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UniCredit 2Q13 Group Results

Higher revenues and lower costs boost Gross Operating Profit

Net operating profit stable in the quarter, visibly up Y/Y

Net new flows to impaired loans in Italy keep slowing

 

 

 

  • Net profit at €361 million in 2Q13 (-19.4% Q/Q, +113.8% Y/Y). Stable Net Operating Profit (-1.0% Q/Q, +48.4% Y/Y), despite higher provisioning (+35.4% Q/Q, -8.8% Y/Y)
  • Gross Operating Profit progresses significantly (+18.3% Q/Q) sustained by positive revenue generation (+5.5% Q/Q) and cost reduction (-2.3% Q/Q)
  • Revenues up by 5.5% Q/Q (+1.4% net of buy-back); Net Interest resilient (-0.3% Q/Q) despite still weak loan demand in Western Europe, thanks to ongoing efforts in repricing liabilities (-13 bp Q/Q on customer deposits); trading income up (+46.7% Q/Q) o.w. €254 million from bond buy-back
  • Continuing cost control (-2.3% Q/Q, -1.8% Y/Y). Staff Expenses down by 1.5% Q/Q and 2.7% Y/Y, supported by about -6,900 FTEs Y/Y, including ca. 3,400 exits related to business refocusing actions. Other Expenses -4.4% Q/Q (-1.6% Y/Y), showing first results of new cost reduction projects
  • Asset Quality in Italy: net new flows to impaired loans continue to decrease, for the third quarter in a row. 2Q13 LLPs in line with guidance. Coverage resilient at 42.1% in Italy (-0.3 p.p. Q/Q) and 44.1% at Group level
  • Capital position: CT1 ratio at 11.41%, +38 bps Q/Q; Leverage ratio at a very good level of 17.6x; Basel 3 fully-loaded CET1 ratio at 9.72% post Yapi Sigorta disposal, pro-forma on the basis of actual data and current regulatory framework. Reimbursed €2 billion LTRO in July 2013
  • CEE & Poland soundly contributed to revenue generation (+4.6% Q/Q; core revenues +1.0% Q/Q) with Poland, Turkey, Russia and Czech Republic as main contributors to the bottom line; Commercial Bank Italy: GOP +4.1% Q/Q; Commercial Bank Germany: net profit +4.3% Q/Q; Asset Gathering: net profit +7.4% Q/Q; Pioneer: net inflows of €2.8 billion in 2Q13; CIB: net profit +41.9% in 1H13/1H12
  • Continued business refocusing: sale of Yapi Sigorta insurance businesses in Turkey and subsequent commercial agreement with Allianz finalized in July; ongoing steps to merge the two Group subsidiaries in Ukraine

 

 

 

1H 2013 KEY FIGURES·      

  • Group Net Profit: €810 million (-25.2% Y/Y, +5.7% net of buy-backs[1])
  • Revenues: €12.5 billion (-6.4% Y/Y, -3.3% net of buy-backs)
  • Operating Costs: €7.4 billion (-1.8% Y/Y)
  • Cost/Income ratio at 59.5% (+2.8 p.p. Y/Y, +0.9 p.p. net of buy-backs)
  • Gross Operating Profit: €5.1 billion (-12.5% Y/Y, -5.5% net of buy-backs)
  • Loan Loss Provisions: €2.9 billion (-7.7% Y/Y)
  • Regulatory capital and Balance Sheet: sound Core Tier 1 ratio at 11.41%, Basel 3 fully-loaded CET1 ratio at 9.72% post Yapi Sigorta disposal, pro-forma on the basis of actual data and current regulatory framework; Leverage ratio at a very good level of 17.6x amongst the lowest in Europe

 

 

 

2Q 2013 KEY FIGURES

 

  • Group Net Profit: €361 million (+ 113.8% Y/Y, -19.4% Q/Q)
  • Revenues: €6.4 billion (+2.0% Y/Y, +5.5% Q/Q)
  • Operating Costs: €3.7 billion (-1.8% Y/Y, -2.3% Q/Q)
  • Cost/Income ratio at 57.2% (-2.2 p.p. Y/Y, -4.6 p.p. Q/Q)
  • Gross Operating Profit: €2.7 billion (+7.5% Y/Y, +18.3% Q/Q)
  • Loan Loss Provisions: €1.7 billion (-8.8% Y/Y, +35.4% Q/Q)

 

The Board of Directors of UniCredit approved the 1H13 results on August 6th.

Federico Ghizzoni, CEO of UniCredit, said: 'In the second quarter 2013, UniCredit Gross Operating Profit increased, confirming the trend of the first quarter, thanks to stronger revenues and the ongoing reduction of operating costs. Net profit is up versus the same period of 2012, underlining our ability to react to a difficult environment. Despite the Eurozone struggling to get out of the recession and the negative growth of the Italian economy, UniCredit records the first positive signs of turnaround in Italy, including an increase in new loan origination to companies and households and - for the third quarter in a row - a slowdown of net new flows to impaired loans. We are constantly striving to fuel profitability focusing on the following strategic actions: development of commercial banking, cost reduction and renewed risk culture. The Group performance in the first half of 2013, our capital ratios and the significant results of our managerial initiatives allow UniCredit to look at the coming months with confidence.'

 

 

STRONG PROGRESSION IN GROSS OPERATING PROFIT SUPPORTED BY COST REDUCTION

 

The Group's Net Profit reached €361 million in 2Q13, thanks to a strong Gross Operating Profit at €2.7 billion in 2Q13 (+18.3% Q/Q, or +7.4% Q/Q excluding the €254 million contribution from bond buy-back). The quarterly operating result was also underpinned by the visible effect of cost reduction initiatives, with total costs decreasing by 2.3% Q/Q and by 1.8% Y/Y, also supported by a quarterly reduction of 4,690 FTEs, of which 3,350 for the sale of ATF Kazakhstan and most of the balance for pre-agreed early retirements in Italy. FTEs are down by about 30,000 since March 2008. The Group also posted a material increase in revenues (+5.5% Q/Q), mainly thanks to bond buy-back done in April and trading income. In a challenging environment characterized by low interest rates (Euribor in 2Q13 averaged 0.21%) and weak commercial loan demand in Western Europe, the Group continued to put in place re-pricing actions on liabilities in order to stabilize Net Interest Income.

 

  Stable Net Operating Profit Despite Higher Loan Loss Provisions

 

Net Operating Profit was stable at €1.1 billion in 2Q13, despite higher Loan Loss Provisions (+35.4% Q/Q). From a geographic point of view, Western Europe posted a Net Operating Profit of €449 million (-3.1% Q/Q); CEE and Poland contributed with €628 million (+0.5% Q/Q), confirming the importance of geographic diversification.

 

   Highlights from Business Divisions

Commercial Bank Italy experienced a notable increase in business activity, with Gross Operating Profit up by 4.1% Q/Q (+11.4% Y/Y) thanks to revenue increase (+0.9% Q/Q) and cost control (-1.8% Q/Q).

 

Commercial Bank Germany recorded a sound 4.3% Q/Q progression in Net Profit. RoAC was at a very high 25.2% in 2Q13.

 

Central and Eastern Europe and Poland recorded a sound performance driven by positive revenue dynamics (+4.6% Q/Q) and costs reduction (-2.1% Q/Q); Poland, Turkey, Russia and Czech Republic are the main contributors to the dynamics of consolidated profit.

 

Corporate and Investment Banking continued to show solid results in 2Q13, with a Return on Allocated Capital (RoAC) equal to 19% despite a weak financing environment. Revenues increased by 15.2% Y/Y, and RWAs declined by €17.3 billion Y/Y, of which €6.0 billion in the quarter. The positive quarterly progression was related to both good client business and to positive contribution from Credit Value Adjustment (CVA). 

Asset Management's Total Assets Under Management were equal to €165.5 billion as at June 2013, slightly up in the quarter (+€0.5 billion) thanks to positive net inflows for €2.8 billion which offset the negative market effect (-€2.3 billion). Net flows in the quarter were almost entirely driven by captive business in Italy.

Asset Gathering registered a good commercial performance, with net inflows equal to €1.4 billion in the quarter and buoyant new clients acquisition (+10% Q/Q, in line with the increase of the previous quarter).

 

 

 

COST REDUCTION INITIATIVES

 

The Group is constantly working on the reduction of the cost base. In particular, over the last months, management has been working on a number of projects which combined are expected to reduce Operating Costs by at least €1 billion by 2015 compared to the targets announced in the Strategic Plan. In addition, a number of initiatives are underway to continue to improve efficiency.

 

 

Network Re-design Projects

 

Several initiatives are ongoing across the Group in order to reshape the network across the different geographies, optimizing the territorial branch distribution, lowering the cost base whilst meeting changing customer habits.

 

The Italian branch network rationalization is underway with the Hub & Spoke project: as of June 2013, 236 branches were closed since January 2011, of which 52 in 2Q13. In addition, project 'Run' has been launched, targeting additional 350 branches to be closed by 2015, enabling the transformation of the service model at network level. As of June 30th, out of 110 closures targeted for 2013, 64 have already been realized.

 

In Austria the project 'Smart Banking' will reshape the local presence of UniCredit in the country, with about 70 branches closed or transformed to self-service locations, allowing to streamline the network map and redesign key branches. The whole project will involve about 200 Full Time Equivalents.

 

In Germany UniCredit is actively implementing a specific project aimed at setting up remote branches with dedicated advisors. The rationalization of the physical retail network is being implemented, with 14 branches closed in 1H13 out of 35 targeted for 2013. As a result of the ongoing transformation process, headcounts are expected to be reduced by almost 800 in Germany by 2014, mostly in the Commercial Bank.

 

Also CEE & Poland is undertaking initiatives to redesign the network. For example the First Branch of the Future opened in Sofia, aimed at enhancing customer experience and increasing efficiency.

 

 

STABILIZING ASSET QUALITY IN ITALY

 

Lower net flows into Impaired Loans for the Third Quarter in a Row

In 2Q13 the pace of credit deterioration in Italy continued to slow down for the third quarter in a row, as a sign that management actions are starting to bear fruits. Net inflows into impaired loans in Italy were at €1.5 billion in 2Q13, 23.7% lower than 1Q13, thanks to flat inflows into impaired loans from performing loans, higher outflows from impaired loans back to performing and higher recoveries related to more effective workout activities. It is worth noting that in Italy UniCredit is experiencing a slower pace of asset quality deterioration versus the rest of the system[2].

 

Optimization Portfolio in Italy

The Italian optimization portfolio reached €45.1 billion as at June 30th 2013, experiencing a €2.1 billion decrease since December 2012. The decrease is the result of successful risk mitigation actions aimed at reducing the riskier positions. The three main strategies deployed depending on each specific situation are: support to ailing clients, increase of collateral of riskier positions, and reduction of exposure.

 

Stable Coverage at Comforting Levels

At Group level, Coverage of Gross Impaired Loans stood at 44.1% as at June 30th 2013, virtually stable in the quarter, whereas the same ratio amounted to 42.1% for the Italian portfolio. In particular, in Italy Non-Performing Loans (Sofferenze - i.e. the riskier category of Impaired Loans) were 54.6% covered.


 

BALANCE SHEET MANAGEMENT

 

Sound Balance Sheet and Conservative Leverage Ratio

Total assets amounted to €889.6 billion as at June 30th, down by 2.6% since March 31st. The decrease is mainly related to lower trading assets (-€4.8 billion Q/Q) and lower loans to customers (-€4.7 billion Q/Q). The leverage ratio[3] of the Group was equal to 17.6x as of June 2013, stable in the quarter and continuing its decreasing trend on a yearly basis (-1.3x Y/Y) confirming UniCredit as having one of the lowest leverage ratios in Europe.


Stable Funding Gap

Funding Gap at Group level was equal to €63.1 billion as at June 30th, up by €2.2 billion in the quarter but down by €2.0 billion considering the bond buy-back of €4.2 billion nominal amount in April. On a yearly basis, the funding gap confirmed a significant improvement equal to €7.4 billion.

 

Buy-back Supports Active ALM

In April UniCredit realized a partial repurchase of senior notes with a total aggregate nominal amount of over €4.2 billion. The deal confirms the Group's ability to manage funding costs and residual liability maturities in a proactive way, realizing a gross gain in trading income of €254 million.

 

LTRO Repayment

Between December 2011 and January 2012, together with most of Eurozone based banks and despite a solid liquidity buffer in support of its liquidity position, UniCredit joined the ECB Longer Term Refinancing Operation (LTRO), borrowing about €26.1 billion maturing in 2015. In July 2013 UniCredit started to prepay some of the LTRO funds, with €2 billion reimbursed year to date. Going forward, UniCredit will consider the possibility of further prepayments of LTRO funds, depending on a number of factors including market conditions.

 

Stable Capital Ratios and Ongoing Actions

At the end of June 2013 the Group's Core Tier 1 ratio (CT1) is equal to 11.41%, improving by 38 bps versus March 2013 (11.46% pro-forma for Yapi Sigorta sale to be booked in 3Q13). The sale of ATF Kazakhstan and the subsequent deconsolidation of its RWAs (ca. €3.6 billion), coupled with the ongoing optimization in CIB RWAs (-€6.0 billion) resulted in a material capital generation of 32 bps; sound earning generation in the quarter provided additional 7 bps[4]. The fully loaded Basel 3 Common Equity Tier 1 ratio (CET 1) is equal to 9.72%, post Yapi Sigorta disposal, pro-forma on the basis of actual data and current regulatory framework. Considering the phasing in of Basel 3 as of 2014, the Common Equity Tier 1 ratio is equal to 10.92%. The strong capital generation confirmed the Group capability to weather the current macro environment and regulatory changes in a self-sustained way.


BUSINESS REFOCUSING

 

Finalization of ATF Bank Kazakhstan Sale

On May 2nd 2013, the sale of ATFBank JSC to KNG has been finalized. The transaction added ca. 10 bps to Group Core Tier 1 ratio (ca. 8 bps to Common Equity Tier 1 ratio) by the release of ATF's Risk Weighted Assets.

 

Sale of Insurance Business in Turkey (Sigorta) and Strategic Partnership with Allianz

Following obtainment of all regulatory approvals, as of July 12th 2013, the sale of Yapı Kredi's insurance businesses (Sigorta) to Allianz has been finalized. Yapı Kredi entered into a 15-year exclusive Strategic Distribution Agreement with Allianz for distribution of insurance and pension products to its customers in Turkey. The deal resulted in a capital gain of about €200 million gross of taxes at Group level, equal to about +5 bps on capital ratios under Basel 2.5 and Basel 3 to be accounted in 3Q13.

 

 

Towards the Merger of Subsidiaries in Ukraine

On July 16th 2013 the merger process of subsidiaries of UniCredit in Ukraine progressed with 100% of shares of PJSC UniCredit Bank transferred from Bank Pekao to UniCredit. The next step will consist of merging PJSC UniCredit Bank with the other Ukrainian subsidiary Ukrsotsbank into a single Legal Entity, as already approved by both banks' statutory bodies on August 5th.

 

 

Joint Venture Unicredit Services S.C.p.A. - IBM

The Board of Directors of UniCredit S.p.A. has given the go ahead to Unicredit Services S.C.p.A. the Group's global service company, for the creation of a joint venture with IBM, which aims at optimizing ICT infrastructure services. The operational structures will be located in Italy, Germany, Austria, Czech Republic, Slovakia and Hungary. This project is included in the Newton Program, approved by UniCredit Board of Directors in August 2012, that explores business opportunities in the third-party market - to be pursued through strategic partnerships with global multinational market leaders - for specific areas of Unicredit Services. Newton aims to achieve high levels of internal efficiency by exploiting the Group's process know-how and technology assets.

 

BUSINESS INITIATIVES TO REVAMP LENDING IN ITALY

During the first half of 2013, in order to address persistently challenging macroeconomic conditions in Western Europe, and in particular in Italy, UniCredit has reinvigorated efforts to revamp lending in Italy with new commercial initiatives. In this way, the bank aims at providing support to the real economy, while maintaining high attention on lending criteria focused on best rating classes.

 

We are seeing positive signs with new flows in UniCredit in Italy, up by 58.9% in 1H13/1H12 in the Italian Corporate segment. These flows however are still insufficient to offset the amount of loans running off. New flows of household mortgages increased by 11.3% in 1H13/1H12, amid support of recent new commercial initiatives which have widened the flexibility and availability of banking products. Finally, we also see improvement in the personal loans segment, with new flows equal to €1.1 billion in 1H13, up by 6% versus 1H12.

 

Also, UniCredit is active on initiatives to incentivize medium and long-term lending to SMEs, leveraging on supranational and public guarantees. These structures allow corporates to get easier access to credit as the bank - benefitting from lower capital absorption and lower cost of risk - can charge lower rates to customers.

 

Finally, at system level, in the last few quarters Italian corporates have increased the volume of corporate bond issuance, thus substituting bank borrowing. UniCredit has a leading advisory role in this market segment. The main positive element of this new trend is the fact that this includes a high number of Italian debut issuers who have successfully tapped the international capital markets. As of end of July 2013, total issuance of first-time issuers amounted to €5.3 billion in Italy, up by 135% versus full year 2012

 

Notes:

 

1) Trading Income from buy-backs mentioned herein and throughout the document are related to tender offers on T1-UT2 in 1Q12 (€697 million) and senior notes in 2Q13 (€254 million), all amounts gross of taxes.

 

2) Total impaired loans in UniCredit SpA have been growing at slower pace than the system in the last few months. In particular, in May total impaired loans grew by 17.0% Y/Y for UniCredit SpA versus 23.5% for the system (ABI- Italian Banking Association sample) 

 

3)Calculated as the ratio of Total Assets net of Goodwill and Other Intangible Assets (numerator) and Equity (including Minorities) net of Goodwill and Other Intangible Assets (denominator).

 

4) Other effects such as deductions and filters accounted for a decrease of 1 bp in the quarter.