* Lower than expected loan losses, trading drives profit
* Fees up post-lockdown, loan repayments hit interest income
* Rules out M&A, confident ECB to lift dividend ban in 2021 (Recasts, adds comments from analyst call)
MILAN, Nov 5 (Reuters) - UniCredit has put plans to split its domestic and foreign operations on ice, saying heavy bond buying by the European Central Bank kept its sovereign risk profile in check.
UniCredit, which on Thursday confirmed its profit goals after a stronger than expected third quarter, had been looking to create a sub-holding company for operations in Germany, Austria and eastern Europe to improve its funding costs.
Italy’s second largest bank faces higher sovereign risks in its home market as a result of Rome’s fragile public finances, to which UniCredit has been reducing exposure by cutting its holdings of domestic government bonds.
“Thanks to the massive buying of bonds by the ECB and the very tight spreads on sovereign bonds ... there is no need for us to put in place the sub-holding so the project remains a project,” CEO Jean Pierre Mustier said.
Mustier, whose mandate as chief executive comes up for renewal in the spring of 2021, told a media briefing that UniCredit would hold an investor day by the middle of next year.
“We’ll share the lesson we’ve learnt from the pandemic,” he said, pointing to rapid progress in digitalisation.
Sources had said the asset separation had met resistance inside UniCredit, but it had also been seen as potentially easing tie-ups, including a foreign deal Mustier had sought to strike before focusing on returning more cash to investors.
Mustier’s firm refusal to join a domestic consolidation wave that has seen rival Intesa Sanpaolo snap up smaller peer UBI has left investors guessing at his long-term strategy.
The French banker said he expected an update soon from the ECB on a dividend ban that has derailed his efforts to lift UniCredit’s share price, which is worth less than 30% of the its book value, against Intesa’s 50%.
He declined to comment on reports UniCredit faced government pressure to take on Monte dei Paschi.
“Our plan is based on no M&A. We prefer to transform rather than integrate and use our excess capital to support the economy and pay it back to shareholders when allowed to,” he said.
UniCredit reported a third-quarter net profit of 680 million euros ($798 million), above an average forecast of 334 million euros in a company-provided consensus, and higher core capital.
It said it was on track to hit a target of an underlying net profit of more than 0.8 billion euros this year and of between 3.0-3.5 billion in 2021, which it uses for capital distribution.
A surge in trading income helped to lift revenue by 4.4% from the three months through June. Fees also recovered as commercial activity picked up in the bank’s main markets when governments eased coronavirus restrictions.
Unlike Intesa, which on Wednesday also beat expectations with a strong third quarter, UniCredit saw income from lending decline despite funds borrowed by the ECB at negative rates, after customers used government-guaranteed funds to repay loans.
Mustier said UniCredit, which slightly raised its target for cost cuts, would expand lending once the economy improved.
Although lower than expected loan losses helped in the third quarter, UniCredit said will step up provisions against credit risks in the last quarter to prepare for the impact of the pandemic in line with its guidance for the year.
UniCredit shares were up 0.7% at 1148 GMT against a flat European sector. ($1 = 0.8517 euros) (Additional reporting by Gianluca Semeraro; Editing by Muralikumar Anantharaman, Jane Merriman and Alexander Smith)