UniCredit Stock: M&A Optionality (OTCMKTS:UNCFF)

Unicredit Tower skyscraper in Milan

Cineberg

We would like to share a few updates with our readers. In an interview with the business newspaper called Handelsblatt, UniCredit’s (OTCPK:UNCFF) CEO returned to talk about the European banking M&A optionality with a particular focus on Germany, the foreign market where the Italian bank is most present thanks to the HypoVereinsbank’s acquisition dated back in 2005. According to Reuters, potential acquisitions are on the radar and Orcel explained that: “external growth would be great for the group’s aim for revenue geo diversification“, reiterating also that M&Acan be a growth accelerator and create additional value for the institution under certain conditions“.

Over the last years, the second biggest Italian bank has always aimed for M&A growth on different occasions. For instance, the former UniCredit’s CEO, Jean Pierre Mustier, had analyzed a potential business combination with Société Générale (OTCPK:SCGLY) (here at the Lab, we are covering the French bank – currently we have also an outperforming rating). In the second instance, Commerzbank was the most interesting alternative due to the company’s German exposure. At the beginning of the year, the latter target was, once again, analyzed by UniCredit’s new CEO. However, Ukraine/Russia war evolution has complicated UniCredit’s future plans (we already cover UniCredit’s Russian exposure).

Banks Russian exposure

Banks Russian exposure

Source: Financial Times

Moreover, the German government has a 15% equity stake in the bank and Christian Lindner, the German Finance Minister, just confirmed that the potential exit is not immediate. Since the 2008 subprime crisis, Commerzbank is a troubling story, and the German State has postponed the disinvestment. During Angela Merkel’s mandate, there was a proposal for a potential merger with Deutsche Bank (DB), however, this integration was firmly opposed by unions and managers. Going to UniCredit, it is hard to predict if the Italian bank’s interest will be successful but this represents a positive confirmation of UniCredit’s potential and solidity.

Buyback & interest rate sensitivity

Similar to our recent analysis of Intesa Sanpaolo (OTCPK:ISNPY), UniCredit is also generating a lot of capital. With the ECB’s rate hike, for every 100 points of increase, we calculate that the company will generate €1 billion more in revenue. In addition, the institute is approaching possible macroeconomic shocks with a solid capital position and bad debts down from 6% to under 3%. UniCredit also has set aside provisions for eventual shocks with an additional 1 billion buffer.

In the same interview with Handelsblatt, the CEO, once again, confirmed that they are still evaluating exit options in Russia. With new sanctions, a very limited number of companies might be interested in UniCredit’s Russia branch, but Orcel refused to give up a business that could be worth more than €3 billion for free.

Regarding the buyback, UniCredit announced that it has defined the procedures for implementing the second tranche of the 2021 buyback program authorized by the ECB on 31 August, and approved by the board of directors on 14 September. The maximum purchase amount will be almost €1 billion for a maximum number of ordinary shares equal to 200 million. The program is expected to end by November. According to our calculation, the repurchase will have an estimated impact on the CET1 ratio of around 32 basis points (the bank’s Cet 1 at the end of the second quarter of 2022 was 15.7%). Still, a very safe number. With the buyback first trance already completed, UniCredit will carry out buybacks for over €2.5 billion this year, confirming our thesis on – the company could return its entire capitalization in four years.

Conclusion and Valuation

UniCredit confirmed its financial targets and even talked about M&A optionality. Aside from the Russian implication, last time we provided an update to support our investment case on a Micro to Macro level. Today, we confirm our target price of €14 per share maintaining an outperforming rating.

Previous analysis with valuation:

  1. UniCredit: Buy Case Supported By Macro To Micro Developments
  2. Unlocking UniCredit’s Value

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