Head to Head: Unicredit vs Societe Generale
* Head to Head — In the latest edition of the series we compare Unicredit and
Societe Generale. Both banks are unloved by the market and trade at discount to
book. This is possibly due to the groups business complexity, as well as market
skepticism on capital level and future profitability. We have run sensitivity analysis
on capital, looked at profitability and balance sheet. We believe the market will rerate
the stocks on the back of evidence of delivery on capital rebuild and profitability
recovery (in Italy for UCI and internationally for SOGN). We rate both banks Buy,
but prefer UCI (on Citi Focus List Europe), given higher ROTE growth, gearing to
Italian business recovery, higher cost cutting opportunities, and upcoming plan.
* Transforming into Swans via Capital Rebuilding — UCI and SOGN are at the
lower end of the peer group on capital. We have run 2 simulations on CET1: on the
current framework we simulate a c50bp gap for UCI and c60bp for SOGN; 2) on a
more conservative scenario (e.g. B4 RWAs) the gap widens to c130bp. Our base
case is no need for capital increases, given banks’ ability to generate capital
organically (we estimate the banks to generate each c170bp of capital in the next 3
year) via higher profitability, RWAs optimization, disposals and actions on dividend.
* Western Europe vs International Recovery — UCI ROTE is depressed by high
loan loss provisions in Italy and low profitability in Austria and Germany. The Italian
cost of risk should benefit from Italian NPLs/macro recovery and we expect higher
cost cutting/restructuring in Austria, Germany and Italy. SOGN has a proven track
record on costs, its domestic business shows stable and high return, the CIB is
profitable, and only the international business is running below target. We expect
ROTE to reach c9% for UCI and c11% for SOGN in 2018E.
* Discount Too Wide — Both banks trade at discount to the European sector (UCI at
0.7x 16E P/TBV; SOGN at 0.8x, vs sector at c1.0x), are unloved vs the main
domestic peer (especially UCI) and we expect no need for external capital and
positive profit development; all of these should support the stocks re-rating. Key
risks are regulatory development and macroeconomic trends.