UniCredit $21 Billion Bad-Loan Sale Draws ECB Scrutiny

Updated on
  • ECB said to examine impact on capital of sale structure
  • A lower price could lead to higher provisions for the disposal

Jean Pierre Mustier, chief executive officer of UniCredit SpA, poses for a photograph during the Ambrosetti Forum in Cernobbio, Italy, on Saturday, Sept. 2, 2017. Policy makers and business leaders meet at the forum to discuss local and global issues. Photographer: Stefan Wermuth/Bloomberg

(On Feb. 23, 2018, the first deck head and first three paragraphs of story published Oct. 30 were corrected to clarify that the ECB was reviewing the structure of the FINO transaction in relation to its impact on the bank’s capital, not the pricing per se.)

The European Central Bank is examining UniCredit SpA’s landmark sale of 17.7 billion euros ($20.6 billion) of bad loans to assess the impact on the bank’s capital, according to people familiar with the matter.

The ECB is assessing if the price the bank reported is inflated by fees that should be stripped out from the valuation of the loan, the people said, asking not to be identified because details of the transaction are private. The pricing, per se, does not fall within the ECB’s direct remit, but the impact of such a deal on capital buffers is something that the central bank monitors closely.

A lower price for the trade could lead to higher provisions than UniCredit has already made for the sale, potentially impacting the bank’s capital. In a filing in January, UniCredit indicated that it agreed to sell a majority of the loans at an average price of about 13 percent of gross book value, a figure that is now under review, the people said. The lender has yet to remove the loans from its books, they said.

Chief Executive Officer Jean Pierre Mustier took over running the bank in July 2016, when the ECB was pressuring Italian lenders to offload bad assets. Mustier began tackling the bad- loan pile with this sale to Fortress Investment Group and Pacific Investment Management Co., in an initiative dubbed Project FINO, an acronym for ‘failure is not an option.’ He also tapped investors for 13 billion euros of new capital earlier this year to help cover for losses that stemmed from the disposal, a key component of the bank’s turnaround.

The ECB is looking at the loan sale because some of the commissions that UniCredit will pay to the buyers to manage the loans over coming years could affect the price, the people said, asking not to be identified because details of the transaction are private.

Bad loan transfers by banks often include fees payable to buyers for managing the assets. In this case they’re drawing regulatory scrutiny because they may be excessive for the services provided, said the people.

“The news is negative as the CEO could lose credibility which is the real main pillar of UniCredit’s business plan,” Fabrizio Bernardi, an analyst at Fidentiis Equities, wrote in a note.

UniCredit shares fell 0.2 percent at 11:02 a.m. in Milan after dropping as much as 1.4 percent earlier on Monday. The stock has gained about 23 percent this year.

‘Transparent Market’

“These big NPL transactions, which are more and more popular, highlight the need for a more efficient and transparent market that shows, among others, the difference between paid fees and the intrinsic net value of the loans sold,” said Emanuele Vizzini, who helps manage more than 4 billion euros as chief investment officer at Investitori Sgr in Milan, an Italian wealth management unit of Allianz SE.

A spokesman for UniCredit declined to comment, reiterating that the bank said in July it was planning to reduce its stake in the debt, which it has securitized, to less than 20 percent by the end of the year. An official from the ECB declined to comment.

The Bank of Italy in June published a seven-page analysis of the trade as part of its broader research on the industry, in which it noted the 13 percent valuation, citing UniCredit.

Confidence had been returning to the Italian banking industry after UniCredit’s capital raising, the rescue of Banca Monte dei Paschi di Siena SpA -- a onetime pillar of the financial establishment brought to the edge of ruin by bad loans and poor management -- and the takeover of two troubled banks in Italy’s Veneto region. The rescues were seen as an opportunity to reboot a banking industry plagued by lax underwriting and problem loans.

‘Step Back’

“This could be a step back for UniCredit’s recovery path and the whole Italian banking system in general,” should the disputed figures prove true, said Jacopo Ceccatelli, CEO of Marzotto SIM SpA, a Milan-based broker-dealer. “This is a situation that must be monitored.”

UniCredit’s loan loss provisions in the third quarter declined to 598 million euros from 977 million euros a year earlier, the bank said earlier this month. Profit in the period jumped six- fold, buoyed by the sale of its Pioneer Global Asset Management unit. Increased investor optimism in its turnaround has helped drive this year’s stock increase.

Still, some investors have expressed renewed caution about the Italian banking system -- saddled by 318 billion euros of soured loans, or a third of Europe’s total -- because of new ECB proposals requiring banks to provision against the entire potential loss on newly-classified nonperforming loans after two years, if they’re not backed by collateral. The central bank has promised to publish plans for existing bad loans, including “appropriate transitional arrangements,” by the end of the first quarter.

Italian banks may face higher loan-losses and could be discouraged from lending as a result, according to Societe Generale SA analysts.

— With assistance by Alessandro Speciale

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