As UniCredit posts ever improving results, culminating in 2023's record annual profits, it has put itself in an enviable position of strength when it next comes to the debt markets for funding.
Last week was one of the busiest for the number of additional tier one (AT1) notes sold as four European banks raised $2.2bn-equivalent in dollars and euros in the most subordinated bank debt capital, all at tight valuations.
Most of these capital offerings were printed fresh off the issuing banks’ publication of their annual results. There was no deal from UniCredit and a look into the bank's evolving business suggests that it can pick and choose when it will come to the market.
The spotlight last week fell on UBS Group’s capital deal as it came just a day after it posted its full annual results for the year giving a better glimpse into how it was absorbing and integrating Credit Suisse’s business. It makes for an interesting contrast with UniCredit.
Being the only deal from last week's quartet to come with 144A documentation, allowing sales into the US, as well as offering what some may call a Swiss premium for what happened with Credit Suisse’s $17bn-equivalent of AT1s last March, UBS’ $1bn note attracted the largest order book of new AT1s — nearly 12 times the size of the deal.
But UBS has a need to supplement its tier one leverage ratio and increase its capital in relation to its risk weighted assets following the takeover of its rival, precisely because Credit Suisse’s AT1 capital was wiped out. That means UBS is going to be a regular issuer in the asset class as, per its earnings, it plans at least one more $1bn AT1 by the end of 2024 and $5bn-$7bn more following the latest deal.
Contrary to that, UniCredit has created a scarcity for its debt capital. The Italian lender also indicated in its earnings last week its capital issuance plans: a combined volume of €2bn in tier two and AT1 capital for all of 2024. But having already printed a €1bn 5.375% 10.25 year non-call 5.25 tier two in early January that leaves space for only up to €1bn of the most junior debt.
At the same time UniCredit is forecasting likely reductions in its risk-weighted assets, suggesting a new AT1 deal is not a certainty. It is also safe to assume that despite the conducive funding conditions in February, it is still seeing the cost of raising capital too expensive in euros — the only currency the bank can issue AT1s in.
Moreover, UniCredit also redeemed a €1.25bn 6.625% AT1 on its first call date last June without replacing it, as it had enough of its own funds to pay back the bonds.
At the time, that move created chatter among FIG market participants about the decision as some expected a deal to come. But none has materialised yet, and given its strong financial metrics — allowing it to plan for full distribution to its shareholders this year – there is further reason to think one may not be forthcoming.
Since last June, investors looking to buy into UniCredit’s growth story led by its chief executive officer Andrea Orcel could only have done so through its new tier two debt or through secondary markets. But with its plan to buy back its own shares, equity too is becoming more scarce. UniCredit’s share price is up more than 20% since the start of this year, following an eye-watering 85% rise over 2023.
While banks coming to the debt markets in 2024 have found an eager investor base, when, or if, UniCredit comes it should be able to dictate terms entirely to its own advantage.