UniCredit Drops as ECB Expresses Concerns on Credit Quality

  • Italian bank preparing to raise as much as 13 billion euros
  • Bank expects to miss ECB capital requirements for full year

UniCredit SpA tumbled in Milan trading ahead of a 13 billion-euro ($13.9 billion) capital increase, as Italy’s largest lender cautioned that its new business strategy may not convince the European Central Bank.

The ECB has demanded an improved plan for dealing with bad loans by the end of February, the bank said in a filing Monday detailing the share sale and related caveats. Under a strategy announced in December, the lender intends to use about 8 billion euros to absorb losses on loans that it expects to sell to investors at a discount.

The shares fell more than 6 percent and were down 5.7 percent to 26.12 euros as of 3:56 p.m. in Italy. That compares with a decline of 1.4 percent in the Europe Stoxx 600 Banks index.

“Attention is shifting back to the negative side of the story after the stock’s recent rally,” said Jacopo Ceccatelli, head of Marzotto SIM SpA, a Milan-based broker-dealer. “Investors are paying attention to the risks related to a monster capital raising and today’s filing highlighting them has been the peg to sell shares.”

UniCredit estimates its phased-in common equity Tier 1 ratio, a measure of financial strength, was about 8 percent at the end of 2016, missing the ECB minimum of 8.75 percent because of fourth-quarter charges to cover bad loans. The bank reiterated Monday that it would take a 12.2 billion-euro hit in preparation for the balance sheet cleanup.

The ECB is ramping up pressure on lenders to offload bad assets, especially in Italy where Banca Monte dei Paschi di Siena SpA resorted to a government bailout in December after failing to raise capital to cover loan losses. UniCredit won permission from investors last month for a rights offer to carry out a turnaround strategy under Chief Executive Officer Jean Pierre Mustier.

The offer -- almost as much as the bank’s market value of 16.5 billion euros -- may come as early as Feb. 6, as the board will meet Wednesday to decide terms, Il Sole 24 Ore wrote on Sunday. UniCredit was expected to begin the rights issue after fourth-quarter earnings on Feb. 9.

“The anticipation of the start of the rights offer may put further pressure on UniCredit,” said Fabrizio Bernardi, a Milan-based analyst at Fidentiis Equities who has a hold recommendation on the stock. "We may assume that UniCredit’s historical shareholders may finance their portion of recap selling shares and now have one week less to complete the disposal."

Model Review

UniCredit’s strategy includes reducing risk as outlined by the ECB in its 2016 review of the bank’s capital needs. It remains possible that the steps the bank has already taken are “not enough to counter such weaknesses,” the bank said in the filing.

The ECB has asked UniCredit to present a “strategy for deteriorated loans, supported by an operational plan,” the filing says. UniCredit is among a number of ECB-supervised banks having to submit plans for dealing with nonperforming loans by the end of next month.

“Possible considerations from the European Central Bank over the strategic plan will be communicated as part of the ‘Business Model Analysis 2017’ process,” the filing says, referring to ECB plans to evaluate lenders’ ability to generate returns. The question of profitability has become more pressing in an era of sluggish economic growth, low interest rates and high levels of nonperforming loans.

— With assistance by Sonia Sirletti, Fabio Benedetti Valentini, and Francesca Cinelli

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