Unicredit’s Strategic Plan Is Appropriately Aggressive; Italian Banking System Should Benefit

UniCredit’s long-awaited strategic plan for 2016-19 addressed many of the key issues on costs, nonperforming exposures, and capital that we have been concerned about, and the EUR 13 billion capital raise is scheduled for January. We plan to maintain our no-moat rating for the bank, and will adjust our EUR 3.50 fair value estimate as pricing for the raise becomes clearer, but we do not expect a material move, as our model assumes a EUR 10 billion raise and asset sales to close a EUR 15 billion capital gap. Virtually all of the key aspects of UniCredit’s plan matched our explicitly laid-out forecasts in terms of employee reductions, capital raises, branch closures, cost/income ratio goals, and the involvement of alternative capital in the plan. The plan also supports our view that 2016 will be the peak year for nonperforming exposures in the Italian banking system, given that UniCredit’s large balance of NPEs will be cut in half in the coming years. Ultimately, we view as achievable the strategic plan that focuses on boosting return on equity to around 9% in 2019, given that the bank recognizes that the Italian economy is unlikely to improve significantly (revenue growth is expected to be 0.6% over the next few years), and thus the changes need to come from the bank itself. The major risk we see is that disposing of the remaining nonperforming exposures takes longer than expected due to the weak Italian economy and lack of needed legal system reforms, pushing out the 9% target to the early 2020s.