As life imitates art, so business mimics football. Milan’s UniCredit is a perpetual underdog to Intesa Sanpaolo, just as Inter Milan trails Juventus, another pride of Turin. The points gap between the cities in bank valuations is far wider than their Serie A positions, though. UniCredit has scope to move up the table, judging by its first-quarter results.
The net profits the pair squeezed from revenues were not radically different. They have similar exposure to the high non-performing loans that are a quaint rococo feature of Italian finance. Intesa’s core tier one equity of 13.5 per cent was just over 100 basis points higher than the figure for UniCredit, itself ahead of consensus according to Jefferies. Yet shares in UniCredit trade at only half their tangible book value, compared with Intesa at nine-tenths.
UniCredit is seen as riskier. A business in Turkey may be a recurring problem, as that unhappy country wobbles towards authoritarianism. In theory, a $1.3bn US fine for Iranian sanctions busting should be a one-off. But just as some football teams have a reputation for dirty play — Genoa springs to mind — some banks have a reputation for attracting trouble.
UniCredit’s notional cost of equity is believed to be 15 per cent. That is steep, even for a European bank. Some rivals, albeit optimistically, lay claim to figures below 10 per cent. If UniCredit could do the same, the number would better match its returns on its equity.
The bank pays a penalty for its exposure to Italian sovereign debt, destabilised by volatile Italian politics. This week, for example, neo-fascists tried to infiltrate a Turin book fair. Shocking! Who even knew neo-fascists could read?
UniCredit boss Jean-Pierre Mustier is on track to whittle down the bank’s sovereign bond holdings, costs and liabilities. The former hedgie has just set up a €2bn fund for long-term investment in small Italian companies. UniCredit shareholders should expect a valuation uptick rather sooner.
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