Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- UniCredit SpA (UNCFF, Financial) reported a record quarter and first half of 2024, marking 14 consecutive quarters of profitable growth.
- Net revenues increased by 7% to EUR 12.6 billion in the first half and 6% to EUR 6.3 billion in the quarter.
- Fee income grew impressively by 6.6% in the first half and 10% in the quarter, driven by investments in people and products.
- The cost-to-income ratio improved to 36.3%, a 2.9 percentage point improvement from the previous year.
- The company achieved a record return on tangible equity of 13% and a CET1 ratio of 16.2%, indicating strong capital generation and financial health.
Negative Points
- Net interest income (NII) and margins showed a slight decline quarter-on-quarter due to reducing rates and increasing pass-through.
- Germany's net revenue fell by 3.6% in the first half and 2.6% in the quarter, with NII down 10% in the half and 11% in the quarter.
- The cost of risk in Germany remained elevated at around 20 basis points, indicating sensitivity to single-name files and early credit cycle stages.
- Despite strong performance, the company remains cautious about fee income sustainability due to potential rate normalization and portfolio rebalancing.
- The company faces ongoing challenges in reducing its exposure to Russia, with significant reductions in local loans and deposits still required.
Q & A Highlights
Q: Could you please reiterate your NII income guidance with and without Russia? Should we read the implied cushion in your net profit guidance as eventual actions related to Russia or to smoothen year-on-year profitability for 2024, 2025, and 2026?
A: Our NII guidance has been increased to in excess of EUR23 billion. We are cautious about replicating the fee growth seen in the first half into the second half. The implied cushion in our net profit guidance is to potentially further propel profitability for 2025, 2026, and beyond. Russia is not driving our net profit and return on tangible equity guidance.
Q: Can you share your views on pass-through levels for lending and deposits as rates start compounding, especially in Germany and Austria? How quickly can you reprice deposits in these countries to protect NII as rates decline?
A: The group’s deposit pass-through is at 31.5%, with Italy at 15.5%, Eastern Europe at 28%, and Germany and Central Europe above 46%. The cost of deposits in Germany and Austria will reprice down quickly, already in the second part of the year, due to the average maturity of term deposits being between three and five months.
Q: How should we expect the improved guidance of organic capital generation to translate into distributions for 2024?
A: Our distribution policy is set on at least 90% of net profit for ordinary distribution and not exceeding our organic capital generation. We have accrued 100% of our net profit so far, and our CET1 ratio has increased. We aim to distribute EUR8.6 billion this year and repeat or exceed this in 2025 and 2026.
Q: Does acquiring Vodeno-Aion make you reconsider touching your own core systems? Could better organic performance today raise the bar for potential acquisitions tomorrow?
A: Integrating Vodeno-Aion would be a mistake. We will keep them separate to leverage their cutting-edge technology. We remain disciplined on M&A, balancing returns from buying back our own stock versus acquisitions. Better organic performance does not necessarily raise the hurdle rate for acquisitions but ensures we remain disciplined.
Q: Can you give us an idea of how much of your current book is still below average profitability and what categories might reverse earlier when rates normalize? Also, what are the trends in asset quality?
A: About 20% of our book has not yet migrated to above cost of equity. We aim to finish this migration in the next 18 months. Our NPEs have improved, and we have positive stage migration and write-backs. The cost of risk remains low, reflecting our conservative provisioning policy.
Q: What is the deadline for the use or release of the EUR1.7 billion overlays? When do you expect to see normalization in the cost of risk?
A: Overlays do not have a hard deadline but are linked to specific risks. We expect to release them between 2025 and 2026 if the potential risks do not occur. The cost of risk will normalize as these overlays are released.
Q: Do you expect any impact from the ECB's push to increase provisioning levels on leveraged loans at UniCredit?
A: Interactions with the ECB on leveraged loans are ongoing. Our cost of risk guidance below 20 basis points includes our assessment of this topic.
Q: How should we interpret the increased organic capital generation guidance while the net income guidance remains unchanged?
A: The increased organic capital generation is due to improved profitability of NII and higher fee income, which do not require capital. This enhances our organic capital generation and profitability.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
