UniCredit hit by Kazakh business difficulties

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Net profit at UniCredit, Italy’s largest bank by assets, fell sharply in the fourth quarter as it took an impairment charge of €199m ($281m) on its business in Kazakhstan and its trading profit suffered from market volatility.

The bank, Italy’s most international lender, expanded rapidly in central and eastern Europe from 2004 up until the financial crisis when it was forced to undertake a capital increase to offset losses in the region.

UniCredit said its net profit was €321m, down from €371m in the same quarter of 2009. Mediobanca analysts said the results were in line with expectations, and, setting aside the Kazakh impairment, its underlying business was performing slightly better than expected.

Net interest income in the quarter rose 1.5 per cent to €4.21bn. Fees and commissions rose 3.8 per cent to €2.155bn in the fourth quarter, but trading income fell to €53m from €152m in the same quarter of 2009.

The crisis took a heavy toll on Kazakhstan in particular, stranding the banking sector with $40bn of foreign debt and large volumes of non-performing loans.

UniCredit bought its Kazakh business ATF for $2.1bn in 2007 when Kazakh banking was thriving, borrowing heavily on foreign markets to fund an oil-driven consumer boom.

Kazakhstan, where Italian investors are involved in oil and gas projects, was central to UniCredit’s foreign expansion, said Okan Akin, emerging markets credit strategist at RBS. “UniCredit bought ATF at the top of the market and its asset value is continuing to suffer,” he said.

Federico Ghizzoni, UniCredit’s chief executive, said 2010 was “definitely a difficult year”. Mr Ghizzoni, a UniCredit veteran who was promoted to chief executive in October, replacing Alessandro Profumo, who left the bank partly due to pressure from shareholders over its losses in eastern Europe.

Mr Ghizzoni added he looked with “more optimism” into 2011, and the first two months were already showing an improvement, especially in Germany and central and eastern European countries.

He added its exposure to central and eastern Europe, which had always been an advantage for the bank before the financial crisis, was beginning to reap rewards again as growth picked up in the region.

UniCredit, along with other banks across Europe, has been under pressure to show a strong core capital base ahead of stress tests that begin next month and Basel III core capital rules. Giulio Tremonti, Italy’s economy minister, has encouraged Italian banks to have top-notch core capital of 10 per cent.

Mr Ghizzoni said if the bank applied new global Basel III rules today core tier one ratio would be at 7.6 per cent, above the minimum 7 per cent demanded by Basel III rules by 2019. He said growth from UniCredit’s core business would allow it to bolster its capital further and he “strongly” believed it would not need to make any further recourse to the market for funding.

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