2015_05_07_UCG_Beware the Underdog

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IMPORTANT DISCLOSURE FOR U.S. INVESTORS: This document is prepared by Mediobanca Securities, the equity research department of Mediobanca S.p.A. (parent company of Mediobanca Securities USA LLC (“MBUSA”)) and it is distributed in the United States by MBUSA which accepts responsibility for its content. The research analyst(s) named on this report are not registered / qualified as research analysts with Finra. Any US person receiving this document and wishing to effect transactions in any securities discussed herein should do so with MBUSA, not Mediobanca S.p.A.. Please refer to the last pages of this document for important disclaimers.

Unicredit

07 May 2015 Banks Update

Beware the Underdog Andrea Filtri

Equity Analyst

One of Europe’s best ‘value for money’ large caps – €9.1 TP on 2016 rollover

We see UCG as a restructuring story - with cost cutting in Italy well under way

and about to start in Germany and Austria – well positioned to benefit from the

following macro trends: a) ECB QE through peripheral and CEE exposure, b) the

recovery in Eurozone GDP, c) the inversion of the asset quality cycle. We believe

delivery on 2015 results, further RWA optimisation and improved NPL recovery in

Non-Core will fend off the current market worries on capital ratios. We see UCG

on 0.8x 2015E TE for 9% 2016E RoTE, one of the most attractive stories at

discounted valuation. We reiterate our Outperform.

Asset quality and NIM normalization worth 6 p.p. higher RoTE

The Q413 monster cleanup has been effective: NPLs were up 1% in 2014 (19%

Italian banks), while maintaining a high 51% coverage ratio. Internal migration is

ongoing but new NPL formation is negative. This suggests to us 2015 will mark

the turning point and a new cycle is in sight. Both our top-down (44bp LLP and

310bp NIM) and our bottom-up (48bp LLP and 372bp NIM) approaches estimate a

normalization of LLPs and NIM could boost PBT by €3bn and RoTE by 6 p.p., a

30% and 5% premium to MB 2017E and to the 2018 Strategic Plan target.

High gearing to ECB’s QE and to Eurozone economic recovery

We see two strong tides potentially lifting European banks: 1) ECB QE, 2) a

recovery in the GDP of the Eurozone. On the first, as the huge FED balance sheet

expansion propelled US and adjacent Emerging Markets, we believe the ECB‟s QE

program will be a large positive catalyst for CEE exposure. On the second, we

found that the joint industrial production of ITA+GER+AUT is a key factor

determining the Eurozone‟s GDP two quarters later. Finally, we believe that QE

and GDP recovery jointly determine an increase in NPL values from higher

recovery values, lower funding costs and the market‟s hunt for yield. These

could couple with the Italian government‟s efforts to reform the bankruptcy law,

fast forwarding NPL recovery and therefore their NPV. With NPLs/TE at 2x, CEE

at 50% 2015E group PBT and with ITA+GER+AUT at 82% of group loans, we see

UCG ideally positioned to intercept these tidal trades.

1 bank, 1 capital, 1 funding: c.+50% EPS potential, ¼ from Corporate Center

So far Banking Union has only meant costly regulatory hurdles for banks. This is

why the market has overlooked the advantages this should bring - particularly to

cross border banks – from the convergence of national markets into a single one.

We assess the potential impact from the optimisation of capital, liquidity and

group structure following the logic of one market, one company, one capital,

one liquidity pool, similarly to what UCG implemented in Italy in 2010 with

project One4C. We find potential for 48% boost to 2016E EPS: +12% p.p. from

c.4,200 staff cuts in the corporate centre; +26 p.p. from €1.3bn lower pretax

funding costs from realigning the cost of the funding gap to German levels; +10

p.p. from €0.5bn higher pretax from the redeployment of German and Polish

excess capital at the expense of 24bp CET1 gearing. It is admittedly early to

assess the extent to which these potential can be extracted and over what time

period. Yet, the magnitude is such that could mean a reduction of 2016E P/E

from 9.6x to 6.5x and cannot be therefore ignored. Beware the Underdog!

+44 203 0369 571

[email protected]

Antonio Guglielmi

Equity Analyst

+44 203 0369 570

[email protected]

Andres Williams

Equity Analyst

+44 203 0369 577

[email protected]

Source: Mediobanca Securities

Price: € 6.26 Target price: € 9.10 Outperform

2014 2015E 2016E 2017E

EPS Adj (€) 0.37 0.55 0.66 0.86

DPS (€) 0.11 0.19 0.23 0.34

TBVPS (€) 7.30 7.58 7.88 8.35

Avg. RoTE Adj (%) 5.2% 7.4% 8.5% 10.6%

P/E Adj (x) 17.0 11.4 9.5 7.3

Div.Yield(%) 1.8% 3.1% 3.7% 5.5%

P/TBV (x) 0.9 0.8 0.8 0.7

Market Data

Market Cap (€m) 36,211

Shares Out (m) 5,789

(%)

Free Float (%) 100%

52 week range (€) 6.87-4.91

Rel Perf vs STOXX EUROPE 600 (%)

-1m -0.7%

-3m 8.4%

-12m -15.6%

21dd Avg. Vol. 67,924,873

Reuters/Bloomberg CRDI.MI / UCG IM

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Unicredit

07 May 2015 ◆ 2


Valuation Matrix



Profit & Loss Acc(€ m) 2014 2015E 2016E 2017E Multiples 2014 2015E 2016E 2017E

Net Interest Income 12,442 12,769 13,182 14,023 P/E 18.3 12.6 11.4 7.5

Growth (%) 1.1% 2.6% 3.2% 6.4% P/E Adj. 17.0 11.4 9.5 7.3

Non-Interest Income 10,849 11,320 11,931 12,279 P/Net Op.Income 4.4 4.0 3.6 3.3

Growth (%) -7.5% 4.3% 5.4% 2.9% P/Revenues 1.6 1.6 1.5 1.4

of which Fee Income 7,572 7,973 8,297 8,486 P/TBV 0.9 0.8 0.8 0.7

of which Financial Income 1,557 1,642 1,827 1,881 P/Total Deposits (%) 18.5% 16.3% 14.6% 13.3%

Total Income 23,291 24,089 25,113 26,302 Yield (%) 1.8% 3.1% 3.7% 5.5%

Growth (%) -3.1% 3.4% 4.2% 4.7%

Total Costs -14,672 -14,610 -14,732 -14,748

Growth (%) -2.0% -0.4% 0.8% 0.1%

of which Personnel Costs -8,201 -8,137 -8,190 -8,179

Net Operating Income 8,619 9,479 10,381 11,554

Growth (%) -4.9% 10.0% 9.5% 11.3%

Provisions&Write-downs -4,651 -4,376 -4,246 -3,784 Per Share Data (€) 2014 2015E 2016E 2017E

Extraordinary Items -405 -268 -228 -148 EPS 0.34 0.50 0.55 0.83

Pre-tax profit 4,091 5,045 5,496 7,732 EPS growth (%) nm 45.2% 10.4% 52.1%

Tax -1,297 -1,463 -1,594 -2,165 EPS Adj. 0.37 0.55 0.66 0.86

Tax rate(%) 31.7% 29.0% 29.0% 28.0% EPS Adj. growth (%) nm 49.0% 20.7% 30.4%

Minorities and others -380 -336 -386 -419 TBVPS 7.30 7.58 7.88 8.35

Net profit 2,008 2,978 3,288 5,000 DPS Ord 0.11 0.19 0.23 0.34

Growth (%) nm 48.3% 10.4% 52.1%

Adjusted net profit 2,206 3,288 3,970 5,176

Growth (%) nm 49.0% 20.7% 30.4%

Balance Sheet (€ m) 2014 2015E 2016E 2017E Key Figures & Ratios 2014 2015E 2016E 2017E

Customer Loans 470,569 475,124 483,595 495,306 Avg. N° of Shares (m) 6,005 6,005 6,005 6,005

Growth(%) -2.7% 1.0% 1.8% 2.4% EoP N° of Shares (m) na na na na

Customer Deposits 203,183 230,504 257,042 281,536 Avg. Market Cap. (m) 36,003 37,560 37,560 37,560

Growth(%) 15.5% 13.4% 11.5% 9.5%

Shareholders' Funds 49,390 51,217 53,116 56,046 NII/Total Income (%) 53.4% 53.0% 52.5% 53.3%

Minorities 3,446 3,515 3,585 3,657 Fees/Total Income (%) 32.5% 33.1% 33.0% 32.3%

Total Assets 841,054 860,456 882,785 906,682 Trading/Total Income (%) 6.7% 6.8% 7.3% 7.2%

Cost Income ratio 63.0% 60.7% 58.7% 56.1%

Personnel costs/Total costs 55.9% 55.7% 55.6% 55.5%

Impairment/Average Loans 1.0% 0.9% 0.9% 0.8%

NPLs ratio 11.1% 10.5% 9.9% 9.3%

Provisions/Loans 2.3% 2.3% 2.3% 2.3%

Avg. RoTE Adj. (%) 5.2% 7.4% 8.5% 10.6%

ROA (%) 0.24% 0.35% 0.38% 0.56%

Tier 1 ratio 11.3% 11.6% 11.8% 12.6%

Basel III Core Tier 1 ratio 10.0% 10.3% 10.6% 11.4%

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00

M J J A S O N D J F M A

Unicredit STOXX EUROPE 600

5/05/15

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07 May 2015 ◆ 3


Executive Summary Stand alone restructuring and solid positioning on macro trends

We reiterate our Outperform on UCG and raise our Target Price (TP) to €9.1 from the rollover to

2016E, leaving over 40% upside on current prices. We see UCG as a sound restructuring story with

cost cutting in western Europe – Italy is well under way, Germany and Austria are just starting – well

positioned to benefit from the main macro trends ongoing:

1) ECB QE to boost peripheral Eurozone and CEE recovery;

2) The recovery in Eurozone GDP to come mainly from industrial production in Germany, Italy

and Austria;

3) The inversion of the asset quality cycle.

We see UCG on 0.8x 2015E TE for 9% 2016E ROTE, one of the most attractive value for money EU

large caps.

Delivery in 2015 to fend off capital worries

Despite CET1 ratios in line with main European banks, the market remains uncomfortable with

UCG‟s capital adequacy. We believe that accelerating organic capital generation, combined with

further RWA free up from the run-off of the Non-Core and the optimisation of models and the

delivery of the Pioneer-Santander Asset Management deal will take CET1 towards levels of comfort,

triggering the partial removal of the current valuation discount, in our view.

Asset quality and NIM normalisation worth 6 p.p. higher RoTE

UCG launched a monster cleanup in Q413 with €10bn provisions raising NPL coverage by 7 p.p. and

anticipating the AQR and restoring pre-crisis levels. The measure has been effective: despite an

increase of Italian NPLs by 19%, NPLs at UCG grew only 1%, marking the reach of stability. Within

this context, internal migration is ongoing, but formation of new NPLs is already at negative rates.

This suggests to us the turning point is close and a new cycle of asset quality is about to start. We

estimate a normalisation of LLPs and NIM could boost PTP by €3bn and RoTE by 6 p.p. a 30% and 5%

premium to MB 2017E and 2018 Business Plan target. This indicates we are likely at the bottom of

the RoTE potential of the group and that material further upgrades could come from a speeding up

in normalisation and from relevering (excluded from the normalisation exercise), in our view.

Table 1: simulation of UCG LLP trough and corresponding NIM vs UCG estimates

LLP

trough

year

trough

(bp)

LLP

2016e

LLP

2017e

NIM of

LLP

trough

year

NIM

2016

2016

loans

LLP:

2017 vs

trough

NII:

2016 vs

trough

UCG

group

CB / retail 2007 53 46 45 3.78% 2.98% 268,309 215 2,146

CIB 2007 45 40 40 1.91% 2.62% 92,795 46 -659

Poland 2008 12 60 55 6.71% 4.08% 29,371 -126 772

CEE 2007 47 138 123 4.81% 4.41% 60,676 -461 243

Divisional LLP realignment

-326 2,503

2017 RoTE points

0.7% 5.0% 5.6%

Group 2007 44 83 73 3.08% 2.75% 483,595 -1,402 1,596

2017 RoTE points

2.8% 3.2% 6.0%

Source: Mediobanca Securities, company data

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07 May 2015 ◆ 4


High gearing into QE in CEE and Eurozone GDP recovery in w-Europe

As the huge FED balance sheet expansion propelled US equities forward but also significantly

benefitted adjacent Emerging Markets (Mexico above all), we believe the ECB‟s QE program could

be a positive catalyst for CEE. Meanwhile, we are seeing a stabilisation of the Russian and Ukrainian

situations limiting downside from that front.

On the macro recovery of the Eurozone, half of the overall industrial production comes from

ITA+GER+AUT, UCG‟s core western European countries. In a regression, we find that their

aggregate industrial production is a key factor determining Eurozone GDP with a lag of two

quarters. In turn, GDP growth is a strong inverse predictor of NPL growth seven quarters later.

With NPLs/TE of 2x, with 50% of the bank‟s 2015E PBT from CEE and with ITA+GER+AUT

representing 82% of group loans, we see UCG very well positioned to intercept the benefits of QE

and of a Eurozone GDP recovery.

Industry and Manufacturing value added vs EMU GDP lagged by 2 quarters, 2006-14

Source: Mediobanca Securities, Eurostat

48% EPS upgrade potential from Banking Union’s one company, one capital, one

liquidity

So far Banking Union has meant costly regulatory hurdles for banks. Progressively, we believe

Banking Union should bring advantages – particularly to cross border names - from the convergence

of national markets into a single one. We assess the potential impact from the optimisation of

capital, liquidity and group structure following the logic of one market, one company, one capital,

one liquidity pool, similarly to what UCG implemented in Italy with project One4C in 2010. We find

potential improvements of up to 48% boost to 2016E EPS from:

c.4,200 staff cuts in the corporate centre: +12% EPS;

€1.3bn lower pretax funding costs from realignment of the funding gap to German levels:

+26% EPS;

€0.5bn higher pretax from the redeployment of German and Polish excess capital, at the

expense of 24bp CET1 gearing: +10% EPS.

It is admittedly early to assess the extent to which these potential can be extracted and over what

time period. Yet, the magnitude is such that could mean an optical reduction of 2016E P/E from

9.6x to 6.5x and cannot be therefore ignored, in our view.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

EMU GDP

IT+DE+AT Value Added

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07 May 2015 ◆ 5


EPS and P/E sensitivity from Banking Union potential upside, 2016E


9.6x

6.5x

.x

2.x

4.x

6.x

8.x

10.x

12.x

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2016E change in structure

Liquidity optimisation

Capital optimisation

Banking Union best case

EPS, €

P/E (rhs)

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07 May 2015 ◆ 6


Asset quality: 2015 bound to be the turnaround year UCG launched a monster cleanup in Q413 with €10bn provisions raising NPL coverage

by 7 p.p. and anticipating the AQR and restoring pre-crisis levels. The measure has

been effective: despite an increase of Italian NPLs by 19%, NPLs at UCG grew only 1%,

marking the reach of stability. Within this context, internal migration is ongoing, but

formation of new NPLs is already at negative rates. This suggests to us the turning

point is close and a new cycle of asset quality is about to start. We estimate a

normalisation of LLPs and NIM could boost PTP by €3bn and RoTE by 6 p.p. a 30% and

5% premium to MB 2017E and 2018 Business Plan target. This indicates we are likely

at the bottom of the RoTE potential of the group and that material further upgrades

could come from a speeding up in normalisation and from relevering (excluded from

the normalisation exercise), in our view.

Gross impaired loans to tangible equity have stabilized…

Chart 1 shows the evolution of the total gross impaired loans to tangible equity at UCG from 2006 to

2014. This peaked at 196% in Q113, up from 124% in Q406, implying c.10 p.p. increase per annum.

The ratio has stabilised below 190% since the large asset quality cleanup of Q413 and remained

unscathed following the Comprehensive Assessment.

…with NPL vs doubtful and past due dichotomy signaling the turning point of the cycle

Chart 2 shows the evolution of the gross (lhs) and net (rhs) total impaired loans composition from

2006 to 2014. We note:

1) The stabilisation of total impaired loans, with the sharp correction of net impaired loans in

Q413 post cleanup;

2) The sharp reduction in doubtful, past due and restructured loans from their peaks;

3) The stable to slight increase in NPLs.

Chart 1: total gross impaired loans / tangible equity, 2006 – 2014


124%

196%188%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Q4 06 Q2 07 Q4 07 Q2 08 Q4 08 Q2 09 Q4 09 Q2 10 Q4 10 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 Q4 14

Self-clean up through reset of EL shortfall

Comprehensive Assessment

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07 May 2015 ◆ 7


Chart 2: evolution of rebased gross (lhs) and net (rhs) total impaired loans and their composition, 2006 = 100


In particular, Chart 3 shows the QoQ formation of NPLs, past due and past due + doubtful loans. We

identify three separate periods:

1) 2007-2009: over this period, all categories were growing at an average 7% per quarter,

with past due+doubtful growing at 10% a quarter and reflecting a marked creation of new

bad loans.

2) 2010-2013: this period marked a gradual slowdown in the formation of new bad loans with

all categories growing at an average 2% a quarter and with NPLs growing faster (3%)

suggesting the new formation plus the rating migration trends were well under way.

3) 2014 to date: following UCG‟s Q413 cleanup and despite the release of the Comprehensive

Assessment results in Q314, all categories grew at an average -2% a quarter in 2014, but

with NPLs up 2% a quarter, past due down 6% a quarter and doubtful+past due down 2%.

We believe the above trends reflect the turning point in the asset quality cycle, where internal

credit migration is ongoing (from past due, restructured and doubtful into NPL) but with a reduction

in the flow of new impaired loans (past due, restructured and doubtful).

Chart 3: evolution of QoQ NPL growth by category, %


Q413 cleanup re-established pre-crisis coverage levels

Chart 4 shows the evolution of cash coverage across the different impaired loan categories from

2006 to 2014. This shows that the Q413 cleanup restored pre-crisis cash coverage levels. In detail,

NPLs stand at 62% coverage, 2 p.p. below Q406, but doubtful and past due loans carry materially

187

402

376

161

128

329

140

206

0

50

100

150

200

250

300

350

400

450

Q4 06

Q2 07

Q4 07

Q2 08

Q4 08

Q2 09

Q4 09

Q2 10

Q4 10

Q2 11

Q4 11

Q2 12

Q4 12

Q2 13

Q4 13

Q2 14

Q4 14

NPLsDoubtfulRestructuredPast dueGross tot. Impaired

203190

350

333

149

309

118

230206

0

50

100

150

200

250

300

350

400

Q4 06

Q2 07

Q4 07

Q2 08

Q4 08

Q2 09

Q4 09

Q2 10

Q4 10

Q2 11

Q4 11

Q2 12

Q4 12

Q2 13

Q4 13

Q2 14

Q4 14

NPLs - net

Doubtful - net

Restructured - net

Past due - net

Net tot. Impaired

-30%

-20%

-10%

0%

10%

20%

30%

Q3 07 Q2 08 Q1 09 Q4 09 Q3 10 Q2 11 Q1 12 Q4 12 Q3 13 Q2 14

Past due + doubtful

Past due

NPLs

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07 May 2015 ◆ 8


higher cash coverage at 35% and 23%, respectively versus 27% and 9% pre-crisis. Also, the generic

reserve has been bolstered at 0.6% vs 0.4%.

New cycle is in sight: regression of Past due plus doubtful loans vs NPLs

Chart 5 shows the results from the regression of the cumulative flows of past due+doubtful loans vs

NPLs from 2008 to 2014. We note a growing statistical significance and beta multiplier into 2013

and a more sharp decrease of both indicators in 2014. This would suggest that the relationship

between the two variables has tightened every year from 2008 to 2013 and has inverted in 2014.

NPL recoveries three years after the initial deterioration of the asset quality cycle…

Chart 6 shows the r-squared and beta multipliers of the regression of NPLs and past due+doubtful

loans flows (lhs) and of past due only (rhs) of quarterly data from 2007-2014, where NPLs have been

lagged from t0 to t16 to test the inter temporal relationship of past due and doubtful loans with

Chart 4: evolution of coverage ratios, 2006-2014, %


Chart 5: R-squared and beta of the regression of past due + doubtful loans on NPLs cumulative

flows, 2008-14


64%

57%62%

27%

33%35%

29%

32%34%

9%15%

23%

51%

45%

51%

0

0.001

0.002

0.003

0.004

0.005

0.006

0.007

0%

10%

20%

30%

40%

50%

60%

70%

80%

Q4 06

Q1 07

Q2 07

Q3 07

Q4 07

Q1 08

Q2 08

Q3 08

Q4 08

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Q2 10

Q3 10

Q4 10

Q1 11

Q2 11

Q3 11

Q4 11

Q1 12

Q2 12

Q3 12

Q4 12

Q1 13

Q2 13

Q3 13

Q4 13

Q1 14

Q2 14

Q3 14

Q4 14

Performing (rhs) NPL Doubtful loan

Restructured Past due Tot impaired

48.7%

57.0%62.2%

64.8% 65.4% 66.6%62.5%

41%

51%56% 54% 53% 55%

52%

0%

10%

20%

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012 2013 2014

R2 β

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07 May 2015 ◆ 9


NPLs. The chart on the left shows a high, significant, positive relationship (50%) in the 1st quarter of

recognition of past due+doubtful, followed by three quarters of further weaker positive correlation,

one quarter of rest and 6 following quarters of negative relationship, one quarter of rest and 5

quarters of positive relationship. Imagining a cycle of asset quality deterioration, this suggests that

for the first four quarters there is deterioration across categories (past due, doubtful and NPLs are

growing). After a quarter of reflection, a contraction in past due+doubtful loans still generates NPL

growth, which is then followed by a contraction of both indicators for the following quarters.

Chart 6: regression of NPL and doubtful loans+past due quarterly flows (lhs) and past due only (rhs), 2007-2014


The chart on the right shows instead very little significance in the flows of past due loans with NPL

creation.

…so that the new NPL cycle is close

Chart 7 shows the QoQ flows of NPLs and past due+doubtful loans from 2012 to 2014. We note that

the two groups have grown hand in hand for the 2012-2013, resembling the 1st phase of Chart 6. In

2014, the latter group have started to fall, while NPLs have continued to grow, marking the second

phase of Chart 6. This trend inversion has been ongoing for circa five quarters, suggesting that the

third phase – i.e. the one of NPL writebacks – should not be far, in our view.

-65%-55%-45%-35%-25%-15%-5%5%15%25%35%45%55%65%

-40%

-20%

0%

20%

40%

60%

t0 t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16

β R2 (rhs)

0%

2%

4%

6%

8%

10%

12%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

t0 t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16

β R2 (rhs)

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07 May 2015 ◆ 10


UCG has implemented a heavy de-risking strategy from the start of the crisis

Table 2 shows a comparison of the 2015E and 2008 balance sheet, capital, asset quality and P&L

metrics of UCG. We note the following:

18% and 22% total asset and customer loan deleverage;

Capital ratios doubling (10.3% vs 5.3%) from a 29% RWA reduction, taking the density on

loans to 87% from 95%, while tangible equity grew by 60%. This reflects in a leverage ratio

of 5.3% vs 2.7% in 2008;

Asset quality deterioration took gross NPLs / loans to 15.7% from 6.6%, but coverage has

been maintained fairly stable at c.51%;

The P&L reflects the changes with:

19% fall in total revenues;

15% cost contraction;

23% profit fall.

As a result, RoTE of 7.4% is half of the 14% posted in 2008.

Chart 7: Doubtful and past due vs NPL QoQ flows, 2012-2014


-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14

Doubtful and past due

NPL

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07 May 2015 ◆ 11


6 p.p. higher ROTE from LLP and NIM normalization…

Table 3 shows the simulation of the normalization of UCG LLPs and NIM by realigning them to the

LLP trough and to the corresponding NIM of the same year. We run the exercise both bottom-up,

i.e. taking the inputs for each division, and top-down, i.e. taking group figures. Both results point

towards €2.9-3bn PTP boost or c.6 p.p. higher RoTE resulting from the exercise but from a different

split.

If on the one hand, one could argue that today‟s CEE is geopolitically more unstable and risky than

before, on the other the heavy de-risking implemented over the last few years should argue for

lower provisioning levels in a normalised environment.

We note anyhow that the recovery of the LLP and NIM levels of the trough LLP year would restore

UCG‟s 14% RoTE in line with 2008.


2015 2008 % change delta

Total asset 856,246 1,045,612 -18%

Customer loans 475,124 612,480 -22%

RWA 413,988 584,281 -29%

RWA/loans 87% 95%

-8.3%

Tangible equity (TE) 45,545 28,517 60%

TE/total assets 5.3% 2.7%

2.6%

CET1 ratio 10.3% 5.3%

5.1%

NPL ratio 15.7% 6.6%

9.1%

NPL coverage 50.8% 52.5%

-1.8%

Revenues 24,089 29,671 -19%

(NII+fees)/revenues 86% 96%

-9.9%

Costs -14,610 -17,249 -15%

LLPs 0.87% 0.62%

0.25%

Net profit 3,288 4,256 -23%

RoTE 7.36% 13.7%

-6.32%



LLP

trough

year

trough

(bp)

LLP

2016e

LLP

2017e

NIM of

LLP

trough

year

NIM

2016

2016

loans

LLP:

2017 vs

trough

NII:

2016 vs

trough

UCG

group

CB / retail 2007 53 46 45 3.78% 2.98% 268,309 215 2,146

CIB 2007 45 40 40 1.91% 2.62% 92,795 46 -659

Poland 2008 12 60 55 6.71% 4.08% 29,371 -126 772

CEE 2007 47 138 123 4.81% 4.41% 60,676 -461 243

Divisional LLP realignment

-326 2,503

2017 RoTE points

0.7% 5.0% 5.6%

Group 2007 44 83 73 3.08% 2.75% 483,595 -1,402 1,596

2017 RoTE points

2.8% 3.2% 6.0%


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07 May 2015 ◆ 12


…implies 30% and 5% premium to 2017E MB and 2018E BP targets

Table 4 shows the contrast between the 13.7% estimated RoTE at UCG for a normalization of NIM and LLPs vs the 2017E MB estimates and the 2018 UCG Business Plan target. This implies 30% and 5% premium to our 3yr estimates and to the company 2018 BP target, before balance sheet growth is taken into account.

Table 4: RoTE for normalized NIM and LLP vs MB 2017E and 2018 UCG BP target

RoTE Delta vs normalised

Normalised NIM and LLP 13.7%

MB 2017e 10.6% -3.1%

2018 BP target 13.0% -0.7%


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07 May 2015 ◆ 13


Quantitative easing and macro recovery We look at the positioning of UCG on the two main current macro themes: ECB QE and

European macro recovery. The huge FED balance sheet expansion occurred during the

QE program propelled US equities forward but also significantly benefitted adjacent

Emerging Markets. We believe this could be a positive catalyst for CEE during the

ECB’s QE program. Meanwhile, we are seeing a stabilisation of the Russian and

Ukrainian situations limiting downside from that front. On European macro recovery,

ITA+GER+AUT constitute over half of the Eurozone’s industrial production. We plot

the aggregate industrial production of these three core countries and find that this is

a key factor determining GDP with two quarters lag. Finally, we find GDP growth is a

strong inverse predictor of NPL growth seven quarters later. With UCG at NPLs/TE of

2x, with 50% of the bank’s 2015E PBT from CEE and with ITA+GER+AUT representing

82% of group loans, we see UCG very well positioned to capture both the benefits of

QE and of a recovery in Eurozone GDP.

Emerging Markets major beneficiaries of QE proximity Emerging markets equity indices are positively correlated to QE…

Chart 8 shows the evolution of the Federal Reserve‟s balance sheet during its quantitative easing

(QE) program and the evolution of US, Europe and emerging markets‟ (EM) equity indices. We

identify a strong, positive correlation with the US equity index (94% r-squares) confirming the very

large impact of this monetary policy measure on financial markets. Furthermore, we plot the

evolution of EM indices to check the level of influence of QE deriving from the hunt for risk and

yield by developed markets‟ capital. We find an overall strong positive correlation, with

progressively fading impacts differing across geographies:

Mexico is the most correlated emerging market, reflecting its tight relationship with the US

economy;

Asian EM also show a strong positive correlation;

Latin American indices were strongly positively correlated in the earlier phase of QE and

then decorrelated once they started to experience geopolitical turbolence and the Fed

introduced the debate on tapering;

European equities show a statistically insignificant level of correlation and only converge

up once the announcement of a European QE program is expected/made.

Anyhow, we conclude that EM that are closely interlinked with developed markets undergoing a

large QE program strongly benefit from spillovers.

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07 May 2015 ◆ 14


…suggesting ECB QE should benefit CEE: ½ of group 2015E pretax profits

The above analysis suggests that the ongoing ECB QE program should be largely beneficial for

European emerging markets.

Table 5 shows the pretax profit contribution and the expected 2015-16E GDP growth of the major

eastern European (CEE) countries UCG is active in. we estimate 34% and 48% of the 2015E core and

of the group pretax profits is generated in the region with Poland, Turkey, Russia and Czech making

up for ¾ of the sample. This area is expected to grow at c.2% in 2015E and 3% in 2016E, providing a

growth engine for the UCG group. We expect this area to vastly benefit from the ongoing ECB QE

program, in line with what described in Chart 8.

Russian and Ukrainian situations have partially stabilised

Not all EM can benefit from the ongoing QE program of the ECB. Geopolitical tensions in eastern

Europe remain and the Russian-Ukranian turbulence is not over. Chart 9 shows the evolution of the

FX between the Euro and the Russian and Ukranian currencies from 1/1/2014 to date. This shows

how in 2014, following the breakout of the Crimean war, the Russian Ruble and the Ukranian

Hryvnia devalued by c.50% in 2014. Since then, the Ruble has recovered c.15 p.p., while the

Hryvnia as further slipped by c.10 p.p..

Chart 8: FED balance sheet vs equity US and Emerging Markets indices, 2009-2015


Table 5: CEE weight into UCG, 2015E

PTP % of UCG % of Core

GDP growth

2015

GDP growth

2016

Poland 835 17% 12% 3.4 3.6

Turkey* 396 8% 6% 3.4 3.8

Russia 338 7% 5% -4.1 0.5

Czech 218 4% 3% 2.4 2.8

Bulgaria 188 4% 3% 1.2 2

Croatia 141 3% 2% 0.3 1

Rest of CEE 283 6% 4%

CEE 2,399 48% 34% 1.7 2.7

Source: Mediobanca Securities, BBG

* equity consolidation of Yapi Kredi

FED BS

ASIA EM

LATAM

MEX

S&P 500

SXXP

0

50

100

150

200

250

300

Mar

-09

Jul-

09

No

v-0

9

Mar

-10

Jul-

10

No

v-1

0

Mar

-11

Jul-

11

No

v-1

1

Mar

-12

Jul-

12

No

v-1

2

Mar

-13

Jul-

13

No

v-1

3

Mar

-14

Jul-

14

No

v-1

4

Mar

-15

FED BS ASIA EM LATAM

MEX S&P 500 SXXP

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07 May 2015 ◆ 15


Russia and Ukraine: 4-5% of UCG BV and 7-10% of pre-tax profits

Table 6 summarizes UCG‟s exposures in Russia and Ukraine. The currencies‟ devaluations taken in

Q414 have taken the incidence of these two countries to UCG‟s BV to 4%. The slight strengthening

of the RUB in Q115 should entail a revaluation, taking the ratio to c.4.5%. Both subsidiaries hold

large USD loan exposures (2/3 in Russia, ½ in Ukraine). Following our 25% cut in estimates on Q414

FX devaluations, we see c. 7-10% of UCG‟s pretax profit coming from the region. Yet, on Russia, we

are gaining more comfort at this stage, given the high exposure to mid-sized, export driven

corporates (79% of loans), the large dollar exposure, the solid NPL ratio (3.7%) and the limited net

intragroup exposure (€0.9bn).

Chart 9: EURRUB and EURUAH rebased to 1/1/2014

Source: Mediobanca Securities, BBG

Table 6: summary of UCG’s Russian and Ukranian exposure

Russia % of UCG Ukraine % of UCG

BV (EUR) Q414 1,933 3.9% 75 0.2%

BV (EUR) Q414 @ Q115 FX 2,279 4.6% 58 0.1%

USD denominated assets 66%

70%

2014 PBT (EUR) 448 11% -240 -6%

2015e PBT (EUR) 338 7%

2015e / 2014 PBT -25%

RWAs 15,690 4% 3,200 1%

Corporate loans/ Total loans 79%

45%

NPL ratio 3.7%

c.60%

Net intragroup exposure, Eur bn 0.9

1.0


54

73

30

45

0

20

40

60

80

100

120

EURRUB

EURUAH

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07 May 2015 ◆ 16


Industrial production to drive Eurozone’s economic recovery

GER+ITA+AUT industrial production drives west-EU GDP...

Chart 10 shows the share of Eurozone industrial production from Germany, Italy and Austria, UCG‟s

reference countries in western Europe. These three countries represent one half of the entire

industrial production of the area. This contribution has remained fairly stable throughout the last

years, with Italy losing 2 p.p. and Germany and Austria gaining them.

Chart 11 shows the Eurozone‟s Industry and Manufacturing Value Added in Germany, Italy and

Austria, plotted against GDP growth lagged by two quarters. We note a tight, positive relationship

between the two variables, suggesting that manufacturing in these three countries is a significant

factor determining the GDP growth in the Eurozone.

Chart 10: contribution to Eurozone industrial production, 2005-13, %


Chart 11: Industry and Manufacturing value added vs EMU GDP lagged by 2 quarters, 2006-14


20% 20% 20% 20% 19% 19% 18% 18% 18%

32% 32% 32% 32% 32% 32% 33% 33% 34%

3% 3% 3% 3% 3% 3% 3% 3% 4%

0%

10%

20%

30%

40%

50%

60%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Austria Germany Italy

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

EMU GDP

IT+DE+AT Value Added

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07 May 2015 ◆ 17


The impression above is confirmed by Chart 12 which shows the regression of the Eurozone‟s GDP

growth with Industry and Manufacturing Value Added in Germany, Italy and Austria. Dispersion is

fairly limited, reflecting in an r-squared of 50%.

NPL recoveries to follow

Real GDP growth driving NPL recoveries with a 7 quarters lag

Chart 13 shows the regression of Italian GDP growth vs the NPL growth lagged by seven quarters.

The 55% r-squared confirms that NPLs respond to GDP growth with an almost two year lag. This is

fairly consistent with the analysis made on UCG‟s credit cycle in Chart 6 and Chart 7.

Chart 12: regression of EMU GDP on Industry and manufacturing value added (GER+IT+AUT)


Chart 13: regression of Italian NPL growth t+7 vs real GDP growth, 1998-2014

Source: Mediobanca Securities, Bank of Italy, BBG

R² = 0.5006

7,800

8,000

8,200

8,400

8,600

8,800

9,000

9,200

9,400

9,600

9,800

1,450 1,500 1,550 1,600 1,650 1,700 1,750 1,800 1,850 1,900

EM

U G

DP

Industry and manufacturing value added (IT+GER+AUT)

R² = 0.5473

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

YoY NPL growth t+7

Real GDP YoY growth

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07 May 2015 ◆ 18


NPLs at 2x tangible equity: UCG is very geared to macro improvements

Table 7 shows the weight of the Non-Core unit as a percentage of UCG group. This attracts 9% of

group loans, 10% of group RWAs, 2/3 of group NPL. UCG is largely exposed to improvements in the

macro scenario given NPLs/TE stand at a very high 192%.

UCG is well positioned to capture Europe’s upswing

In conclusion, we see UCG well positioned to capture an upswing in Europe from:

An industrial production-driven economic recovery in western Europe;

The natural inflation mechanism of Emerging Markets adjacent to developed markets

undergoing QE programs;

The beneficial impact to NPL recovery that economic recovery and QE should bring.

Table 7: Non-core weight as % of group, 2014

Non core

% of group net loans 9%

% of group RWAs 10%

NPLs/ Group NPLs 67%

Group NPLs/TE 192%


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07 May 2015 ◆ 19


A (free) call option on Banking Union’s opportunities So far Banking Union has meant higher regulatory hurdles for banks. Progressively, as

this is implemented, we believe Banking Union should bring advantages – particularly

to cross border names - from the convergence of national markets into a single one.

We assess the potential impact from optimisation from full fungibility of capital and

liquidity and rethinking of group structure following the logic of one company, one

capital, one liquidity pool, similar to what project One4C was for the presence of the

bank in Italy. Our analysis of the corporate centres in Italy, Germany, Austria and

Poland highlight wide asymmetry in efficiency with Germany lagging behind. A

realignment to internal best practice would entail c.4,200 staff cuts for 11-12% EPS

boost. Similarly, the optimisation of funding costs would lead to €1.3bn cost savings or

26% EPS upgrade. Finally, the optimisation of capital allocation would provide further

10% EPS upgrade at the expense of 0-24bp CET1 gearing.

Banking Union to remove the banks-sovereign contagion

Banking Union has been the compromise found by Eurozone partners to reduce the negative

contagion of sovereign and financial sector while leaving the Eurobond or full political union out of

the political agenda. This followed the summer and the fall of 2011 when markets tested the

stability of the Euro by taking sovereign spreads within the Eurozone to unsustainable levels,

demanding a policy intervention. In previous years, national banking regulators had progressively

introduced barriers to the free movement of capital by requiring local subsidiaries of international

group to downstream capital and liquidity at the local level. This imposed high gearing to the

parent companies of multinational groups and the introduction of „diseconomies of scale‟ for banks

operating across national borders, generally defined as Balkanisation.

To react to the markets‟ dislocation, the ECB‟s Governor Draghi introduced the Outrights Monetary

Transactions (OMT) – an unlimited sovereign bond buying program on bonds up to three year

maturity to defend the Currency Union – and governments followed almost a year later with the

Banking Union project, which was based on:

1) A common regulator – the ECB – to take control of the largest banks in the Union following

a Comprehensive Assessment on the asset quality and on the conditions of banks‟ capital

under stress;

2) The institution of a Resolution Fund with ability to recapitalize banks, following the

application of bail-in rules involving at least 8% of liabilities;

3) The progressive mutualisation of national deposit guarantee funds into a single fund for the

Union.

The Single Supervisory Mechanism (SSM) started in November 2014 with the publication of the

results of the Comprehensive Assessment and the implementation of Banking Union is under way.

Banking Union’s costs are a fact of life (sunk costs)...

So far, Banking Union involves extra costs for banks including Resolution Funds and the Deposit

Guarantee Funds. These are intrinsic in holding a banking licence and gathering deposits and hence

we should consider these organic to the mere investment in the sector. Intellectually, it would be

interesting to assess to what extent the introduction of such safety measures could compensate the

higher regulatory costs through a reduction in funding costs and cost of equity. But this is not what

we are concerned about; we take such developments as a fact of life and the logic consequence of

the recent financial crisis.

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07 May 2015 ◆ 20


...but progressive harmonisation and convergence within the Eurozone...

As the aim of the Banking Union is to cushion and absorb sovereign shocks and asymmetries avoiding

the reciprocal contagion between sovereigns and banks, we should expect a successful

implementation to progressively reduce or remove differences across banks deriving from their

domicile. Hence banks‟ funding costs should more and more reflect their individual credit rating

depending on their business mix and risk profile instead of their geographical operations. It is likely

that within a Banking Union with harmonized rules, banks would more and more look at diversifying

their geographical portfolio through cross border M&A. This should create larger banks where the

relevance of each individual country within the group gets diluted vis-à-vis today. This is likely the

ECB‟s ultimate goal and we would expect the new regulator will favour a consolidation process once

it has gained confidence on the solidity and stability of the current system. Hence, widespread

cross-border consolidation is probably still far, but groups which already operate according to this

setup should start benefitting sooner rather than later, in our view.

...could bring advantages the market has not assessed yet

We are interested to investigate the potential benefits of Banking Union which have not been

assessed – and therefore priced – by the market thus far. We do this knowing that the Banking Union

is a „work in progress‟ new regime and that those who run it could not have made up their minds

regarding all aspects of it.

This should create a single banking market inside the Eurozone, regulated by a single institution and

operating according to a single, harmonized rulebook for all players. Ultimately, this should

progressively bring convergence across banks and geographies, leaving individual banks‟ credit risk

as the main factor dictating funding cost differences.

Meanwhile, we UCG potentially benefitting from the following factors:

Capital and liquidity fungibility;

Rethinking group structure;

Rationalisation of regulatory costs.

UCG is one of the Eurozone’s main banking players

Chart 14 shows UCG‟s geographical positioning in Europe. The group is active with local banking

operations in 17 countries. Eight of these – representing 50% of the Eurozone‟s nominal GDP – belong

to the Eurozone as the group operates in the Baltic countries through its leasing company. This

makes UCG one of the Eurozone‟s largest banks.

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07 May 2015 ◆ 21


Digging into UCG legal entities to pinpoint upside potential

2010 One4C: seven Italian banks into one and 6% headcount reduction

In 2010, following the acquisition of Capitalia, UCG approved the merger of all Italian subsidiaries

into the parent company Unicredit Spa under the name of the One4C project. This turned the

holding company of the group into an operating company concentrating all Italian banking

operations (UniCredit Banca S.p.A., Unicredit Banca di Roma S.p.A., Banco di Sicilia S.p.A.,

Unicredit Corporate Banking S.p.A., Unicredit Private Banking S.p.A., Unicredit Family Financing

Bank S.p.A. and Unicredit Bancassurance Management & Administration S.c.r.l.) into a single entity

(UniCredit S.p.A.), realigning Italy to the organization of the rest of the group, i.e. with one legal

entity in each country.

UCG provided little disclosure on cost savings from the project, but contemporaneously announced

a headcount reduction plan for 2,575 staff (-6% on the Italian operations).

Chart 14: UCG geographical presence


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07 May 2015 ◆ 22


One company, one capital, one liquidity pool for the Banking Union

We believe the Banking Union could trigger a similar operation to One4C at UCG, this time

implemented cross border for the regions belonging to the Banking Union. Our vision is a single

company maximizing economies of scale and scope, getting rid of national and central functions

duplications and allocating capital liquidity in the profit maximizing way subject to doing so within

the geographies of the Union. We are conscious this could be utopistic or premature to say the

least, but this is the logical direction the Banking Union should develop towards.

A change of group structure is a very complex operation...

Conceiving a change of group structure can be a cumbersome and expensive process, involving very

complex items such as:

Fiscal implications – the risk of loss of tax loss carry forward accumulated at national level

(c.€0.3bn remaining);

Taxation – the complex fiscal implications of the operation;

Regulatory Constraints – these operations particularly involve local regulatory constraints

which the Banking Union should overcome;

Political constraints – reducing visibility, staff, headquarters and potentially local taxation

can have sensitive political implications which can affect these operations;

Legal constraints – the shift could clash with previous legal constraints. For instance, we

recall the 2005 business combination agreement of the UCG-HVB-BaCa merger included a

clause locking for 10 years the running of CEE operations from Austria;

Market perception – the risk that the benefits from the lower funding costs for

geographies with higher sovereign spreads would be offset by a contamination of the

funding costs of high-rated geographies.

Chart 15: Unicredit group structure


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07 May 2015 ◆ 23


...but here we just focus on the potential opportunities

In this note, we acknowledge the potential difficulties of a potential change in group structure, but

assume these are issues which can be overcome and focus on the potential opportunities this

change could bring.

Geographical visibility on Corporate Centre shows wide asymmetries in efficiency...

Table 8 shows our reconstruction of the geographical composition of UCG‟s corporate centre (C.C.).

We started from the group‟s C.C., we dug out the figures of the corporate centers belonging to

Austria, Germany and Poland and have calculated the Italian/Group Central Functions of the group

corporate center by difference. We note the following:

12% of UCG group staff work in local and group corporate centres. C.C. hold 12% of group

RWAs and represents 9% of group costs, 17% of group pre-provision profits and 30% of

group PBT;

Corporate centers are very different within the same group, they service different type of

activities, yet some differences are hard to understand at a first glance and could be

hiding some room for higher efficiency if scale economies can be exploited through the

removal of national constraints;

45% of the Corporate Centre staff service Italian operations and the group central

functions, in line with their share of Corporate Centre RWAs of 48%. These employees

service 47% of group loans, 42% of RWAs (higher than average mortgage exposure) and 30%

of group costs;

41% of C.C. staff stand in Germany vis-à-vis 24% of C.C. RWAs. Yet, these employees only

service 23% of group loans, 21% of group RWAs and 24% of group costs;

14% of C.C. staff stand in Austria vis-à-vis 27% of C.C. RWAs. These employees service 24%

of group loans, 31% of RWAs and 23% of costs.

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07 May 2015 ◆ 24


…with most scope for improvements in Germany

From the above we can derive the following initial indications:

There could be relative excess staff in the German Corporate Centre;

The Italian C.C. has potentially higher efficiency than seen as: 1) this likely also

consolidates the staff belonging to Polish operations which are not disclosed in Pekao‟s

annual report and 2) this includes all staff belonging to group central functions;

The Austrian/CEE C.C. shows high efficiency as with only 14% of C.C. staff (i.e. almost 1/3

of the German C.C.) services large operations.

The German C.C. shows potentially low levels of efficiency as: 1) holds the same

employees of the Italian and group central functions C.C. but servicing half of the

loans/RWAs. German C.C. looks overstaffed also when looking at ratios like staff/RWA

serviced or staff/loans serviced where the German C.C. emerges at 1.7x and 2x the

average of the group C.C. German staff also results 20% more expensive than the average

Table 8: Corporate centre geographical composition

Group C.C. C.C. AUT/CEE C.C. GER C.C. Pekao

C.C. Italy +

group H.Q.

Revenues -1,014 -122 197 120 -1,171

Costs -800 -235 -151 0 -414

...Staff -1,177 0 -582 0 -595

Operating income -1,814 -357 46 120 -1,585

PTP -1,789 -320 180 120 -1,769

Net customer loans -6,440 0 -1,123 0 -5,317

RWAs 50,194 13,385 12,286 274 24,250

Deposits from customers 1,587 0 0 0 1,587

Bonds 61,717 0 0 0 61,717

Employees 15,793 2172 6,531 n.a. 7,090

Loans serviced 475,124 113732 109,636 26,729 225,027

RWA serviced 409,223 125081 85,768 27,710 170,664

Costs serviced 14,672 3336 3,559 3,426 4,351

Costs serviced/staff, € m 0.93 1.54 0.54 n.a. 0.61

Staff cost/staff, € -74,506 0 -89,113 n.a. -83,875

Costs/Staff, € -50,670 -108,195 -23,121 n.a. -58,402

Costs as % of group C.C. 100% 29% 19% 0% 52%

Costs/loans, € -1,684 -2,066 -1,377 -6 -1,840

Costs/RWAs, € -1,956 -1,879 -1,761 -6 -2,426

serviced RWA/loans 86% 110% 78% 104% 76%

Staff/loans serviced 0.03 0.02 0.06 n.a. 0.03

Staff/RWAs 0.31 0.16 0.53 n.a. 0.29


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07 May 2015 ◆ 25


cost of group C.C. staff. Yet, overall costs are low at the German C.C. as likely recoveries

on services provided (G&A) compensate for staff cost.

11-12% EPS upgrade from Corporate Centre rationalisation

The previous paragraphs have showed that there is room for efficiency enhancements inside UCG‟s

corporate centres. Whether this depends on a unification of operations within the Banking Union or

on the optimisation of resources is beyond us. Yet, Table 9 simulates the realignment of staff

allocation to the German C.C. in line with internal best practice according to two ratios:

1) Staff / loans serviced

2) Costs serviced / staff

Both methodologies point towards c. 4200-4400 headcount reductions, implying 27-28% reduction to

the overall C.C. staff and 2/3 reduction in Germany. These should generate between €376-395m

cost savings, implying almost halving C.C. costs at UCG. These savings would entail 11-12% 2016E

EPS upgrade at UCG.

This simulation expresses by no means the cost cutting potential from the merger of banking

operations in the Banking Union, but provides a ball park figure of how significant cost savings could

be, in our view.

Chart 16: C.C. distribution of RWA (lhs) and staff (rhs), UCG 2014


27%

14%

24%31%

23%

24%

41% 23%

21%

24%

6%

7%23%

48% 45% 47%42%

30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

RWAs Employees Loans serviced RWA serviced Costs serviced

C.C. Italy + group H.Q. C.C. Pekao C.C. GER C.C. AUT/CEE

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07 May 2015 ◆ 26


26% EPS upgrade from funding cost savings

Funding composition across legal entities

Table 10 shows the current asymmetry in funding costs split by deposit rates, bond rates, interbank

deposits and financial liabilities held for trading across UCG‟s HVB, Bank Austria, Pekao and Parent

company. These are contrasted with the respective lending rates. We note the following:

Table 9: Simulation of C.C. rationalization according to internal best practice, 2014

Group

C.C.

C.C.

AUT/CEE C.C. GER

C.C.

Pekao

C.C. Italy +

group H.Q.

As % of

group C.C.

Savings as % of

group C.C.

As % of 2016E EPS

after 30% tax rate

Costs -800 -235 -151 0 -414

Net customer loans -6,440 0 -1,123 0 -5,317

Employees 15,793 2,172 6,531 0 7,090

Costs serviced -14,672 -3,336 -3,559 -3,426 -4,351

Loans serviced 475,124 113,732 109,636 26,729 225,027

Staff/loans serviced 0.03 0.02 0.06 0.03

Costs serviced/staff, € m -0.93 -1.54 -0.54 -0.61

Stuff cuts from realigning

staff/ loans -4,437 -28%

Cost Savings 395 -49% 12%

Staff cuts from realigning to cost serviced/staff -4,214 -27%

Cost Savings 376 -47% 11%


Table 10: Funding cost and lending rate breakdown across UCG’s legal entities, 2014

IT (Spa) ex Non-

Core HVB BACA Pekao Group

Interest income

...loans to customers 6,219 3,480 4,531 4,997 19,227

Interest expense

...deposits from customers -585 -574 -1,202 -1,516 -3,878

...deposits from central banks and banks -256 -466 -25 -747

...debt securities in issue -2,145 -1,797 -781 -94 -4,817

...financial liabilities held for trading -18 -467 -129 -614

Deposit rates -0.35% -0.37% -1.18% -1.21% -0.94%

Bond rates -4.09% -1.55% -2.60% -2.44% -3.21%

Interbank deposits -0.81% -1.97% -0.46% -0.70%

Financial liabilities held for trading -0.14% -13.52% -2.57% -4.04%

Funding costs -0.92% -1.83% -1.26% -1.47%

Lending rates 3.48% 3.17% 3.98% 4.47% 4.09%

RWA/Loans 80% 78% 110% 104% 86%

pretax RoRWA 3.3% 1.3% 1.4% 2.9% 1.0%


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Unsurprisingly, BaCa and Pekao remunerate deposits 3x more than HVB and the parent co.

given their large CEE exposure. This also reflects into higher lending rates at 4% and 4.5%,

respectively;

It is surprising to see instead how the parent co. remunerates deposits in line with

Germany‟s HVB. This is not the case for bonds (4.09% vs 1.55%), but as the former

consolidates also group subordinated debt, the comparison is very difficult. Lending rates

instead are fairly similar at 3.5% at the parent co. and 3.2% at HVB;

Chart 17 shows the distribution of the main funding and lending metrics at the main legal entities:

The Parent company, operating Italian banking activities and group holding operations

generates 32% of group interest income, 30% of interest expense, consolidates 41% of

customer deposits, 76% of bonds, 30% of interbank funding, 47% of customer loans and 88%

of funding shortfall (loans – deposits);

HVB, running German banking and group investment banking operations, generates 18% of

group interest income, 24% of interest expense and consolidates 25% of customer deposits,

19% of bonds, 51% of interbank funding, 23% of customer loans and 15% of funding

shortfall;

Bank Austria (BaCa), running Austrian and CEE banking, generates 24% of group interest

income, 29% of interest expense, 25% of customer deposits, 20% of bonds, 22% of

interbank funding, 24% of customer loans and 19% of funding shortfall;

Pekao, running Polish banking, generates 26% of interest income, 18% of interest expense

and consolidates 17% of customer depsoits, 1% of bonds, 1% of interbank funding, 6% of

customer loans and is the only unit without a deposit shortfall.

Chart 17: distribution of funding and lending metrics across legal entities, 2014

Source: Mediobanca Securities, companies

30% 32%41%

76%

30%

47%

88%

24% 18%

25%

19%

51%

23%

15%

29%

24%

25%

20%22%

24%

19%18%

26%

17%1% 1%

6%

-5%

-20%

0%

20%

40%

60%

80%

100%

Interest expense Interest income Deposits from customers

Bonds Interbank funding Customer loans Funding shortfall

Pekao BACA HVB IT (Spa) ex Non-Core

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The chart highlights the following:

The parent company is issuing the majority of bonds, matching the funding shortfall;

HVB is responsible for the majority of interbank funding, likely to fund short term

derivatives books in the investment bank;

The parent co. is pretty balanced in its contribution to interest income and interest

expense. Instead, HVB and BaCa show interest income 6 and 5 p.p. short of their share of

interest expense, while conversely, Pekao has a surplus of 8 p.p.;

Funding cost optimisation worth 26% EPS upgrade

Table 11 simulates the downward repricing of funding shortfall to the internal best practice to

assess the potential funding costs at UCG from an integration of banking operations triggered by

Banking Union. We estimate €70bn deposit shortfall at group level split across the four legal entities

and the majority of which sitting in the parent co.. Given the large asymmetries in bond rates, we

hypothesise the issuance of bonds all from HVB – the price leader. We estimate the current €2.4bn

cost of those funds would drop dramatically to €1bn, for €1.3bn funding cost savings. These, taxed

at 35% would boost 2016E EPS by 26%. Again we see this exercise as a pretty theoretical one; yet

this provides an idea of the magnitude of potential optimisations available to the current group

structure in light of the Banking Union developments.

Table 11: simulation of funding cost savings

IT (Spa) HVB BACA Pekao Group

Deposits from customers 167,990 100,674 102,271 30,012 410,412

Bonds 114,109 28,249 30,014 922 150,276

Interbank funding 31,703 54,080 23,696 1,277 106,037

Customer loans 220,649 109,636 113,732 26,729 470,569

Excess funding -52,659 -8,962 -11,461 3,282 -69,800

Bonds 114,109 28,249 30,014 922 173,294

Share of bonds issued 66% 16% 17% 1%

Current bond rates -4.09% -1.55% -2.60% -2.44%

Current interest expense 1,882 176 315 9 2,381

Optimised interest expense 1,079 1,079

Funding cost savings 1,302

2016E EPS impact @35% Italian tax rate 26%


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07 May 2015 ◆ 29


10% EPS upgrade from optimisation of capital allocation

Germany and Poland overcapitalised, gearing in the parent co.

Chart 18 shows the capital ratio and the excess/deficit (vs a national benchmark) across UCG‟s main

legal entities in 2014. This highlights:

HVB and Pekao hold the majority of the group capital with CET1 ratios of 22% and 17%,

respectively and with €15bn estimated excess capital (assuming 11% and 12% min.

requirements, respectively);

The Austrian and CEE operations work with a relatively more geared balance sheet with

10.3% CET1 ratio, in line with the group‟s ratio;

The 21% CET1 ratio reported by the Parent co. incorporates the value of the stakes in the

subsidiaries, implying that the cash component is thinner and is likely where the gearing of

the group lays into.

This very asymmetric distribution of capital derives from the balkanisation occurred during the

crisis where local regulators demanded down streaming of capital and liquidity at local level to ring

fence local banking from the risk of large group defaults.

Chart 18: geographical asymmetry in CET1 ratio and excess capital allocation, 2014


Up to 10% EPS upgrade from optimisation of capital allocation

Banking Union should remove the local constraints introduced during the crisis. We doubt the ECB

could argue in favour of any particular geographical distribution of capital within cross border banks

operating within the Banking Union. Hence, Table 12 shows the simulation of capital optimisation at

UCG. We assume that excess capital is deployed on the national 10yr sovereign. This implies that

the €9.5bn of German bunds at HVB would only return €7m revenues, or that the €6bn Polish bonds

at Pekao generate €142m. We make two simulations:

1) The redeployment of German excess capital on the higher-returning Italian BTPs;

2) The redeployment of excess capital at the higher ROTE adj. for RWA density (pretax

RoRWAs/RWA density of loans).

21.0%22.1%

10.3%

17.3%

10.4%

0%

5%

10%

15%

20%

25%

-4000

-2000

0

2000

4000

6000

8000

10000

12000

IT (Spa) HVB BACA Pekao UCG Group

Eur mExcess/deficit CET1 ratio (rhs)

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07 May 2015 ◆ 30


In the first case, we obtain €127m additional PBT, for 3% 2016E EPS boost. In the latter case, we

obtain €493m additional PBT, for 10% 2016E EPS boost, while generating €10bn additional RWAs or

24bp CET1 deduction.

This exercise just points out the potential upside that an optimisation of capital allocation could

bring at UCG for a Banking Union‟s removal of national barriers, in our view.

Table 12: simulation of capital optimisation

IT (Spa) HVB BACA Pekao UCG Group

CET1 ratio (rhs) 21.0% 22.1% 10.3% 17.3% 10.4%

RWAs 206,405 85,768 125,081 115,975 409,223

Min requirement 10.0% 11.0% 12.0% 12.0% 10.0%

Excess/deficit 9,559 -2,126 6,147 1,673

Yield on 10yr govies 1.4% 0.1% 0.2% 2.3%

Current yield on capital excess 7 -4 142 145

Reallocation of investment of excess

capital to BTP 134 134

Additional pretax profits from

redeployment 127 127

2016E EPS impact @35% Italian tax

rate 3%

Loan yields 3.48% 3.17% 3.98% 4.47% 4.09%

Pretax RoTE adj. RWA density 4.09% 1.61% 1.29% 2.79% 1.16%

Excess capital redeployment to avg.

loan yield 111

Excess capital redeployment to max

loan yield 391 -4 251 638

Additional pretax profits from

redeployment 384 0 109 493

2016E EPS impact @35% Italian tax

rate 10%

Additional RWAs created 7,519 2,144 9,663

Impact to CET1 ratio 2014 -0.19% -0.05% -0.24%


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07 May 2015 ◆ 31


Banking Union implementation can become a catalyst to unleash EPS upside

Chart 19 shows the joint effect we estimated from the potential optimisation of group structure,

capital and funding costs the implementation of the Banking Union could potentially bring for UCG.

Our €0.66 2016E adj. EPS would inflate by 48% to €0.98, ½ from lower funding costs, ¼ from lower

corporate centre costs, ¼ from capital optimisation. In turn, this would entail a P/E drop from 9.6x

to 6.5x. Hence, despite having very little visibility on how and when this potential upside could

materialise, the magnitude is such that we cannot ignore it.

Chart 19: EPS and P/E sensitivity from Banking Union potential upside, 2016E


9.6x

6.5x

.x

2.x

4.x

6.x

8.x

10.x

12.x

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2016E change in structure

Liquidity optimisation

Capital optimisation

Banking Union best case

y x

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07 May 2015 ◆ 32


Outperform, TP hike to €9.1 from 2016 rollover We roll over the valuation to 2016 and retrieve €9.1 Target Price up from our

previous €8.3. This is based on a 1.1x P/allocated capital and 8.4% COE.

€9.1 Target Price on 2016E... Table 13 shows the rollover to 2016E of our valuation on UCG. The Target Price (TP) raises to €9.1 from €8.3 from a material. We base our valuation on a sum of the parts valuation according to the following methodology:

1) We redistribute the minorities, corporate centre and PPA on the estimated PBT of each

component of UCG;

2) We generate the allocated capital by allocating target CET1 ratio to the individual RWAs;

3) We assign an over the cycle ROAC to each component of UCG by taking as reference the

one estimate for 2016E and adjusting it for the cycle and for case specific items;

4) We estimate the individual COE as per Table 14 and then derive the value of each division

by multiplying the allocated capital by the P/TBV derived;

5) We add the estimated excess capital as the B3FL CET1 ratio minus the allocated capital.

Table 13: UCG 2016E sum of the parts valuation

2016E PBT

MB adj.

net profit RWAs

MB capital

/RWA

Allocated

capital (MB) ROAC

Over the

cycle

ROAC

Cost

of K

P/

TBV Value excess K TP

COMMERCIAL BANKING 4,523 2,625 140,612 9.5% 13,358 19.7% 19.8% 7.3% 2.7x 34,279

...ITALY 4,010 2,328 81,130 9.5% 7,707 30.2% 30.0% 7.9% 3.8x 29,121

...GERMANY 530 307 35,078 9.5% 3,332 9.2% 10.0% 6.5% 1.5x 5,158

...AUSTRIA -18 -10 24,405 9.5% 2,318 -0.4% 0.0% 6.4% .x 0

POLAND 891 517 28,196 9.5% 2,679 19.3% 20.0% 8.4% 2.4x 6,389

CIB 1,948 1,131 69,596 10.0% 6,960 16.2% 16.0% 8.6% 1.9x 12,948

ASSET GATHERING 267 155 1,845 3.0% 55 280.5% 300.0% 6.8% 44.x 2,436

ASSET MANAGEMENT 512 297 2,251 30.0% 311 95.5% 90.0% 6.8% 13.2x 4,113

CEE DIVISION 1,755 1,019 93,701 12.6% 11,853 8.6% 11.2% 9.9% 1.1x 13,732

CEE BOSNIA 53 31 2,221 13.0% 289 10.7% 10.0% 13.3% .8x 218

CEE BULGARIA 208 121 5,535 13.0% 720 16.8% 18.0% 8.6% 2.1x 1,515

CEE CROATIA 179 104 8,332 13.0% 1,083 9.6% 10.0% 8.6% 1.2x 1,267

CEE CZECH 233 135 12,447 11.0% 1,369 9.9% 12.0% 6.7% 1.8x 2,467

CEE HUNGARY 155 90 3,965 11.0% 436 20.6% 20.0% 9.7% 2.1x 898

CEE ROMANIA 71 41 4,870 13.0% 633 6.6% 8.0% 9.7% .8x 524

CEE RUSSIA 469 272 16,734 13.0% 2,175 12.5% 15.0% 11.4% 1.3x 2,867

CEE SERBIA 56 33 2,631 13.0% 342 9.6% 10.0% 13.2% .8x 259

CEE SLOVENIA 29 17 1,336 13.0% 174 9.8% 10.0% 7.2% 1.4x 241

CEE REST OF DIVISION 300 174 35,630 13.0% 4,632 3.8% 8.0% 10.7% .8x 3,476

CORPORATE CENTRE -2,626 0 53,599 10.0% 5,360 0.0% 0.0% 0.0%

CORE 7,270 5,744 389,800 10.4% 40,576 14.2% 0.0% 0.0%

NON-CORE -1,774 -1,774 23,813 10.0% 2,381 -74.5% -75.0% 8.6%

UNICREDIT GROUP 5,496 3,970 413,612 10.4% 42,957 9.2% 10.8% 8.4% 1.1x 53,130 1,714 9.1


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Table 14: UCG cost of equity estimate

Risk free

rate

RWAs -

Retail

RWAs -

Corporate

Market

premium Beta

Cost of

capital

COMMERCIAL BANKING 1.3% 55.9% 44.1% 5.5% 1.09x 7.3%

...ITALY 2.0% 60.0% 40.0% 5.5% 1.08x 7.9%

...GERMANY 0.3% 40.0% 60.0% 5.5% 1.12x 6.5%

...AUSTRIA 0.5% 65.0% 35.0% 5.5% 1.07x 6.4%

POLAND 2.5% 65.0% 35.0% 5.5% 1.07x 8.4%

CIB 2.0% 0.0% 100.0% 5.5% 1.2x 8.6%

ASSET GATHERING 1.3% 100.0% 0.0% 5.5% 1.x 6.8%

ASSET MANAGEMENT 1.3% 100.0% 0.0% 5.5% 1.x 6.8%

CEE DIVISION 3.7% 37.2% 62.8% 5.5% 1.13x 9.9%

CEE BOSNIA 7.0% 30.0% 70.0% 5.5% 1.14x 13.3%

CEE BULGARIA 2.5% 50.0% 50.0% 5.5% 1.1x 8.6%

CEE CROATIA 2.5% 50.0% 50.0% 5.5% 1.1x 8.6%

CEE CZECH 0.5% 40.0% 60.0% 5.5% 1.12x 6.7%

CEE HUNGARY 3.5% 35.0% 65.0% 5.5% 1.13x 9.7%

CEE ROMANIA 3.5% 40.0% 60.0% 5.5% 1.12x 9.7%

CEE RUSSIA 5.0% 20.0% 80.0% 5.5% 1.16x 11.4%

CEE SERBIA 7.0% 35.0% 65.0% 5.5% 1.13x 13.2%

CEE SLOVENIA 1.0% 35.0% 65.0% 5.5% 1.13x 7.2%

CEE REST OF DIVISION 4.5% 40.0% 60.0% 5.5% 1.12x 10.7%

CORPORATE CENTRE 2.0% 0.0% 100.0% 5.5% 1.2x 8.6%

NON-CORE 2.0% 0.0% 100.0% 5.5% 1.2x 8.6%

UNICREDIT GROUP 2.2% 32.9% 67.1% 5.5% 1.1x 8.4%


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GENERAL DISCLOSURES

This research report is prepared by Mediobanca - Banca di credito finanziario S.p.A. (“Mediobanca S.p.A.”), authorized and supervised by Bank of Italy and Consob to provide financial services, and is compliant with the relevant European Directive provisions on investment and ancillary services (MiFID Directive) and with the implementing law.

Unless specified to the contrary, within EU Member States, the report is made available by Mediobanca S.p.A. The distribution of this document by Mediobanca S.p.A. in other jurisdictions may be restricted by law and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. All reports are disseminated and available to all clients simultaneously through electronic distribution and publication to our internal client websites. The recipient acknowledges that, to the extent permitted by applicable securities laws and regulations, Mediobanca S.p.A. disclaims all liability for providing this research, and accepts no liability whatsoever for any direct, indirect or consequential loss arising from the use of this document or its contents. This research report is provided for information purposes only and does not constitute or should not be construed as a provision of investment advice, an offer to buy or sell, or a solicitation of an offer to buy or sell, any financial instruments. It is not intended to represent the conclusive terms and conditions of any security or transaction, nor to notify you of any possible risks, direct or indirect, in undertaking such a transaction. Not all investment strategies are appropriate at all times, and past performance is not necessarily a guide to future performance. Mediobanca S.p.A. recommends that independent advice should be sought, and that investors should make their own independent decisions as to whether an investment or instrument is proper or appropriate based on their own individual judgment, their risk-tolerance, and after consulting their own investment advisers. Unless you notify Mediobanca S.p.A. otherwise, Mediobanca S.p.A. assumes that you have sufficient knowledge, experience and/or professional advice to undertake your own assessment. This research is intended for use only by those professional clients to whom it is made available by Mediobanca S.p.A. The information contained herein, including any expression of opinion, has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness although Mediobanca S.p.A. considers it to be fair and not misleading. Any opinions or estimates expressed herein reflect the judgment of the author(s) as of the date the research was prepared and are subject to change at any time without notice. Unless otherwise stated, the information or opinions presented, or the research or analysis upon which they are based, are updated as necessary and at least annually. Mediobanca S.p.A. may provide hyperlinks to websites of entities mentioned in this document, however the inclusion of a link does not imply that Mediobanca S.p.A. endorses, recommends or approves any material on the linked page or accessible from it. Mediobanca S.p.A. does not accept responsibility whatsoever for any such material, nor for any consequences of its use. Neither Mediobanca S.p.A. nor any of its directors, officers, employees or agents shall have any liability, howsoever arising, for any error, inaccuracy or incompleteness of fact or opinion in this report or lack of care in its preparation or publication.

Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. The analysts named in this report may have from time to time discussed with our clients, including Mediobanca S.p.A. salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein.

ADDITIONAL DISCLAIMERS TO U.S. INVESTORS: This research report is prepared by Mediobanca S.p.A. and distributed in the United States by Mediobanca Securities USA LLC, which is a wholly owned subsidiary of Mediobanca S.p.A., is a member of Finra and is registered with the US Securities and Exchange Commission. 565 Fifth Avenue - New York NY 10017. Mediobanca Securities USA LLC accepts responsibility for the content of this report. Any US person receiving this report and wishing to effect any transaction in any security discussed in this report should contact Mediobanca Securities USA LLC at 001(212) 991-4745. Please refer to the contact page for additional contact information. All transactions by a US person in the securities mentioned in this report must be effected through Mediobanca Securities USA LLC and not through a non-US affiliate. The research analyst(s) named on this report are not registered / qualified as research analysts with Finra. The research analyst(s) are not associated persons of Mediobanca Securities USA LLC and therefore are not subject to NASD rule 2711 and incorporated NYSE rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst.

ADDITIONAL DISCLAIMERS TO U.K. INVESTORS: Mediobanca S.p.A. provides investment services in the UK through a branch established in the UK (as well as directly from its establishment(s) in Italy) pursuant to its passporting rights under applicable EEA Banking and Financial Services Directives and in accordance with applicable Financial Services Authority requirements.

ADDITIONAL DISCLAIMERS TO U.A.E. INVESTORS: This research report has not been approved or licensed by the UAE Central Bank, the UAE Securities and Commodities Authority (SCA), the Dubai Financial Services Authority (DFSA) or any other relevant licensing authorities in the UAE, and does not constitute a public offer of securities in the UAE in accordance with the commercial companies law, Federal Law No. 8 of 1984 (as amended), SCA Resolution No.(37) of 2012 or otherwise. This research report is strictly private and confidential and is being issued to sophisticated investors.

REGULATORY DISCLOSURES

Mediobanca S.p.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Mediobanca S.p.A. or its affiliates or its employees may effect transactions in the securities described herein for their own account or for the account of others, may have long or short positions with the issuer thereof, or any of its affiliates, or may perform or seek to perform securities, investment banking or other services for such issuer or its affiliates. The organisational and administrative arrangements established by Mediobanca S.p.A. for the management of conflicts of interest with respect to investment research are consistent with rules, regulations or codes applicable to the securities industry. The compensation of the analyst who prepared this report is determined exclusively by research management and senior

Disclaimer

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management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of Mediobanca S.p.A. as a whole, of which investment banking, sales and trading are a part.

For a detailed explanation of the policies and principles implemented by Mediobanca S.p.A. to guarantee the integrity and independence of researches prepared by Mediobanca's analysts, please refer to the research policy which can be found at the following link: http://www.mediobanca.it/static/upload/b5d/b5d01c423f1f84fffea37bd41ccf7d74.pdf

Unless otherwise stated in the text of the research report, target prices are based on either a discounted cash flow valuation and/or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst's views on the likely course of investor sentiment. Whichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company's products. Such demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, from changes in social values. Valuations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. All prices are market close prices unless differently specified.

Since 1 July 2013, Mediobanca uses a relative rating system, based on the following judgements: Outperform, Neutral, Underperform and Not Rated.

Outperform (O). The stock‟s total return is expected to exceed the average total return of the analyst‟s industry (or industry team‟s) coverage universe, on a risk-adjusted basis, over the next 6-12 months.

Neutral (N). The stock‟s total return is expected to be in line with the average total return of the analyst‟s industry (or industry team‟s) coverage universe, on a risk-adjusted basis, over the next 6-12 months.

Underperform (U). The stock‟s total return is expected to be below the average total return of the analyst‟s industry (or industry team‟s) coverage universe, on a risk-adjusted basis, over the next 6-12 months.

Not Rated (NR). Currently the analyst does not have adequate confidence about the stock‟s total return relative to the average total return of the analyst‟s industry (or industry team‟s) coverage, on a risk-adjusted basis, over the next 6-12 months. Alternatively, it is applicable pursuant to Mediobanca policy in circumstances when Mediobanca is acting in any advisory capacity in a strategic transaction involving this company or when the company is the target of a tender offer.

Our recommendation relies upon the expected relative performance of the stock considered versus its benchmark. Such an expected relative performance relies upon a valuation process that is based on the analysis of the company's business model / competitive positioning / financial forecasts. The company's valuation could change in the future as a consequence of a modification of the mentioned items.

Please consider that the above rating system also drives the portfolio selections of the Mediobanca's analysts as follows: long positions can only apply to stocks rated Outperform and Neutral; short positions can only apply to stocks rated Underperform and Neutral; portfolios selection cannot refer to Not Rated stocks; Mediobanca portfolios might follow different time horizons.

Proportion of all recommendations relating to the last quarter

Outperform Neutral Underperform Not Rated

53.07% 39.39% 6.70% 0.84%

Proportion of issuers to which Mediobanca S.p.A. has supplied material investment banking services relating to the last quarter:


12.31% 13.79% 10.00% 100.00%

The current stock ratings system has been used since 1 July 2013. Before then, Mediobanca S.p.A. used a different system, based on the following ratings: outperform, neutral, underperform, under review, not rated. For additional details about the old ratings system, please access research reports dated before 1 July 2013 from the restricted part of the “MB Securities” section of the Mediobanca S.p.A. website at www.mediobanca.com.

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COMPANY SPECIFIC REGULATORY DISCLOSURES

MARKET MAKER Mediobanca S.p.A. is currently acting as market maker on equity instruments, or derivatives whose underlying financial instruments are materially represented by equity instruments, issued by Unicredit. MEDIOBANCA SIGNIFICANT FINANCIAL INTERESTS As of the date of publication of this research report, Mediobanca Securities USA LLC's parent company, Mediobanca S.p.A. beneficially owns 1% or more of any class of common equity securities of the securities of Unicredit. ISSUER REPRESENTATION ON MEDIOBANCA GOVERNING BODIES Certain members of the governing bodies of Unicredit are also members of the governing bodies of Mediobanca S.p.A. or one or more of the companies belonging to its group. ISSUER SIGNIFICANT FINANCIAL INTERESTS ON MEDIOBANCA Unicredit owns a “major holding” (as defined in the EU Transparency Directive as implemented in each relevant jurisdiction) in Mediobanca S.p.A. Please consult the website of the relevant competent authority for details.

RATING The present rating in regard to Unicredit has not been changed since 26/03/2012.

INITIAL COVERAGE

Unicredit initial coverage as of 30/06/2003.

COPYRIGHT NOTICE

No part of the content of any research material may be copied, forwarded or duplicated in any form or by any means without the prior consent of Mediobanca S.p.A., and Mediobanca S.p.A. accepts no liability whatsoever for the actions of third parties in this respect. END NOTES

The disclosures contained in research reports produced by Mediobanca S.p.A. shall be governed by and construed in accordance with Italian law. Additional information is available upon request.

Disclaimer Disclaimer Disclaimer Disclaimer Disclaimer

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Mediobanca S.p.A. Antonio Guglielmi

Head of European Equity Research +44 203 0369 570

[email protected] ANALYSTS

European Banks

Alain Tchibozo France/IBK +44 203 0369 573 [email protected]

Adam Terelak France/IBK +44 203 0369 574 [email protected]

Andrea Filtri Spain/Italy +44 203 0369 571 [email protected]

Andres Williams Spain +44 203 0369 577 [email protected]

Riccardo Rovere Italy/Scandinavia/CEE/Germany +39 02 8829 604 [email protected]

European Insurance

Gianluca Ferrari Italy and Reinsurance +39 02 8829 482 [email protected]

Simonetta Chiriotti Nordics +39 02 8829 933 [email protected]

Italian Research

Alessandro Tortora Building Materials/Industrials/Capital Goods +39 02 8829 673 [email protected]

Andrea Scauri Oil & Oil Related/Capital Goods +39 02 8829 496 [email protected]

Chiara Rotelli Branded Goods/Consumers Goods +39 02 8829 931 [email protected]

Fabio Pavan Media/Telecommunications/Consumer Goods +39 02 8829 633 [email protected]

Javier Suárez Utilities +39 028829 036 [email protected]

Jean Farah Utilities +44 203 0369 665 [email protected] Massimo Vecchio Auto & Auto Components/Industrials/Holdings +39 02 8829 541 [email protected]

Niccolò Storer Auto & Auto Components/Industrials/Holdings +39 02 8829 444 [email protected]

Nicolò Pessina Consumer Goods/Infrastructure +39 02 8829 796 [email protected]

Sara Piccinini Utilities +39 02 8829 295 [email protected] Simonetta Chiriotti Real Estate/ Industrials +39 02 8829 933 [email protected]

FOR NON US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:

Mediobanca S.p.A. Charlotte Roden

Head of Equity Sales +44 203 0369 537

[email protected] SALES

Angelo Vietri

+39 02 8829 989 [email protected]

Christopher Seidenfaden


Lorenzo Angeloni


Timothy Pedroni


Stephane Langlois


European Spec Sales

Gaelle Jarrousse Banks +44 203 0369 530 [email protected]

Carlo Pirri Banks +44 203 0369 531 [email protected]

Gert-Jaap Kraan Insurance +44 203 0369 510 [email protected]

Mediobanca S.p.A. Dominic Bidwell

Head of Equity Trading and Sales Trading +44 203 0369 627

[email protected] SALES/TRADERS

Alessandro Gobbi


Matteo Agrati


Michael Sherry


Roberto Riboldi +39 02 8829 639 [email protected]

FOR US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:

Mediobanca Securities USA LLC Pierluigi Gastone

Head of Mediobanca Securities USA LLC +1 212 991 4745

[email protected]

Massimiliano Pula


Robert Perez


MEDIOBANCA – Banca di Credito Finanziario S.p.A. Piazzetta Enrico Cuccia, 1 - 20121 Milano - T. +39 02 8829.1 33 Grosvenor Place – London SW1X 7HY – T. +44 (0) 203 0369 530

mailto:[email protected]






























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GENERAL DISCLOSURES

This research report is prepared by Mediobanca - Banca di credito finanziario S.p.A. (“Mediobanca S.p.A.”), authorized and supervised by Bank of Italy and Consob to provide financial services, and is compliant with the relevant European Directive provisions on investment and ancillary services (MiFID Directive) and with the implementing law.

Unless specified to the contrary, within EU Member States, the report is made available by Mediobanca S.p.A. The distribution of this document by Mediobanca S.p.A. in other jurisdictions may be restricted by law and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. All reports are disseminated and available to all clients simultaneously through electronic distribution and publication to our internal client websites. The recipient acknowledges that, to the extent permitted by applicable securities laws and regulations, Mediobanca S.p.A. disclaims all liability for providing this research, and accepts no liability whatsoever for any direct, indirect or consequential loss arising from the use of this document or its contents. This research report is provided for information purposes only and does not constitute or should not be construed as a provision of investment advice, an offer to buy or sell, or a solicitation of an offer to buy or sell, any financial instruments. It is not intended to represent the conclusive terms and conditions of any security or transaction, nor to notify you of any possible risks, direct or indirect, in undertaking such a transaction. Not all investment strategies are appropriate at all times, and past performance is not necessarily a guide to future performance. Mediobanca S.p.A. recommends that independent advice should be sought, and that investors should make their own independent decisions as to whether an investment or instrument is proper or appropriate based on their own individual judgment, their risk-tolerance, and after consulting their own investment advisers. Unless you notify Mediobanca S.p.A. otherwise, Mediobanca S.p.A. assumes that you have sufficient knowledge, experience and/or professional advice to undertake your own assessment. This research is intended for use only by those professional clients to whom it is made available by Mediobanca S.p.A. The information contained herein, including any expression of opinion, has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness although Mediobanca S.p.A. considers it to be fair and not misleading. Any opinions or estimates expressed herein reflect the judgment of the author(s) as of the date the research was prepared and are subject to change at any time without notice. Unless otherwise stated, the information or opinions presented, or the research or analysis upon which they are based, are updated as necessary and at least annually. Mediobanca S.p.A. may provide hyperlinks to websites of entities mentioned in this document, however the inclusion of a link does not imply that Mediobanca S.p.A. endorses, recommends or approves any material on the linked page or accessible from it. Mediobanca S.p.A. does not accept responsibility whatsoever for any such material, nor for any consequences of its use. Neither Mediobanca S.p.A. nor any of its directors, officers, employees or agents shall have any liability, howsoever arising, for any error, inaccuracy or incompleteness of fact or opinion in this report or lack of care in its preparation or publication.

Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. The analysts named in this report may have from time to time discussed with our clients, including Mediobanca S.p.A. salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein.

ADDITIONAL DISCLAIMERS TO U.S. INVESTORS: This research report is prepared by Mediobanca S.p.A. and distributed in the United States by Mediobanca Securities USA LLC, which is a wholly owned subsidiary of Mediobanca S.p.A., is a member of Finra and is registered with the US Securities and Exchange Commission. 565 Fifth Avenue - New York NY 10017. Mediobanca Securities USA LLC accepts responsibility for the content of this report. Any US person receiving this report and wishing to effect any transaction in any security discussed in this report should contact Mediobanca Securities USA LLC at 001(212) 991-4745. Please refer to the contact page for additional contact information. All transactions by a US person in the securities mentioned in this report must be effected through Mediobanca Securities USA LLC and not through a non-US affiliate. The research analyst(s) named on this report are not registered / qualified as research analysts with Finra. The research analyst(s) are not associated persons of Mediobanca Securities USA LLC and therefore are not subject to NASD rule 2711 and incorporated NYSE rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst.

ADDITIONAL DISCLAIMERS TO U.K. INVESTORS: Mediobanca S.p.A. provides investment services in the UK through a branch established in the UK (as well as directly from its establishment(s) in Italy) pursuant to its passporting rights under applicable EEA Banking and Financial Services Directives and in accordance with applicable Financial Services Authority requirements.

ADDITIONAL DISCLAIMERS TO U.A.E. INVESTORS: This research report has not been approved or licensed by the UAE Central Bank, the UAE Securities and Commodities Authority (SCA), the Dubai Financial Services Authority (DFSA) or any other relevant licensing authorities in the UAE, and does not constitute a public offer of securities in the UAE in accordance with the commercial companies law, Federal Law No. 8 of 1984 (as amended), SCA Resolution No.(37) of 2012 or otherwise. This research report is strictly private and confidential and is being issued to sophisticated investors.

REGULATORY DISCLOSURES

Mediobanca S.p.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Mediobanca S.p.A. or its affiliates or its employees may effect transactions in the securities described herein for their own account or for the account of others, may have long or short positions with the issuer thereof, or any of its affiliates, or may perform or seek to perform securities, investment banking or other services for such issuer or its affiliates. The organisational and administrative arrangements established by Mediobanca S.p.A. for the management of conflicts of interest with respect to investment research are consistent with rules, regulations or codes applicable to the securities industry. The compensation of the analyst who prepared this report is determined exclusively by research management and senior

Disclaimer

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management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of Mediobanca S.p.A. as a whole, of which investment banking, sales and trading are a part.

For a detailed explanation of the policies and principles implemented by Mediobanca S.p.A. to guarantee the integrity and independence of researches prepared by Mediobanca's analysts, please refer to the research policy which can be found at the following link: http://www.mediobanca.it/static/upload/b5d/b5d01c423f1f84fffea37bd41ccf7d74.pdf

Unless otherwise stated in the text of the research report, target prices are based on either a discounted cash flow valuation and/or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst's views on the likely course of investor sentiment. Whichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company's products. Such demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, from changes in social values. Valuations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. All prices are market close prices unless differently specified.

Since 1 July 2013, Mediobanca uses a relative rating system, based on the following judgements: Outperform, Neutral, Underperform and Not Rated.

Outperform (O). The stock‟s total return is expected to exceed the average total return of the analyst‟s industry (or industry team‟s) coverage universe, on a risk-adjusted basis, over the next 6-12 months.

Neutral (N). The stock‟s total return is expected to be in line with the average total return of the analyst‟s industry (or industry team‟s) coverage universe, on a risk-adjusted basis, over the next 6-12 months.

Underperform (U). The stock‟s total return is expected to be below the average total return of the analyst‟s industry (or industry team‟s) coverage universe, on a risk-adjusted basis, over the next 6-12 months.

Not Rated (NR). Currently the analyst does not have adequate confidence about the stock‟s total return relative to the average total return of the analyst‟s industry (or industry team‟s) coverage, on a risk-adjusted basis, over the next 6-12 months. Alternatively, it is applicable pursuant to Mediobanca policy in circumstances when Mediobanca is acting in any advisory capacity in a strategic transaction involving this company or when the company is the target of a tender offer.

Our recommendation relies upon the expected relative performance of the stock considered versus its benchmark. Such an expected relative performance relies upon a valuation process that is based on the analysis of the company's business model / competitive positioning / financial forecasts. The company's valuation could change in the future as a consequence of a modification of the mentioned items.

Please consider that the above rating system also drives the portfolio selections of the Mediobanca's analysts as follows: long positions can only apply to stocks rated Outperform and Neutral; short positions can only apply to stocks rated Underperform and Neutral; portfolios selection cannot refer to Not Rated stocks; Mediobanca portfolios might follow different time horizons.

Proportion of all recommendations relating to the last quarter


53.07% 39.39% 6.70% 0.84%

Proportion of issuers to which Mediobanca S.p.A. has supplied material investment banking services relating to the last quarter:


12.31% 13.79% 10.00% 100.00%

The current stock ratings system has been used since 1 July 2013. Before then, Mediobanca S.p.A. used a different system, based on the following ratings: outperform, neutral, underperform, under review, not rated. For additional details about the old ratings system, please access research reports dated before 1 July 2013 from the restricted part of the “MB Securities” section of the Mediobanca S.p.A. website at www.mediobanca.com.

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COMPANY SPECIFIC REGULATORY DISCLOSURES

MARKET MAKER Mediobanca S.p.A. is currently acting as market maker on equity instruments, or derivatives whose underlying financial instruments are materially represented by equity instruments, issued by Unicredit. MEDIOBANCA SIGNIFICANT FINANCIAL INTERESTS As of the date of publication of this research report, Mediobanca Securities USA LLC's parent company, Mediobanca S.p.A. beneficially owns 1% or more of any class of common equity securities of the securities of Unicredit. ISSUER REPRESENTATION ON MEDIOBANCA GOVERNING BODIES Certain members of the governing bodies of Unicredit are also members of the governing bodies of Mediobanca S.p.A. or one or more of the companies belonging to its group. ISSUER SIGNIFICANT FINANCIAL INTERESTS ON MEDIOBANCA Unicredit owns a “major holding” (as defined in the EU Transparency Directive as implemented in each relevant jurisdiction) in Mediobanca S.p.A. Please consult the website of the relevant competent authority for details.

RATING The present rating in regard to Unicredit has not been changed since 26/03/2012.

INITIAL COVERAGE

Unicredit initial coverage as of 30/06/2003.

COPYRIGHT NOTICE

No part of the content of any research material may be copied, forwarded or duplicated in any form or by any means without the prior consent of Mediobanca S.p.A., and Mediobanca S.p.A. accepts no liability whatsoever for the actions of third parties in this respect. END NOTES

The disclosures contained in research reports produced by Mediobanca S.p.A. shall be governed by and construed in accordance with Italian law. Additional information is available upon request.

Disclaimer Disclaimer Disclaimer Disclaimer Disclaimer

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07 May 2015 ◆ 41


Mediobanca S.p.A. Antonio Guglielmi

Head of European Equity Research +44 203 0369 570

[email protected] ANALYSTS

European Banks

Alain Tchibozo France/IBK +44 203 0369 573 [email protected]

Adam Terelak France/IBK +44 203 0369 574 [email protected]

Andrea Filtri Spain/Italy +44 203 0369 571 [email protected]

Andres Williams Spain +44 203 0369 577 [email protected]

Riccardo Rovere Italy/Scandinavia/CEE/Germany +39 02 8829 604 [email protected]

European Insurance

Gianluca Ferrari Italy and Reinsurance +39 02 8829 482 [email protected]

Simonetta Chiriotti Nordics +39 02 8829 933 [email protected]

Italian Research

Alessandro Tortora Building Materials/Industrials/Capital Goods +39 02 8829 673 [email protected]

Andrea Scauri Oil & Oil Related/Capital Goods +39 02 8829 496 [email protected]

Chiara Rotelli Branded Goods/Consumers Goods +39 02 8829 931 [email protected]

Fabio Pavan Media/Telecommunications/Consumer Goods +39 02 8829 633 [email protected]

Javier Suárez Utilities +39 028829 036 [email protected]

Jean Farah Utilities +44 203 0369 665 [email protected] Massimo Vecchio Auto & Auto Components/Industrials/Holdings +39 02 8829 541 [email protected]

Niccolò Storer Auto & Auto Components/Industrials/Holdings +39 02 8829 444 [email protected]

Nicolò Pessina Consumer Goods/Infrastructure +39 02 8829 796 [email protected]

Sara Piccinini Utilities +39 02 8829 295 [email protected] Simonetta Chiriotti Real Estate/ Industrials +39 02 8829 933 [email protected]

FOR NON US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:

Mediobanca S.p.A. Charlotte Roden

Head of Equity Sales +44 203 0369 537

[email protected] SALES

Angelo Vietri


Christopher Seidenfaden


Lorenzo Angeloni


Timothy Pedroni


Stephane Langlois


European Spec Sales

Gaelle Jarrousse Banks +44 203 0369 530 [email protected]

Carlo Pirri Banks +44 203 0369 531 [email protected]

Gert-Jaap Kraan Insurance +44 203 0369 510 [email protected]

Mediobanca S.p.A. Dominic Bidwell

Head of Equity Trading and Sales Trading +44 203 0369 627

[email protected] SALES/TRADERS

Alessandro Gobbi


Matteo Agrati


Michael Sherry


Roberto Riboldi +39 02 8829 639 [email protected]

FOR US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:

Mediobanca Securities USA LLC Pierluigi Gastone

Head of Mediobanca Securities USA LLC +1 212 991 4745

[email protected]

Massimiliano Pula


Robert Perez


MEDIOBANCA – Banca di Credito Finanziario S.p.A. Piazzetta Enrico Cuccia, 1 - 20121 Milano - T. +39 02 8829.1 33 Grosvenor Place – London SW1X 7HY – T. +44 (0) 203 0369 530































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