Since the transaction was settled in two separate tranches between the end of September and the beginning of October, a gross profit of €58.9 million (€39.5 million net of taxes) has been booked in 3Q12. The remaining part will be booked in 4Q12.





UniCredit has a well-diversified Sovereign bond portfolio, primarily in countries where it is active and has a strong presence. As at September 30th, UniCredit held around €92.7billion of Sovereign bonds, of which €42.5billion were Italian Sovereign bonds.





1) Direct funding is defined as the sum of customer deposits and customer securities in issue (such asbonds sold via the commercial network).


2) Funding gap is the difference between customer loans and direct funding.


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