(Bloomberg) -- UniCredit SpA raised its full-year profit target and said it will boost shareholder payouts, after a surge in lending revenue helped the bank post its best-ever first-quarter. 

The Milan-based bank expects adjusted profit this year above €6.5 billion ($7.2 billion) and investor returns about €500 million higher, according to a statement on Wednesday. Key performance metrics for the period — including net income — were all better than expected. 

Since taking charge at Italy’s second-biggest bank almost two years ago, Chief Executive Officer Andrea Orcel has trimmed costs and shifted focus to better performing businesses, and is now catching the tailwind of higher European Central Bank rates. UniCredit is now sweetening a buyback and dividend strategy that’s already one of the region’s most generous, even as turbulence in the banking sector persists. 

UniCredit rose as much as 6% and was up 5.3% at €18.56 as of 9:28 a.m. local time, giving it a market value of €36 billion.

“The improved macro-outlook and rate environment, positive business trends and our continuing transformation and strengthened lines of defense have enabled us to increase our 2023 guidance,” Orcel said in the statement. 

Among the bright spots of the earnings was revenue rising 18% from a year earlier and net interest income jumping 44% from the same period in 2022. 

“UniCredit reported a stronger than expected net profit, better than expected capital generation and more resilient balance sheet,” Azzurra Guelfi an analyst at Citigroup Inc., wrote in a report. “We expect this outperformance to continue thanks to continued consensus upgrades, higher capital return and undemanding valuation.”

While retail deposits at Italian banks declined 3.6% in the quarter, UniCredit’s deposits from customers increased by 2.4% in the period. Still, the average commercial deposits of the Milan-based lender were down 1.6% to €479.4 billion. Orcel said that the bank is unlikely to be affected by some of the cash flight affecting US banks.

“Our deposits are sticky,” as we have a significant amount of deposits that are from retail and small and medium sized firm, Orcel said on a media call. “We have a completely different dynamic from high net worth or larger corporate deposits, as such we have seen none of the dynamics that you have seen in the US so far.”

Still, UniCredit booked €93 million in additional provisioning in the quarter, while its non-performing loan ratio stood at 2.7% in the period. Orcel has often said the bank is “well positioned” for a period of macroeconomic uncertainty with extra provisions — so-called overlays — against potential losses at about €1.8 billion.

UniCredit’s common equity tier 1 ratio, a key measure of financial strength, was broadly in line with the end of December at about 16%.

What Bloomberg Intelligence Says: 

UniCredit’s well-rounded 1Q consensus beat for revenue, costs and CET1 shows good execution of the “Unlocked” program, with 2023 guidance upgrades across many financial lines encouraging for further share buybacks, a key investment thesis for the lender. Management’s capital-distribution target of €5.75 billion this year is expected to be less than net profit, suggesting a greater returns capability in 2024.

— Lento Tang and Ilia Shchupko, BI banking analysts

Orcel said he sees “greater value” in repurchasing stock instead of pursuing M&A, given the bank’s performance and valuation. While he said that “strategically and industrially” there are a number of M&A opportunities in Europe, the financial valuations don’t make them appealing.

“If value propositions were to change, we would consider differently,” he said.

A longtime dealmaker, Orcel has repeatedly said he’ll evaluate all available strategic options and consider mergers and acquisitions provided they add value. UniCredit’s talks with Italy’s government on a takeover of struggling lender Banca Monte dei Paschi di Siena SpA broke down in 2021, while a leak about a bid on Banco BPM SpA on February 20222 pushed up the smaller rival’s shares, scotching a deal.

In recent weeks speculation has mounted on a possible bid for Banco BPM, as relative valuations are favorable to UniCredit. A combination between the two banks “could bring earnings-per-share accretion while not derailing buyback capacity,” analyst Benjie Creelan-Sandford at Jefferies International Ltd wrote in a May 2 report.

Russia derisking

Orcel has hedged his bets on Russia by holding off on the same kind of full-scale exit as rival Societe Generale SA, instead continuing to reduce the size of the business. UniCredit said that it has cut its total Russian cross-boarder exposure by 68%. Rival Raiffeisen Bank International AG said in March it plans to sell or spin off its Russian subsidiary.

The unit’s profit stood at €98 million in the quarter. UniCredit took almost €2 billion of charges on the unit following the invasion of Ukraine in 2022, in a bid to defend against the impact of a potential full loss of the business there.

Read More on UniCredit:

• UniCredit Redeems AT1 Bond in First Test Since Credit Suisse
• UniCredit CEO Orcel Says Bank Failures Were Isolated Cases

--With assistance from Antonio Vanuzzo.

(Adds Raffeisen plans on Russia)

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