UniCredit warns of prolonged virus impact after $3 billion lossUniCredit warns of prolonged virus impact after $3 billion loss
A view of the Unicredit headquarters of which many employees are working from home due to a coronavirus outbreak, in Milan

By Valentina Za

MILAN (Reuters) – UniCredit <CRDI.MI> forecast next year’s profit could fall short by as much as a quarter of its target even if the eurozone economy rebounds strongly from the coronavirus, underscoring the protracted damage from the pandemic.

Successful restructuring efforts at the Milan-based bank have suffered a blow due to Italy’s coronavirus outbreak, one of the world’s deadliest, which is set to plunge the already fragile economy into its worst recession since World War II.

UniCredit Chief Executive Jean Pierre Mustier told a media briefing uncertainty was too high to give an outlook for the year. He expressed confidence, however, the bank could reach a 3-3.5 billion euro profit next year, or 75%-80% of its original target, if the euro zone economy rebounded by 10% as expected.

UniCredit reported on Wednesday a net loss of 2.7 billion euros ($2.9 billion) in the first quarter, higher than an average forecast for a 1.53 billion euro loss in an analyst consensus compiled by the bank.

The bank booked extraordinary charges of 3 billion euros in the quarter, stemming from its decision to reduce its stake in Turkish bank Yapi Kredi <YKBNK.IS> and a recent accord with unions on voluntary layoffs.

Charges linked to the Yapi disposal as well as loan writedowns had also led to a loss in the fourth quarter, though the bank had hit its full-year profit targets and pledged to boost investor returns.

UniCredit said it would present an updated strategic plan at the end of 2020 or early next year. Its shares reversed an initial fall to rise 2% by 0806 GMT.

UniCredit’s caution contrasts with the confident stance of rival heavyweight Intesa Sanpaolo <ISP.MI> which on Tuesday said its 2020 net profit would be at least 3 billion euros after virus-related writedowns for half that amount.

Strong trading gains and low loan loss provisions drove a surprise 10% rise in Intesa’s first-quarter net profit.

UniCredit’s first-quarter revenues came in marginally below expectations at 4.38 billion euros, down 8% from a year earlier, hurt by a sharp drop in trading income amid market turmoil despite higher fees.

“Results impacted by various big ticket items (expected) in the quarter as well as weaker trading/other income,” Jefferies analysts said in a note. “This takes shine off solid core trends, with fees particularly strong.”

Net loan writedowns totalled 1.26 billion euros after UniCredit warned last month it would book 900 million euros in additional provisions in the first quarter to factor in an expected 13% contraction in 2020 in the euro zone’s economy.

But it also took a 1.3 billion euro hit in the quarter to pave the way for 5,200 voluntary layoffs it agreed with unions in April as envisaged by a business plan unveiled in December.

Another 1.7 billion euro charge related to the disposal of part its Yapi stake, the last step in a string of asset sales completed in recent years by Mustier to beef up capital.

CORPORATE DEFAULTS

UniCredit said its core capital improved slightly in the quarter to 13.4% of assets.

When the pandemic hit, UniCredit was just emerging from years of painful cost cuts and a successful clean-up that allowed it to reduce impaired loans to below 5% of total lending from 16% when Mustier took over in mid-2016.

Now Italian banks are bracing for a surge in corporate defaults after a strict near two-month lockdown which Italy began to gradually unwind on Monday.

After shelving plans for a cross-border merger, Mustier had been focusing on lifting returns for investors but had to put dividend payments and a share buyback plan on hold earlier this year to comply with regulatory demands in the current crisis.

(Reporting by Valentina Za; Editing by Muralikumar Anantharaman)