Photographer: Alessia Pierdomenico/Bloomberg

UniCredit (and Italy) Reap Rewards of Successful Bad-Loan Sale

UniCredit SpA Chief Executive Officer Jean Pierre Mustier, who has made cleaning up the lender’s balance sheet a hallmark of his tenure, is close to reaping the benefits of the biggest disposal of bad loans in Italian history.

Earlier this year, Italy’s top lender wrapped up 14 months of negotiations to close the sale of 17.7 billion euros ($22 billion) in non-performing loans to investors, and it’s now set for a capital boost from the trade. Dubbed Project FINO, the transaction bolstered confidence in efforts by the sector to tackle its legacy of soured debt, boosting stock prices and prompting more disposals across the industry.

Jean Pierre Mustier

Photographer: Krisztian Bocsi/Bloomberg

"FINO has been the trailblazer for the Italian bad-loan market,” said Massimo Famularo of Milan-based Frontis NPL, which helps manage and advise on bad debt. “The transaction sent the right message to the Italian banking industry."

UniCredit’s loan disposal came as Italy’s banks were choking under the pressure of more than 300 billion euros in non-performing debt amassed during the country’s deepest post-war recession. The crisis even forced the Italian government to rescue some banks with the biggest bailouts in decades.

What UniCredit showed was that Italian lenders were finally getting serious about their bad-debt problem (see chart below), boosting the sector’s allure for investors. While the country’s recent inconclusive election result has clouded the economic outlook somewhat, Italian bank shares are up 50 percent from December 2016, dwarfing the 14 percent gains posted by the benchmark STOXX Europe 600 Banks Price Index.

UniCredit stock jumped 66 percent in the same period, though it still trades 30 percent below its tangible book value. By contrast, Intesa Sanpaolo SpA, Italy’s second-biggest bank by assets, trades at book value, while smaller Italian lenders including UBI Banca SpA trade at less than half of book value.

The Road Ahead

Italian banks are delivering on plans to reduce their bad debt levels

Source: Company filings

Note: Paschi's 2017 ratio would be 21% when including a major planned portfolio disposal

Mustier, a Frenchman who once led Societe Generale SA’s investment bank, started working on FINO shortly after taking the top job at UniCredit in July 2016. In its initial phase, Fortress Investment and Pacific Investment Management Co. agreed to buy 50.1 percent of the portfolio at an average price of about 13 percent of the gross book value. Then, last year, UniCredit securitized the loans in three different vehicles as it sought to cut more of its exposure. 

Assicurazioni Generali SpA and King Street Capital joined in, buying a portion of the notes with Fortress, now one of the largest international investors in Italy’s bad loans.

The transaction, which the European Central Bank followed closely, saw UniCredit cutting its holding in FINO to below 20 percent. As a result of reducing its exposure on the loan package to a level that’s deemed less material, the bank plans to secure a capital boost as laid out under the ECB’s guidelines.

That will increase UniCredit’s common equity Tier 1 ratio by a net 10 basis points at the end of the first quarter. The ratio stood at 13.6 percent at the end of 2017, up from 10.5 percent when Mustier took over at UniCredit and some way above the 9.2 percent it reached at the depths of Europe’s sovereign debt crisis.

Officials for UniCredit declined to comment on FINO, as did the ECB, in line with its policy of not discussing individual companies.

For all the optimism sparked by the loan sales in Italian financial circles, the country’s banks still face headwinds. New ECB guidelines on loans that turn sour, expected Thursday, could force firms to further accelerate their cleanups.

Italian lenders have also been rattled by the political instability unleashed by an inconclusive March 4 general election that’s left the country without a clear parliamentary majority. A prolonged stalemate may heighten concerns about the country’s economic rebound, which still lags behind that of Germany, France and Spain.

“Banks may be the ones suffering the most if uncertainty persists because they are among the most exposed to the domestic economic cycle,” said Luca Rubini, managing director at Fidentiis Equities.

UniCredit also anticipates that its CET1 ratio will fall somewhat from here. It expects that another set of regulations -- including the introduction of a requirement to cover potential losses as soon as a loan is made -- will trim its capital buffers in the short term, and aims to reach a CET1 ratio of above 12.5 percent for 2019. The average consensus for European banks is 13 percent next year, according to Bloomberg Intelligence.

That all still marks a sharp improvement for UniCredit and the bank’s fortunes are helping to boost those of the broader Italian banking industry.

“UniCredit is doing the right things to de-risk its balance sheet,” said Wolfram Mrowetz, CEO of Italian broker Alisei SIM. “The finalization of FINO marks an important step not only for the bank but for the whole Italian banking industry, which in some cases still need additional clean up.”

— With assistance by Chiara Remondini, and Nicholas Comfort

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