UniCredit SpA, Italy’s biggest bank, said first-quarter profit rose 59 percent after it set aside less money for bad loans and costs declined.
UniCredit jumped as much as 4.3 percent in Milan trading after posting net income of 712 million euros ($980 million), up from 449 million euros a year earlier and higher than the 509.3 million-euro average estimate of seven analysts surveyed by Bloomberg.
Chief Executive Officer Federico Ghizzoni is cutting expenses and reducing riskier assets at UniCredit as the European Central Bank reviews lenders across the continent before taking over banking supervision in November. The bank, which posted a record 15 billion-euro loss in the fourth quarter as it increased provisions and revalued companies it acquired, is targeting 2 billion euros of net income in 2014 as Italy emerges from its longest recession in decades.
The results “confirm the effectiveness of our strategy and demonstrate that the group is heading in the right direction,” Ghizzoni, 58, said in the statement.
UniCredit rose 1.4 percent to 6.31 euros in Milan, giving the bank a market value of 37 billion euros. The stock has advanced 55 percent over the past 12 months.
The profit was a “clear beat, mainly due to loan loss provisions much lower than expected,” Andrea Filtri, a London-based analyst at Mediobanca SpA, wrote in a note today. “Lending activity in Italy is showing signs of recovery, the capital is sound and the asset quality is finally improving.”
Loan-loss provisions fell to 838 million euros in the three months to March from 1.17 billion euros a year earlier. UniCredit kept its bad-loan coverage ratio at 52.4 percent, the highest among Italian banks. Operating costs declined 1.8 percent to 3.5 billion euros.
“For the first time since 2008, the stock of gross impaired loans is decreasing,” Ghizzoni said during a conference call with analysts. “This allows us to look at the future with confidence.”
Revenue declined 3.6 percent to 5.58 billion euros as trading income fell. UniCredit said it paid back an additional 5 billion euros in the first quarter of the 26 billion euros it borrowed in the ECB’s longer-term refinancing operations, bringing total repayments to date to 10 billion euros.
UniCredit, which is one of 15 Italian banks in the ECB review, will not need additional capital after the stress tests, the CEO said. “The first internal analysis gives us sufficient confidence that the process will be successfully completed,” Ghizzoni told analysts.
Stress tests’ criteria published by the European Banking Authority last month are more favorable than expected on the real estate side, while the bank is paying attention to the impact of its lending in eastern Europe, Ghizzoni said.
The company’s common equity ratio under fully-applied Basel 3 rules, a key measure of financial strength, rose to 9.5 percent on March 31 from 9.4 percent at the end of December.
UniCredit expects to complete the initial public offering of a minority stake in its Internet bank unit, Fineco SpA, by the end of July, according to Ghizzoni. The planned share sale is generating “very high interest,” the CEO said. The unit has 2,400 financial advisers, 900,000 customers and manages 40 billion euros of assets, according to the bank’s website.
Ghizzoni, who is selling its Ukrainian unit as part of the bank’s disposal plan, said discussions with two potential bidders are continuing, “even if it’s difficult to say when and if the sale will be completed.”
UniCredit reported 600 million-euro charges related to its Ukrainian subsidiary in the fourth-quarter when it classified the unit as available for sale.
Unicredit’s non-core gross loans declined by 2 billion euros in the quarter to 83.6 billion euros, as part of the lender’s strategy to cut assets in its non-core portfolio of riskier Italian loans by about 63 percent to 33 billion euros by 2018.
“We are on track versus the reduction target,” Ghizzoni said.