Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Italy's battered banking sector desperately needs some good news, and the apparently imminent departure of UniCredit CEO Federico Ghizzoni just might be it.

The country's only systemically important bank has usually played the part of savior of faltering Italian lenders, stumping up cash and underwriting capital increases for national plans to help the weakest of the pack.

Now it looks like UniCredit is the one that needs help. Ghizzoni may step down as soon as Tuesday, according to Bloomberg News, with a change in management likely to pave the way for a painful and dilutive multi-billion-euro capital hike that he's consistently claimed is unneeded. 

The problem is that UniCredit is skating on some seriously thin ice in terms of capital, and that's morphed into a management credibility problem. This could actually be an opportunity and a precursor to the sort of good news story the Italian banking sector badly needs.

Thin Ice
UniCredit's core capital ratio at end-Q1 trails peers and its own regulatory requirements
Source: Bloomberg Intelligence

The lender has one of the lowest core capital levels in Italy relative to the regulatory minimum, according to Bloomberg Intelligence's Jonathan Tyce. For Unicredit to get to a capital level of 12.5 percent by 2018 from around 11 percent it would need to raise 6 billion euros ($6.7 billion), according to Barclays analysts. That's about a third of its current market capitalization.

Raising that kind of money through asset sales will require more than cutting fat -- some of the bank's gems, such as assets in Poland or Austria, will have to be put on the block. That might bring in about 1 to 2 billion euros, but won't be enough to solve the problem. And, it would also cut off revenue streams outside its sluggish domestic market.

A fresh team at the top and a 5 to 7 billion-euro rights offering is a much better approach. Investors already reckon that new blood is needed to replace Ghizzoni and other top executives that have spent virtually all their careers at the bank. With this, the bank can set a better example of governance and shake off its image of financial weakness.

And that image is pretty entrenched. The bank's shares are down 41.5 percent so far this year, making them the fourth-worst performer in the Bloomberg Europe 500 Banks Index (which is down 20.7 percent in the period). It badly needs to close the gap with domestic peer Intesa Sanpaolo, Italy's biggest bank by market cap, in terms of both capital strength and valuation.

Not So Strong
UniCredit shares have lagged rivals and the broader market as investors question balance-sheet risks
Source: Bloomberg

Italy's not short of tales of struggling lenders that are struggling to garner support from private investors as they try to raise cash. In fact, were it not for 1 billion-euro pledges from UniCredit and Intesa, the government-backed bank rescue fund Atlante wouldn't have got off the ground.

UniCredit, despite its capital struggles, is nevertheless in a better position. It's a national champion that investors would likely back under new management and a new business plan. It has franchises in Germany, Austria and Eastern Europe, and a full-fledged investment bank. There's clearly value to be had and, though challenges in the Italian banking industry and its own business outlook will persist, a fresh slab of capital will go some way to helping that be realized.

The only hitch is that by strengthening UniCredit you exacerbate the divide between Italy's strongest and weakest banks -- and therefore the likelihood that UniCredit will eventually have to stump up more cash to support the laggards.

That imbalance is not ideal, in the long term. But for now, more firepower to support the system is better than none.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net