UniCredit Profit Doubles on Debt Buyback; Shares Jump

UniCredit SpA, Italy’s biggest bank, said second-quarter profit more than doubled after it cut costs and bought back debt. The shares jumped to the highest level in two months.

Net income surged to 361 million euros ($479 million) from 169 million euros a year earlier, in line with the 360 million-euro average estimate of eight analysts surveyed by Bloomberg. The Milan-based bank posted a 254 million-euro gain from the buyback of 4.2 billion euros of senior securities in April, according to a statement today.

Chief Executive Officer Federico Ghizzoni is cutting costs and reducing risk as an economic recession in Italy and stricter capital requirements weigh on earnings. The bank is reorganizing its Italian branch network, as well as operations in central and eastern Europe, as part of a five-year plan to increase profit and strengthen finances.

“Cost cutting measures positively impacted on pre-provision profit,” Carlo Tommaselli, an analyst at Societe Generale SA, said in e-mailed comments to clients. The earnings showed sound capital “with asset quality worsening less than expectations.”

The company lowered second-quarter operating costs by 1.8 percent from a year earlier to 3.67 billion euros. It now plans to reduce the costs by 1 billion euros more than targeted by 2015, according to the statement. In 2011, the bank announced 15.8 billion euros of cost reductions by 2015.

Shares Jump

UniCredit’s shares surged as much as 4.9 percent in Milan trading to the highest level since June 3. They rose 3.4 percent to 4.31 euros at 3:32 p.m., valuing the company at 25 billion euros. Gains this year of 16 percent compared with an increase of 10 percent for the Bloomberg Europe Banks & Financial Services Index. Ten of 39 analysts recommend buying the shares, according to data compiled by Bloomberg.

“UniCredit recorded the first positive signs of turnaround in Italy,” Ghizzoni said during a conference call with analysts. “For the third quarter in a row there was a slowdown of net new flows to impaired loans.”

Loan-loss provisions dropped to 1.67 billion euros in the second quarter from 1.83 billion euros a year ago. The bank’s core Tier 1 capital adequacy ratio, a key measure of financial strength, rose to 11.4 percent as of June 30 from 11 percent at the end of March.

Low Rates

Net interest income dropped to 3.3 billion euros in the quarter from 3.6 billion euros a year earlier as the European Central Bank kept interest rates at record-low levels, paring returns, and the bank’s lending volume declined. Trading income, boosted by the bond buyback, rose 79 percent to 953 million euros in the period, while total revenue increased 2 percent to 6.4 billion euros.

UniCredit said that it paid back 2 billion euros in July from the 26 billion euros it borrowed in the ECB’s long-term refinancing operations. The company will consider further pre-payments of LTRO funds, depending on market conditions, it said.

Net income from eastern Europe grew an annual 3.6 percent to 425 million euros in the second quarter, countering losses from banking units in western Europe, the company said. It made a loss in Italy and Austria and a profit in Germany.

UniCredit, emerging Europe’s biggest lender with operations in Turkey and 16 former communist countries, has struggled with uneven growth and pockets of recession in those markets. Operating profit in the region last year outstripped losses in Italy and helped the group report a profit.

Bad debt provisions in eastern Europe rose by 49 percent, driven by Ukraine and Croatia, UniCredit said. Delinquent loans expanded to 8.2 percent of the bank’s loan book.

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