UniCredit puts spin-off plan on hold after ECB bond purchases ease

MILAN (Reuters) – UniCredit IDRC.MI has put plans to separate its domestic and foreign operations on hold, saying the European Central Bank’s massive bond purchases have brought its sovereign risk profile under control.

FILE PHOTO: A view of the headquarters of Unicredit, many of whose employees are working from home due to an outbreak of the coronavirus, in Milan, Italy March 2, 2020. REUTERS/Yara Nardi

UniCredit, which confirmed its profit targets on Thursday after a stronger-than-expected third quarter, was looking to set up a sub-holding for operations in Germany, Austria and Eastern Europe to improve its funding costs.

Italy’s second-biggest bank faces higher sovereign risks in its domestic market due to the fragility of Rome’s public finances, to which UniCredit has reduced its exposure by reducing its holdings of domestic government bonds.

“Thanks to the massive bond purchases by the ECB and the very tight spreads on sovereign bonds…we don’t need to set up the sub-holding so the project remains a project,” said CEO Jean Pierre Mustier.

Mustier, whose term as chief executive is up for renewal in the spring of 2021, told a press conference that UniCredit would hold an investor day by the middle of next year.

“We will share the lesson we have learned from the pandemic,” he said, highlighting the rapid progress in digitization.

Sources had said the asset split had been met with resistance within UniCredit, but it had also been seen as a potential easing of tie-ups, including a foreign deal Mustier had sought to complete before focusing on the return. more money to investors.

Mustier’s firm refusal to join a wave of national consolidation that has seen rival Intesa Sanpaolo ISP.MI snapping up smaller counterpart UBI has left investors guessing about its long-term strategy.

The French banker said he expected an update soon from the ECB on a dividend ban that has derailed his efforts to boost the price of UniCredit shares, which are worth less than 30% of its value accountant, against 50% for Intesa.

He declined to comment on reports that UniCredit had come under government pressure to tackle Monte dei Paschi. BMPS.MI.

“Our plan is not based on any mergers and acquisitions. We prefer to transform rather than integrate and use our excess capital to support the economy and return it to shareholders when permitted,” he said.

UniCredit reported third-quarter net profit of 680 million euros ($798 million), above an average forecast of 334 million euros in a consensus provided by the company, and a higher capital base.

He said he was on track to achieve an underlying net profit target of more than 0.8 billion euros this year and between 3.0 and 3.5 billion in 2021, which he uses for the distribution of capital.

A strong increase in commercial revenue helped lift revenue 4.4% from the three months ending June. Fees also recovered as business activity picked up in the bank’s main markets as governments eased coronavirus restrictions.

Unlike Intesa, which also beat expectations on Wednesday with a strong third quarter, UniCredit saw lending revenue decline despite the ECB borrowing funds at negative rates, after customers used government-guaranteed funds to repay their loans.

Mustier said UniCredit, which raised its cost-cutting target slightly, would increase lending once the economy improves.

Although lower-than-expected loan losses helped in the third quarter, UniCredit said it would increase credit risk provisions in the final quarter to prepare for the impact of the pandemic in line with its guidance for the year.

UniCredit IDRC.MI shares were up 0.7% at 11:48 GMT against a flat European sector .SX7P.

Additional reporting by Gianluca Semeraro; Editing by Muralikumar Anantharaman, Jane Merriman and Alexander Smith

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