By GIOVANNI LEGORANO
Thanks, Mario! With $90 Billion Of Bad Loans, Italy’s Largest Bank Is Being Monkey-Hammered by ECB’s Subzero Rate Policy
By GIOVANNI LEGORANO
“Fixing UniCredit is of paramount importance for Italy’s banking system, for the country’s economy and for the eurozone,” said Fabio Caldato, a London-based partner at asset manager Olympia Wealth Management.
Like most of its Italian peers, UniCredit has sustained a double whammy of ultralow interest rates—Italian mortgage rates are as low as 1%—and a decade of economic doldrums in Italy, which have helped drive up bad loans and batter profits.
UniCredit CEO Jean-Pierre Mustier PHOTO: EMILIO ANDREOLI/EUROPEAN PRESSPHOTO AGENCY
As a result, a plan to reach net profit of €5.3 billion in 2018 appears wildly optimistic, with net profit last year at just €1.7 billion. At the same time, the bank has had to write down €24 billion in bad loans in three years.
These problems have conspired to leave UniCredit’s common equity Tier 1 ratio, an important measure of banks’ capital, at 10.51% at the end of the second quarter, just a hair over regulatory requirements of 10% and lower than the 12.7% for its Italian rival Intesa Sanpaolo SpA.
UniCredit ousted its chief executive this spring, hiring Mr. Mustier in June.
With the stock down more than 60% since the start of the year, Mr. Mustier sought to buttress investor confidence in July by announcing two transactions immediately after taking the helm: the sale of 10% stakes in two of the bank’s crown jewels—online broker FinecoBank SpA and Poland’s Bank Pekao SA.
However, a few weeks later, the stress tests showed that a downturn would leave the bank with a dangerously thin capital buffer of just over 7%. The bank’s stock fell 13% in the days after the stress tests. It has picked up since but is still down 55% in the past year.
Now, Mr. Mustier faces some tough choices as he readies a new strategic plan slated before year’s end. First, he plans to fatten UniCredit’s capital cushion by at least €8 billion, according to a person familiar with his thinking.
But the figure could be higher if the bank decides to sell a large chunk of its bad loans in one go—an option investors are pushing for and Mr. Mustier is considering, the person said.
However, Monte dei Paschi presented a plan in July to sell €28 billion of bad loans at 27% of face value. That has effectively set a new benchmark for the pricing of Italian bad loans. Since UniCredit attributes a higher value to its bad loans, a sale of €20 billion of loans would force it to take €2 billion in write-downs—thus increasing the size of a capital increase.
Mr. Mustier could also sell assets to beef up capital, but such prospects have worsened recently. Turmoil in Turkey would make it hard to sell the bank’s Turkish business. Meanwhile, UniCredit has been in talks to sell its remaining 40% stake in Pekao to Polish insurer PZU SA, but the latter is now interested in buying just 30%, according to people familiar with the situation.
Any capital increase could also collide with Monte dei Paschi’s plans for a €5 billion share sale this winter, amid a market with little appetite for Italian banking shares. Indeed, Monte dei Paschi is considering asking investors to convert riskier bonds into shares to reduce its capital increase.
Finally, Mr. Mustier cannot present his plan until after a national referendum in Italy—likely in late November—that threatens to topple Italian Prime Minister Matteo Renzi’s government and is already unnerving investors.
Write to Giovanni Legorano at firstname.lastname@example.org