Bank investors are not a complicated breed. They want minimal risk and steady returns. Chief executive Andrea Orcel delivered greater clarity on both in a matter of fact way at UniCredit’s first-quarter results on Thursday.
The plan set in motion last year to return €16bn of capital to shareholders by 2024 is still on track. He also reported progress in resolving one of the largest Russia exposures in European banking. That has been responsible for a 40 per cent fall in the value of UniCredit shares since the invasion of Ukraine began.
These are now trading at 0.4 times book value or around the lows of the pandemic. A commitment to begin the first €1.6bn tranche of buybacks imminently sent shares up 6 per cent on Thursday. In market value that is a modest rise compared with the magnitude of expected capital returns. That hints at the risk posed by second order impacts from the war in Ukraine.
UniCredit reduced its direct exposure to Russia by swapping cross-border loans with unsanctioned Russian banks. That resulted in €2bn of de-risking. Total exposure to Russia fell from €7.4bn in March to €7bn which also includes losses on currency hedges.
Of this amount, UniCredit thinks €5.2bn would be lost in the worst-case scenario, which assumes that 40 per cent of cross-border exposures could be recovered. That hit in full would be equal to 128 basis points of common equity tier one capital. UniCredit chose — conservatively — to provide for 72 per cent of that in the first quarter.
Including confirmed buybacks and dividends, that leaves the CET1 ratio at 14 per cent, well above UniCredit’s 12.5 per cent minimum target. That more than covers the planned additional €1bn of buybacks later this year.
Investors should not count on that, even as the Russian risks recede. Hindrances include more CET1-eroding loan loss provisions or regulatory obstinance on signing off buybacks. The likelihood of both are increasing with the risk of a recession in Europe.
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