UniCredit Posts Surprise Drop in Capital Ratio, Shares Fall

  • CEO Mustier says bank is reviewing all assets, dividend policy
  • UniCredit announces agreement to sell card-processing business

UniCredit SpA reported an unexpected drop in its key capital ratio in the second quarter, sending shares into a dive as Chief Executive Officer Jean Pierre Mustier seeks ways to shore up buffers.

Italy’s largest lender said its fully loaded common equity Tier 1 ratio, a benchmark for capital adequacy, fell to 10.3 percent at the end of June. The bank made some changes in the calculation, so the 10.9 percent ratio it posted at the end of March would have been 10.5 percent under new method. Factoring in asset sales in July, the June 30 ratio would reach 10.5 percent, the Milan-based bank said in a statement Wednesday.

“The bank’s capital levels are well below expectations, showing that recent disposals have filled a hole instead of boosting capital,” said Wolfram Mrowetz, chairman of Alisei SIM, a Milan brokerage. “The quality of earnings is pretty poor with most of the beat coming from trading.”

Net income rose to 916 million euros ($1 billion) in the second quarter from 522 million euros a year earlier boosted by one-time gains. Earnings beat the 719 million-euro average of 11 analyst estimates compiled by Bloomberg. UniCredit booked a capital gain of 216 million euros from the sale of its stake in Visa Europe Ltd. to Visa Inc.

Shares plunged as much as 5.6 percent in Milan trading, and closed 2.3 percent lower at 1.8 euros, giving the bank a market value of 11.2 billion euros. The stock has lost almost 18 percent of its value since the publication Friday of European stress tests showing UniCredit with thinnest capital margin among banks deemed important to the financial system.

UniCredit said it has agreed to sell its card processing business in Italy, Germany and Austria for 500 million euros to the Italian payments processor SIA. The disposal will generate about 440 million euros in capital for the bank in 2016, the bank said.

UniCredit has struggled to build up capital and meet regulatory requirements, a task compounded by the bank’s complex structure spread across 17 countries. Mustier, a 55-year-old Frenchman who took over as chief executive officer last month, said he will present a plan before the end of the year to strengthen capital and profitability.

“We are over the hardest work of the strategy review,” Mustier said during a conference call Wednesday, adding that it will include all assets as well as dividend policy.

UniCredit is considering tapping shareholders for as much as 5 billion euros and offloading Poland’s Bank Pekao SA and online lender FinecoBank SpA, having already sold more than $1 billion of their shares last month, people with knowledge of the matter have said. The CEO may also dispose of a big chunk of its Italian bad-loan portfolio, they said.

UniCredit said its buffer was affected by a higher level of risk-weighted assets due to increased lending and negative interest rates, partially offset by a reduction in operational risk.

“While capital is disappointing, the company has made an effort to report on a cleaner base its capital ratio and this should remove some overhang from the starting point,” Azzurra Guelfi, an analyst at Citigroup Inc., wrote in a note.

Total revenue rose 7 percent to 6.1 billion euros in the second quarter from a year earlier, as higher income from trading more than offset a decline in fees and income from lending. The lender set aside 914 million euros to cover loan losses in the quarter, compared with 913 million euros booked a year earlier.

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