UniCredit Stock: Commerzbank Deal Implication (OTCMKTS:UNCFF)

In our last UniCredit (OTCPK:UNCFF, OTCPK:UNCRY) analysis, here at the Lab, we emphasized a clear upside in the M&A. Combined with an attractive capital return and a solid balance sheet, the leading Italian bank was a clear buy opportunity. No sooner said than done, the Group communicated the acquisition of a 9% equity stake in Commerzbank (OTCPK:CRZBF) (OTCPK:CRZBY). 4.51% was acquired on the market, while 4.49% was bought in the accelerated book building launched by the German government for €13.2 per share. Considering a €702 million investment, we positively value this add-on with potential synergies ahead. The operation would be immediately accretive regarding profits projection, with a limited capital impact on UniCredit CET 1 ratio evolution. In addition, the Italian group also submitted a request to the EU regulator to obtain authorization to increase its stake above 9.9% (there is a 30% equity stake threshold for a full takeover). According to the press release, the company is guiding 15 basis points of capital impact with no changes in the current distribution policy. This is due to the company’s ample capital buffers, which in Q2 reached 16.2% compared to a regulatory requirement set at a minimum of 7% (4.5% as a percentage of risk-weighted assets +2.5% of capital conservation buffer). This report provides our view on the deal and the latest Commerzbank Q2 update.

Commerzbank Deal

As a reminder, UniCredit already has a significant presence in Germany (Fig 1). HypoVereinsBank accounts for 22% of the total company’s sales, and there is also a complementary investment banking business. Considering that, the combined entity would rank first in revenues in the German lending market, ahead of Deutsche Bank. According to our calculation, combining the two German businesses would imply approximately €550 billion in assets. The combined budget will also have circa €350 billion in loan book and approximately €400 in deposit, with a market share of 10%. Looking at the details, Commerzbank is bigger than UniCredit German bank (loans of €225 billion vs. €130 billion. The company is also more balanced between retail and corporate; however, it is much less efficient. In detail, Commerzbank has a cost/income ratio of 60% (Fig 3), while UCG Germany stands at < 45%. On an aggregate basis, in a full bid scenario, Germany’s weight for UniCredit would rise to 40% from the current level of approximately 20-25%.

Running preliminary numbers for a potential complete acquisition, these are our key takeaways:

1. UniCredit has balance sheet optionality to complete the deal. In our numbers, the company would potentially reach a 13% CET 1 ratio with an ample margin of safety;
2. The company could generate solid EPS accretion, even with limited synergies. This would exacerbate the Commerzbank stock’s attractive valuation angle. The Italian bank’s price-to-tangible book ratio now stands around 1.05x, compared to Commerzbank’s around 0.5x. Predicting a 20% majority premium, and considering that Commerzbank has a profitability (RoTE of 8%) compared to over 17% for UniCredit, we might expect a potential 15% upside in the current UniCredit EPS estimates.

Source: UniCredit Q2 results presentation – Fig 1

Commerzbank Q2 results

Looking at the Q2 2024 results (Fig 2), the company reported:

1. Sales of €2.7 billion, with solid contributions from all the business;
2. Operating result to €2.0 billion in the semester;
3. And a CET1 ratio of 14.8%.

In the details, there is a 24% loan loss provision and a 5% increase in Commerzbank’s OpEx guidance. Thirdly, there is a pending litigation concern about the mBank CHF mortgage. On the loan volume, there was a 9% decline in consumer lending, which was offset by corporate clients, which delivered a plus 3% on a quarterly basis and a plus 5% on a yearly comparison. The German mortgage business was stable, but there is a continued shift from sight deposits to call money. This might decrease the NII evolution. That said, the company reiterated the Fiscal Year 2024 NII guidance of around €8.1 billion (Fig 3). While volume growth and loan loss provision are temporary concerns, we believe that OpEx outlook and litigation might trigger future profitability and distributions. The company needs to show effective cost control, considering cost and wage inflation. This might result in a pre-tax consensus downgrade. On the downside, the bank booked €240 million for the CHF litigation and confirmed the total litigation provisions below €1.1 billion. The bank CET 1 ratio is vital. Despite the NII decline due to a normalized interest rate environment and a P&L drag from mBank CHF mortgage litigation, we are below the bank’s net income projection. That said, before the UniCredit acquisition, the bank was trading at a P/E of 5.7x (2025) with a P/TNAV of 0.5x. This is well below EU bank peers with a P/E of 7x and a P/TNAV between 0.8/1x.

Source: Commerzbank’s Q2 results presentation – Fig 2

Fig 3

Valuation & Risks

Starting positively, ECB President Christine Lagarde is open to EU bank consolidation and expresses favorable words. UniCredit trades at a P/E of 6.4x in 2025, with a P/TBV of 0.9x. Here at the Lab, we expect severe scrutiny, which includes Commerzbank’s potential stake build-up and a problematic situation in Germany given the difficult juncture of its economic cycle. Even if our initial view of the deal is positive and the company already operates in the country, we have made no changes to our valuation methodology. Our buy is reiterated with a valuation of €38.55 per share. Including a complete merger and valuing the combined entity with UniCredit current multiple might result in a significant upside opportunity (with a target price of almost €52 per share).

Conclusion

Here at the Lab, we are not speculating on an OPA from UniCredit. There are many downsides to consider. That said, the Italian company is still a buy on a standalone basis. In our previous analysis, there was a risk section; today, we include M&A execution risks, changes in taxation, and potential litigation. In addition, a deal with Commerzbank also needs a favor from the German Union.

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