Few banks have bucked the sector’s narrative of gloom and doom as spectacularly as Italy’s UniCredit.
After a year that was the worst for lenders since 2008, UniCredit’s shares have delivered a stunning total return of 56pc in sterling terms over the past 12 months.
That’s not been lost on some of the world’s top fund managers. Twenty-one of these investors, each among the best-performing 3pc of the 10,000 equity investors tracked by the financial publisher Citywire, own shares in UniCredit.
That results in the bank’s top AAA rating from Citywire Elite Companies, which rates companies on the basis of their backing by the world’s best fund managers.
UniCredit’s share price rally over the past 12 months builds on the bank’s strong record since chief executive Andrea Orcel was appointed in April 2021. The shares have returned 283pc in sterling terms during his time at the helm.
Helping to drive those returns has been the bank’s consistent rise in profits and the prospects of that growth continuing. In blockbuster results last week, the bank reported a 74pc rise in 2023 earnings per share to €4.71, compared with last year’s €2.71, a figure that was itself up by nearly the same percentage on 2021’s figure.
What’s more, that will all find its way back to shareholders: the bank said it would return the entire €8.6bn (£7.3bn) profit pool from 2023 in the form of dividends and share buybacks.
UniCredit is guiding towards more of the same this year, with a target of paying out 90pc or more of net profits.
Brokers are meanwhile pencilling in further rises in earnings per share out to 2027, though not at quite as spectacular a rate as over the past two years.
The impressive performance is the result of a cost-cutting drive as well as a soaring net interest margin – the difference between the interest earned on loans and that paid to depositors – thanks to higher interest rates.
These favourable conditions have also been a major boost to the balance sheet.
Even accounting for the €8.6bn distribution, UniCredit’s “common equity tier 1” ratio (a measure of the ability of banks to withstand financial distress) stood at 15.9pc at the end of 2023. It rose by one percentage point over 12 months and is well above a long-term target of 12.5pc-13pc.
This has underpinned the share buybacks and dividend growth. Dividends will reach €1.78 for UniCredit’s 2023 financial year, a rise of 80pc on 2022’s 99¢, and analysts forecast another rise to €2.06 this year.
The biggest threats to UniCredit’s continued success lie in the prospect of falling interest rates and any deterioration in economic conditions.
Investors are betting on interest rate cuts from the European Central Bank this year, which could eat into UniCredit’s net interest income. What’s more, there are worries that falling rates could be accompanied by a sharp rise in bad debt as stretched borrowers struggle with higher loan costs as a result of earlier rises in rates.
But there are few clear signs yet of increasing stress among borrowers. In last week’s results, the lender highlighted its low and falling proportion of bad loans.
Orcel meanwhile acknowledged in a call with analysts last week that the bank was unlikely to enjoy the same benefit from higher interest rates this year, but said the bank’s fees, which have grown to account for nearly a third of revenues, should help offset the impact.
Fees of €7.5bn in 2023 were 2pc lower than in the previous year, as a reduction in current account fees in Italy weighed, but performance improved towards the end of the year.
Put simply, if the loan book proves relatively robust and net interest margins do not reverse too sharply, UniCredit’s shares look as if they have further to run.
With the shares trading at a 25pc discount to the bank’s forecast book value over the next 12 months, they aren’t expensive either, even after their strong rally.
Questor says: buy
Share price at close: €29.06
Algy Hall is investment editor of Citywire Elite Companies
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