Andrea Orcel aims to put UniCredit "back in the top tier of European banks" with his new three-year plan. |
UniCredit SpA CEO Andrea Orcel's three-year growth strategy for the bank depends on a sustained economic recovery in the eurozone and political stability in its home market, said analysts.
Shares in the Italian lender have risen more than 10% since December 2021, when Orcel revealed his plan aiming to return €16 billion to investors. He said he would use UniCredit's excess capital to reach annual net profit growth of 10% through boosting fee income, investing €2.8 billion in digital and data and carrying out €500 million in cost savings across the 13 markets in which the bank operates.
"There are potential pitfalls on net interest income if loan growth proves weaker than expected in the eurozone," Berenberg analyst Michael Christodoulou said.
UniCredit did not respond to requests for comment. The bank will release its full-year 2021 results on Jan. 28.
Fees are the key
Orcel's plan calls for considerable growth in fee income derived from charges on personal accounts, credit cards, insurance, investment banking and other products. Much of this will depend on a rebounding economy in the eurozone and especially in Italy, the bank's main market. One-third of UniCredit's targeted profitability improvement comes from higher revenues, mainly in the form of fees.
"UniCredit needs to show the market that it is delivering that fee growth soon, as reassurance its plan is working," said Christodoulou. "It cannot afford to say later that this is all going to be back-loaded."
Orcel's aim is for UniCredit to deliver a €1.1 billion increase in net revenues between 2021 and 2024. He wants UniCredit to achieve €400 million of net interest income growth and €800 million of fee income growth. The bank's net fees and commissions are likely to rise 12.5% this year to about €6.7 billion, said Berenberg. It expects fees and commissions to reach €7.4 billion by 2024.
UniCredit's common equity Tier 1 ratio — a measure of a bank's strength that compares its capital against its assets — stood at 15.5% at third-quarter results last year. Orcel plans to boost the bank's return on tangible equity — a key measure of profitability — from over 7% in 2021 to about 10% in 2024. Return on tangible equity fell sharply in 2020 after the bank incurred a loss due to lower operating income and one-off costs. This should be achievable, said Credit Suisse in a note to investors, but this assumes a continued improvement in the economic situation that would allow management to release loan loss provisions held in post-model adjustments. Any delay in an economic recovery is likely to have the reverse effect, it said.
Key markets for UniCredit, including Italy and Germany, are projecting GDP growth of 4.3% and 4.4%, respectively, this year, but this is forecast to fall to 2.3% and 2% in 2023, according to Fitch Ratings.
Draghi for president?
The political situation in Italy could also impact UniCredit's growth plan, with the country's presidential election due in late January.
Prime Minister Draghi, a former central banker whose broad political coalition provides an overwhelming parliamentary majority and has brought stability to Italy, is seen as likely to stand for the presidency. A replacement for Draghi will then have to be found, bringing the coalition he currently leads under considerable pressure.
"There is an element of potential political risk at play around the presidential election in Italy coming as central banks are turning more hawkish," said Benjie Creelan-Sandford, analyst at Jefferies.
If Draghi were to be elected president, the challenge of forming a new government and risk of an early general election would come into focus, Matteo Ramenghi, chief investment officer at UBS Wealth Management Italy, wrote in a Jan. 14 note. Italian presidential elections are usually a "nonevent for markets," but the situation has already led to a widening of sovereign bond spreads, Ramenghi added.
As elsewhere in Europe, the main Italian banks have benefited from state-backed loan growth during the COVID-19 pandemic. Further state-backed support is due as the Next Generation European Union Fund, the stimulus package from the European Union, is rolled out in the wake of the pandemic.
"UniCredit will still be reliant on the top-down environment trending favorably," said Creelan-Sandford.
UniCredit's planned distributions also still require authorization by the regulator, said Creelan-Sandford. Tacit acceptance of the outline plan is encouraging and indicates that the European Central Bank is more focused on capital buffers than payout ratios, he said.
There is likely to be an early indication of the potential success or failure of the plan in the coming weeks as the bank tries to reach agreement with unions on its efficiency proposals and with partners on its insurance distribution agreements.
Back to the top
A gradual delivery on its targets should sustain the re-rating of UniCredit's shares and narrow its discount to its peers. UniCredit last year lost its domestic market leadership to rival Intesa Sanpaolo SpA after the latter acquired mid-sized Unione di Banche Italiane SpA.
Orcel has steered the bank away from a merger with Banca Monte dei Paschi di Siena SpA, which is 64% state-owned. This was after the Italian government indicated it was unwilling to commit any more funds to the bank when expected recapitalization costs soared.
When delivering the plan in December, Orcel said his goal was to "move out of a period of retrenchment and restructuring" and put UniCredit "back in the top tier of European banks." Yet he added the caveat that the growth targets assume a conservative interest rate scenario and exclude unexpected material adverse developments, such as the COVID-19 pandemic.
"The macro environment remains crucial, given our footprint and business model," Orcel said.