Exploring UniCredit Bank's Financial Aspects And Issues Faced In An Essay.

Financial aspect of the company

Discuss about the Bank Specific Variables On Non-Performing.

UniCredit Bank ranked in the 7^th position under the Hungarian market for baking and holds a strong position with regard to serving the corporate clients and is becoming more important in serving the customers from retail sectors. The company delivers banking services and products to the private customers, medium and small sized enterprises and large corporate all over Hungary. It operates through private banking, retail, CIB and various other segments. Further, it offers the free purpose loans, housing mortgages, credit cards and refinancing services. Further, the company provides various saving products like investments funds, promotional deposits, government equities and bonds, various saving products like credits and insurance savings and health insurance. The vision of the bank is to be “One Bank, One UniCredit”. Further, the bank’s top priority is to serve their customers at each minute of the day with the best possible way they can (Unicreditbank.hu 2018).

After suffering several years of losses the Hungarian banking sector recorded the profits after deduction of taxes amounted to HUF 456 billion. However, the improvements with regard to profitability also led to significant reduction in bank levy, improvements in the portfolio cleaning and led to favourable labour and economic market developments. UniCredit Bank experienced highly successful year in 2016 and surpassed the historic level of the year 2015 in terms of balance sheet total and they ranked 3^rd among all the banks in Hungary (Gunter, Krenn and Sigmund 2013).  Though the interest rate is falling continuously over the last few years, the bank experienced outstanding 39% increase in profits. The bank’s balance sheet total for the year ended 2016 amounted to 1,737 billion forint and the amount was 1% more as compared to the previous year. On the basis of the total assets it achieved 8.9% of market share during the year 2016. The company earned 53.7 billion forint as outstanding profit after tax and 20% return on the equity. The reason behind this was the strong customer base, outstanding cost efficiency of 40% and excellent quality of loan portfolio. Further, the revenue of the company was increased by 2.3% in 2016 as compared to the revenue of the previous year. However, owing to the decline in the interest rate the interest income reduced by 1.6% and the reduction was offset by increase in the commissions and fees by 1.6% and enhancing trading result by 25%. The year 2016 was successful year for the bank with regard to the developments of the customer volumes. The loan portfolio of the bank’s customers were increased by 5.8% and volumes of deposits increased by 3.1% instead of the changes in the investment and savings preference of the customers by low rate of interest. 

Issues faced by the bank in recent times

Various issues faced by the bank in recent times are as follows –

• Capital – common tier 1 ratio for equity that is used for measuring the financial strength lags behind its most of the peers. The bank is further weakened in the 1^st quarter as it slipped by 10.5%. It raised concern regarding strength of the bank. Further, the cash call for the shares failed to attract the investors in sufficient numbers (Weygandt, Kimmel and Kieso 2015). It could further lower the capital ratio of the company below minimum regulatory requirement. Subsequently the company backstopped the cash call through systemic rescue fund.

(Source: Ft.com 2018)

As per the analyst, the bank requires to raise € 5 billion to € 10 billion additional capital to adjust their balance sheet.

• Bad debts – the reason why the analysts are in the view that UniCredit requires more capital is that the bank has one of the largest portfolios for non-performing loan among all the banks in Europe. It amounts to more than € 80 billion that is more than 1/5^th of the total receivables and customer loans of the bank (Warren and Jones 2018). However, owing to lack of the economic growth and fragile economic recovery trends UniCredit may face further provisions for covering up additional amount of bad debts.

(Source: Ft.com 2018)

For solving the above issues and boost up the capital position of the company, the bank shall simplify the strategy, structure and it shall avoid doing the expansions of last 2 decades. 

It can be recognized from the horizontal analysis of Unicredit bank for the year ended 2014, 2015 and 2016 that the company has satisfactory performance. If the net interest income is of the company is considered it can be identified that the interest income of the company fell by 2.07 in 2015 as compared to 2014 and it further fell by 3.65% in 2016. However, the shortfall has been compensated by increase in the commission and fees income. It was increased by 6.175 in 2015 as compared to 2014 and further increase by 7.83% in the year 2016. The total operating income of the company in 2015 was lower by 5.26% as compared to 2014 (Shingjergji 2013), However, it managed to increase the operating income by 2.15% in 2016.  If the financial activity result is considered, it is found that the result was lower by 4.89% in 2015 as compared to 2014. However, the company managed to increase it by 0.23% in 2016 as compared to 2014. Further, the company had shown improved result with regard to its operating cost (Dietrich, Wanzenried and Cole 2015). It was able to reduce the operating cost in 2015 by 37.08% and further by significant 51.84% during 2016 as compared to the year 2014. The reason behind this was there was no provision for FX loans compensation for the year 2015 as well as 2016.  Finally, it was found that the net profit of the company was 141.43% higher in 2015 as compared to 2014 and the company experienced significant increase in net profit for the year 2016 by 234.90% as compared to 2014 (Heikal, Khaddafi and Ummah 2014). 

Looking at the balance sheet of the bank, it was found that the plant, equipment and property of the company had been reduced by 10.94% in 2015 and further by 13.96% in 2016 as compared to the balance of 2014. The company was able to enhance their cash balance in 2015 by 38.84% as compared to 2014 (Vogel 2014). However, for 2016 the increase was just 5.26% as against 2014. If the total assets are considered, it can be identified that UniCredit was able to increase the total asset by 21.19% in 2015 and further by additional 1.23% in 2016 as compared to the year 2014 (He and Krishnamurthy 2013). On the other hand, if the liabilities are considered it can be recognized that the liabilities of the company had been increased by 22.18% in 2015 as compared to 2014 but the company was able to reduce the liabilities by 1.10% as compared to the year 2015 which is a good sign for the company in respect of liquidity (Kraft 2014). Considering the shareholder’s equity it is found that the equity of the company increased by 12.25% in 2015 and further by additional 22.38% in 2016 as compared to their respective previous years. The contribution behind this increase was the increase in statutory reserve, valuation reserve and retained earnings.

Analysis of vertical and horizontal explanation

Looking into the income statement of the company it is identified that the net profit of the company is in the increasing trend for the last 3 years. The net profit for the year 2014 was 14.36% whereas it increased to 36% in 2015 and further went up to 48% in 2016 (Edmonds et al. 2013). The reason was that the company was able to reduce its operating cost over the years. The operating cost of the company for the year 2014 was as high as 84.22%, However, the company was able to reduce it to 55.71% in 2015 and to 40.46% in 2016. The operating income of the company for 2014 and 2015 is more or less same and reduced by 4% in 2016 (Wahlen, Baginski and Bradshaw 2014). The reduction was due to the reduction in interest income and income from commission and fees.

Analysing the balance sheet of UniCredit Bank vertically for the year ended 2014, 2015 and 2016 it is found that the performance of the company is quite stable. The liability of the company for all the 3 years are more or less 90% and equity is more or less 10%. Therefore, the company is highly leverages as it has pay large amount towards debt repayment and interest on debt. However, if any further fund is required, it shall raise it through equity and not debt to maintain balance between debt and equity (Dewachter et al. 2015). 

Return on equity – it is one of the profitability metrics and it reveals the earning of the company after tax as compared to the total shareholder’s equity of the company. It states the efficiency of the company with regard to the usage of money from the shareholders for generating the profits and growth of the company. The return of 1 represents that for each dollar of shareholder’s equity, the company generates 1 dollar as net income. It can be identified from the calculation table that the return on equity of the company for all the three years is significantly low. It was able to earn the return at 0.179, 0.014 and 0.179 respectively for 2014, 2015 and 2016.

Return on assets – it is the financial metrics that measure the profit percentage of a company as compared to the overall resources. It can be identified from the calculation table that the return on asset of the company 0.007, 0.014 and 0.020 respectively for the year 214, 2015 and 2016. It represents that on every dollar invested in the assets it generates income of 0.007, 0.014 and 0.020 dollar for the last 3 years which is considered to be very low.

Ratio analysis

Operating profit ratio – it was recognized from the computation that the operating profit of the company for 2014 was 7.63%. However, it reduced to 3% in 2015 and further reduced to 2.20% in 2016. 

Debt to asset ratio – it reveals the financial leverage of the company. It states the percentage of assets financed through debt, liabilities and creditors. It can be identified from the calculation that for all the year company’s assets were more than the liabilities.

Debt to equity ratio – it represents the amount of debt the company is using for financing the assets as compared to the equity of the shareholders. From the calculation it can be identified that the debt to equity ratio of the company for all the 3 years is more than 8. Therefore, the debt of the company is significantly high as compared to its equity.

Interest margin ratio – it measures the difference among the interest income earned by the bank and the interest paid by it to the lenders or depositors as compared to the invested assets. The positive ratio represents that the investment is successful (Bodie, Kane and Marcus 2014). The interest margin of UniCredit bank is in increasing trend and it increased from 3.98 in 2014 to 5.61 in 2016. Therefore, the investment of the bank is quite successful. 

Conclusion and recommendation

It can be concluded from the above analysis that the the net profit of the company is in the increasing trend for the last 3 years. The net profit of the company increased from 14.36% in 2014 to 36% in 2015 and further to 48% in 2016. Further, the interest margin of the company has shown an increasing trend and the investment of the bank is considered to be profitable. However, the company is highly leveraged as 90% of its finance is raised through debt and only 10% is raised through equity. Therefore, it has pay large amount towards debt repayment and interest on debt. Thus, if any further fund is required, it shall raise it through equity and not debt to maintain balance between debt and equity.

Reference

Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.

Dewachter, H., Iania, L., Lyrio, M. and de Sola Perea, M., 2015. A macro-financial analysis of the euro area sovereign bond market. Journal of Banking & Finance, 50, pp.308-325.

Dietrich, A., Wanzenried, G. and Cole, R.A., 2015. Why are net-interest margins across countries so different?.

Edmonds, T.P., McNair, F.M., Olds, P.R. and Milam, E.E., 2013. Fundamental financial accounting concepts. New York, NY: McGraw-Hill Irwin.

Ft.com., 2018. UniCredit’s new chief will face four main challenges. [online] Available at: https://www.ft.com/content/4bfcad98-2249-11e6-9dea-6c9f084f551d [Accessed 11 Jan. 2018].

Gunter, U., Krenn, G. and Sigmund, M., 2013. Macroeconomic, market and bank-specific determinants of the net interest margin in Austria.

He, Z. and Krishnamurthy, A., 2013. Intermediary asset pricing. The American Economic Review, 103(2), pp.732-770.

Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia stock exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.

Kraft, P., 2014. Rating agency adjustments to GAAP financial statements and their effect on ratings and credit spreads. The Accounting Review, 90(2), pp.641-674.

Shingjergji, A., 2013. The impact of bank specific variables on the non performing loans ratio in the Albanian banking system.

Unicreditbank.hu., 2018. Magánszemélyek. [online] Available at: https://www.unicreditbank.hu/hu/maganszemelyek.html [Accessed 11 Jan. 2018].

Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education.

Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.