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UniCredit accelerates restructuring after landmark Q1

UniCredit SpA is ahead of schedule for implementing its Transform 2019 restructuring plan and will expedite the rundown of its noncore business unit, CEO Jean Pierre Mustier said May 10 as he presented the Italian bank's best first-quarter earnings since 2007.

The market welcomed the news, with UniCredit shares up and outperforming the FTSE MIB benchmark index the same day. At 1.16 p.m. in Milan, UniCredit shares were up 1.21% to €17.75, while the FTSE MIB was up 0.08% around the same time.

The group's gross nonperforming exposure ratio, measuring NPE as a percentage of total credit exposure, stood at 9.5% at the end of the first quarter, reflecting a year-over-year reduction in NPEs by about €10.6 billion to €44.56 billion. For 2018, the lender aims for €4 billion of gross NPE disposals, of which €2 billion will be noncore assets. For 2019, the group has set a total gross NPE target of €37.9 billion, of which €14.9 billion will be in the noncore unit.

The core banking unit's NPE ratio stood at 4.7% in the first quarter, while its return on tangible equity was 10.4% compared with an adjusted ROTE of 8.9% at group level (up from 7.0% a year earlier). Responding to positive investor feedback on the performance of the core bank, UniCredit has decided to bring forward the runoff of its noncore operations to 2021 and start with the most difficult asset class, which is residential mortgages, Mustier told analysts.

"We felt 2025 was too far away for investors and analysts to take into account that the noncore will be fully run off and to focus on the core bank metrics," the CEO said. He added that UniCredit would like to see the metrics of the core bank become the underlying gauge for its valuation as soon as possible.

The noncore rundown will be achieved through a combination of disposals and write-offs, Mustier said. In the first quarter, UniCredit's noncore unit recorded write-offs of €1.8 billion.

Dividend uncertainty

UniCredit's strong capital position allows it to accelerate the noncore unit runoff, but the repricing that comes as a result of selling down assets sooner than planned will affect the common Tier 1 equity ratio, Mustier said. To account for that, the bank has adjusted its guidance on the effect on the CET1 ratio from the first-time adoption of the new International Accounting Standard, dubbed IFRS 9. The standard, in force since Jan. 1, requires that banks set aside capital for potential defaults on all of their assets.

UniCredit now expects a 99 basis points hit on its CET1 ratio from IFRS 9, compared to the previously projected 74 basis points. UniCredit's fully loaded CET1 ratio stood at 13.06% at March-end, compared to 13.60% at the end of 2017 and 11.45% at the end of March 2017. The group expects a year-end 2018 CET1 ratio in the range of 12.3% to 12.6% and a ratio above 12.5% at 2019-end, Mustier said, adding that a level of 12.5% is necessary for the bank to consider an increase in dividend payout.

"We have mentioned that we will increase in 2019 our dividend payout to 30%, to be paid in 2020," he said. "We intend to raise the dividend payout to 50% while maintaining a [CET1] ratio of above 12.5% [beyond 2019]."

Although the group aims to reach a 50% payout level as quickly as possible, this will depend on the CET1 ratio level at the end of 2019 and the impact various regulatory requirements will have on the bank's capital position by 2027, the CEO said. The final Basel capital requirements, dubbed Basel IV, are due to be implemented from 2022, with full adoption from 2027 onward.

Hedge fund complaint

Addressing questions about a recent complaint by U.K.-based hedge fund Caius Capital LLP, which wrote to the European Bank Authority claiming UniCredit had misclassified a significant part of its CET1 capital for the past decade, Mustier said the group's CET1 ratio would not be affected by the case "under any circumstances."

Caius told EBA Chairperson Andrea Enria that UniCredit was using proceeds from a particular kind of bond — convertible, subordinated hybrid equity-linked securities known by their acronym as "cashes" to boost its Tier 1 instruments and that this broke EBA rules. If the proceeds are not accounted for, the group's CET1 ratio would drop by 50 basis points, Reuters reported May 8, citing a source familiar with the matter.

"The regulatory treatment of the cashes has been fully disclosed to the market and confirmed, approved and reviewed by all competent regulators ... and is fully compliant with all past and current regulation," Mustier told analysts. "We have alerted the competent authorities, and we are evaluating potential legal action to protect the bank."