UniCredit ▲ Neutral Previous: Underweight
Risk-reward more balanced ahead of strategy review -
We upgrade UCG to Neutral. With shares down ~60% absolute/~30% vs the
sector since our downgrade early Jan, we feel that a lot of the capital concerns
are priced in. We welcome the new CEO’s more prudent approach to CET1
calculation and pro-activeness in selling assets; we expect the group to address
the capital and balance sheet risks while mitigating the dilution via improved
efficiency and credit risk management. With UCG trading at 5.7x PE, 0.35x
NAV for RoNAV 6% in 2018e in our base case, including a €7bn rights issue
and 50% IPO of Pioneer, the valuation risk-reward looks more balanced.
Asset quality – €12bn NPL disposals to reduce NPE ratio to 20%: Noncore
bank deleveraging is on track, but Italian NPLs remain stubbornly high
and the new CEO is targeting a more proactive approach to reducing NPLs.
We believe UCG could consider €12bn of NPL disposals to improve NPE
in Italy from 23.6% currently to 20% at a cost of 42bp of capital including
€1.2bn of additional provisions post tax to increase NPL coverage to 67%.
Addressing capital position – €7bn rights issue and listing 50% of
Pioneer, a possible scenario: With Basel 3 CET1 FL at 10.65% pro forma
end Q2, the group could potentially raise €7bn of new equity and IPO 50%
of Pioneer to bring CET1 to 12.5%, in our view, more in line with peers.
Improve efficiency – potential €0.5bn new net cost savings: While UCG
is on track to deliver on its €12.9bn cost target for 2018, revenues have not
grown and cost/income at 60% is far off the 50% target. We expect UCG to
announce further measures with possibly €0.5bn new net cost savings,
which would be equal to 4% of current cost base or 10% of PBT in 2018e.
Valuation – risk reward more balanced: Based on our base case scenario,
2018e EPS impact would be ~27%, with the rights issue dilution and 50%
lower contribution from Pioneer IPO partly offset by net cost savings
(€500m pretax) and the lower provisioning run rate post €12bn NPL
disposal. UCG shares would trade at an undemanding 5.7x PE, 0.35x NAV
for RoNAV 6% in 2018e post money and clean up.
EPS upgrades post Q2: We upgrade EPS by 10-14% in 16-19e, mainly on
higher NII and trading, but also a lower share count, as we remove the
dilution from scrip dividends and cut the dividend to zero. Thus, we increase
our Dec-17 SOP-based target price from €2.10 to €2.30.
