Oct. 6 (Bloomberg) -- UniCredit SpA Chief Executive Officer Alessandro Profumo said Italy's biggest bank underestimated the global financial crisis, forcing him to cut profit forecasts and propose raising capital.

UniCredit fell as much as 16 percent in Milan trading to 2.59 euros, near an 11-year low, before closing down 5.5 percent at 2.91 euros, cutting the bank's market value to 39 billion euros ($53 billion).

``We made some mistakes in evaluating the market scenario, that's absolutely clear to us,'' Profumo said on a conference call with analysts today. ``Waves of market turbulence,'' a deteriorating macroeconomic scenario and ``unprecedented lack of trust among financial institutions'' led to the need to raise capital.

European governments from Brussels to Berlin have rushed to shore up faltering banks in recent weeks as the credit crunch worsened in Europe. BNP Paribas SA, France's biggest bank, today agreed to take control of Fortis in Belgium and Luxembourg for 14.5 billion euros ($19.8 billion). In Germany, the government and the country's banks and insurers agreed yesterday on a 50 billion-euro rescue of commercial property lender Hypo Real Estate Holding AG.

Short Selling

To try to slow the decline in UniCredit's share price, which fell 24 percent in three days last week, Italy's government temporarily banned short selling of financial shares, and Prime Minister Silvio Berlusconi said bank deposits would be guaranteed. UniCredit last week insisted it wouldn't need to raise capital.

Milan-based UniCredit yesterday said it would boost capital by as much as 6.6 billion euros. The bank plans to pay out next year's dividend in new shares, a move that will increase capital by 3.6 billion euros. UniCredit will also offer new stock worth 3 billion euros to existing shareholders for 3.08 euros a share. The bank's biggest stakeholders have agreed to buy convertible bonds in the first quarter of 2009 to make up any difference should shareholders not fully subscribe to that rights offer.

Improving Ratios

The plan aims to raise Tier I capital, a measure of the banks' financial strength, to 6.7 percent by the end of the year, from 5.7 percent now, Profumo said. A core Tier I of 6 percent or higher is considered adequate for banks.

``This capital increase marks a 180-degree turn for management,'' Goldman Sachs analysts Jernej Omahen, Pawel Dziedzic, Monica Kalia and Robin Wrench wrote in a research report today. ``We believe that UniCredit's credibility will suffer further with a clear valuation impact.''

UniCredit also cut its earnings estimates for 2008 by 25 percent, saying that earnings-per-share for 2008 would be 39 euro cents. That forecast excludes the effect of the capital measures, which will further dilute EPS. Profumo had said as recently as Sept. 9 that a target of 52 euro cents was ``still achievable.'' Net income for 2008 will be 5.2 billion euros, down from 6.6 billion euros a year ago, Profumo said.

UniCredit was also forced to write down another 700 million euros in loans and bonds in the third quarter, Profumo said. That includes 500 million euros of asset-backed securities and 200 million euros of other bonds, he said.

Cutting Targets

Analysts at Credit Suisse reduced their target price on the stock to 4.4 euros from 5.2 euros ``in light of the earnings per share downward revision,'' according to a research report published today. Credit Suisse maintained its ``outperform'' rating on the stock as the shares are ``at a discount to the sector.''

UniCredit will sell its 3.5 percent stake in Assicurazioni Generali SpA, currently worth 1.1 billion euros. The bank will also sell off more real estate and some branches of Capitalia, the Rome-based bank it acquired last year.

UniCredit plans to continue to hold an indirect stake in Generali through its shareholding in Mediobanca SpA. UniCredit owns 8.7 percent of Mediobanca, which in turn holds 15 percent of Generali. UniCredit's stake in toll-road company Atlantia SpA is ``not strategic'' and could be sold, Profumo said.

The bank will implement a stricter cost-cutting policy, including a freeze on new branch openings in Eastern Europe, Profumo said. This and other measures will allow total costs to decrease in 2009, he said.

Won't Resign

The moves are meant to ``send a strong signal to clients and investors'' to reassure them about capital strength, Profumo said in an interview with Bloomberg Television. He denied rumors that he planned to resign, saying he will ``stand by'' the bank's employees and management team.

UniCredit ``will have to prove its ability in managing a phase of consolidation,'' Pio De Gregorio, Centrobanca SpA's head of equity research and trading in Milan, said in an interview with Bloomberg Television. ``UniCredit's strengths, its exposure to central and eastern Europe, are now seen as weaknesses.''

Profumo took advantage of the stock's decline to buy 150,000 UniCredit shares today at an average price of 2.76 euros each, the bank said in filings.

In addition to underestimating the ``length and depth'' of the crisis, Profumo said the bank also erred in acquiring several rivals at the ``top of the market.'' In retrospect ``we could have waited,'' he said, referring to acquisitions in Ukraine, Kazakhstan, Austria and Russia, and the purchase of Capitalia. Still, the bank has no plans to exit any markets, the executive said.

To contact the reporter on this story: Alessandra Migliaccio in Rome at amigliaccio@bloomberg.netTommaso Ebhardt in Milan at tebhardt@bloomberg.net

Last Updated: October 6, 2008 11:52 EDT