Milan-based UniCredit is one of the most geographically diversified European banks, with ~75% of revenues from its operations in Italy, Germany and Austria. Beyond these markets, it has a diverse presence in countries across Central and Eastern Europe.
Strong momentum has seen it reach a net profit of €2.8 billion in the opening three months of this year, pushing return on tangible equity to 22%, while the group’s common equity Tier 1 capital ratio edged up to a robust 16.1 per cent, as retained earnings more than covered its already accrued shareholder payouts. That surplus capital is being recycled directly to investors: the European Central Bank (ECB) approved a fresh €3.6bn share buyback in May, testifying to management’s confidence that the balance sheet will replenish itself from ongoing profits.
In our view, since 2021, under the helm of CEO Andrea Orcel, the bank has transformed from an underperformer in the banking sector to an outperformer. Whilst profitability across European banks has improved meaningfully in recent years due to rising interest rates, UniCredit has been able to outperform the sector, due to management focus on reducing Risk-Weighted Assets (RWAs) to improve capital efficiency and generate capital for distribution.
Looking ahead, it may seem that the outperformance story is over, with the ECB cutting rates eight times in just over a year. However, we remain positive on UniCredit given our expectation of an improved economic backdrop following significant announcements of fiscal stimulus from Germany and other European countries. Whilst loan growth has been limited across Europe in the past five years, we’ve recently seen an increase across European markets as lower interest rates feed through the system and stimulate demand.
However, we remain mindful that UniCredit does face regulatory and operational risks, including from its ambitious future growth plans. In the last 12 months UniCredit has positioned itself for inorganic growth, with a ~30% stake in Commerzbank and a ~20% stake in Greek bank Alpha Services. A takeover bid for Banco BPM has been complicated by domestic politics, as the Italian government has sought to bolt conditions onto UniCredit’s bid – including an exit from Russia by early 2026, drawing censure from the EU.
Even allowing for those uncertainties, we believe that UniCredit’s story remains one of a franchise that has rebuilt capital, embedded a disciplined distribution policy and secured a technology roadmap designed to keep costs falling faster than revenues in a lower-rate world.
That mix – together with a valuation that continues to lag many northern European peers – explains why both the WS Canlife European Equity Fund and WS Canlife Diversified Monthly Income Fund continue to hold the stock.
Rino Shala | Fund Manager, UK & European Equities
Rino joined Canada Life Asset Management’s equities team in September 2015. He is the manager of the WS Canlife European Fund and co-manager of the WS Canlife UK Equity Fund and WS Canlife UK Equity Income Fund. Rino holds a BSc in Economics from the London School of Economics and is a CFA Charter holder.
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