UniCredit, the Italian banking giant, has been on a tear. Ten straight quarters of profitable growth, record earnings, and a leadership position in shareholder distributions - they're doing everything right, or so it seems. But hidden in plain sight within their latest transcript is a potential game-changer that no one seems to be talking about: the uniquely low deposit beta in Italy.

On the surface, this low beta is fantastic news. It means UniCredit is enjoying a massive boost in net interest income as rising interest rates haven't forced them to aggressively hike deposit rates. Compared to their Northern European counterparts, where betas are already normalizing above historical levels, Italy's 11% beta is a dream come true.

But what if this dream is actually a ticking time bomb? What if this low beta is not a sign of superior client loyalty or brilliant strategy, but rather a delayed reaction waiting to unleash its full force?

Here's the hypothesis: Italians, known for their savings-oriented culture, have been hit with a double whammy. Not only have they endured years of negative interest rates, but now they're also facing a sudden surge in attractive yields on Italian government bonds (BTPs). This has triggered a massive shift from traditional deposits to higher-yielding assets.

UniCredit's own data confirms this: their asset under custody (AUC) figures, primarily driven by BTPs, soared €11 billion in just one quarter. This suggests that Italians are not simply holding onto their cash, they're actively moving it into investments, bypassing the traditional deposit channel altogether.

The potential consequences are significant. If this trend continues, UniCredit's low Italian deposit beta will eventually catch up with reality. A sudden surge in deposit repricing could drastically impact their net interest income, negating the advantage they've enjoyed for the past several quarters.

Deposit Beta Comparison

The following table compares UniCredit's deposit betas across different regions in Q2 and Q3 2023. Note the significant difference between Italy and other regions.

Let's look at the numbers. UniCredit's net interest income sensitivity for a 1 percentage point change in deposit beta is €130 million at current rates. If Italy's beta were to normalize to, say, 30%, in line with historical levels, it would translate to a potential €2.5 billion hit to their NII.

This is not an immediate threat, but it's a looming risk that needs to be addressed. While UniCredit is confident about maintaining its 2023 distribution levels for the foreseeable future, this Italian deposit beta time bomb could derail their long-term profitability and growth ambitions.

"Stefano Porro (CFO): "Clients, especially in Italy, are diversifying their saving into more assets under custody product. The deposits are still well above pre-2020 levels. We expect the overall deposit value to continue slightly declining in 2023." - Q3 2023 Earnings Call"

The management team acknowledges the potential for NII compression as the interest rate cycle peaks and pass-through normalizes. But they seem to downplay the magnitude of the Italian beta risk, focusing instead on mitigating factors like volume growth and replication portfolio benefits.

However, these mitigating factors may not be enough. UniCredit's future hinges on navigating this deposit beta time bomb with a proactive strategy. They need to actively encourage clients to return to traditional deposits, potentially through more competitive pricing or innovative product offerings. They also need to accelerate their efforts in diversifying their revenue streams, particularly by boosting fee income from their product factories.

Ignoring this looming risk could have serious consequences. While UniCredit is enjoying the fruits of its transformation, this Italian deposit beta time bomb has the potential to shake the very foundation of its success. The question is: will they defuse it in time, or will they let it explode?

Hypothetical Impact of Deposit Beta Normalization on NII

The chart below shows a hypothetical scenario of how UniCredit's NII could be impacted if Italy's deposit beta were to normalize to 30% in 2024.

"Fun Fact: The term "beta" in finance comes from the Greek letter β, often used to represent a stock's volatility relative to the overall market. In the context of deposit beta, it measures how much deposit rates change in response to changes in market interest rates."