Q3 2013 results show continued P&L weakness, but there are signs of stabilization on the asset quality front which may translate in profitability improvements next year
Unicredit reported its Q3 2013 results on November 11. You can find the full announcement on the bank’s IR website.
The results show a substantial continuation of the trends that have emerged in previous quarters. Weak core revenues and high loan losses keep profitability depressed, and this time results don’t benefit from trading income, which was weak in the quarter. Net profit of EUR 204 mn was in line with consensus estimates, but also included one off gains from the sale of the Turkish insurance operations.
Unicredit Q3 2013 results: core revenue decline continues
Unicredit core revenues are still declining (-5.4% y/y):
- NII was down 7.5% y/y and 1.5% q/q (here, the good news is that the pace of decline is slowing.
- Fee income declined 4% over the previous quarter and 2% over Q3 2012.
- The overall revenue decline was 8.6% compared to the same quarter last year, as this time around trading income just wasn’t there to save the day (in Q1 and Q2 2013, Unicredit revenues had benefitted from very strong trading results – See Unicredit Results – Q2 2013: Trading revenues behind profit growth).
Despite continued cost containment efforts (costs were down 3% y/t and 1.5% q/q) the weak revenue performance drove an increae in the cost income ratio to 63% (57% in Q2).
Loan losses stay high, but the NPL outlook is improving
Loan loss charges remained high, at 118 bps of loans (27% of revenues). The high level of loan losses reflects the cyclical downturn in Italy, and losses should start to decline as the countries exits recession (keep an eye on Italian GDP flash estimate for Q3 out on Thusday this week).
NPL net inflows had already declined substantially last quarter, and Q3 numbers signal some stabilization just above the EUR 1 bn mark per quarter. As a result of the lower inflows (as well as the still high provisioning rate), Unicredit coverage ratio improved to 44.6% (44.1% in Q2 2013). We wonder whether Unicredit took an especially conservative approach to P&L this quarter in view of the upcoming Asset Quality Review from the ECB. We know Bank of Italy has been pushing Italian lenders in this direction and this could translate in a faster decline of loan losses once the AQR threat is past.
Capital base stable, but falling balance sheet risk translates in higher capital ratios
Unicredit capital base has been substantially stable since Q1 2012 (Core Tier 1 Capital was EUR46.8bn at the end of Q3 2013. In Q1 2012, this number was EUR46.9.), but the core capital ratio has improved by 140 bps in the same period (from 10.3% to 11.7%). This improvement was entirely driven by a fall in Risk Weighted Assets (-EUR56 bn in the period), partly due to the shrinkage of the loan portfolio but also impacted by significant RWA optimization. The Basel 3 fully loaded Core Equity Tier 1 Ratio stood at 9.8%, which is above the Basel 3 minimum threshold but still leaves room for uncertainty ahead of the ECB stress tests next year (the stress test paramenters are still unknown).
Overall, Q3 2013 results show continued P&L weakness, but there are signs of stabilization on the asset quality side which may translate in profitability improvements next year.