UniCredit: 4Q12 Group Results

Net Profit €865 million in 2012 and dividend payment in a challenging macroeconomic environment

Credit coverage ratios at the highest level in Italy

UniCredit stronger than one year ago and well positioned for recovery

• Gross Operating Profit up in 2012 by +5.1% Y/Y (-3.2% net of bonds buy-backs) thanks to comprehensive cost cutting actions in 2012 (-2.9% Y/Y and -2.7% Q/Q), supported by a decrease of more than 4,000 FTEs
• Higher Loan Loss Provisions in 4Q12 lead to enhanced coverage ratios in Italy, now at 43.4% (+3.20 pp Q/Q), the highest level in Italy. Bottom line impact partially offset by tax redemption on Goodwill
• CEE business refocusing: ongoing process to dispose Kazakhstan; rationalization of presence in Baltics; merger of banks in Czech Republic and Slovakia and of subsidiaries in Ukraine; development of high growth Consumer Finance business in Russia
• Stable capital position, with Core Tier I ratio at 10.84 per cent under Basel 2.5 (11.14 per cent proforma including sale of a stake in Pekao and the disposal of ATF). The impact of Basel 3 fully loaded is currently equal to 165 bps, leading to 9.2 per cent CET 1 ratio. Sound Balance Sheet, with Tangible Equity up by €11.2 billion Y/Y, RWA in CIB down by €32 billion and funding gap further down by €33.4 billion in 2012
• Strategic Plan management actions confirmed and vigorously pursued as shown by the successful impact of cost-cutting measures, restructuring of the Italian network and RWA management in 2012. However, due to the unprecedented difficult macroeconomic environment, financial projections will be revised
• The Board of Directors of UniCredit SpA proposes a dividend distribution from profit reserves of 9 cents per share for 2012

 

 

FY 2012 KEY FIGURES

 

• Group Net Profit: €865 million (versus -€9.2 billion in FY11)
• Revenues: €25.0 billion (+0.1% Y/Y), of which €0.8 billion from buy-backs (1)
• Operating Costs: €15.0 billion (-2.9% Y/Y)
• Cost/Income ratio at 61.8% net of buy-backs (+0.1% Y/Y)
• Gross Operating Profit: €10.1 billion (+5.1% Y/Y, -3.2% net of buy-backs)
• Loan Loss Provisions: €9.6 billion (+67.7% Y/Y), with bottom line impact partially offset by a €2.0 billion goodwill tax redemption

 

 

4Q 2012 KEY FIGURES

 

• Group Net Loss: €553 million, versus a profit of €114 million in 4Q11 and €335 million in 3Q12
• Revenues: €5.7 billion (-5.6% Y/Y, -6.1% Q/Q), of which €39 million from buy-backs
• Operating Costs: €3.7 billion (-2.7% Y/Y, -1.1% Q/Q)
• Cost/Income ratio at 65.0% net of buy-backs (+2.4 p.p. Y/Y, +3.1 p.p. Q/Q),
• Gross Operating Profit: €2.0 billion (-12.2% Y/Y and -13.5% Q/Q net of buy-backs)
• Loan Loss Provisions: €4.6 billion (3.2x 4Q11, 2.6x 3Q12), with bottom line impact partially offset by €2.0 billion from goodwill tax redemption

 

 

 

The Board of Directors of UniCredit approved the 4Q12 results on March 15^th.

 

Federico Ghizzoni, CEO of UniCredit, said: "Today UniCredit is better positioned than one year ago on balance sheet, capital and liquidity. We are prepared for the upcoming challenges in 2013.UniCredit's results held up well in 2012 in spite of a persistently difficult global economic climate. This performance was very much thanks to the implementation of the Strategic Plan management actions, such as cost-cutting measures, focused management of RWAs and a streamlined business organization. In Italy, we have achieved the best impaired loans coverage ratio. We are also ahead of Plan with the revamp of the Italian branch network. In 2013, we will actively pursue our efforts to boost profitability. The Board of Directors of UniCredit SpA decided to propose a dividend distribution of 9 eurocents per share to the AGM, which underlines our confidence in UniCredit's ability to create recurring value for shareholders".

Gross Operating Profit Stable Thanks to Cost Savings

 

The Group's annual and quarterly results were affected by a difficult macroeconomic environment as well as by historically low interest rates. For 2012 UniCredit reported €0.9 billion Net Profit (€0.8 billion adjusted) (2) Gross Operating Profit showed a resilient performance in FY12, i.e. +5.1% Y/Y (-3.2% net of buy-back) thanks to the simplification of the business and to cost reductions.

 

Net Interest Income stood at €14.3 billion in FY12 (-6.3% Y/Y) and €3.3 billion in 4Q12 (-6.2% Q/Q). Loan repricing actions and interest rate hedging strategies partially mitigated the negative impact of the historically low 3-month Euribor rate (-16 bps to 0.2% in 4Q12) and of low commercial loan demand.

 

4Q12 confirmed the ongoing decrease in Operating Costs (-2.7% Y/Y and -1.1% Q/Q), leading to a reduction of 2.9% FY12 vs FY11, as cost savings more than compensated salary inflation and IT related expenses. Cost saving actions had a material impact both on staff expenses and non-HR costs, which in FY12 declined by 2.8% and 3.2% respectively vs FY11. Headcount is down by more than 4,000 FTEs, primarily due to Western Europe including over 1,500 FTEs in Italy, and now stands at 156,354 FTEs. Non-HR costs such as real estate, consulting and marketing are being strictly monitored and optimized wherever possible.

 

 

Asset Quality and Improvement of Coverage In Italy

 

Throughout 2012, the Group's asset quality was negatively affected by the unfavorable macroeconomic environment, particularly in Italy. In the last quarter, a concerted effort was made to tackle asset quality and improve coverage ratios, especially in Italy. The coverage of Group Impaired Loans increased from 42.7% in September 2012 to 44.8% in December 2012. Over the same period, in Italy, the coverage of impaired loans grew from 40.2% to 43.4%, bringing UniCredit at the highest level among Italian peers (3). As a result, the Group's net impaired loans ratio was virtually stable in 4Q12, standing at 8.1% as of year-end.

 

In 4Q12 in order to enhance coverage ratios in Italy, UniCredit booked €2.1 billion of additional loan loss provisions, with the bottom line impact offset by €2 billion from tax redemption on goodwill and other intangibles (4). Additional provisions in 4Q12 allowed for the increase of coverage on several specific categories: households mortgages increased from 32% to 37%, Small Medium Sized Enterprises from 41% to 45% and Corporate and Investment Banking from 34% to 42%.

 

Management is actively taking action to minimize future inflows into impaired loans and their impact on P&L, especially in Italy. This includes: stricter new lending criteria, reducing default rates of new business, management of the existing performing portfolio, by reducing riskier asset classes, management of the existing impaired portfolio, by redesigning the organizational structure in order to manage defaulted assets more actively (work-out).

 

 

 

New Business Organization and Cost Cutting Actions

 

UniCredit is working on material cost cutting actions through several projects, for a total net present value of €1.8 billion. The new country-based organization (Project Gold) is up and running, with the aim to streamline roles and responsibilities, promoting faster decision making processes, improved operational efficiency and closer proximity to the client. In Italy, the reorganization is leading to a reduction of the number of layers between the branch and the CEO.

 

Italian Network Re-design (Hub & Spoke) Well Advanced

The Italian branch network rationalization is underway. As of December 2012, out of the 3,611 branches in the Hub & Spoke project, over 1,000 are now Cash-Light and Cash-Less (compared to only 288 in January 2011). In addition, a further 350 branches are expected to be closed by 2015, while upgrading alternative channels.

 

Cost Saving Actions in Germany and Austria

German and Austrian subsidiaries are actively implementing the Group's cost management initiatives with specific projects aimed at innovating sales channels and redesigning branch networks. Following the growing importance of alternative channels, significant efforts have been put to set up remote branches with dedicated advisors (in Germany) and strengthening of multichannel services (in Austria). These initiatives will lead to a drop of almost 800 FTEs in Germany and around 200 in Austria.

 

Project Newton

The Newton project aims to achieve high levels of internal efficiency by exploiting the Group's process know-how and technology assets. Total estimated cumulative savings of more than €1.3 billion are expected over ten years.

 

Business Refocusing in CEE Underpinning Profitability

 

Central and Eastern Europe is key for the Group's profitability and one of the pillars of UniCredit's strategy. Gross Operating Profit for the region was €3.5 billion in 2012 (+4.3% Y/Y) and €960 million in 4Q12 (+15.4% vs 4Q11) thanks to strong revenue generation (+3.1% in FY12 Y/Y and +10.1% in 4Q12 Y/Y). UniCredit is rationalizing the Group's geographic presence in CEE; this has led to a reduced presence in some countries and additional investments in selected core markets.

 

Disposal of Kazakhstan Operations

UniCredit Bank Austria has signed a Share Purchase Agreement with KazNitrogenGaz LLP, fully owned by Mr. Galimzhan Yessenov, for the disposal of 99.75% of ATF for a total consideration equal to ca. 1.0x the shareholder's equity of ATF Group at closing date (5). The transaction is still subject to the approval of the regulatory authorities, expected by March 2013. In 4Q12, the signing of the agreement led to an extraordinary charge in the Group's P&L of ca. €260 million of which ca. €215 million without any impact on Basel 3 UniCredit Group CET1. By the time of the closing, the transaction is expected to add overall ca. 8 bps by the release of ATF's risk weighted assets (6). For the deal, UniCredit was advised by UniCredit Corporate & Investment Banking.

 

Centralization of Baltics Operations Bringing Synergies and Improved Efficiency

Going forward, UniCredit's operations in Estonia, Latvia and Lithuania will be centralized and run from Latvia. This will create synergies in terms of efficiency, balance sheet and liquidity management. The project is awaiting final approval by the relevant regulators, and centralization is expected to be completed in mid-2013.

 

Czech Republic and Slovakia Combination Leading to Cost Savings

UniCredit is combining its subsidiaries in Czech Republic and Slovakia into a single cross border bank based in Prague. The integration is expected to be completed by end 2013 and bring synergies from 2014 onwards in relation to efficiency, balance sheet and liquidity management.

 

Merger of Subsidiaries in Ukraine

In February 2013 the Board of Directors of UniCredit approved the acquisition by UniCredit SpA of Bank Pekao's subsidiary UniCredit Bank Ukraine, with the aim of merging it into UniCredit's Ukrsotsbank leading to cost savings and simplifications.

 

Creation of a Car Financing Joint Venture in Russia

In light of the strong growth of the Russian car market, UniCredit and Renault-Nissan Alliance have agreed to establish a dedicated automotive bank offering a wide range of financial services to Renault, Nissan and Infiniti brand customers and dealers in Russia. The joint venture, in which UniCredit will hold a 40% stake, will further develop the successful and long standing cooperation between the Renault-Nissan Alliance and UniCredit which, in the Russian market, has been in place since 2007 in the form of a commercial agreement. The Renault-Nissan Alliance and UniCredit are partners also in other CEE countries such as Czech Republic, Slovakia, Croatia and Hungary.

Capital Structure: Stable Ratios and Additional Actions

 

At the end of December 2012 the Group's Core Tier I ratio is equal to 10.84%, improving by 17 bps versus September 2012, mainly thanks to RWA reduction. Fully loaded Basel 3 Common Equity Tier 1 ratio (CET 1) is equal to 9.2%. The sale of 9.1% stake of Pekao in January 2013 leads to additional 13 bps under Basel 3, whereas ATF disposal would provide a potential additional upside of 8 bps. The total reduction of RWA in the CIB division accounted for a reduction of €32 billion Y/Y, while since 2010 RWA were reduced by €53 billion before Basel 2.5 impact.

 

Sale of 9.1 Per Cent Stake in Pekao Leading to Positive Impact on Capital Ratios

 

At the end of January 2013, UniCredit sold about 9.1% of Pekao. UniCredit continues to be fully committed to Pekao, which remains core to its franchise and strategy, retaining a majority shareholding of about 50.1%. The sale enables UniCredit to optimize the capital allocation within the Group and to support organic growth in CEE. Gross proceeds of the sale amounted to approximately €0.9 billion, resulting in a capital gain of approximately €135 million, which will be entirely accounted to equity reserves, as Pekao remains a fully consolidated subsidiary of UniCredit, and will translate into an increase in the Group CT1 ratio pro-forma as of December 2012 of 20 bps under Basel 2.5 and of 13 bps under Basel 3.

 

Distribution of Extraordinary Dividend by UniCredit Bank AG to UniCredit SpA

Since the combination with UniCredit, UniCredit Bank AG has kept an extraordinarily high Core Tier 1 ratio (18.3% as of December 2012 before dividends distribution) compared to German peers and to regulatory requirements. Therefore, UniCredit Bank AG has proposed to the Shareholders' General Meeting the distribution of accumulated profit reserves for a total consideration of €1.0 billion on top of the €1.5 billion 2012 dividend. Even after the dividend distribution, UniCredit Bank AG Core Tier 1 ratio will remain at a very high 17.4%, while the 2013 UniCredit SpA Core Tier 1 ratio will improve by 146 bps.

 

Proposed Re-Organization of UniCredit SpA Shareholders' Equity

Today the Board of Directors, in the context of the approval of the financial statements project 2012, has resolved upon the reclassification and re-statement of certain positive and negative reserves and upon a proposal to be submitted, inter alia, to the 2013 AGM to re-allocate the 2011 loss.

 

In particular, the Board of Directors has approved the reclassification of some equity reserves to reserves from profits - for a total amount of c.a. €4.4 billion - on the basis of a substantial approach which looks at their nature and origin, as well as the re-statement of certain negative component of UniCredit SpA shareholders' equity, whose total value would remain in any case unchanged.

 

In addition, the AGM will be proposed to re-allocate to the Share Premium Reserve the entire 2011 loss which last year was met out of Statutory and Profit Reserves and only in part of the Share Premium Reserve. This re-allocation would ensure a more dynamic and linear organization of the information regarding the Company's distributable equity reserves, allowing UniCredit S.p.A. to pursue its policy on the remuneration of capital in a manner that is more consistent and transparent while at the same time maintaining considerable capital strength, on both a consolidated and non-consolidated basis. In fact, both the re-classification of reserves and the re-allocation of 2011 loss would not have any impact on the overall balance of UniCredit SpA's equity, which would remain unchanged.

 

 

2013 Outlook

 

Given the current challenging macroeconomic environment, the Strategic Plan financial targets will be revised, although the underlying set of actions are confirmed. 2013 outlook reflects this new scenario.

 

Net Interest Income: Given the expected low interest rates throughout 2013, still weak loan demand and the cost of new wholesale funding above the cost of maturing funding, a yearly downward trend in Net Interest Income is expected in comparison to 2012. Such trend may be offset by repricing and remix activities.

 

Costs: Renewed management initiatives are in place with the aim to at least confirm the 2012 cost base, despite planned investments on regulatory compliance and investments in business.

 

Loan Loss Provisions: LLPs should slightly decrease in 2013 versus 2012, benefitting from the conservative coverage enhancement done in 4Q12.

 

Capital: UniCredit maintains a solid capital position, with a year-end 2012 Basel 2.5 CT 1 ratio of 10.84% and a fully phased-in CET 1 ratio of 9.2% under Basel 3. For 2013, a minimum level of 9% is confirmed.

 

 

Milano, March 15^th 2013

 

 

 

 

 

Notes:

 

1) Buy-backs mentioned herein and across the document are related to tender offers on T1-UT2 in 1Q12 (€697 million) and on ABS in 3Q12 (€59 million) and 4Q12 (€39 million), all amounts gross of taxes.

 

2) Post tax adjustments in FY12 include: proceeds from tender offers on T1-UT2 and ABS for €543 million (o.w. €39 million in 3Q12 and €26 million in 4Q12); Integration costs for -€174 million (in 4Q12); goodwill and other impairments for -€22 million (in 4Q12); Kazakhstan valuation as per reclassification in Held for Sale portfolio for -€260 million (in 4Q12). Post tax adjustments in FY11 include: Goodwill and other impairments for -€8,669 million; POI -€702 million (o.w. -€70 million in 4Q11); PPA for -€662 million; integration costs -€184 million (o.w. -€63 million in 4Q11); taxes for -€100 million.

 

3) Based on 3Q12 and, where available, 4Q12 data.

 

4) In 2011 and extended in 2012, Italian Tax authorities granted the possibility to tax redeem Goodwill and Other Intangibles, embedded in the purchased participations' prices, as resulting in the Consolidated Financial Statement as of 31.12.2010 (the so-called Goodwill Tax Redemption). In 4Q12, UniCredit recognizes a net positive P&L impact of ca. €2 billion, which is the difference between €3.9 billion DTAs and -€1.9 billion substitute tax.

 

5) Cash based consideration. The price will be adjusted for certain upfront payments.

 

6) The extraordinary charge booked in 4Q12 led to a reduction of 1 bp already included in Basel 3 proforma UniCredit Group Common Equity Tier 1 as of December 2012.