UniCredit beats profit forecasts as Monte dei Paschi talks start

• UniCredit, which had long rebuffed government pressure to take on Monte dei Paschi, said it would only acquire "selected parts" of the lender in a deal that would leave its capital buffers unchanged while boosting earnings per share by a double-digit percentage.
• On Friday, UniCredit improved its 2021 outlook for loan loss charges, after lower-than-expected provisions, as well as higher revenue, drove second-quarter profit above market forecasts.

Italy's UniCredit posted higher-than-expected second-quarter net profit on Friday, a day after agreeing to embark on formal talks with the government to buy rival Monte dei Paschi di Siena.

Italy's No.2 bank late on Thursday said it had signed an accord with the country's Treasury setting guidelines for a potential acquisition of the Tuscan bank which Rome rescued in 2017, spending 5.4 billion euros ($6.4 billion).

UniCredit, which had long rebuffed government pressure to take on Monte dei Paschi, said it would only acquire "selected parts" of the lender in a deal that would leave its capital buffers unchanged while boosting earnings per share by a double-digit percentage.

Discussions will unfold over the next few weeks with a decision expected by mid-September, Chief Executive Andrea Orcel, who took over in April, said.

Orcel said the deal would deliver significant cost cuts and boost UniCredit's market position in Italy, where it has fallen behind rival Intesa Sanpaolo which last year snatched rival UBI to become Italy's biggest bank.

UniCredit would be shielded from legal risks weighing on Monte dei Paschi following years of mismanagement and not take on any problem loans.

"The terms set out for negotiations tick all of the boxes for the equity market to potentially like a final deal," broker Autonomous said in a note.

Shares in UniCredit rose 5.4% by 0726 GMT, while Monte dei Paschi surged 9%.

Monte dei Paschi faces a capital shortfall of up to 2.5 billion euros and banking stress test results due later on Friday are set to turn the spotlight on to its frail finances.

IMPROVED OUTLOOK

On Friday, UniCredit improved its 2021 outlook for loan loss charges, after lower-than-expected provisions, as well as higher revenue, drove second-quarter profit above market forecasts.

UniCredit said it now expected its 2021 underlying net profit, excluding one-off items, to be above 3 billion euros versus a previous estimate of around 3 billion, while reiterating its revenue and cost targets.

Net profit for the April-June period came in at 1.03 billion euros versus a company-provided analysts' average estimate of 736 million.

That compares with 420 million euros a year earlier, when the group wrote down loans to the tune of 937 million euros to prepare for the fallout from the pandemic.

Loan-loss provisions totalled 360 million euros in the period, below the 647 million euros analysts had estimated.

UniCredit said it now expects its cost of risk, which measures provisions against loan volumes, to be below 50 basis points, compared with below 70 basis points forecast earlier.

Shrinking loan losses also helped drive profits at Barclays <BARC.L> and Santander <SAN.MC> earlier this week.

Revenue totalled 4.4 billion euros, above an average 4.3 billion analyst forecast, with fees rebounding by more than a fifth from a year ago when Italy enforced a strict lockdown to fight the pandemic.

Higher fees and trading income more than offset the yearly decline in interest income.

Profit from the core lending business, long a sore spot for UniCredit, edged higher from the previous quarter thanks to the contribution from funds borrowed at negative rates from the European Central Bank as well as a pick-up in volumes.

UniCredit has pledged to boost its lending business, with Orcel – hired after predecessor Jean Pierre Mustier fell out with the board over strategy – saying a phase of "active retrenchment" for the bank was now over.

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