UCG Unicredit Spa

By Giovanni Legorano and Pietro Lombardi 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 4, 2019).

LONDON -- Italy's largest bank, UniCredit SpA, ruled out targeting big acquisitions as it pledged share buybacks and dividend increases, part of a four-year plan that also includes cuts in jobs and costs.

The bank said it would focus on growing organically amid a challenging economic environment, after struggling to increase its share price in comparison to peers in recent years, despite progress under Chief Executive Jean Pierre Mustier.

UniCredit intends to cut roughly 8,000 jobs, or around 9% of the total workforce, and close about 500 branches through 2023 as it targets gross savings of EUR1 billion ($1.1 billion) in Western Europe.

The plan offers an insight into the headwinds faced not just by UniCredit but by fellow banks. Profits at Europe's largest lenders have been dented by low rates, stringent regulation and greater competition from U.S. rivals. Most of the region's banks are downsizing, cutting costs or realigning their businesses as a result.

UniCredit said it would return EUR8 billion to shareholders through 2023, including a share buyback of EUR2 billion. This corresponds to an increase of profit distribution to shareholders of 40% in the next three years, rising to 50% in 2023.

Mr. Mustier said the bank prefers to use capital in this way instead of buying other European banks. Speculation has mounted in recent months that UniCredit was eyeing a tie-up with troubled German lender Commerzbank AG or France's Société Générale SA

UniCredit has never commented on specific potential mergers, but Mr. Mustier has often cast doubt on the viability of European cross-border banking tie-ups, citing regulatory hurdles and likely additional capital needs.

Instead, the bank prefers to buy back some of its shares, he said Tuesday.

"In short, no M&A and that's it," he told reporters, saying the bank would consider only "small bolt-on acquisitions" mainly in central and Eastern Europe.

While Italian lenders have made considerable progress in digesting the pile of bad loans accumulated during the financial crisis, they are struggling to modernize their operations and make their businesses leaner.

At the end of June, Italian banks owned EUR177 billion of bad loans, or 8% of their total loans, compared with EUR350 billion, or 17% of total loans, at the end of 2016.

Their revenue is under pressure from negative rates. The pressure to deploy liquidity induced by negative rates has increased competition among banks to lend money. This in turn has pushed down interest rates applied on new mortgages and company loans.

Average interest rates charged on residential mortgages dropped to 1.69% in August, from 2% on existing loans up to December last year, according to estimates from consulting firm Oliver Wyman. Interest rates on company loans dropped by 80 basis points to 1.26% over the same period.

Lower rates on government bonds are also putting additional pressure on banks' revenue.

Italian banks have tried in recent years to make more money through fees and commissions on wealth and asset management, with patchy results.

One of the few levers remaining is to cut costs. However, Italian banks need to make large investments to improve the digitization of their businesses and train their personnel. Oliver Wyman estimates that almost half of Italian bank employees need to be trained in new skills, as their business models change and the use of new technology spreads.

UniCredit aims to increase its net profit to EUR5 billion for 2023, slightly higher than the EUR4.7 billion planned for this year.

Earnings per share are projected to grow 12% a year, while UniCredit aims for revenue to rise roughly 0.8% a year to EUR19.3 billion in 2023. Costs are expected to decline 0.2% a year and reach EUR10.2 billion when the plan ends.

The bank said it doesn't plan any more large asset sales after it agreed over the weekend to cut its stake in Turkish bank Yapi ve Kredi Bankasi AS to below 32% from roughly 41%, aiming to simplify its shareholding structure and boost its capital.

Over the past three years, UniCredit has sold several other assets, including Polish lender Bank Pekao SA and asset management firm Pioneer Investments. More recently, it sold its stakes in online lender FinecoBank SpA and in Mediobanca SpA.

Write to Giovanni Legorano at giovanni.legorano@wsj.com and Pietro Lombardi at Pietro.Lombardi@dowjones.com

(END) Dow Jones Newswires

December 04, 2019 02:47 ET (07:47 GMT)

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