UniCredit SpA Chief Executive Officer Federico Ghizzoni said fourth-quarter profit will roughly match earnings for the previous three months as Italy’s economic downturn pares demand for loans.
Net income fell 39 percent to 204 million euros ($273 million) in the third quarter from a year earlier after UniCredit earned less from lending, the Milan-based bank said in a statement late yesterday. That exceeded the 191 million-euro average estimate of 14 analysts surveyed by Bloomberg.
“I think 2013 remains quite a challenging year,” Ghizzoni said in an interview with Bloomberg television after the results were published. “The fourth quarter will be more or less in line with the previous one. Low demand for loans and cost of risk in Italy is pretty high.”
Ghizzoni is cutting expenses and setting aside more provisions for non-performing loans to help strengthen UniCredit’s finances as he prepares for a European Central Bank review of lenders’ balance sheets. Italian banks may need to write down more bad loans, ECB Governing Council Member Ignazio Visco, who is governor of the Bank of Italy, said a week ago.
UniCredit rose 0.7 percent to 5.5 euros at 11:30 a.m. in Milan trading, valuing the company at 31.9 billion euros and taking gains this year to 48 percent. The average estimate for the share price in 12 months among 27 analysts was 5.35 euros, according to data compiled by Bloomberg.
The bank is making progress on dealing with non-performing loans, capital and costs, Andrea Filtri, a London-based analyst at Mediobanca SpA, said in an e-mailed report to clients today.
Although UniCredit’s asset position is strong, Italy’s central bank may ask banks to increase provisions as the ECB asset review continues and the regulator prepares for stress tests next year, Ghizzoni said.
“We approach this exercise with confidence -- our capital and our liquidity position is pretty high and the quality of our assets has been reviewed several times,” he said. “It will be tougher, longer, but we are confident.”
Leverage, which global regulators are increasingly focusing on to gauge financial health, fell to a record low of 17.4 times tangible capital, UniCredit said in a presentation published on its website. Risk-weighted assets declined 2.7 percent in the third quarter from the previous quarter to about 400 billion euros, driven in part by de-leveraging in commercial banking in Italy. Assets immediately available to liquidate totalled 138.5 billion euros at the end of September, UniCredit said.
Some lenders including UniCredit will be meeting ECB officials in Frankfurt on Nov. 25 for a “preliminary discussion” about the review, Ghizzoni said. Spanish banks will hold similar meetings on Nov. 18, El Economista reported today without saying how it got the information.
Italy’s economy is due to begin recovering from its longest recession since World War II this quarter after a “moderate” contraction in the previous three months, the European Commission said last week.
UniCredit’s provisions for bad debt dropped to 1.55 billion euros at the end of September from 1.74 billion euros a year previously, the bank said. The core Tier 1 capital adequacy ratio, a key measure of financial strength, rose to 11.7 percent on Sept. 30 from 11.4 percent at the end of June.
The company expects lower provisions this year compared to 2012, unless regulators make “specific requests,” Ghizzoni said during a conference call with analysts today. UniCredit’s management will review targets for its strategic plan next year, when banks should be benefitting from an expected economic recovery, he said.
“The focus of investors will remain on credit quality, as banks approach the asset quality review,” Emanuele Vizzini, who manages $2.5 billion as chief investment officer at Investitori Sgr, said by telephone from Milan. “I expect Italy’s systemic banks, UniCredit and Intesa Sanpaolo SpA, already have adequate levels of capital and are in good shape for the ECB’s assessment.”
The ECB is beginning its review of the assets of about 130 banks in the euro area this month. It will also conduct stress tests as it takes over supervision of the industry from national regulators next year.
Net interest income, the difference between revenue from loans and the cost of paying interest on deposits, dropped to 3.25 billion euros in the third quarter from 3.53 billion euros a year earlier as record-low rates, the slowdown in lending and regulatory changes in Turkey squeezed margins. Trading income fell 39 percent from the previous year to 403 million euros, while total revenue declined 8.5 percent to 5.72 billion euros.
“The market will likely focus on the balance sheet and it is overall positive,” Carlo Tommaselli, a Milan-based analyst at Societe Generale SA, said in an e-mailed report to clients.
Third-quarter net income declined even as UniCredit posted a 191 million-euro gain in the period from the sale of Turkish insurer Yapi Kredi Sigorta AS.
The company will also book a 160 million-euro gain in the fourth quarter from the sale of a 6.7 percent stake in Italian insurer Fondiaria-SAI SpA and 5.7 percent of the Moscow stock exchange. The disposals will increase the core Tier 1 ratio by five basis points, the bank said.
UniCredit, which received 26 billion euros during the ECB’s two longer-term refinancing operations, repaid 3 billion euros during the year, the bank said. The lender has completed 84 percent of its funding needs for 2013, it said.
The company will continue repaying ECB loans gradually, depending on market conditions, Ghizzoni said.
UniCredit is expected to post profit of 1 billion euros for 2013 compared with 865 million euros in 2012, according to the average estimate of 17 analysts surveyed by Bloomberg.