UniCredit 2Q 2018 Results as Expected, but Some Warning Lights Starting to Flicker

No-moat Unicredit reported net profit of EUR 1 billion for second-quarter 2018, right on the nose of consensus expectations. The first-half earnings run rate from Unicredit is in line with our full-year growth expectations. The drivers of earnings growth for Unicredit tell a familiar story that we have seen played out at many of its European peers: nonexistent revenue growth, some cost control, but the bulk of earnings growth coming from a reduction in loan-loss provisions. Two issues are of concern to us--first, a markdown of around EUR 1 billion against Unicredit's holding of Italian bonds that bypassed the P&L; and second, an early indication that credit quality might be deteriorating. We maintain our EUR 17 fair value estimate and our no-moat rating.