UniCredit/Barclays: investors discount boom as bad omen

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Milan style beat The London Look on Tuesday. UniCredit and Barclays both exceeded profit expectations for the third quarter. The Italian bank made the better impression.

UniCredit investors shrugged at confirmation of a €6.5bn capital return and higher revenue targets. But weak net interest margins in Barclays’ home market sent its shares down by as much as 8 per cent.

Rock-bottom valuations of banking stocks hint at economic weakness and imminent disaster. They are at levels only seen during past financial shocks. Investors see the rate-driven profits boom as yesterday’s news.

Returns on loans have soared most strikingly in southern Europe. Shares in UniCredit have been the best performing of any big European lender, up 70 per cent year to date. Investors foresee little in the way of further gains.

The benefits of rate rises are ebbing in the UK. Barclays’ UK net interest margins of 3.04 per cent undershot the figure of 3.12 per cent expected. Chief executive CS Venkatakrishnan cut full-year NIM guidance. Competition for deposits in the UK is growing. UK lenders have passed on higher rates to savers faster than continental peers. 

“Low deposit beta”, as the pass-on rate is called, explains why UniCredit thinks it can squeeze out an extra €500mn of net interest income this year. Boss Andrea Orcel expects net profits of at least €7.25bn in 2023, and the same again in 2024. The expected return in dividends and buybacks is equal to an incredible 16 per cent annual yield.

UniCredit will avoid paying a tax on “windfall profits” imposed by the government of Giorgia Meloni. After news of the levy crashed bank shares, ministers gave lenders the option to reserve an amount equal to 2.5 times the notional tax charge. The figure for UniCredit stands at €1.1bn.

UniCredit shares have re-rated this year thanks to self-help and higher rates. It plans to compensate for peaking NIMs with steeper fees. Barclays will cut costs to protect its bottom line.

Only a diehard follower of depressed European bank stocks would spot much difference between the pair. UniCredit shares remain well below tangible book value at 0.7 times. Barclays stock is even less loved at 0.5 times.

Price to earnings ratios of around 5 times have rarely been this low. It does not feel like a buying opportunity.