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

Good morning, everybody. I'm delighted once again to be joined by Stefano Porro, Chief Financial Officer of UniCredit, a role which she has held for just over 4 years. Today, we're going to run through a sort of handful of opening questions, and then I'll come to audience Q&A. Just a couple of points there. This session is being webcast. So if you can wait for a microphone, that would be helpful for everybody who's joining us remotely. And the second issue is these lights that we're seeing are very bright. So if you put your hand up in the air, we'll do our best to see you, but do feel free to waive if we don't come to you immediately. So Stefano, thank you so much for joining us once again.

Let's start at the top of the P&L. You've guided for sort of profitability to continue to be supported going forward. You've guided for net income of over EUR 6.5 billion for the foreseeable future beyond FY '23, and that's despite potential headwinds around NII, et cetera. Can you talk about some of the key lines and related initiatives that would support the bottom line if we do, in fact, go through a period of easing rates, a bit on the model deposit side, et cetera, et cetera?

Yes. I mean, we are in a unique position currently, because we are having the impact from the transformation that we are doing, that is positively impact in the core profitability and then the balance sheet strength. So because we have a very strong balance sheet, pro forma liquidity, capital and asset quality standpoint. And the effect that I went from the transformation is not only short term. So the transformation will go beyond 2023. So that's why the combination of the 2 effect is bringing us confidence that we can keep the same level of profitability beyond 2023. So not only the profitability but also the distribution. So let's go through all the items, just to give you the flavor of '23, but with an eye to 2024. So let's start from net interest income. So we guided for above EUR 12.6 billion for this year. Key relevant elements are deposit facility rates. So deposit facility rates were, we're assuming 3.5% by the end of June and then flat until year-end. That's the first relevant item. So just to give the sensitivity -- sensitivities, plus 50 basis point positive contribution of, let's say, around EUR 300 million. Second very important element is the pass-through. So it's the deposit pass-through. We started from a level of 22%. We have guided, and so we are assuming a level of around 30% on average for the year. The exit rate, we are assuming to be around 40%, that is higher than the historical average. So the historical average of the group was between 30%, 35%. So in a way, it's a conservative assumption, which is the sensitivity to the pass-through. Every percentage point is EUR 120 million. What about '24? So for '24, we're expecting normalization of the rates so slightly below the level of 2023, let's say, on average 3% and, let's say, an increased level of the pass-through. So this is the assumption because the average this year, we are assuming 30% and then the exit rate around 40%. So the average of next year, the assumption is slightly above 40%. This is on one hand. Let's consider that the dynamic that so far we had in not only Q1, but also in April, May is better than the assumption for the year. So, so far, the dynamic was better than the assumption. The assumption for 2024 are conservative in terms of pass-through because as I was telling you, is higher than the historical average. Why that? Because still, we need to see in the second part of the year and the velocity of the increase of the rates was very, let's say, quick and sizable, both in U.S. and [ Europe. ] So that's why we would like to have a look at that. Positive mitigating factor. So the positive mitigating factor are 1, replicating portfolio. So on the replicating portfolio that start doing will positively contribute, not only this year, but also in the following years. We have a portfolio of around EUR 175 billion. So the rolling of this portfolio every year around 10% will positively contribute for around few hundreds of million every year. So this is a mitigating factor, not only for '24, but also for 2025. Then there is the repricing. So this happened already in Q1, so the repricing -- the commercial spread. So the new production of the front book in Q1 was higher than 20 basis points. So the medium long-term lending production -- so when we enter into 2024, this will be also a positive contribution to the net interest income. So to give you a flavor, 1 basis point of increased level of credit spread is around EUR 40 million more of net interest income. So this is, all-in-all, the key elements that will support the dynamic on net interest income 2024, notwithstanding the potential effect that I went from stabilization of the rates and a different level of pass-through. Then fees. What about fees? So 2023. In 2023, we will have a decline in trend versus last year. Finally, deriving from a couple of points. One is current account fees adjustment in Italy due to the level of rates. And the second 1 is securitization. I mean, so that the current account adjustment in Italy is around EUR 20 million per month starting from April, let's say, around EUR 60 million per quarter. Net of that, the dynamic of the fees during this year, so 2023 will be fundamentally in line with last year. And the fee is pretty diversified. Right? So if we look Q1 out of EUR 2 billion, EUR 700 million were investment fees, EUR 500 million financing, EUR 600 million are transactional fees and EUR 200 million client hedging fees. All-in-all, the diversification is helping in different type of market situation. What about 2024? We are expecting an increased level of fees in '24 because the normalization of rates a higher level of GDP and a dynamic -- a more stable and less volatile dynamic of the markets is bringing us to assume a higher level of fees. On investment fees, in the part of fees connected with the financing fees and the part of fees related to, let's say, factories in general to transaction fees, including general insurance. Costs. So if we look to costs, the guidance for this year is below EUR 9.6 billion. We did well. We are putting in place all the actions to mitigate inflation, to give you the flavor. If we are accumulating the inflation impact in a couple of years, so '22 and '23, the accumulated effect is higher costs for a little bit more than EUR 500 million. So we have been able to more than mitigating this with all the actions that we have put in place. The philosophy of the action will remain the same. So above 2023 and 2024, a big focus on the cost pertaining to the not client-facing function and activities via optimization of the processes, this has already brought us to an overall reduction of FTEs in not client-facing functions. So if you look dynamic of FTEs of the group year-on-year, we have less than 3,000 full-time equivalents, and this has positively contributed. The goal is to do the same and also do some actions in order to keep on doing that for the future. And this is why also this year, we will have around EUR 300 million integration costs in order to support these actions. Important to bear in mind that we keep on investing. So one end, we are reducing our client-facing activities. On the other hand, we are investing in a network and in a client-facing part. If you look the FTEs that we have in the network or facing the clients is fundamentally flat year-on-year. The dynamic of the non-HR cost, especially with NII to 2024 will be impacted from further optimization on the real estate. And the energy cost will be better in 2004 (sic) [ 2024 ] in comparison to 2023 because they are all off of contracts of energy and also the hedging will have a positive contribution. So all-in-all, in the plan, '24 was assuming to be at EUR 9.4 billion of cost, cost income around 50%. Cost income is more than achieved, where we already gathered this year from less than EUR 9.6 billion. Our goal, so we are aiming at do what is necessary to be as close as possible to the EUR 9.4 billion. Having said that, all the actions are such fundamentally to mitigate all the federal from the inflation. And if we can, to keep the pace and to as highlighted arrive as much as close as possible to the target of the plan. Cost of risk, we guided for 30 bps to 35 bps cost of risk '23. Same for '24-'25. We already anticipated and we can confirm that we are seeing upside in this guidance due to overall dynamic of, let's say, default rate and also the early warning indicators. So the default rate dynamic also in April and May is fundamentally comparable to the one network seen in the Q1 that was for the group below 1%. It's very important to consider that we have a very sound asset quality. We have overlays -- we have EUR 1.8 billion overlays, i.e., were an amount of LLP that is -- this is only on the performing portfolio that is on top of the LLP that we have for the macro scenario. These LLPs will be either utilized or released during the course of the next couple of years. So the overall dynamic of the default rate, the quality of the portfolio. The new origination expected loss also in Q1 was 26 basis points. So really, really sound. And the average of the stock in terms of expected loss was 30 basis points. So the performing portfolio is really sound. The coverage of the end portfolio is as well very sound and NPE assumption -- the NPE ratio, we're assuming fundamentally to remain at a similar level in compared to what we have experienced so far. And the fact that we have overlays is making us confident that we can have also a potential upside for the guidance of cost of risk this year and that we can keep the guidance for 30 bps, 35 bps also for 2024 and 2025. Last but not least, systemic charges. This is a very important element because this year, we are around EUR 1 billion. But then with NII to 2024 and 2025, the portion of systemic charges are related to the single restructuring fund will be lower. So let's say, a few hundred million. So the combination of all of this is bringing us confident that we are able to have a current recurring profitability and keep the profitability broadly in line with the guidance of above EUR 6.5 billion for 2023 also in 2024 and 2025.

Thank you for that comprehensive answer. You talked about fees at the beginning of your answer. I just wanted to stick on that non-interest income line item for a bit. Could you talk a little bit about your product factory strategy, the initiatives you're currently pushing through there and how you expect to see that play out?

Yes, absolutely. So let's say I already discussed before and mentioned before how diversified is the fee level. The unlock plan was based on, let's say, capital-light business model, right? So we have a big focus on fees. Then there was a positive impact. There are also from rates, the focus on net interest income. But that focus on the fees is part of the long plan, will remain there. So let's start from OER. So 15 million clients, 13 geographies, both corporate and retail clients. So a really diversified base. So for us, what is very important is the product shelf for our clients, right? So -- and this is important for what we are calling factories. And our focus has been and will be fundamentally mainly in asset management, insurance and payments. And what we are focusing on is strengthening the product factory and the product shelves and getting optionality also for the future. And this is especially for asset management and also for life insurance, but I will explain that. So -- on asset management, we are focusing on top of all the partnerships that we have with third-party asset manager. We are focusing on our own platform that is called onemarket. And then the partnership with Azimut, right? So in the partnership with Azimut, what we are leveraging on is their expertise in order to have very specific niche product for our Italian clients is giving up as optionality because in a 5-year horizon, we have the call in order to [indiscernible] source. So in this sense, it's also giving us optionality. And through that, we can, let's say, enrich our product shelves and increase also the level of value chain that we can capture. Same for internal asset management. So the goal is the same. So a part of the product done also by us, so we will have manufactured fund also with, let's say, third parties well-known asset management. So this will give us the possibility to source a part of, let's say, of the value chain, strengthening our product shelves. Insurance. So insurance, the focus is similar. So strengthening the product shelf also with the partnership with Allianz. We have also streamlined and simplified because currently, we are fundamentally partners. So on one hand with Allianz, on the other hand with Zaba. With Allianz, we are also working in reinforcing the digital platform, right, in order to improve the client experience, let's say, an omnichannel one, especially on the digital side and also having more product. I was commented before fiscal 2024 in relation to the growth that can come also from insurance. We are working also towards new products, general insurance rather than on the Life, but for smaller enterprises, but also for individual and so we will have also a new product in the second part of the year for both Italy and Germany. And so we will have, let's say, an important part also in '24 derived from this action. We are also leveraging on the partnership to train our workforce because in order to properly advise our clients, we are also doing joint training to, let's say, train our workforce. Last but not least, as commented before on the optionality on the asset management, we do have optionality also on insurance. Because in Italy, you know that we are not only a distributor. We are also working by JVs, we have Allianz and Zaba, we do have the optionality between '24 and '25 to get back the JV. We are more focused on Italy, if there are conditions so it's an optionality, we are more focused in that case on Life rather than non-Life because we do think that on the non-Life, the post-sale service to the client is a value added, and we don't think that we are equipped to do that. So we are more than happy with the partnership. Last not -- last but not least is payments. On payments, let's say, important to mention that we are one of the few in Italy that we kept acquiring, for example. So we are operating along the chain, right? So with regards both issuing, acquiring and so on, on payments, what we are focusing on is, one in there, review the portfolio, similarly to what we've done with other strategies. So far, we have not managed the business with 1 specific division like so with 1 function we are working on that. So we are reviewing the strategy and also during this year in order to be able during the second part of the year to have a fully set strategy. And let's say, the partnership that we have just communicated with Mastercard, they're showing you, the type of strategy that we have in a way similar to insurer. I mean, having a partner that is embracing the goal of the group that can help us in order to reach the product shelf, right? So also with innovative product, also with, let's say, an innovative digital offer, but then giving us the possibility to scale considering that we have a global partnership with a global partner helping us in 13 countries. So this is the goal, total equivalent with the capital-light business model with the focus on fees for, let' say not only '23 but for '24 and '25 as well.

I want to spend a bit of time on cost again. You talked earlier in your -- in the answer to the first question around the EUR 9.6 billion this year, the EUR 9.4 billion for next year. And I think a lot of us have spent a lot of time in the last year or so looking at revenues, right, as the big sort of driver and actually, the cost performance has been fairly remarkable. So I sort of wondered, what are the sort of tangible examples of what you're doing differently now versus previously that's enabled you to actually deliver that kind of cost performance and gives you the confidence on a go-forward basis? What are the actions that are slightly different to what you've been doing in the past?

Yes. As mentioned before, we have been focusing mainly on the non-business-related costs and not client-facing activities as commented before. So in order to manage that, we are over time changing the processes, their procedure. We are, let's say, doing the necessary automation in order to drive that. And this is, let's say, a progressive process, right, with the focus on that. This is bringing over time, the possibility to reduce the number of FTEs that are doing fundamentally this type of activity keep on investing on the business function. That's why I was telling you that we are keep on hiring on, let's say, the network on the client-facing activity. So this in order to counter mitigate the impact there having from the inflation, so that inflation is not there. So the salary inflation is there. This year, we will have the impact of the new agreements in Austria, also the new agreements that we'll have in Italy and Austria. The salary was 8.5%. Having said that, the guidance of EUR 9.6 billion is including also the salaried, if there having from, let's say, the renegotiation. Germany will be next year, so will be 2024. All-in-all, these actions are reducing the amount of FTEs allocated to not client-facing activity and all-in-all, a compensating the drift there having from let's say, the salary inflation. Non-HR was commented before. So the focus on HR was massively on consulting costs. So we have reduced massively consulting costs. We keep on optimizing the real estate, will be a focus for 2024 and 2025 as well. And as I was commented before, we had an impact this year from energy, right? So that can be, let's say, in a way, a positive and upside in relation to the cost dynamic in '24 and '25 due to the different dynamic of the energy costs and the connected hedging that we have executed.

You talked earlier about the fact that sort of credit cost trends were aligned with Q1 so far through April and May. I wondered if you could just give a bit of a broader macro perspective on what you're seeing more holistically across Germany and Italy in terms of credit trends. I mean, we now know Germany is in technical recession in Q1, et cetera. What are you seeing on the ground at a sort of bottom-up level across both those big markets?

Yes. The general trend that we saw was better than what we assumed. I have to say in all the geographies, so both in Italy also, I have to say, in Central Eastern Europe. So let's say, starting from Italy, so commenting on Italy. So the GDP dynamic, if you look at dynamic also, post-COVID was very well supported by both the manufacturing, by the servicing activities. Also Q1 GDP was really good. The assumption that we have for the GDP in Italy is ranging between 0.5% and 1% in relation to the GDP. The action, let's say, also of the new government and fundamentally in line with the past of the previous ones. So all the action in relation to the next-generation AU plan and so on are fundamentally in line. Yes, there are discussions ongoing in order to, let's say, review that, but the reform execution should be in line with the expectation. The employment rate is also going well. Currently, we're seeing a deceleration on the manufacturing side, but still well supported the dynamic of the servicing activity. In relation to the lending, I would distinguish. So consumer financing activity were very well supported. So the new production is holding also the demand this year. The lending activity on residential mortgages and fixed -- the one of that is fixed income, fixed investment from corporates slightly reduced over time, but this is also the impact on the higher level of rates. So in a way, it's expected. Germany, let's say, a couple of quarters of technical recession, especially due to dynamic of the manufacturing sector. The expectation for the year is fundamentally around 0. Okay, then can be slightly less or slightly up. While we are more constructive of the dynamics for 2024, so we are expecting a GDP above 1%. The dynamic of Germany is more impacted by Italy in relation to the dynamic of the manufacturing. On the other hand, in relation to the lending, if we are looking the dynamic of the lending and lending stock year-on-year, still, the dynamic of Germany was supportive as commented for Italy, especially for large corporate. And corporate, they are definitely more selective, i.e., in consideration to the level of rates, they are also using the liquidity that yes, meaning the deposit that in order to support working capital and they are more selective in getting money for fixed investment. Maybe a couple of words on Central Eastern Europe -- Eastern Europe, more resilient than I assume. So the dynamic was sound -- particularly sound in Eastern Europe. In Eastern Europe, the GDP is around a couple of percentage points, so 2% also in 2022 and also the lending dynamic is the strongest in the group. So it's the part of the group where the lending dynamic, not only on the retail, but also the corporate is, let's say, more positive than other parts of the world.

And just 1 more question before I go to the audience, and I'm sure you can probably guess the topic. In terms of capital distribution, 18 months ago, roughly 18 months ago, you outlined a target of EUR 16 billion, '21 through to '24. Subsequent to that, there's clearly been a big improvement in the expected P&L performance. And so as we sit here today and we think about what the right capital ratio is, but also where that distribution number may eventually end up, there's quite a range of consensus of what their total returns will be. And so I wondered what's the right way to think about that EUR 16 billion mark-to-market for how the bank is now performing?

Let's say, let's start from our targets. So we have already commented. So the transformation that we have done improve the profitability, right? So the profitability is double-digit return on tangible equity on one hand and this is structural. And then the organic capital generation is definitely better than the plan. So the average of the plan was 150 -- this year, we've done more than 100 in a quarter, and we will be at or above 250. So the combination of these 2 elements, let's say, is keeping us very confident with the target common equity Tier 1, 12.5%, 13%, no change in relation to that. Definitely in relation to unlock there is a change with regards the overall net profit but also the overall, let's say, distribution. So we guided for at or above EUR 5.75 billion. And as I was commented before, we're expecting to be broadly in line for the foreseeable future, '24, '25 both for the profitability and for the distribution. So this will bring the overall distribution. So we were commenting in unlocked above 16. So taking this into consideration, will be at or above EUR 20.5 billion, if you are accumulating '21 and '24. Then what about the capital? The capital considering the organic capital generation and the assumed distribution will remain strong, right? Because what we are expecting for year-end is, however, a capital calculated pro forma higher than the level of the end of 2022 because the organic capital generation that we are expecting for this year will be at or above 250 basis points. And so also the level of the capital that we are expected to have during 2024 will be very strong. So that's why I was telling you at the beginning that the transformation is not just them, so it's bringing positive effect to the recurring profitability and also the capacity to originate capital in 2023, but also in the course of 2024. By the way, not only in relation to the profitability, but still also in relation to the risk with the asset, whose guidance that we are conforming will be below EUR 300 billion by year-end because still we have a part of our portfolio that we can still optimize and with, let's say, capital efficiency action, both this year and next year.

Very clear. Any audience questions? Down here at the front, on the right hand side. There's a microphone on its way to you.

A quick question on asset management. You already have a partnership with Amundi. Why are you looking for someone else? And they already offer all the a wide range of products. Is it simply wanting to internalize this activity?

Yes, we do have a partnership with Amundi. So the partnership and the agreement with Amundi is expiring in 2027. But as I commented before, so we have clients, so we have 50 million clients. We are distributing from them. So for us, it's very important to have as much as possible have an open architecture, right? So -- and be able to, let's say, advice and to sell to our clients, many options, right, in terms of product, but also in terms of asset managers. So that's why we are focusing on diversifying the offer, but also reaching not only product offer, but our capability to internalize where possible a part of the value chain, right? So we are getting also fee as a distributor. But then once it's possible to combine the arrangement of the product shelf versus the client with getting a higher share of the value chain, we will do that. And as commented before, we will not do that. We are doing that only with specific selective action taking into consideration, on one hand partially that we have Amundi, on the other hand, the other selective action that we are currently doing with other third-party asset manager with Azimut and with our onemarket platform.

I just have 1 final question, but I know we're running out of time. You talked about deposit betas earlier. But just in terms of actual flows and deposits, I mean, it's been more of an emphasis in the U.S. than it is here. But what are you seeing in terms of deposit dynamics? We saw obviously a very healthy evolution in the first quarter, but maybe so far through Q2?

Let's say, the deposit dynamic is pretty stable, I have to say. Slightly up, but then to look at that with a picture, so to meaning that, for example, in compared with Q1, we are slightly up in Italy and also in Eastern Europe, right? There is a shift of deposit assets under cash in some cases. So -- but all-in-all, there is a shift and some outflows still on large corporate for pricing reasons fundamentally. But all-in-all, the dynamic of the deposit is stable and our market share is stable. And there is a normalization also dynamic of the pass-through, as I was telling you before. So we have 2 percentage points more in Q2 in comparison with Q1. So Q1, we were at 22%. In Italy, for example, we are around 9%, currently we're around 10%, okay? So this is the situation where we are. So that's why I was telling you the situation that we have is better than the assumption that still a little to be said, right? So that's why I was commenting, let's hope best second half of the year. But so far, deposit dynamic and pass-through dynamic is better than the average.

Very clear. Thank you so much for once again coming to the conference, and we look forward to seeing you next year. Thank you.

Thank you.