Pair Trade: Long BES - Short UniCredit

Wednesday, November 21st 2012

Investment Case

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Companies Description

Analysts Recommendations:

Source: Bloomberg

Banco Espirito Santo (BES PL) reported a net profit of €65mn in Q3

2012, well above consensus. There were positive news on the capital

(under the EBA criteria, Core Tier 1 reached 10%, above the 9%

required minimum), and liquidity front. The bank has reduced its ECB

reliance to €9.8bn, -28% from June 2012, and the loan-to deposit

ratio fell to 142%.

BES has been able to present a solid capital position without

resorting to public funds. The bank has got an exposure to the

Portuguese export sector, which could make BES a play on the

country’s economic recovery. BES’s exposure to emerging markets is

increasing, mainly through its subsidiaries in Africa and Brazil. The

bank continues to show an appropriate management of its sovereign

exposure. Stronger asset quality deterioration remains our main

concern. BES was the first Portuguese bank able to tap wholesale

funding markets in the current environment.

Unicredit (UCG IM) reported a 3Q2012 net profit of €335m, above

consensus expectations. Capital improved further, mainly due to

continuing RWAs deleveraging (down c€10.9bn over the quarter

ago). The bank seems to be well positioned from a funding and

capital perspective, in a stable sovereign environment. However,

Unicredit is expected to show a low profitability level, with earnings

risk still probably skewed to the downside.

Asset quality challenges are still a burden on the domestic unit. A

better performance from its foreign units (Germany and Poland)

would be important. Investors are uncertain if the bank´s cost

restructuring will be sufficient to boost its return.

The BES PL / UCG IM relative index has a current value of 0.219 We

will define as our target 0.23. 0.21 will be our stop-loss level.

Market Price Data

Banco Espirito Santo (BES PL)

Last Price (€) 0.759

YTD Change -6.80%

Mkt Cap (€ bn) 3,049.6

UniCredit (UCG IM)

Last Price (€) 3.47

YTD Change -17.94%

Mkt Cap (€ bn) 20,102.9

Source: Bloomberg

Market Multiples

P/B ROE DY EPS

Est. 2013 Est. Est. 11/13e

2013 2013 CAGR

BES PL 0.43 3.27% 1.92% 62.6%

UCG IM 0.32 2.63% 3.12% -9.56%

Source: Bloomberg

Next Report Date & Events

BES PL 2012 Results February 1st, 2013

UCG IM YE Results March 15th, 2013

Source: Companies data