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

Good morning, everybody, and welcome to day 3. It's my pleasure to introduce Stefano Porro, CFO of UniCredit, a role which he has held since 2020. And I think you've been doing the conference every year since, so thank you again for your support. Similar setup to the other discussions, so 35 minutes, we're going to do a few questions between the 2 of us and then open up for audience Q&A towards the end of the session. But -- so first of all, Stefano, thank you so much for coming. So let's begin with a broader question. UniCredit has gone through quite a journey in the last 3 years, and it's quite a different bank for 2021. So maybe if you could start by just outlining what lies ahead for the franchise? And what more is there still to do?

Yes, absolutely. So good morning, everyone, first of all. Effectively, let's say, it's been a journey, and we're referring to a transformed bank, right? So if we look to the past, as a matter of fact, we have dramatically increased the profitability. If you look the return on tangible equity, if you look at the capital efficiency, if you look at the cost efficiency. But also, if you look at the capacity of originating capital and then distributing the capital. As a matter of fact, if you look the last 3 years, we have been distributing the market cap since the beginning, so EUR 18 billion, while generating EUR 27 billion capital. And then we have been able to be a leader in many of the KPIs, right? So you can see risk-adjusted revenues KPIs, like revenues to risk-weighted assets; cost efficiency, the cost income; the capital efficiency, meaning the organic capital that we're able to generate, not talking also about the EPS and DPS growth. So, from that perspective, UniCredit is not more a restructuring story, UniCredit is something different now, right? So what we are looking at is more, let's say, a sustainable, best-in-class bank, right? So this is, if you want the difference in comparing to the past. What is ahead of us, right? So we've been working in the last 3 years, not only to achieve what we have achieved, but also to work in order on some specific elements that will help us in support such a level of profitability over time, right? So we have been working, let's say, on factories, for example. We have been working on all the elements that will support our capital efficiency, but also our cost efficiency. Let's look '24. So if you look '24, fundamentally, net profit in excess of EUR 8.5 million. The profitability will remain very high, right? So it will be return on tangible around 16.5. And the distribution would be in line with the previous year, right? So 8.6, with an excess capital that's really sound, right, because taking into consideration the level of capital of Q1. If you are netting from the federal from Basel IV, the excess capital is about 6.5, right? And when we're looking beyond 2024, we will see, let's say, some of the differentiating factor that we work on playing a role, right? So there is still something to do, right, especially on fees. On fees, we are expecting a growth that will support the trend of revenues during the course of '25 and '26. We are able to keep really the cost under control, and same for cost of risk. So when you are looking beyond 2024, our target profitability is very high and very good because it is, let's say, in excess of 15. And the capital generation is also very good, right? So that's why we are able, with such a level of capital generation, to a very good, best-in-class distribution. And on top of that, you have the excess capital. On top of that, we have the excess capital as we communicated, we will either deploy or return. If you return at the average, and we will do that by '27. So the horizon is that one. So if you look '26, '27 distribution, assuming to a return, clearly, the average 6 -- 5 and 6, so '25 and '26 will be higher than what we have distributed in '23 and '24. Unless, I mean, we will deploy that, but clearly with some specific criteria that are in line to what we have done in the past.

Very clear. So maybe digging into our favorite topic, NII, how do you see the drivers of NII beyond 2024 if you think about the different drivers: pass-through rate cuts, volumes?

Yes, let's start from what I was telling you before, right? So it's important to look to net interest income trend having in mind also the fee trend because when you're looking to the overall revenues, right? So that's why the actions that we have put in place and that we'll execute will support the increased level of fees. And, as a constant, will help in mitigating the effect from, let's say, NII normalization. When we -- let's look to the key driver of 2024, right? Last year, we have around EUR 14 billion net interest income. This year, we're expecting that NII will moderate, which are the key drivers. First is rates. The average EURIBOR was, last year, 3.4. This year, we are expecting that will be above that. So let's see today ECB, but on average, we are expecting to be within LIBOR this year between 3.6 and 3.7, which is the net interest income sensitivity. The net interest sensitivity is, in our case, plus 25 basis points or minus 25, is around EUR 140 million effect on the net interest income. So all in all, if you compare to 2023, rate situation is better. Different for '25 and '26 in which we are expecting a lower average. Then we have the deposit pass-through. So i.e., the ratio between what we are paying for our client and the average short-term rates. In relation to that, let's look at the history and the expectation. The history is the average during the course of last year was 25. We exited with an average of 28% in Q4. Q1 was around 30%, more or less. In that 30% is pretty differentiated, right? So you have Italy is 14.5%, so it's low. Germany, Austria are about 40%. If you look, let's say, Q2, it's a bit higher. So -- but it's completely in line with our expectation for the year. So the expectation for the year is slightly above 30%, okay? Then we have the replicating portfolio. So it's the -- if you want the noncommercial component of the net interest income, where we're replicating portfolio, the amount of derivatives that we are doing in order to hedge our deposit is around EUR 85 billion. This is rolling, let's say, every year, around 10%, 15% every year, and this is positively contributing to the net interest income. What will be the contribution in '24 versus '23? Around EUR 400 million. That's a positive side. If you look at the horizon '24, '26, such a contribution will be EUR 700 million. It's going to reduce over time because the more that we go, the more the average, let's say, yield of that replicating portfolio will increase. So the benefit will be lower. Then we have 2 other important components. I have to say more important for '25 and '26 rather than '24, that is the stock of lending and the spread of the lending, right? Stock of lending, we confirm the expectation that our stock of lending end of this year will be lower than the beginning of the year, especially in a country like Italy and Germany. Let's remind ourselves that UniCredit does not go for volume lending, okay? So as part of our strategy, we go for profitable lending, right? So we are very focused on -- there is discipline on one end and, on the other end, on the risk-adjusted return of our profitable lending. And if you look, we are among the, let's say, the majority of the peers, we are among the highest with the return on capital of our net interest income. This is deriving from such a strategy, okay? It's clearly differentiated by sector of geography and it will depend also on the market evolution. But all in all, this is the expectation. On the other hand, '25 and '26, we are expecting a lower stock of lending also because the GDP trend in many of the countries where we're operating will improve. Repricing of the asset side, this is an important component. If you look Q1 and if you look at the stock, overall stock of lending, we have repriced, the credit spread were around 7 basis points. If you look, the new medium-term production improved, all in all, between 30 and 40 basis points, front book versus the back book, i.e., the maturing asset of the prepayment asset in all the geographies. So there are the premises also when there will be a normalization of the rate to reprice on the front book and so on the overall book, which is a sensitivity because I talked before in relation to the sensitivity in the case every basis point, considering that the stock of the lending, the commercial one, is more than EUR 400 billion, consider that 1 basis point improvement is around EUR 40 million of net interest income. That's why taking out into consideration, we're expecting a moderation of the net interest income during the course of 2024 with a resilient net interest income in second quarter.

And you mentioned in both of those answers, the importance of fees over the next few years. In Q1, you grew fees sequentially versus Q4, but also year-over-year. So could you sort of unpack it a little bit how you think about delivering that incremental, I think the EUR 1.4 billion, by 2026. What are the key drivers within that?

Yes. So EUR 1.4 billion, let's say, is a steady state improvement of the fee base in comparison to 2023. So broadly it should be 2026, as you have mentioned. Let's start from our fee base. That's important to consider that is diversified by geographies and also by source, generating fees, right, so by items. Geography is around 50% in Italy, 30% in Central Europe, 20% in Germany. When you look in the source, look at our fee base in Q1 to give you the flavor. So it's EUR 2.1 billion fees. A little bit more than 600 is connected to asset management investment and 600 also is the part related to payments. I mean, look at that because the overall payments in the case of UniCredit is an important one. The financing related one is around 400. It's more than 400. The life part is more than 200, and then there is another part that is close to 200 is what we are calling client agility. So the fee that we are doing hedging the position of our clients. So that's very diversified. Another important element to consider is the ratio of fees towards revenues. Sometimes we are losing that. In the case of UniCredit is 34%, right? And in Italy is around 40%. In 2025, also with the rate normalization at the group level will be about 35%. So we have worked on what? We have worked on, fundamentally, enlarging the product shelf, right? So in order to be able, let's say, for different items, to increase the number of product that we can advise and we can sell to clients. Factories, meaning, let's say, strengthening the factories, either with partnership, like we have done with Allianz or with Mastercard, to give you an example. But also strengthening also via hiring our, let's say, people base, right? So if you look, for example, to adviser and capital market, right? But also to the training of our people in the network when then we need to advise and sell, for example, insurance product, which is the split of the 1.4 growth, right? So is around 400 coming from Asset Management, in which what we are doing and what we will do is increasing the number of, let's say, asset under management that are distributed with internal factories, right? So we have an internal factory [indiscernible] market, then there is the JV that we have with [indiscernible]. What we are looking for is working in order to increase the amount of the value chain of the total fees in asset management that we are retaining. Consider that we are retaining around 70% now. We are retaining 100% of the distribution fees and, on average, consider that the average rebate that we have on asset management product is around 70 basis points, okay? So that's not bad, right? What we are aiming for with such a strategy is moving up such a ratio from 70% to around 80%, right, 80% or more. And that is independent from what will happen with Amundi, right? So we will remain with an open architecture. And this 1.4 increase and of which 400 is independent from the renewal of Amundi, right, because it's depending from other levers. Then we have insurance. Insurance growth is around 300. Is a part life, a part nonlife property and casualty. The last part will fundamentally derive from the re-in-sourcing of the JV that we have in Italy, one with [indiscernible], the other with Allianz that we'll do during the course of 2025. So this is dependent on us, right? And it's more a matter of allocation of the capital, right? Another portion will be deriving from property and casualty, where it's deriving from credit protection insurance. We are doing very well on consumer financing, right? So the new production in Q1 was very good, Q2 is the same. And so connected with that, we are cross-selling credit potential insurance. Then we have also property and casualty products. In Q1, the growth was double digit. So the expectation is to do very well also from this perspective. Then we move to payments, right? So if you look payments, as I told you before, that's an important component for us. We are expecting to grow 300. Now if you look, the overall revenue base of payments in our case is a big one. It's EUR 2.5 billion where we are looking to 2023 numbers. It's around EUR 1.3 billion deriving from transactional payments, around EUR 0.5 billion is issuing and acquiring. And the remaining part that is EUR 0.8 billion is the connect with current accounts and so on. Where the growth will come from? The growth will come from -- the 300 will go -- will come from transactional payments. If you look, our market share in pan-European cross-border payments and so on is 3x our market share usually in, let's say, corporate business in each of the country where we're operating because we can, let's say, cross the flows of our clients. This is a portion of the group, is around 4% CAGR, if you look '26 versus '23. The other part of the growth is deriving from issuing and acquiring. Part of that is deriving from the partnership, for example, that we've done with Mastercard. Part of that is deriving from the activity that we do. And it will be a single -- high single-digit growth in relation to that component. Then last but not least, we have, let's say, for another 300 is the corporate solution part. That is mainly the financial, but especially the advisory and capital market. It is connected with the action that I told you before relation and to the strengthening on our workforce in order to advise our clients. On the other hand, reaching not only, let's say, large corporate, but also mid corporate and small media enterprises, so especially mid corporate. So we would like to be [indiscernible] the go-to bank for SME, not only for cross-border payments but also for advisory and capital markets. Just to close on that, a couple of points. A good portion of the increase is lock in, in the sense that it's depending from levers that are in our hands, right, can be partnership already done and so on or in-sourcing of the life insurance. Quick view in relation to Q2, the trend is good. So it's in line with our guidance that, for the 2024, this few hundred billion for during the course of 2024, so 1.4, is the state, '24, we're confirming that we will be a few hundred million better than 2023. And Q2 is confirming the trend, especially in relation to the trend of investment fees and payment fees.

And if we keep moving down the P&L and turn to credit costs, if I put the EUR 1.8 billion of overlays to one side, credit costs have come in lower than you've expected for some time now. That's true for several European banks as well. Given the relatively, I guess, benign macro operating backdrop, what do you think is really sort of underpinning those lower-than-expected credit costs? How long can that last? I mean, is this sort of too good to be true?

Yes. So let's distinguish the macro-driven one or the more sector-driven situation from the idiosyncratic one. So for UniCredit, I believe that's very important. Let's start from UniCredit because UniCredit is coming from, let's say, a 10-year approach of derisking on the NPA and changing the risk profile on the origination, right? So -- and then if you look let's say, 10 years ago, and you look now, it's a completely different bank, right? So if you look at the stock of NPE, the NPE ratio is very low. Now it's, let's say, below 3%, 2.7%, even lower if you look at the EBA numbers. Let's look also to the origination, right? So if you look to the origination, you look our expected loss, the expected loss of our portfolio, the stock is -- excluding Russia, is around 30 basis points and is below 30 basis points if you look at the new business, right? And if you look at the provisioning policy, the provisioning policy has been conservative, right, because we have been reducing the NPE, but then increasing the percentage of the coverage, always remind that when you look to our NPEs, the absolute amount, the vast majority of that is unlikely to pay, right? So when you look to the coverage, bear in mind that the majority of that is unlikely to pay. Then so taking that into consideration, we are confident that our, let's say, steady state cost of risk will be in the range of 20, 25 basis points. I'm looking to, let's say, the period '25, '26, '27. In the case of '24, we are confirming that we'll be below 20 basis points. All in all, let's not -- I mean you are right, let's put aside the overlays, the overlays are there, right? So that is, in a way, the surplus of provision that we have done because the next couple of years, either we are utilizing or we will fundamentally release EUR 1.8 billion, if you translate that into a cost of risk component in a couple of years, it's an important element to be considered. Then when you look more, let's say, macro and sector situation, as a matter of fact, there are certain elements to be taken to consideration, right? So because, all in all, there was a general reduction of the NPE level in the sector, right, in the last period of time. And then when you look the situation of household, but also of corporates, on average, the savings were higher, right, also during, let's say, the COVID period and so on. Also, the cash profile of many of the corporates in a way either was not deteriorating or improved, right? And on top of that, there were some specific supporting [indiscernible] from governments, but also from banks, right? So the combination of all of these improve the resilience of the sector and improve the resilience of the sector in situation that are also pretty diversified because if you look, we have moved from COVID, high-level inflation, IRAs and so on. So it's not only one strength scenario, it's more than one. I mean, that is a very good situation, but let's look for the future, right? And so for the future, we do believe that default rate will increase, but will not increase in a meaningful way. What I mean is let's look to UniCredit. So UniCredit, the average default rate in Q1, if you are excluding a couple of big tickets, one in Italy, the other in Germany, was below 1, so it's 0.9. More or less in line with last year. For the future, we are expecting that the default rate will be higher, right? So we'll be above 1. But it will be closer to 1 than closer to 2, right? So also for some of the reason that I mentioned before. When you look to UniCredit, consider the diversification profile, I commented before, diversification profile in relation to fees. When you look to cost of risk, let's look also that it's not only Italy, right? So it's Italy, Germany, Austria and Eastern Europe. And when you look also to Germany, bear in mind that we are not at the average, right? Because, in Germany, we are mainly focused on [indiscernible] and private banking, not on mass, and we are in the mid-corporate, not really in Germany on the small business. And this is also a positive element when then you look, let's say, the full trade and the expectation of the trend of the cost of risk. '24 in Q2, as I added before, '24, we are confirming the guidance of a cost of risk below 20. Q2, at least so far, we have not seen anything different than the Q1 trends and then is fundamentally in line with the full year guidance.

Very clear. So I don't think we can have a conversation about the outlook for UniCredit without discussing excess capital. But clearly, in the current context, there's also been an increased focus on M&A in the sector. So I wanted to put a few different questions to you on this topic. So first, could you remind us the financial hurdles, which you set yourself when you consider M&A? Second, could you talk a little bit about the context of strategic fit of any kind of deal? Is there a risk that strategic fit is a bit of a nebulous concept? And then third, perhaps, how does the ECB view your distribution ambitions, which are clearly a little bit more elevated than a lot of your peers?

Okay. So let's start from, let's say, the criteria. We didn't change the criteria, right? So the criteria are the same as the one that we have presented, so when we presented the plan, right? So -- and the criteria has fundamentally based on creation of value for shareholder, and we have proven that we have been really disciplined, right, so in following this criteria. So, fundamentally, when you are looking to the financial component are related to the return on the investment on one end and if you want the price earning level, right? So -- and the 2 are also connected. Then you have, as a benchmark, the return of a share buyback, right? Because when you are doing a share buyback, fundamentally, we are buying our share at the prevailing price earning, right? The translation of this into return of investment in this moment is between at or above 15%. So the idea is to do transaction that post synergies can fundamentally be done with a price earning at or below the prevailing price earning of our stock. That means that the bar in some situation is very high, right? Second element, strategic fit. What do we mean with strategic fit? Strategic fit, we mean fitting on one hand with our strategy. But on the other hand, we have the possibility to generate the necessary synergies in order to arrive to that call. And so what we have done is the following. So we have worked fundamentally on factories, we've been very good in cost efficiency and capital efficiency. Let's remind this because this is what we look at also for potential targets in order to replicate what we have done for UniCredit also for potential targets, okay? So this is a part of the strategic fit. When you are looking to the type of transaction type of transaction or one traditional banks, there is not a specific focus in one of the countries. We're operating in 13 countries. We are looking to all the countries. Specific eye on Central Europe due to the profitability and the growth perspective of the area. We are looking to traditional banks. We are also looking to insurance. For example -- an example is what I mentioned before in relation to Italy. When we are looking then the condition and the financial condition, the condition in terms of typhoon and sun can be slightly different. But then when you look at the effect, for example, from the management compromise in Italy, if you look at the allocation of the capital and the return that we can get from them is totally in line with the return on investment that I added before. Then we are also assessing and potentially we can do something in the fintech let's say, part. But then when we look on that, we're looking to something that is not meaningful. And clearly, the financial criteria are different because the criteria that we look and the strategic approach to that is slightly different. When we're looking to, let's say, ECB, because we have mentioned also in relation to the ECB, fundamentally, the key topic in all the interaction was is, in our opinion, will be, let's say, track record but then the capacity on deliver on the capital generation. So what I mean is, let's go back to what I told you at the beginning, EUR 18 billion distribution, '21, '23, EUR 27 billion is the organic capital generation. When you look to 2023, the distribution 8.6, the capital common equity ratio went up because the organic capital generation was very, very high. Now for the future, I mean, if you look this year, the capital generation will be clearly above 300 basis points, and we believe that the capital generation will be very sound also in '25 and '26. And so this is able to support best-in-class distribution. It's clear than when we have a dialogue and interacting with ECB, ECB is looking usually. Multi-high period horizon in a stress test situation, but then when you look at that UniCredit and you combine with this capital generation capacity, clearly, the level of capital that we have, we are confident that like happened in the past also with the future, the interaction with ECB will be good. And as a consult, we are confident that the distribution level that we have guided for will be also confirmed by the interaction with ECB.

Very clear. Now I do want to open up for audience Q&A, but just one more before we do that. So to wrap up the conversation, I think, your final point on the importance of organic capital generation summarizes it neatly. The most, but not the only important ingredient in that is your return on tangible equity, which you're able to deliver, you're targeting at least 15% or above 15%. So having walked through all those parts, what kind of gives you the greatest confidence that you have the levers -- the different levers to be able to pull to deliver on that 15% plus?

Yes. So we are confident because of what we have mentioned before, right? So let's start from the top line. One is fees, right? So we have put in place all the action that makes us confident that we can grow on the fees. We have mentioned before the 1.4. So the net interest income will normalize. I have not mentioned before Russia. But if you look at Russia, in our case, we will have few hundred million net interest income in '24, but also few hundreds million more in '25, okay? But that's leaving that aside, we will have the normalization net interest income, especially '25 and '26, that have been from rates, but the fee contribution will be very good. Then let's look to cost. We believe that we are able to keep costs flat or slightly down also beyond 2024. Cost of risk, we have mentioned before. Our cost of risk is low, but then, through the cycles, steady state, in this period of time, we were able to -- that we were able to remain in the range of 2025. Below the nonoperating profit, there is, on one hand, systemic charges, right? So what we are paying for deposit guarantee scheme, single resolution fund as well. This year, we will be, '24, EUR 400 million lower than the previous year. But overall, we believe that we can also be few hundred less also in '25 and '26. And then we have integration costs, right? So integration costs, if we look '23, 1.1. We will be trending to around 0 in 2025. So all in all, if we are taking everything in concentration, the profit, we believe, is sustainable, high level. The profitability in excess of 15, notwithstanding the normalization. Better quality, right? Because I mentioned before, [indiscernible] the top line, the average of fees versus revenues will be above 35. And we are remaining with a very good excess capital, right? So going back to excess capital that I added before. So all in all, if I can summarize, let's say, the rate peak is, let's say, behind us, but the growth of fees and best-in-class distribution level is ahead of us.

Very clear. Okay. I think with that, let's see if we have any questions from the audience. Ian, halfway down at the front, just the microphone is coming to you now.

Could you talk, please, a little bit about regulatory and political stability in your largest markets because it's always one of the hardest parts of investing in any European bank. Most recently, I've seen in Italy some noise about maybe the finance minister is going to change. Maybe that might change the government's stance towards the banks. And we saw a few months ago, there was an attempt to put on extra taxes that quietly disappeared. But maybe does that come back on the radar again or not? And I also saw some court cases being brought against the banks to try and force you all to be a little bit more systematic with moving deposit rates alongside loan rates, which obviously goes exactly against the net interest margin dynamic, which you've generated so well over recent quarters.

Let's say, when we are looking to the core market in Italy, currently, there is no specific concern in relation to the stability of the government per se and the related actions. When we're looking -- also, if you look, let's say, the majority that the current coalition has. All in all, we are expecting that we remain stable over time. In relation to the specific actions, yes, when we look to the past, was, let's say, bank levy, but then has been in a way addressed. Currently what we are looking for -- what we are looking at, if you look also the effect that are from the normalization of the rates is such that combined also with some direction to support the economy put in place that the bank are allowing us to be confident in relation to the fact, at least for the time being, we are not expecting an unstable regulatory or political situation in Italy. Then as always, as we've seen in the past or seen in some of the Central Eastern Europe countries, the profitability of banks is remaining very high, so we cannot exclude -- and we do have in place currently bank levy in some of the Central Europe countries. But the overall evolution that we are expecting is not such that we can expect meaningful impact on our, let's say, bottom line deriving from such an evolution.

Okay. That brings us neatly to time. Stefano, thank you so much for giving us some of your time and sharing your thoughts. Thank you.

Thank you, all. Take care.