UniCredit sticks to profit goals after better than expected quarter

MILAN: Italy's UniCredit posted higher than expected second-quarter results and stuck to its profit goals, saying commercial activity was recovering but it would keep writing down loans to anticipate the hit from the COVID-19 crisis.

Robust trading gains and cost cuts helped UniCredit top market expectations with a second-quarter profit of 420 million euros ($499 million), down 77pc from a year earlier but above a 347 million euro forecast in a consensus provided by the bank.

Shares in UniCredit rose 0.7pc in early trade, outperforming a slightly lower Italian banking index.

The bank booked 937 million euros in loan writedowns in the quarter, further increasing "overlay" provisions on performing loans that could turn sour after the end of debt holidays in an economy ravaged by the pandemic.

CEO Jean Pierre Mustier told a media call the bank would continue to book overlay provisions in the second half to maintain its cautious approach to virus-related losses.

He said this would lead to an underlying net profit, which strips out one-off items, in line with the first half, when it totalled 368 million euros, despite improving revenue trends.

UniCredit, which has 10pc of its loan book exposed to sectors worst hit by the virus crisis such as such airlines, shipping and tourism, wrote down loans for 1.3 billion euros in the first quarter after slashing its macroeconomic projections due to COVID-19.

That and other one-off charges led to a quarterly net loss of 2.7 billion euros in the period, the biggest in three years.

CAPITAL BUFFERS

UniCredit confirmed a 2021 goal for an underlying profit of between 3.0 billion euros and 3.5 billion, after reducing that target earlier this year by up to a quarter to take into account of the COVID-19 fallout.

Contagion hit just as UniCredit was reaping the fruits of a years-long restructuring.

Regulatory demands that banks preserve capital buffers in the pandemic have thrown a spanner in the wheels of Mustier's plan to boost returns for investors through dividends and buybacks.

UniCredit plans to resume its policy from 2021 to pay out 50pc of underlying net profit to investors.

It said that, depending on market conditions, it may review the current split between paying 30pc of profit as cash dividends and using 20pc for buybacks.

Core capital strengthened in the quarter to 13.85pc of assets, up from 13.44pc at the end of March.

Revenue totalled 4.2 billion euros, a touch ahead of expectations, helped by a strong rebound in the bank's commercial operations after lockdowns to contain contagion eased in the markets where UniCredit operates.

"Results showed resilient core revenues and better than expected loan-loss provisions," Citi analysts said in a note. "Capital was stronger than expected and this should provide support for ... capital return when allowed by the regulator."