UniCredit S.p.A. (UCG) Earnings Call Transcript & Summary

Okay. So thank you very much, everybody, for being with us. It is an honor and a pleasure to have with us today Jean-Pierre Mustier, the CEO of UniCredit. Before starting with Jean-Pierre, I would like to draw your attention on some polling questions that you have on your computer screen. If you can please answer these questions over the next 40 minutes, that would be helpful to us. Now let's move over directly to our discussion with Jean-Pierre.

My first question to Jean-Pierre is regarding the banking transformation. The COVID-19 pandemic has impacted interest rates and GDP as well as how customers interact with you and where employees work. Given the resulting revenue pressure, how radical will you be on costs? Also, do you still need as many branches and as much head office space? Bottom line, can you still deliver an 8% RoTE in the medium term?

Well, first of all, thank you very much, Alberto, to have me with you today. And the answer to your question is yes. So yes, we can deliver 8% RoTE in the medium term. We said 8% is the new 10%, basically. And I think it's important that we put things in perspective. We have the COVID impact today. But all crises have something in common: they all do end. And so we need to look beyond the crisis basically in order to see what can be the profitability of the bank and what we do and not lose sight of what is the medium-term strategy of the bank. We have communicated in Team 23 our new plan, 4 pillars. And what is important is for us to grow and strengthen our client franchise in order to develop our activity with clients while transforming the bank, which is the second pillar. And clearly, the crisis is accelerating the transformation of the bank. But we don't lose sight of our ability to grow and develop our client franchise. You have seen the response from 2019 that we do execute and deliver on our strategic plan. And even if the environment cannot be as favorable, we actually took actions in Transform 19 order to remedy and match all our targets. So you can count on us and on all the management team, which, together with me, is absolutely focused to deliver Team 23, despite the one-off impact, if I may say, of COVID-19. What is important in such an environment, beyond growing and developing the client franchise, and that's the third pillar of our plan, is to manage the bank in a conservative and disciplined way. So we give priority to long-term sustainable outcome over short-term solution. So meaning that we control the costs, but we control as well our underwriting discipline, and we, of course, strengthen our client franchise. Team 23 includes substantial efficiency target, and I don't know if it's the right wording, but we've been a little bit lucky in such a crisis to actually announce our plan just before the crisis and to provision all the restructuring costs that were linked to the plan. So we are in a unique position today to actually move on the efficiency action that were in Team 23 and to accelerate them. And everything is already agreed with the union in terms of FTE reduction. On the net FTE reduction, we have agreed with all the unions, and the latest one was in the first quarter of this year with the Italian unions, for around 8,000 net FTE reduction, so the growth is higher, and a reduction of 500 branches. And so all these actions will generate only EUR 1 billion of cost savings, which is equivalent to 12% of the cost paid. And that will fund our IT investment and offset inflationary headwinds, IT investments, which are necessary in order to accelerate the transformation of the bank, which we are doing now. And we'll comment about our next Capital Market Day, the first quarter next year, about what we do. So this reduction and this cost reduction are on top of what I've been doing in Team -- in Transform 2019, where we cut around 900 branches already and over 14,000 net reduction of FTE. So we keep working. We keep improving the efficiency and productivity of the bank. And we are as well, because of the crisis, if I may say, and the fact that people don't travel, that will change the way we work, we have actually cut our cost target by 2% for financial year '20 and '21. So we should be below the target which was announced in Team 23. So we should have a cost which should be around EUR 10 billion, so very -- I mean similar to the cost we had in 2019 and EUR 200 million below the target we announced to the market last year. In terms of remote working, I mean employees, like in many other companies, have embraced remote working. And this did not affect performance. The productivity has remained very high. Employees in the branch have been coming back to the branch. And today, we have almost 100% presence in the branch, except in very localized areas where the virus might be spiking. And we follow the virus on a very granular basis and adjust our procedures and the way we work in order to make sure that our top priority, which is to protect the health and safety of our employees, is fully respected. So in the branch, almost 100% of the team members in the bigger buildings because we have more constraints, we are working today at around 25% presence in the building. We target after the situation normalized to have, on average, 40% of the team members in the large buildings working remote. So there would be rotation, which is 2 days out of 5, might be 2 weeks out of 5, whatever the managers will do. But what is important is beyond what we do here in terms of remote working, and it's the behavior of the clients. The clients have embraced more remote banking, and remote banking is not only about digitalization. It's first remote advisory. It's a use of the call centers and, of course, digitalization, and then we accelerate the transformation of the business. We are reprioritizing the different changes and transformation we had in Team 23 to make sure that all those which are allowing us to move more quickly on remote banking are prioritized today. And so this acceleration plan is in place, and we are working on it basically so that we'll have an ability to [ occupy ] and be slightly ahead of the change of the client need and client behaviors. Branches will remain, however, important. They are important because they have a role to play in the omni-channel distribution strategy. Their role is changing, and the full traditional branch or full-service model is likely to change, and we will see more advisory-only and part-time branches. And we are accelerating this change of the branches as well. And we are doing that in such a way that we avoid impacting the client churn, basically, which is very important. Our first pillar is go and develop the client franchise, and we are very focused on that. So from what we have learned so far, I mean it's still, I mean, too early to reach any radical conclusion. I would say, don't bet on any radical evolution for the industry, and I'm not speaking about UniCredit only. I was reading some comments recently where people were saying during the Spanish Flu of 1918, there will never be any big cities in the world again. I think they were damn wrong basically. So the pendulum will move, but not to the extreme, and we are going to adjust, which we are doing. And all this adjustment allows us to confirm our Team 23 goal, which is, on one side, grow and develop our client franchise, improve the productivity and delivered a RoTE which should be above 8% for underlying net income in 2023. And as I said, 8% is the new 10%, and we'll give you all more detail at our Capital Market Day in early '21.

The first -- ahead of our discussion, so I already had quite a number of questions on M&A from the audience that you would understand. I'll try to summarize these questions, asking you how do you see consolidation evolving in Europe? What do you see is the benefit and the pitfall of an M&A? Another question is about what will change your mind, make you change your mind on M&A? Because so far, your message has been very clear of no M&A. And then there are other questions, I don't know if you can comment upon, specifically about Monte dei Paschi or Banco BPM.

Well, I was expecting some question on M&A, as it is to be the topic du jour, if I may say. So the -- our stance is very clear, no M&A. So I mean I can sing it, I can repeat it, I can do it forward and backward, is that we have excess capital, and we want to use this excess capital to fund buybacks. So based on the current price to book where we are and the underlying return on equity that we project for 2021, between 6% to 7%, the return on investment on the buyback is in the high teens with no execution risk. So that's an unrivaled return versus any M&A transaction, which have a lower earning per share accretion and comes with much higher execution risk. So no M&A, and the management team remains focused on transforming the bank. In terms of the industry, we don't comment on competitors. And I mean everybody can have its own strategy. We just focus on what we have to do. We accelerate the transformation. That's our key focus. And we make sure we grow and develop our client franchise, improve productivity. That's already a lot to do.

That was very clear, I have to say. In terms of your earnings guidance, you guided the market for EUR 3 billion to EUR 3.5 billion of underlying earnings next year, but consensus see you a little above the EUR 2 billion mark. How do you explain this difference? And are you pretty comfortable about bridging the gap?

Of course, we are super comfortable to bridge the gap, but let me first remind you of the concept of the underlying net income. The underlying net income is a basis for our capital distribution, dividends and share buyback. So what does it mean? We adjust the stated profit for material nonoperating items in order to make sure that we have a recurring and sustainable profit base for the bank. So if we look at what could happen going forward, there will be likely 2 material nonoperating item: an accounting loss, which is arising from the disposal of the remaining stake in Yapi; it's the reversal of FX reserve for the P&L, which have no capital impact. The FX reserve have already impacted the capital, so it just goes through the P&L; and the loan loss provision, which are linked to regulatory headwinds. So that's the 2 main issues. And so when I compare our guidance to the consensus on revenues, cost and tax, they are broadly in line. But there are 2 important difference when I look at what the market is looking at and what we have. First, the consensus is based on the stated net income, while our guidance is based on the underlying net income, so adjusting for this big one-off. So for instance, some analyst include a loss on disposal from further sales on our stake in Yapi in their net income estimate, while our underlying net income guidance exclude that. So analysts are also not adjusting for the regulatory headwinds LLP. So what I would do is encourage analysts but also investors to call our IR team just to make sure that we speak the same language and that we compare apple and pears basically, but these are the 2 main important differences. There is another point which is important and which we guided the market, which is the cost of risk. So we don't adjust for the regulatory headwinds, but the consensus is adjusting for higher cost of risk, which is at the midpoint of our range for 2021, while we are guiding to be at the lower end of this range. We communicated 70 to 90 basis point cost of risk for 2021 versus 10 basis points of regulatory headwind. So x regulatory headwind, the underlying cost of risk is 60 to 80. And we are getting the market to the lower end of 60 basis point. And that's where you have the additional difference with the analysts. So as we are always transparent with what we do, let me give you in details our explanation for 2021. We confirm the EUR 3 billion to EUR 3.5 billion. The revenues will be around EUR 17.7 billion with NII of EUR 9.5 billion, fees of EUR 6.4 billion and trading around EUR 1.4 billion and dividend of EUR 400 million. So that's the breakdown of the most important component on the revenue. The cost will be around EUR 10 billion, which is -- they are flat versus 2019, as I said earlier. The cost of risk will be at the bottom end of the range that we gave, excluding regulatory headwinds. So the range is 70 to 90 basis points. Excluding 10 bps of regulatory headwind, it's 60 to 80. And we are targeting to be closer to 60 basis points in 2021. Given that we have a loan base of EUR 480 billion, that equates more or less to a EUR 3 billion loan loss provision. And then when we look at the below-the-line item, post LLPs and before tax are expected to be around EUR 900 million. So we assume a tax rate of 15% -- between 15% to 20%. So together, that gives us an underlying net income of EUR 3 billion to EUR 3.5 billion in 2021, so with an equivalent RoTE of 6% to 7%.

The next question from the audience is on the revenue guidance. I'd like to summarize, there are a couple of questions here. So on revenues, if you can update us on short-term operating trends. And specifically, on NII, your guidance is more cautious than that provided by other Italian banks. So how can you explain that? Is it because you are more conservative in your planning assumption of all of your facing challenges that other banks are not facing? So I just wanted to clarify the specific issue. And also connected to that, what will you do to mitigate this NII pressure?

Well, I mean, first of all, let me make sure that we -- you compare apple and pears. And we are extremely proud to be headquartered and listed in Italy. But our Italian business represent 1/3 of our loans, basically activity. So we are a happy Italian-listed and headquartered bank, but we are not an Italian bank per se in terms of the business activity. So you need to look at the mix of our activities in Germany, Austria and CEE to look at what the bank is doing. But to be transparent first, I mean, we have -- and when I'm looking at the short-term trends, July and August have developed in line with the outlook we gave at the time of our second quarter results. For the NII, we guided to a weaker second half, basically because of lower rates for longer, and we are towards the target of that and to reach the EUR 9.5 billion of NII for the year. On the fees, we said that the fees will be in second half broadly consistent with the first half. We had a very, very good January and February, then we had the lockdown and the rebound, as we said, in June where the fees were comparable to the fees of June 2019. So there, we move in line with our guidance. And the trading, which is volatile on month-on-month basis, but the trading for July and August are consistent with our guidance of EUR 350 million per quarter basically, and the environment has been favorable for trading, as you can now see. On the NII, I will not comment on competitors. As I said, just mentioned compare apple with apple and not the rest. So for the second half, we base our NII projection based on the effect which we have seen in the second quarter. So there's a mix effect between the mix of the business, Western Europe and CEE and the lower base rate. So the mix effect, I mean, reflect a more cautious spend on the lending that we have adopted before the crisis. We -- before the crisis, we were slowing the rate of consumer finance because we were at the end of the cycle in consumer finance that you have seen with U.S. banks, for instance. It can adjust very, very quickly. Did not adjust yet in Europe because of the different scheme and the furlough scheme, et cetera. But we want to be very careful there in terms of cost of risk, and we are going to gradually increase again consumer finance when we have the rebound of the GDP and more visibility by targeting our client and the higher-rated clients. And the mix effect reflect as well the guaranteed loan, which comes with a lower spread by structure, if I may say. And then we have seen as well on the lower base rate an impact, which has been magnified for us because of the large cuts in interest rate in the CEE side, as we communicated in the second quarter. And we see the NII on the CEE side bottoming out more in the second quarter next year, where you have the full effect on front book by book, which will happen. So our NII guidance include the EUR 75 million annual net benefit for the TLTRO III. We have accounting the benefit of the TLTRO in a very conservative way. We spread the benefit over 3 years life of the operation, and we assume that we reinvest the excess liquidity at the ECB depo rate. It is business which offer more sustainable return. We will do it. But as we have always said, we don't do carry trade, nor do we do volume lending, which are short-term actions. And as I said, we look for a long-term sustainable solution. We have also -- to be realistic, the 3 months Euribor has declined continuously since its peak in late April. So it has fallen from minus 42 basis points at the end of Q2 to roughly minus 49 basis points now. And so if we look at the average, it was at minus 30 basis points in Q2, and now it's averaging minus 45 basis points quarter to date. So Euribor impact does impact the NII. But this is something which is included into our guidance for the full year. In terms of offsetting the pressure of NII, we have exceeded, if you look at what we did in our previous plan, all our key Transform 2019 target, despite a much worse than expected macro environment. So we take decisive action. We execute, and we will work to offset the NII pressure through fee income and costs. Our risk philosophy remain the same. We don't do carry trade. We don't do volume lending, and we are not going to basically impact the quality of our book by taking onboard the one transaction which might flatter short term the NII, which will have a bad impact on our risk profile.

Now the next question is on asset quality, which understandably remain pretty topical for investors. Your guidance, of course, of risk has been consistent. But now it differs to many other Italian banks, where the message is that loan loss provision peaked in H1. When do you expect to get clarity on the outlook for asset quality? And then can you remind us how you get to your cost of risk guidance for the fiscal year 2020 and 2021, including the expected impact of the moratoria [ expanded ]? Also connected to this question, we have another question from the audience. If this system of [ buffer ] provisioning is impacting the bank business model, I think it is connected the discussion that we had yesterday with another CEO of Italian banks.