Buying Unicredit

I am buying Unicredit. Below is an outline of Morgan Stanley report that nicely
summarises the case.

1st Take: CEO Resigns


Unicredit’s CEO steps down after an extraordinary board meeting as “the conditions are now such that it is time for a change at the top of the group”. Mr Ghizzoni agreed to stay in office until his successor is found.

We forecast a CET 11.4% by 2016e vs the 10.75% SREP/G-SIB. The retained earnings, progress in non-core RWA reduction and possible disposals could avoid a capital raise in our view, and hence why we remain Overweight the stock.

Recent unconfirmed press reports (Reuters, May 20) suggest UCG may be reviewing the disposal of up to 15% of Fineco and a stake in its Polish business Pekao among other measures to replenish capital in the short term. Press reports (Reuters 24/05/2016 link) also suggest the JV between Pioneer and Santander may not go ahead, although given the contribution to capital (+25bp) and the approval of the board on the deal, it’s difficult to see it stopped, in our view. UniCredit and Santander declined to comment. We believe the final step around strategy to rebuild capital, including a capital raise or not, will remain uncertain until the new management team is in place.

Delivery on already announced cost targets is key to lift profitability medium term, in our view. Unicredit already booked €760m restructuring charges in FY15 and 1Q16 including provisions for early retirements (6.1k departures planned throughout 2018) and Ukraine. Costs should start to come down from 2017e, and together with lower provisions drive a recovery in ROTE to 7.6% on our numbers 2018E.

At 0.4x P/TBV capital build is key to drive re-rating. UCG is now trading on 2.1x P/PPOP, which is close to historical lows; however, we believe capital rebuild, non-core rundown and execution on restructuring are key levers to restore confidence

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