UniCredit, BNP Show Signs of European Bank Recovery

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UniCredit SpA (BIT:UCG) (BIT:UCGR) showed a year over year decrease in profits and revenue for the first quarter of 2013.

Profits declined from 914 million euros last year to 449 million euros; and revenues fell from 7.11 billion euros last year to 6.08 billion euros. Its rival, BNP Paribas SA (EPA:BNP), also experienced a profit decrease year over year from 2.9 billion euros to 1.6 billion euros. However, BNP Paribas had revenues increase by 169 million euros relative to the first quarter of 2012. Both banks reported profits above consensus expectations.

UniCredit, BNP Show Signs of European Bank Recovery

According to Morgan Stanley, UniCredit SpA (BIT:UCG) (BIT:UCGR) is benefitting from revenue stabilization and cost control. Net interest margins (NIM) expanded as competition subsided. There is still room for improvement in NIM, which depends on a recovery of loan growth. Costs could be lower than expected, according to Morgan Stanley (NYSE:MS) analysts, as Unicredit has a 1.8 billion euro cost savings plan and strict controls on expenses.

UniCredit (UGG) No Change In Loan Loss Provisions

Asset quality has improved over the quarter as loan provisions came in better than expected. However, non-performing loans kept growing at a slower pace. UniCredit SpA (BIT:UCG) (BIT:UCGR) has not changed guidance for its fiscal year 2013 loan loss provision, which is just a bit smaller than the 2012 loan loss provision. Regarding capital, Unicredit has strengthened its position by generating cash and reallocating capital from Germany to Italy. Overall, Morgan Stanley (NYSE:MS) analysts recommend buying the stock and have a 5.50 euro price target.

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BNP Paribas revenue improvement was bolstered by core French and Benelux retail businesses, low cost financing, and insurance growth in Asia. Factors that affected revenues negatively include the decline of over 20 percent in investment banking revenue and the higher cost of risk in Italy. As in Unicredit’s case, loss provision trends have been better than expected. According to Nomura analysts, BNP Paribas SA (EPA:BNP) stock is attractively valued and they forecast double digit return on equity and a target price of 56 euros.

Both banks can be affected by macroeconomic factors that may increase the need for loss provisions. BNP Paribas SA (EPA:BNP) has one of the strongest balance sheets in Europe, which provides it with a competitive advantage over UniCredit SpA (BIT:UCG) (BIT:UCGR) in terms of funding growth. Asset quality in UniCredit SpA (BIT:UCG) (BIT:UCGR) could continue to deteriorate as non-performing loans are still growing.

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