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Concerns over capital, asset quality remain at UniCredit

Analystsreturned repeatedly to capital and asset quality when discussing 's first-quarterresults with CEOFederico Ghizzoni on May 10.

Yearover year, net income in the quarter fell 20.8% to €406 million aftersignificant restructuring charges. The group said that excluding suchnonrecurring items, profit would have amounted to more than €640 million. Grouprevenues fell by 4.7% year over year while operating costs dropped 3.7%.

Nettrading, hedging and fair value income was down 41.5% to €362 million,underlining what Ghizzoni described as "a challenging quarter." Thereturn on tangible equity reached 3.8%, a fall of 1 percentage point year overyear.

Takingan upbeat approach and often using sequential, rather than year-over-year,comparisons, Ghizzoni emphasized that UniCredit's core bank is growing,particularly in Italy, that central and eastern Europe had "anexceptionally strong" quarter and that the commercial and investment bankhad "weathered" difficult market conditions. Ghizzonisaid much of the bank's restructuring had occurred ahead of plan, withsignificant branch closures in Germany. Costs fell year over year and quarterover quarter, and Ghizzoni projected further benefits to come.

Heexpressed confidence about group asset quality in the future and said Italiangovernment measures to deal with nonperforming loans were positive if difficultto quantify; he said some evidence is already visible of prices improving inrecent portfolio sales. He added that it was entirely possible that UniCreditmight sell some of its NPLs to the state-organized Atlante fund.

Theasset quality picture was mixed. Gross impaired loans declined 5.1% year overyear to €79.0 billion, yet gross bad loans, or sofferenze, rose 1.2% during thesame period to €52.0 billion. Net write-downs on loans and provisions fell to€755 million from €980 million year over year, although other charges andprovisions were up to €417 million from €264 million.

Ghizzonihighlighted the falling cost of risk and noted that coverage of net impairedloans increased to 51.7%. He said the increase in gross bad loans wasattributable to the transition from other impaired loans, but given that theimpaired loan stock is shrinking, he expressed "a higher level ofconfidence on group asset quality" looking forward.

Capitalclearly remains a source of concern. The fully loaded common equity Tier 1ratio fell 9 basis points in the quarter to 10.85% and, with the investment inAtlante depressing the ratio further, one analyst expressed concern that thebank was only 30 basis points above its minimum capital ratio under the ECB'sSupervisory Review and Evaluation Process. He cited the 10.50% transitionalCET1 figure, which was down 23 basis points from three months earlier.

Ghizzonisaid the decline in the CET1 ratio had come from growth in commercial lendingin Germany and Italy during the quarter, which he welcomed. "We expect thegood trend to continue," he said, emphasizing that the bank was targetingcapital-light growth.

Askedabout the regulatory approach to UniCredit given that it has the lowest capitalratio among its Italian peers but the highest level of coverage, Ghizzoni saidthe regulator looked at both elements together and considered the bankwell-placed given its coverage.

"Ourstrategy is to keep coverage high and focus on the reduction of NPLs," hesaid.