UniCredit reported an underlying 19 percent rise in third-quarter net profit to 1.122 billion euros ($1.6 billion), but credit market woes took a chunk out of investment banking profits at Italy's largest bank.
The bank said pre-tax profit at its investment bank fell by 215 million euros to 123 million euros as it was hurt by 'mark-to-market' valuation writedowns on structured credits.
Shares in UniCredit were up 0.39 percent at 5.6050 euros by 1340 GMT when the DJ Stoxx European banking sector index was up 2.5 percent.
Analysts had on average expected UniCredit to post a net profit of 995 million euros, according to the bank's own survey.
Chief executive Alessandro Profumo said integration of Capitalia, an Italian retail bank acquired in October, was going smoothly and dismissed rumours that UniCredit was encountering problems at its German subsidiary HVB.
"I have heard a lot of rumours. The only one missing is that I have run off with a Brazilian dancer," Profumo told analysts.
Investment Banking Hit
A slide presented by UniCredit to analysts showed net losses resulting from structured credit exposures of 272 million euros in the quarter. The losses stemmed from 'mark-to-market' writedowns of exposures of 282 million euros, adjusted for net revenues of 10 million euros.
"The bad trend in third quarter (investment banking) profitability is offset by the good performance of other divisions," Deutsche Bank analysts said in a note.
Banks in North America and Europe have taken charges running to 10s of billions of dollars on holdings in mortgage-backed securities which have been hit by a meltdown in U.S. subprime mortgages -- loans made to borrowers with weak credit histories.
UniCredit, which has the biggest international profile of any Italian bank, also said that its net trading, hedging and fair value income was a "negative 11 million euros" in the quarter due to the U.S. subprime mortgage market crisis.
"The bank was used to turning in about 500 million euros of trading income profit per quarter, while this time they have been hit," said a banking analyst. "But the operating results are not bad at all."
"Negligible" Subprime Exposure
The Milan-based bank also said its exposure to U.S. subprime credit -- which is far lower than that of some of its European peers -- had fallen to 246 million euros at the end of September from 354 million euros at the end of June.
Profumo described the bank's subprime exposure as "completely negligible."
He also said that if UniCredit was forced to bring off-balance sheet debt investment vehicles, known as conduits, onto its books, there would be no negative impact on earnings.
Conduits and structured investment vehicles (SIVs) have been set up by many banks to get round regulatory and capital adequacy rules and many have invested heavily in asset-backed securities, which have been hit by the subprime crisis.
UniCredit had cut its overall conduit exposure by 1.5 billion euros to 10.3 billion euros, said Profumo.
Profumo's deputy, Sergio Ermotti, said he believed structured credit had a future once the crisis blows over. "I do think that when the market settles down, the credit market will present opportunities and we will not be a marginal player."
If extraordinary items are included in the comparison, Unicredit's net profit would have fallen by 23 percent as the bank posted a third-quarter profit of 1.462 billion euros in 2006, benefiting from one-off capital gains from asset sales.
Investors have penalised UniCredit more than any of its Italian bank peers since the subprime-linked credit crisis reached its peak in August. The stock has shed nearly 10 percent in three months and nearly 16 percent since the start of 2007.
UniCredit said its nine-month proforma net profit for the combined bank was 5.3 billion euros.
Profumo said UniCredit would complete an assessment of Capitalia's loan portfolio by the end of the year and reiterated that the bank's acquisition would increase profits in 2009.
UniCredit also said its core Tier 1 ratio, which indicates regulatory capital put aside against risk, was 5.98 percent. For the combined group, the pro-forma core Tier 1 ratio at the end of this year's nine months was 6.03 percent.