Unicredito Spa Ord New

Good morning, ladies and gentlemen. Before I hand over to Magda Paczynska, head of investor relations, a reminder that today's call is being recorded. Madam, you may begin.

Good morning and welcome to Unicredit's fourth quarter and full year 2023 results conference call. Andrea Orchel, our CEO, will take you through the results. This will be followed by a Q&A session with Andrea and Stefano Porro, our CFO. Please limit yourself to two questions and with that I will hand over to Andrea.

Good morning and thank you for joining us. Today we will walk you through what we have achieved thanks to our Unicredit Unlocked plan, our goals and our outlook for 2024. I have always stated that my ambition is to build a bank that is strongly grounded in the right principles and values, one that delivers long-term quality growth and value for all our stakeholders, our shareholders, our employees, our clients, and our communities. As we report our 12th consecutive quarter of quality profitable growth across all regions, I can proudly say that in these last three years, we have fulfilled this ambition. For our shareholders, we delivered quality growth, operational and capital excellence, sustainable profitability, capital generation and distributions, all underpinned by strong capitalization, liquidity and asset quality. For our employees, we have focused on providing a motivating vision, a rewarding and merit-based environment, a culture to which they identify and ultimately pride in what we are achieving. And for our clients and community, they are at the heart of everything we do. We have improved the quality of service and support we provide, offering best-in-class product through diversified, integrated, and strengthened channels. This commitment to delivering and pursuing excellence has been our guiding principle and driven all that we have done so far, and it will continue to be our focus as we move ahead. Unicredit had its best year ever in 2023, the culmination of a three-year journey which delivered for the present while transforming our bank and preparing for the future. We will review our past accomplishment and look ahead to 2024 and beyond, where our sights are set on new heights. This is the year we grew our net profit to 8.6 billion, up 54%, while continuing to invest in the future and expensing 1.1 billion of integration cost. Without these, our net profit would have been 9.5 billion. we delivered a record return on tangible equity of 16.6%, 5.8 points higher than last year, or 20.5% with a CT1 ratio of 13% adjusting for our notable excess capital. The fourth quarter was much better than expected, with net profit up 19% despite higher integration costs to secure our future. Without them, net profit would have been up 37%. We generated $12 billion in capital organically this year, underpinning our proposed distribution of $8.6 billion, or 100% of net profit, $3 billion dividend, and $5.5 billion share-by-back, while reinforcing our CT1 ratio by 100 basis points to 15.9%. Following new EBA rules, we adjusted Q4 CT1 and will continue to adjust going forward as we accrue distribution, both cash and share buyback. Our cumulative past three years distribution exceed 17 and a half billion, more than our market cap at the beginning of 2021. At the same time, we increased CT1 by circa 10 billion in the period. OUR PER SHARE GROWTH CONTINUES TO BE INDUSTRY LEADING WITH EPS UP 74%, DPS 80%, AND TANGIBLE BOOK PER SHARE UP 17% THIS YEAR. THE QUALITY OF SUCH GROWTH IS UNDERSCORED BY THE PROGRESS ON OUR THREE FINANCIAL LEVERS AND A 12% REDUCTION IN SHARE COUNT OVER THE YEAR. 30% REDUCTION SINCE THE BEGINNING OF 2021. In 2024, we aim to maintain net profit broadly in line with 2023 record level, normalizing our best year ever while further improving the quality of our results across the P&L, delivering double-digit growth in EPS and DPS. We expect the tailwind from interest rates and cost of risk to gradually fade. The impact from continuing to scale down Russia, while our fees, which have grown to represent 32% of our revenues, should further increase their weight. As we work to deliver this result, we will reward our shareholder with outside calendar year distribution of approximately 10 billion euros. We consider 2024 the start of a second phase of Unicredit Unlocked, rooted in the same vision, the same strategy, and mostly the same levers as we continue our transformation. We will defend our profitability and the leadership achieved in operational and capital efficiency, as well as cost of risk. We will strive to further improve the quality of our results, continuing to deploy our capital profitably while growing our capital light businesses. We shall strive to sustain best-in-class distribution while strengthening our bank and continue to deliver value for investor through substantial earnings and dividend per share growth. Let me now take you through Unicredit's best year ever, a testament to our commitment to excellence and our ability to adapt to changing market condition. 2023 has been an exceptional year for Unicredit, with a stronger than expected fourth quarter in which we took the opportunity to absorb even more integration costs than anticipated. Our key metrics highlight the outstanding performance across our three financial levers. Net revenue increased 26% to $23.2 billion, with gross revenue up 17%. We have continued to improve our operational efficiency, reducing costs by 1% to 9.47 billion, while absorbing inflation and investment. Our cost-income ratio has further dropped by 7.2 percentage points to 39.7% for the year. Similarly, we have continued to improve our capital efficiency with RWA decreasing 2% to 284.5 billion with net revenue to RWAs reaching 7.9% up 2.1 points. We reached a record return on tangible equity of 16.6%, notwithstanding 1.1 billion of integration cost and a significant capital buffer. Indeed, our underlying return on tangible equity at 13% CT1 ratio reached 20.5%, 22.4% if we excluded integration cost. All these lead to 12 billion or 389 basis points of organic capital generation underpinning our proposed increased distribution of 8.6 billion or 100% of 2023 net profit. Let me now take you through the main item of our P&L in greater detail. We report a significant increase in net revenues, growing 26% year over year. This was driven by excellent net interest income and resilient fees, while our cost of risk remained significantly lower than our guidance of 20 to 25 basis points through the cycle. our trading revenues continue to show resiliency and stability as primarily driven by client business. Our NII grew 31% year over year and was sequentially flat, in the quarter, driven by rates rising 218 basis points on average in the year and 21 basis points in the quarter across our footprint, coupled by strict pass-through management, which reached 28% in Q4 and averaged at 25% in the full year. We continue our focus on quality risk adjusted Simplify DVA positive origination, profitable and capital efficient client business rather than value destroying volumes, which together with subdued loan demand led to client volume dropping 8.5 billion in the quarter. The rise in customer deposit rates was small with clients continuing to shift their savings into assets under custody products. However, our already strong liquidity position improved, with LCR increasing to above 145% and loans-to-deposit ratio decreasing to 86%. Our NII sensitivity is updated to 130 million per percentage point change of deposit beta and 140 million per 25 basis points change of the ECB deposit facility rate. We view NII and cost of risk as intimately linked, both in the way that we look at our numbers and the way we manage our franchise and our KPIs. These numbers demonstrate what we have said quarter after quarter. We have a robust and high-quality credit portfolio at $428 billion with a low default rate, a very meaningful reduction of NPE to $11.7 billion with improved quality mix and coverage, as well as a lower expected loss on new business, confirming our vigilant approach towards new origination. The last 12 quarters show a structurally lower and less volatile underlying cost of risk net of overlays in Russia at an average of 16 basis points and always below 22 versus approximately 60 basis points on average from 17 to 19. This transform and strong asset quality underpins our 2023 cost of risk of 12 basis points, 28 basis points in the quarter as we took the opportunity to further build up our market leading overlays and provision to protect or further propel our future results. We have and will continue to make substantial progress in our fee line. Notwithstanding consistent macro headwinds, we have grown our fees each and every year since 2021. We've compound annual growth rate of 2% from 21 to 23 once we exclude the impact from current account fees and accelerated securitization costs. In 2023, fees grew 1% excluding 180 million reduction in current account fees in Italy to the benefit of our clients and a higher securitization cost. Today, Unicredit fee structure is well diversified. It is balanced with a top tier fee to revenue ratio of 32.3%. Full potential from past and future investment as the impact from internalization is yet to be realized. Despite inflation across our geographic footprint and investment in our people, franchise, and technology, we have been able to reduce costs 3% in a targeted fashion between 2021 and 2023. Growth of such investment and inflation, our costs would have dropped 13%. The fourth quarter of 2023 saw costs flat year on year, in spite of a significant increase in our bonus pool. This is evidence in our commitment to paying for performance and recognition of the hard work of our people. Our focus on profitable capital deployment led to a net revenue to risk weighted asset ratio increase to 7.9% in 2023, up from 5% in 2021. We generated 389 basis points of capital organically in 2023, or $12 billion, well above our net profit, leveraging our quality focus and excellent portfolio management with proactive RWA management. Risk-weighted assets stood at circa $285 billion, down almost $25 billion in the year. In 2023, Unicredit CT1 ratio increased almost 100 basis points from 14.91% to 15.89%, showing our ability to distribute capital whilst continuing to substantially strengthen our capitalization. Over the last three years, our CT1 ratio has grown despite absorbing business requirements and substantial regulatory headwinds and returning $17.6 billion to our shareholders. Let me now outline our results through the prism of our business, starting with client solutions. Our factories generated $9.9 billion in 2023, of which fees accounted for 64%. This is a 1% rise from the previous year if we leave out Russia, which we continue to scale down, showing the steady performance of our banks backed by our factories in spite of challenging market condition. Corporate solution brought in a revenue of 4.9 billion, a decline of 6% from the previous year, mainly due to the cutback of the Russian business and TLTRO, without which we would have been flat. Within corporate solution, advisory and capital markets were up 11%, and trade and correspondent banking 5%, as they both continue to leverage our unique footprint. Deals of note include the Eurogroup, L'Automatica, Ferretti IPOs, and UPower leveraged buyout. Payments increased 12% driven by NII growth boosted by our better leveraging of our European presence and recent investment in the business. Please remember that 90% of payments revenues are fee driven. individual solutions still face a difficult macro environment leading to a 4% drop. However, we see positive sign in the growth of managed funds and especially in non-CPI protection, which was up 40% year on year. Our Italian business delivered another quarter of outstanding result, 5.6 billion of profit before tax, up 29% year over year. Net revenue reached 10.5 billion, up 19% with gross revenues aligned. Net interest income grew 50% whilst fees were almost flat when excluding current account fee reduction done for the benefit of our clients and securitization cost. Cost of risk remained low at 22 basis points, stable at 19 basis points in the quarter. Cost decreased by 1.8%, leading to a cost-income ratio of 35.8%, down 7.8 points year-on-year. We've continued to focus on shrinking non-business activities and optimizing processes also through technology. Our focus on capital efficiency improved net revenue to RWA by 2.5 points to 9.3% in Italy, with an increase of ROAC by 8.5 points to 25.7%. Italy generated 168 basis points of 5.2 billion of capital organically this year. Significant progress has been made industrially. We launched 28 one-market funds. We hired over 600 people while shrinking non-business staff by 700. We provided 1.2 million hours of training through UniCredit University to our staff. Finally, we continue to invest in our distribution channel, including by refurbishing our branches and launching Buddy Revolution. We have remained steadfast in our commitment to supporting individuals, households, and businesses investing 10 billion euros through Unicredit per l'Italia. All these efforts have been recognized with Unicredit being named Bank of the Year Italy 2023 by the banker. Our German franchise achieved its best result in over a decade, reaching profit before tax of $2.1 billion, up 18% year over year. Net revenue reached $5.3 billion, increasing 13% with gross revenue up 8%. NII was up 4% and fees 1%. Cost of risk of 14 basis points was down 16 basis points versus 2022. Germany showcased operating efficiency, reducing its cost base by 4% whilst hiring an additional 320 full-time equivalent employees in the business. This resulted in a cost income ratio reduction of 5.5 points to 44.3%. Our focus on capital efficiency improved net revenue over RWA by 1.4 points to 6.9% in Germany, leading to a return on allocated capital of 16.1%, an increase of 5.2 points. Germany generated 98 basis points, or 3 billion, of capital organically this year. These results were propelled by ongoing industrial transformation where we are investing in harmonizing and consolidating our training activities and technology. BanksWare being an example of an enhancement to our digital offering. We have also made available 24 different one market funds in the country. Central Europe. Central Europe delivered excellent performance in the year with profit before tax up 62%, reaching a total of 2.2 billion. Net revenue reached 4.2 billion, increasing 27%, with gross revenue up 24%. NII increased 25%. Fees remain flat. Net of higher acquisition cost in the Czech Republic. Cost of risk reduced to four basis points. Costs remained broadly stable despite inflation and investment, and cost-income ratio decreased by 8.8 points to 38.1%. Our disciplined approach on RWA continued across countries. Net revenue to RWA was up 1.4 points to 6.9%. ROAC reached 21% up 6.7 points. Central Europe generated 62 basis points or 1.9 billion of capital organically this year. In addition to strong financial results, we're progressively rolling out 23 one market funds in Austria, 16 in the Czech Republic, Hungary and Slovenia. And we are proud to have issued the inaugural green mortgage covered bond in the Czech Republic and led the third series of green bonds on the Budapest Stock Exchange. Eastern Europe. Eastern Europe confirmed its consistent profitability and demonstrated its role as a major growth engine for the group, with profit before tax almost doubling to reach 1.7 billion. Net revenue was up 48% to 2.7 billion, with gross revenue increasing 30%. This was driven by NII up 47%, fees up 3.8%, and a net reversal of LLPs with negative cost of risk of minus 22 basis points. Cost-income ratio decreased by 8 points to 32.9%. Costs increased by 4.9%, substantially below inflation. Our approach towards capital excellence moved net revenue to RWA up 3.1 points to 9.6%. ROAC increased 17.7 points to 36.9%. Eastern Europe generated 39 basis points, or 1.2 billion of capital organically this year. The region is continuing its industrial transformation to support its present and future financial performance. We introduce an end-to-end digital process on overdraft and credit cards, as well as a voice bot in Croatia to better serve our clients quickly and efficiently. Our retail offering was revamped in Romania, resulting in a market share increase of approximately 80 basis points year over year. We also began to exploit the synergies resulting from the merger with Alfa Bank. Our one market fund offering is already available in Bulgaria with 16 funds and soon to be launched in Romania. This action led us to be awarded as the best bank in Bosnia and Herzegovina, Bulgaria and Croatia and best mobile bank up in Bosnia and Herzegovina. 2023 was not a standalone achievement, but rather the result of a three-year journey. I will now briefly guide you through the factors that underpin and sustain our outstanding performance. At the core of our journey lies our unique vision and winning strategy underpinned by our industrial transformation, all guided by our shared principles and values. Three years ago, Unicredit was falling short when it came to serving its clients. A siloed model, burdened by bureaucracy, with a corporate center that had lost its focus on the client. We have redefined our operating model, putting clients back at the center of the bank strategy and operation to unlock our inherent potential and deliver value for all our stakeholders. We are rebuilding Unicredit block by block that will result in long-term, sustainable, profitable growth. We are empowering and unifying our team through a common vision and a clear culture, promoting ownership, accountability, and learning from mistake. with all parts working in lockstep with our purpose and values as the linchpin. We're simplifying and delayering, creating a leaner, faster, and efficient structure that cultivates empowerment within a clear framework. We are rationalizing and strengthening our partnership and our approach to procurement, leveraging group scale and bargaining power to build long-lasting relationship with our suppliers. We continue to invest in our people on the frontline, distribution channels, products, and in our franchise, with full value yet to be realized. We're modernizing and enhancing our digital and data capabilities, taking back control of core competencies, streamlining and enhancing our digital organization, and standardizing and modernizing our technology. As a result, Unicredit has gone from laggard to leader, both in terms of its model and its financial performance. Since the unveiling of Unicredit Unlocked, we have adapted to a changing environment to deliver unmatched value to our stakeholders consistently over the last three years. Our financials have been excellent with our 2023 return on tangible equity and net profit increasing respectively over 3x and 2.6x versus the 2017-19 average. We have generated over 27 billion of capital organically in the 21-23 period, supporting a total distribution of 17.6 billion above our initial market cap while substantially increasing our CT1 ratio. Our 2023 EPS, DPS, and tangible book per share are up 3.1x, 9x, and 46% respectively versus the average of 17-19. Our total shareholder returns have exceeded the peer group 3.5x over the last three years, whilst we have continued to build lines of defense and invest for the future. While the future is still uncertain and the challenge is significant, there is still meaningful value to be unlocked and we face the future with confidence. Looking to the future, 2024 is a normalization year. We should absorb most or all of the headwinds facing us by further improving the quality of our earnings, our operation and capital efficiency, and risk-taking, while greatly rewarding the investors willing to embark with us on the next phase of our journey. We expect NII to face headwinds as deposit pass-through continues to increase. We stand firm on profitability rather than volumes and continue to scale down Russia with an impact estimated at 300 million, partly upset by circa 400 million positive impact from our replicating portfolio. Our cost of risk should increase from an all-time low of 12 basis points, but still remain below 20 basis points. We expect fees to grow by a few hundred million, thanks to our investment and more favorable environment. Trading should normalize also in light of the assumed Eurozone rate reduction during 2024, all resulting in net revenue of around 22.5 billion, based on our underlying assumption. The continued scaling down of Russia should account for roughly half of the gap with 2023. We will drive our costs down further. This is while absorbing the effect of inflation and contract renegotiation through the exit financed by our integration costs and supported by continued streamlining and simplification. Our non-operating items deserve a special mention as they shall significantly reduce due to the integration costs that total $1.1 billion in 2023 trending to zero and systemic charges reducing by more than $200 million. As such, we expect net profit to remain broadly in line with 2023 level with improved P&L quality. Return on tangible equity at circa 16.5% and organic capital generation to exceed 300 basis points, all underpinning sustained distribution pre any capital usage. We're aiming for double digit growth in our EPS and DPS. We intend to reward investors who embark with us on the next phase of our journey with circa 10 billion 2024 calendar year distributions. The sum of 7.2 billion of remaining 2023 distribution after the 1.4 billion share by back already executed in 2022, and the introduction of an interim distribution of around 40% of our expected 2024 distribution to be executed in the fourth quarter or in October. Around 4.3 billion will be in cash, leading to a dividend yield of approximately 10% and expected DPS growth of more than 2.5 times. And around 5.8 billion share buyback, more than 20% higher than last year. A total distribution yield above 20%. Looking beyond 2024, the second phase of Unicredit Unlocked entails the continuation of our vision, of our strategy, driving further achievements. We have transformed ourselves and as such are comfortable committing to continuing to do so to deliver significant value, quality and predictability over the long term. We are uniquely positioned to continue outperforming, delivering sustainable outstanding profitability and distribution in 2024 and beyond. We face the future with optimism. We have anticipated the main expected headwinds and taken steps to address them. Our profitability is on the pin by targeted proactive action that will pay dividends. In the face of pressure on NII, we're maintaining our focus on quality, not volume. With our fee-to-revenue now aligned with top-tier peers and set to grow further. We have substantial P&L buffers and provision, a high quality credit portfolio with low non-performing exposure, coupled with overlays of 1.8 billion. 1.1 billion in integration costs trending to zero, and a reduction of over 200 million in system charges. The above supports us in an uncertain macro with changing rate dynamics. Coupled with a best-in-class capital generation, they enable us to maintain our bottom-line profitability and outsize distribution without denting capital, which, however, remain well in excess of our target and shall be used going forward. Finally, we sit on a bolted balance sheet with strong asset quality, low and stable cost of risk, leading CT1 ratio, and healthy liquidity ratio. When we look at our trajectory and performance over the last three years, peculiarity emerged regarding how the market perceives us. We're less dependent on interest rates than sometimes assumed. Our NII growth is aligned with our European peer group average. We benefited less versus Italian peer due to our geographic diversification and an approach based on profitability rather than volume. We are much more fee driven than people perceive and are among the top tier banks in terms of fee to revenues. We have a diversified fee base with future potential from recent investment, including an additional 1.4 billion in fees at run rate from our best in class product factories. It is worth noting that a significant portion of this fee growth is locked in. It is not dependent on market dynamics, rather a function of ongoing managerial actions linked to internalization of value chain in asset management, internalization of life insurance, renegotiation of main supplier contracts across value chain, and action in payment and advisory and capital markets. These slides present the details of Unicredit fee growth consistent with the information shown in the Q3 results presentation. As such, I won't spend time discussing it now as I have already done so at Q3. Before I open for question, I would leave you with five key takeaways. Firstly, we have delivered outstanding profitability significantly up year on year, well above expectation. Secondly, our capital generation and distribution continue to be best in class. Thirdly, EPS, DPS, and tangible book value per share growth are unparalleled, underpinned by continued progress across our three financial levers, coupled with substantial share buyback. Fourth, phase one of Unicredit Unlocked is effectively completed one year in advance, beating all KPIs, resulting in a transformed bank. The foundation for phase two are set and rooted in the same philosophy. And finally, we have a clear direction of travel. In 2024, we expect to normalize 2023 record profitability, improve the quality of our earnings while delivering record calendar year distribution of circa 10 billion and continue to grow EPS and DPS significantly. Thank you. And I'll now open for questions.