UniCredit makes strong start on road to recovery, despite low EU interest rates

UniCredit is getting an early start on its recovery path. A data glitch forced Italy’s biggest bank by assets to publish third-quarter results two weeks ahead of schedule. Fortunately, the figures show lower costs and stronger capital. And a fee-boosting partnership with French asset manager Amundi helped offset the drag from low interest rates.

For UniCredit board members who were summoned to approve the results at the crack of dawn on Tuesday, the inadvertent leak of numbers overnight was a nuisance. For investors, the preliminary figures provided early reassurance that CEO Jean Pierre Mustier’s aggressive restructuring plan is paying dividends.

The Milanese bank’s core Tier 1 capital rose to 13.5 percent of risk-weighted assets at the end of September, higher than in the previous quarter and helped by the sale of asset manager Pioneer. This gives UniCredit a buffer to absorb the changes, such as the introduction of new accounting rules that force banks to provision for bad loans in a new way. That should allow it to hit Mustier’s 12.5 percent target ratio at the end of 2019.

There are other comforting signs. Quarterly income from fees was up 4 percent, demonstrating the benefits of the longterm distribution agreement with Amundi, which bought Pioneer in December.

The deal allows UniCredit to rejuvenate its offering of investment products while also reaping the capital gain from the sale.

Beefing up fee-generating products is a good antidote to Europe’s anaemic interest rate environment.

Despite talk of an end to the easy-money phase that has squeezed banks’ traditional sources of income, there is no sign that this will happen soon – or that interest rates will rise very far when it does.

This means that even disciplined banks such as UniCredit might struggle to earn a return that exceeds their cost of capital. That will make consolidation – for example through a combination with Germany’s Commerzbank – increasingly tempting.