Giving credit to UniCredit

Mob rule, or the wisdom of crowds? Since the liquidity crunch investors have dumped banks more or less indiscriminately, paying little heed to the actual level of exposure to sub-prime, SIVs and other chicanery.

UniCredit, Italy's largest banking group, has lost a fifth of its market capitalisation in the last six months - only marginally better than the average fall for Eurozone banks. But the bank has so far owned up to minimal US mortgage-related losses, has no unmanageable conduits and was fortuitously late to the leveraged loans party. Thanks to a web of operations in under-geared economies - most of them in central and Eastern Europe - and plenty of scope for cost-cutting, JP Morgan expects earnings growth over the next couple of years to be twice the European average.

Funding, meanwhile, is prudent: almost every network within the group funds itself on at least a 1:1 loan to deposit ratio. Despite all this UniCredit has been marked down to a 2009 price to earnings multiple of about 6.5 times, lower than many more aggressive, capital-constrained peers.

Some concerns may be legitimate. Last year's opportunistic move on Capitalia, Italy's fourth-largest lender, increased UniCredit's weighting to an anaemic domestic economy and added some dubious assets. As for all Italian banks, fee income from corporate finance and asset management will be rocky, while deposit spreads will suffer more than Eurozone peers in the event of falling interest rates, as deposits already pay virtually zero interest.

But chief executive Alessandro Profumo has signalled that no further deals are on the cards until 2010 at the earliest. Until then, the emphasis will be on integrating Capitalia - the easy part - and HVB, the German bank it bought in 2005.

At its current valuation, a bet against UniCredit - now Europe's third-largest banking group by market capitalisation - implies its strategy is about to unravel. That is unduly pessimistic.

Financial Times