We have a €73 target price for UniCredit. In valuing Unicredit, we focus primarily on a DDM valuation, using a c20% sustainable RoTE (adjusted for excess capital), c13% cost of equity and c2% long-term growth. We also take into account the group's capital position, business mix, and capital distribution. We cross-check this with a relative P/TB vs RoTE methodology vs peers. At our target price, the stock would trade at c1.9x P/TB, a premium to the broader sector reflecting the superior return profile.

We identify a number of industry- and company-specific risks that may prevent the shares from achieving our target price. The new group governance could be seen as an opening to external growth via M&A, whereas the previous strategy was focused on organic growth and capital return. This could lead to increasing uncertainty on future business mix and potential execution risk on any deal. In addition, despite strong actions in recent years, asset quality is still an area of focus for investors given the amount of moratoria loans post COVID-19.

Other key risks include potential deterioration in macroeconomic conditions and sovereign volatility, credit rating agency action(s), political developments in Italy and other countries in which the group operates (including Austria, Hungary and Russia), as well as liquidity risks. UniCredit also has significant capital market activities which can be highly cyclical.

If the impact from any of these factors proves to be more negative than we anticipate, the stock will likely have difficulty achieving our financial and price targets. However, if any of these factors proves to have less of an effect than we anticipate, the stock could outperform our target price.