August 7, 2018 / 7:33 AM / 7 months ago

UPDATE 2-UniCredit sees no threat from widening Italian bond spreads

* Political uncertainty puts Italian bonds under pressure

* Unicredit’s Mustier says bank can absorb impact

* Bank reports best H1 results since 2008

* Shares gain 3.5 pct after results (Recasts, adds CEO comments)

By Stephen Jewkes and Paola Arosio

MILAN, Aug 7 (Reuters) - Italy’s biggest bank UniCredit is not worried about the impact of widening Italian bond spreads and said it was sticking to its targets after its core capital fell in the second quarter.

Italian banks, which hold 380 billion euros ($441 billion) of the country’s government bonds, have been hit by a spike in sovereign borrowing costs due to political uncertainty linked to the country’s new anti-establishment government.

Italian bonds came under renewed pressure last week as Rome continued to send conflicting messages about its fiscal agenda.

In a conference call with analysts after the bank released second quarter results Chief Executive Jean Pierre Mustier said UniCredit was in a position to absorb any impact on its core capital from developments on Italy’s bond market.

“Widening BTP spreads are well under control,” he said, adding he was very confident about the overall strength of the Italian economy.

The bank, which has a BTP portfolio of 44.6 billion euros, said each 10 basis point rise in the BTP spread corresponded to a 2.6 basis point post-tax negative impact on core capital.

UniCredit, Italy’s only global systemically important bank, said its CET 1 ratio - a sign of financial strength - fell to 12.51 percent by June 30, from 13.06 percent at the end of March, with 30 basis points shaved off as a result of a BTP bond selloff.

However it confirmed that, at current BTP spread levels, its core capital would be between 12.3 and 12.6 percent this year and above 12.5 percent at the end of 2019.

After taking drastic action to cut costs and clean up balance sheets, Italian banks are slowly emerging from a bad loan crisis triggered by a deep recession, but the sector is still weighed down by fragmentation and too many branches.

Mustier, who said Unicredit’s sale of operating assets was now at an end, told analysts that the depreciation of the Turkish lira had little impact on the capital position of its Turkish unit Yapi Kredi.

“The bank is performing very well and I see no reason to change its (book) valuation... ours is a long-term commitment,” he said.

Goldman Sachs said on Tuesday that further lira depreciation could erode Turkish banks’ excess capital, adding Yapi was the weakest bank in terms of capital levels.

UniCredit has been restructuring its business since Mustier took over as CEO in mid-2016. It raised 13 billion euros early last year in Italy’s biggest ever cash call to fund a balance sheet clean-up.

The French banker, a former manager at Societe Generale, has sold businesses, cut jobs and shut branches to strengthen the bank’s balance sheet.

“We’ve reached kilometre 21 in the marathon but this is no time for a victory lap,” Mustier said, indicating there was still a lot more work to do.

UniCredit shares were up 3.5 percent by 1344 GMT, outperforming a 0.7 percent gain in the European banking index .

Asked about acquisitions, the CEO said the bank’s plan to 2019 was based on organic growth but said the next plan could also consider external growth.

“Europe needs strong pan-European banks and we intend to be a pan-European winner,” he said.

The bank reported its best first-half results since 2008 but said its net profit for April-June fell from a year ago to 1.024 billion euros due to higher charges and provisions. That was better, though, than an analyst consensus of 975 million euros.

Its gross non-performing exposure (NPE) ratio improved to 8.7 percent in the quarter with a coverage ratio of 60.9 percent.

“Our end 2018 (non-core gross NPE) objective is to reach 19 billion euros, from 22.2 billion at the end of Q2,” Mustier said.

Broker KBW said the results were good, with strong operating trends and better than expected operating earnings.

“Asset quality continues to improve,” the broker said in a note. ($1 = 0.8624 euros) (Reporting by Stephen Jewkes, editing by Susan Fenton)

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