UniCredit 3Q13 Group Results
Net Profit Reached €1.0 billion in 9M13, €204 million in 3Q13
Managerial Actions Reduced Costs by 2.2% versus 9M12
New Lending Flows in Italy up by 15.5% in 9M13/9M12
Net Flows to Impaired Loans Kept Slowing
- Despite a difficult environment for the banking sector, UniCredit managed to preserve profitability posting €1.0 billion net profit year to date (-28.5% Y/Y) and €204 million in 3Q13 (-43.6% Q/Q, -39.1% Y/Y)
- Low business activity due to summer seasonality (fees -3.5% in 3Q13 Q/Q, but -0.8% Y/Y), still weak loan demand in Western Europe (net interest -2.0% Q/Q, -1.0% at constant FX), unfavorable markets conditions for trading (-42.4% Q/Q, -33.5% Y/Y, all adjusted) all weighed on revenues (-7.1% Q/Q, -7.7% Y/Y all adjusted)
- Managerial actions focused on reducing both Staff Expenses and Non HR costs: operating costs in 3Q13 were down by 1.6% Q/Q and by 3.0% Y/Y
- UniCredit launched several initiatives to support the economic recovery in Europe with loan financing. In Italy new loans to households and corporates in main businesses and products grew by 15.5% in 9M13 versus 9M12
- Asset Quality in Italy: 3Q13 net flows to impaired loans continued to stabilize, below the 1Q13/2Q13 average, with stable coverage ratios
- Group net profit was driven by CEE & Poland, posting €578 million profit in 3Q13 and CIB with €361 million profit, while good gross operating profit of €945 million in Commercial Bank Italy was dragged down by €1.1 billion provisioning
- Divisional highlights: CIB net operating profit +4.7% Y/Y and ROAC at 20.0%; CB Italy net interest +0.9% 9M13/9M12 (-0.5% 3Q13/2Q13); Asset Management volumes reached €168.9 billion in 3Q13, thanks to €7.7 billion net sales year to date
- UniCredit solidity is confirmed by one of the lowest leverage ratios in Europe, equal to 17.4x as of September 30th 2013. Capital ratios further improved with CT1 ratio now at 11.71% and Basel 3 fully loaded CET1 at 9.83%
- 2013 Funding Plan is on track with 84% of the plan executed. This is the result of the strong access to the wholesale markets that the various UniCredit entities enjoy as demonstrated by the breadth and variety of transactions issued, as well as robust demand from the retail market
9M 2013 KEY FIGURES
- Group Net Profit: €1.0 billion (-28.5% Y/Y, -26.4% adjusted)
- Revenues: €18.2 billion (-7.1% Y/Y, -4.7% adjusted)
- Operating Costs: €11.0 billion (-2.2% Y/Y)
- Cost/Income ratio: 60.6% (+3.0 p.p. Y/Y, +1.6 p.p. adjusted)
- Gross Operating Profit: €7.2 billion (-13.8% Y/Y, -8.5% adjusted)
- Loan Loss Provisions: €4.4 billion (-8.7% Y/Y)
- Regulatory capital: sound Core Tier 1 ratio at 11.71%, Basel 3 fully-loaded CET1 ratio at 9.83%, pro-forma on the basis of actual data and current regulatory framework
3Q 2013 KEY FIGURES
- Group Net Profit: €204 million (-39.1% Y/Y, -43.6% Q/Q)
- Revenues: €5.7 billion (-8.5% Y/Y, -10.8% Q/Q)
- Operating Costs: €3.6 billion (-3.0% Y/Y, -1.6% Q/Q)
- Cost/Income ratio: 63.1% (+3.6 p.p. Y/Y, +5.9 p.p. Q/Q)
- Gross Operating Profit: €2.1 billion (-16.7% Y/Y, -23.1% Q/Q)
- Loan Loss Provisions: €1.6 billion (-10.6% Y/Y, -6.8% Q/Q)
- Leverage ratio amongst the lowest in Europe: 17.4x (-1.1x Y/Y, -0.2x Q/Q)
The Board of Directors of UniCredit approved the 9M13 results on November 11th.
Federico Ghizzoni, CEO of UniCredit, said: 'In an overall persistently difficult economic framework, I believe it is important that UniCredit has achieved a positive net profit also in a particularly challenging third quarter, not only due to seasonality. This has been possible thanks to our quest for efficiency, cost reduction across the Group and to our strong international footprint, with a significant contribution to net profit from CEE & Poland. In the first nine months of 2013, UniCredit achieved a net profit of €1 billion, with a constant attention to the capital ratios. Core Tier 1 ratio has been further improved - now at 11.71% - while leverage ratio is amongst the best in Europe. The reduction of RWA confirms the capability of the Group to satisfy regulatory requirements and market expectations. The liquidity position is extremely sound. Net flows to impaired loans have been stabilizing across all the main areas of the Group, as well as the coverage ratios. With regard to the ECB asset quality review, we strongly believe in the need of a strict assessment with common rules for all, in the interest of market players, customers and investors' confidence. In the meantime, we have started to perceive some initial encouraging signs of recovery also in Italy. We confirm UniCredit commitment to support the real economy both in Italy and Europe in the coming months.
€1.0 Billion Net Profit in 9M13 in a Difficult Business Environment
Despite a difficult macroeconomic and business environment for the banking sector and political uncertainty in Italy, in 9M13 UniCredit posted €1.0 billion Net Profit, down by 28.5% Y/Y. In 9M13 gross operating profit decreased by 8.5% (after adjusting for bonds buy-backs, or -13.8% stated): difficult market conditions were partially offset by the strong managerial effort to reduce costs, which led to a considerable cost decrease of 2.2% Y/Y, against a revenue decrease of 4.7% adjusted (-7.1% stated). Revenues were pulled down by extremely low market interest rates and lackluster loan volumes (-5.7% Y/Y) on the back of macroeconomic headwinds in Western Europe and despite positive revenues from CEE & Poland (+2.5% 9M13/9M12, +4.6% at constant FX). Loan loss provisions were 8.7% below 9M12; notwithstanding this, the coverage ratio of total impaired loans reached 44.6% in September 2013 (44.1% as of June 2013).
In 3Q13, Group's Net Profit reached €204 million (-39.1% Y/Y, -43.6% Q/Q). Gross Operating Profit reached €2.1 billion in the quarter (-14.7% Y/Y, -15.2% Q/Q, both adjusted), as continuous cost reduction actions pushed total operating costs down by 3.0% Y/Y and by 1.6% Q/Q, thus partially counterbalancing revenue dynamics (-7.7% Y/Y, -7.1% Q/Q, both adjusted). The main drags on revenues were summer seasonality leading to low activity across business sectors affecting fees (-3.5% Q/Q) and weak loan demand; moreover, currency movements in CEE and regulatory changes in Turkey affected Group net interest (-2.0% Q/Q, but -0.6% excluding the CEE impacts of regulation and FX effect), and unfavorable market conditions led to a drop in trading profits (-42.4% Q/Q adjusted).
Business Divisions: CEE and CIB the main profitability contributors
Net profit for 3Q13 saw a very strong contribution of CEE & Poland, posting €578 million, including €181 million net capital gain from the sale of Yapi Sigorta. Also CIB reached a high net profit of €361 million; Commercial Bank Italy carried a net loss of €165 million, due to loan loss provisions of €1.1 billion, offsetting the good gross operating profit result of €945 million in the quarter.
Business Divisions: Results highlights
Central and Eastern Europe and Poland showed an improvement of 4.0% Q/Q at constant FX (-0.3% at current FX) in net operating profit, improving thanks to cost efficiency and lower cost of risk, down to 123 bps (versus 154 in 2Q13).
Corporate and Investment Banking: net operating profit progressed by 4.7% Y/Y, but decreased by 4.8% Q/Q, dragged by trading profits, as a result of an unfavorable markets environment. Net interest income had a considerable quarterly progression (+3.7% Q/Q) even with lower loan volumes (-0.7% Q/Q).
Commercial Bank Italy showed resilience in net interest income, which was almost stable Q/Q (-0.5%), thanks to deposits repricing. Also, costs reduction efforts were highly visible: -2.7% Q/Q, and -5.2% Y/Y. High levels of loan loss provisions (€1.1 billion) dragged the bottom line, but supported the coverage ratio on all impaired loans, now at 42.3%.
Commercial Bank Austria returned to profitability (€11 million) after three quarters of bottom line loss, thanks to improving revenues (+4.5% Q/Q), lower costs (-5.6% Q/Q) and lower provisions (-5.1% Q/Q).
Commercial Bank Germany: weak loan demand from cash rich corporates and lower contribution from treasury activities penalized net interest (-11.7% Q/Q). Net profit was €34 million for the quarter, down by 83.0% Q/Q and by 69.0% Y/Y.
Asset Management: Assets Under Management were equal to €168.9 billion as at September 2013, up by 7% year to date (+€11.0 billion) thanks to positive net sales for €7.7 billion in 9M13 and positive market and FX effect (+€3.3 billion). Both captive and non-captive channels soundly contributed to net flows year to date.
Asset Gathering recorded a good commercial performance, with net sales equal to €1 billion in the quarter, reaching €73.2 billion of Total Financial Assets as at September 2013 (+€2.7 billion Q/Q).
COST REDUCTION CONFIRMED
The Group is constantly focused on cost savings efforts that are yielding tangible results and is committed to continue to find additional opportunities to further reduce the cost base. In the first nine months of 2013 signs of cost reduction were material: operating costs amounted to €11.0 billion (-2.2% Y/Y), with Staff expenses at €6.6 billion (-3.2% Y/Y) and Non HR costs at €4.5 billion (-0.7% Y/Y). On a quarterly basis, operating costs were equal to €3.6 billion in 3Q13, down by 3.0% Y/Y and 1.6% Q/Q. The trend of operating costs is confirmed even after netting some one-off components. FTEs decreased by almost 2,500 in 3Q13 thanks to the newco VTS of IT infrastructures (almost 700 FTEs) and the sale of Sigorta, Yapi's insurance business unit in Turkey (about 1,800 FTEs).
In addition to what already done, the Group will continue to pursue new actions to foster efficiency in a more and more streamlined structure.
NETWORK RE-DESIGN AND INNOVATIONS HEADING TO A NEW SERVICE MODEL
In Italy the branch network rationalization is underway with the Hub & Spoke project: as of September 2013, 236 branches have been closed since January 2011. The real innovation of the distribution model rests in the underlying format of the branches. Out of a total number of 3,554 branches of the Hub & Spoke perimeter, the number of highly automated, less FTEs intensive and innovative branches (the so called 'Cash Light' and 'Cash Less' branches) has increased by 76 units in the quarter, standing now at 1,444, or about 41% of the Hub & Spoke perimeter.
Other projects are ongoing in Italy in order to improve the customer experience of our clients and react to the changes of the sector. Initiatives currently in place include:
- More than 400,000 clients enjoying services via mobile & tablet apps, with a leadership position in Italy;
- Video-chat services with over 6,000 interactions completed to date;
- Fully digitalized paperless contract system, now operating in over 180 branches (500 by December 2013), with over 20,000 clients subscriptions.
In Austria, the SmartBanking customer service model is now available at country level offering personal advisory services via video telephony, telephone, SMS and via online banking. All branches have been equipped with wireless LAN free of charge and customers can benefit from extended advisory service hours.
In Germany UniCredit is actively implementing the project 'Online Branch', and 3 locations are currently open with dedicated advisors and extended opening hours. The rationalization of the physical retail network continued successfully with 29 branches closed in 9M13 out of 36 targeted for 2013. As a result of an overall transformation process across the country, headcounts are expected to be reduced by almost 800 in Germany by 2014.
CEE is keeping on innovating alternative channels and integrating them with a new physical network model: our customers are already using a new mobile banking application in Czech Republic, Slovakia, Slovenia, Romania and Serbia where also a new service model is in pilot. 15 branches have been closed in Hungary without impact on customers service level.
STABILIZING ASSET QUALITY, ALSO IN ITALY
Stabilization of Net Flows to Impaired Loans Confirmed
At Group level, net flows to impaired loans slowed down for the fourth quarter in a row (€1.6 billion net flows in 3Q13 versus €1.9 billion in 2Q13) as net flows outside Italy decreased even further.
In Italy, after three quarters of decline, net flows to impaired loans stood at €1.5 billion in the quarter, stable versus 2Q13. More in detail, the result is composed of stable inflows and outflows versus the previous quarters, mirroring the Group's effort to monitor risk and to make collection procedures more effective.
Coverage Ratios Slightly Up for the Group, Stable for Italy
As of September 30th 2013, coverage on Group Impaired loans stood at 44.6%, 51 bps higher than the previous quarter, stemming from an improvement both in NPLs (sofferenze) coverage from 55.3% in June 2013 to 55.5% in September 2013, and in other impaired Loans coverage (from 29.6% to 30.7%), following the very prudent approach to provisioning of risky positions.
With regard to Italy, all Impaired Loans were covered at 42.3% in September 2013, and in particular the NPLs (sofferenze) coverage ratio reached 54.9%.
Optimization Portfolio in Italy
The Italian optimization portfolio reached €44.1 billion as at September 30th 2013, experiencing a €3.1 billion decrease since December 2012. The decrease is the result of successful risk mitigation actions aimed at reducing the riskier positions.
BALANCE SHEET MANAGEMENT
Sound Balance Sheet and Conservative Leverage Ratio
UniCredit's strong balance sheet is confirmed by its record low leverage ratio, one of the lowest in Europe, standing at 17.4x as of September 30th, down by 0.2x versus June 2013 and continuing its decreasing trend on a yearly basis (-1.1x Y/Y). UniCredit is in a safe position also when considering the leverage ratio calculated on the basis of the current Basel 3 regulatory framework.
Capital Ratios further improved
At the end of September 2013 the Group's Core Tier 1 ratio (CT1) was equal to 11.71%, improving by 30 bps versus June 2013. The sale of Yapi Sigorta insurance business in 3Q13 (net capital gain of €181 million) contributed with 5 bps, and earning generation net of dividend accrual in the quarter provided additional 2 bps. RWAs were down by €11.1 billion in the quarter, thanks to a decrease in Credit RWAs (-€13.5 billion Q/Q) including the ongoing optimization in Corporate and Investment Banking (CIB) for €4.7 billion, offsetting the increase in Group market RWAs (+€2.4 billion in the quarter) related to the rollover of internal model for Market RWAs. The fully loaded Basel 3 Common Equity Tier 1 ratio (CET 1) is equal to 9.83% pro-forma on the basis of actual data and current regulatory framework.
Other Capital Enhancing Actions
On October 28th 2013, UniCredit successfully completed the sale of its entire participation (6.7% ordinary shares) in Fondiaria-Sai SpA with an accelerated bookbuilding process to Italian and international institutional investors. UniCredit CIB acted as the sole bookrunner in the transaction.
On November 6th, UniCredit Russian subsidiary, Zao UniCredit Bank, announced the sale of its entire stake (5.7% ordinary shares) in Moscow Exchange.
The two transactions led to a net capital gain of about €160 million to be booked in 4Q13, corresponding to an increase of approximately 5bps to group CT1 ratio, leading to a pro-forma CT1 ratio of 11.76%, while the pro-forma CET1 is equal to 9.86%.
LTRO Reimbursed for about €3 billion year to date
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. After prepaying about €2 billion in June 2013, at the beginning of November UniCredit further reimbursed about €1 billion of the LTRO funds. The outstanding amount of LTRO is now down to about €23 billion. Going forward, UniCredit will consider the possibility of further prepayments of LTRO funds, depending on a number of factors including market conditions.
Improving Funding Gap
On a yearly basis, the funding gap confirmed a very good improvement, equal to €9.1 billion, reaching 61.2 billion as at September 30th. On a quarterly basis, the funding gap was down by €0.7 billion. Consistently with lower financing needs, related to a strong liquidity position and a more selective pricing approach on deposits, direct funding (including both customer deposits and commercial securities) was down by €5.4 billion, more than offset by loans decreasing by €6.1 billion in the quarter. In Italy the funding gap was equal to €61.6 billion as at September 30th, up by €1.0 billion versus June but down by €4.7 billion on a yearly basis.
Funding Plan Well on Track - Continued Wholesale Market Access
The funding plan for 2013 is well on track: about 84% has been executed as of today thanks to high quality and diversified issuances, mostly in Italy. Taking to account its funding needs, the Group is continuously exploring potential opportunities to access the funding market. The Funding Plan has been implemented thanks to a strong retail franchise and continued access to the wholesale markets. The Group raised over €24.7 billion year to date through the issuance of several benchmark issues in the wholesale markets, with a variety of products. With a good diversification in terms of funding instruments, geographies and currencies, UniCredit's issuances have consistently been positively received by investors. Here are some examples of the latest issuances as to date:
- 7Y Italian covered bond for €1 billion done in August, priced at 95 bps over Mid Swap (MS);
- 5Y Italian Senior bond for €1.25 billion done in September, at 225 bps over MS and over 140% oversubscribed;
- 12Y non-call 7Y Lower Tier 2 Subordinated benchmark bond worth €1 billion done in October at 410 bps over MS, with an order book in excess of €3.3 billion and placed at the tightest level in subordinated debt for the last two years for UniCredit SpA.
BUSINESS INITIATIVES TO REVAMP LENDING IN ITALY
UniCredit launched several initiatives to support the economic recovery in Europe by providing financing to corporates and individuals. As regards Italy, the bank is continuing to register higher new lending volumes in the main businesses and products. In particular, new medium-long term loans to the Italian Corporates and Small Business were up by 17.8% in 9M13/9M12. This positive dynamics is also confirmed in other segments, such as household mortgages, +20.6% in 9M13/9M12 and personal loans, with new flows equal to €1.6 billion in 9M13, + 9.5% versus 9M12. Summing up, the above new lending volumes amounted to €5.2 billion in 9M13, +15.5% versus 9M12, though still lower than loans running-off.
In order to support new lending, UniCredit is also leveraging on the instrument of guarantees and on subsidized funding from international financial institutions. Thanks to several partnerships with public entities ranging from the European Investment Bank to public and mutual guarantee schemes at local level (such as Fondo Centrale di Garanzia and Confidi) UniCredit can collect funding at very low interest rates and receive guarantees on new lending to mitigate credit risk and capital absorption, keeping the quality of new loans high, thus preserving future asset quality. The adoption of such risk mitigation schemes also allows UniCredit to price loans with an average discount of 25% on clients' final rate.
Finally, UniCredit is a leading arranger in the issuance of corporate bonds in Italy: it was ranked number one for the first 9 months 2013. This segment in Italy has a strong potential: an increasing number of Italian corporates, including many debut issuers, have successfully tapped the market with €17.2 billion corporate bonds issued year to date. UniCredit was a bookrunner on 26 transactions for a total of €2.5 billion.
BUSINESS REFOCUSING IN CEE
Sale of Banking Portfolios in the Baltics and Refocus on Leasing Business
UniCredit is refining its presence in the Baltics and stopped providing banking services and will restitute its local banking license. In 4Q13, part of the banking portfolio in Latvia, Lithuania, and Estonia is being sold to Swedbank. The portfolio comprises loans and commitments of about 120 customers in the Baltics. Remaining non-banking assets are going to be merged into UniCredit Leasing Latvia, which will continue to offer leasing services in the Baltics and manage the transferred portfolio.
Sale of Insurance Business in Turkey (Sigorta) and Strategic Partnership with Allianz
During 3Q13, the sale of Yapı Kredi's insurance businesses (Sigorta) to Allianz has been completed. 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 €191 million gross of taxes at Group level, equal to about +5 bps on capital ratios under Basel 2.5 and Basel 3 in 3Q13.
1) Post tax adjustments in 2012 year to date include (amounts gross of tax in brackets): tender offer on T1-UT2 and ABS for €477 million in 1Q12 (€697 million gross); tender offer on ABS for €39 million in 3Q12 (€59 million gross).
Post tax adjustments in 2013 year to date include (amounts gross of tax in brackets): tender offer on senior notes for €170 million in 2Q13 (€254 million gross); sale of insurance business unit in Turkey (Yapi Sigorta) for €181 million in 3Q13 (€191 million gross).
2) 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).
3) Value Transformation Services is a Joint Venture between IBM (51%) and UBIS - UniCredit's global services company (49%), aimed at optimizing UniCredit's infrastructure management and European financial services companies thanks to new information technology management services. The new company is based in Italy, and will operate also in Germany, Austria, Czech Republic, Slovakia and Hungary.
4) 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).
5) Data referred to new flows registered within the Commercial Bank Italy in the following segments: household mortgages, personal loans, corporate mortgages and small business mortgages.
Milan, November 11th 2013