Turnaround plan:: A basker plays a violin outside a branch of UniCredit bank in Rome. CEO Jean Pierre Mustier plans to start the rights offer before March 10 and shareholders will be asked to approve the conversion of every 10 shares into one new share. Picture: REUTERS
Turnaround plan:: A basker plays a violin outside a branch of UniCredit bank in Rome. CEO Jean Pierre Mustier plans to start the rights offer before March 10 and shareholders will be asked to approve the conversion of every 10 shares into one new share. Picture: REUTERS

Milan — After Banca Monte dei Paschi di Siena failed to raise funds on the market, attention now turns to a much bigger cash call by UniCredit.

Italy’s largest bank is seeking investor backing on Thursday for a €13bn rights offer — almost as much as its market value — to carry out a turnaround plan under CEO Jean Pierre Mustier.

Shareholders meeting in Rome also will be asked to approve the conversion of every 10 shares into one new share after the stock dropped more than 45% in 2017.

Monte Paschi’s failed share sale and ensuing government bail-out in December have revived doubts about Italian banks and their ability to deal with bad debt.

Like its smaller rival, UniCredit plans to use most of the cash to absorb losses on loans that the bank is selling at a discount. Unlike Monte Paschi, which tried to raise about €5bn, UniCredit is a profitable lender that is seeking funding for a cleanup, not for survival.

"UniCredit’s new business plan tackles the right concerns and represents a break-through switch in order to rescue
and revamp the equity story of the group," said Fabrizio
Bernardi, an analyst with Fidentiis Equities.

Mustier, a Frenchman who took over in July, said he had met with more than 200 investors in recent weeks and planned to start the offer before March 10. Many European and US institutional investors had shown interest, he said.

Legacy Problem

"UniCredit is finally addressing once and for all the legacy problem represented by the noncore credit portfolio," Banca Akros analyst Luigi Tramontana, wrote in a December 22 report. "The rights issue stands at the top of the expectations, given the stronger-than-expected effort to increase nonperforming exposure coverage."

Investors looking for reasons other than better asset quality to buy the stock can disregard revenue generation. With much of Europe still in low-growth mode, the bank sees revenue rising just 0.6% through 2019. Instead Mustier is counting on cost cuts to deliver €4.7bn in net income in 2019, almost triple the €1.7bn earned in 2015.

The bank plans to use the capital left over from its writedown on bad loans to finance the departure of thousands of employees through early retirement and voluntary redundancy plans and build up the capital defences of a globally systemic lender. UniCredit, which has significant operations in central and eastern Europe as well as in Italy, Germany and Austria, had the slimmest buffer among big banks in the region’s latest health tests.

The bank might not be able to pay coupons on its contingent convertible bonds if the capital increase fell short of its plan, the lender said.

These market instruments are among the first to absorb losses if the bank is unable to meet capital requirements.

UniCredit is trading at a discount — about 0.4 times its tangible book value compared with 1.15 times for the 44-member Stoxx 600 Banks index. Factoring in the fresh capital, the measure rises to slightly above 0.5, below its main peer Intesa Sanpaolo, which is trading above 1.

Foreign Investors

"Despite the size, I think the shares will be all placed, given the bank’s cheap multiples and the positive outlook post-restructuring," said Stefano Girola, who helps manage about €40bn at Syz Asset Management in Lugano, Switzerland.

"Foreign institutional investors may replace some foundations as relevant shareholders, given that several foundations are unlikely to have enough funds to subscribe to their rights."

UniCredit’s main shareholders are based abroad. The biggest investor as of September 2016 was Capital Research and Management Company, a Los Angeles fund manager with a stake of about 6.7%. Abu Dhabi-based Aabar Investments sovereign fund was next with 5%, followed by BlackRock, Dodge & Cox and Franklin Resources, according to Bloomberg data.

Fondazione CariVerona and Fondazione CRT are the main Italian investors with 2.2% and 2.3% respectively.

Aabar Investments was ready to maintain its stake by subscribing in full to the capital increase, said a person who asked to remain anonymous, confirming a report on Wednesday by Italian newspaper Il Messaggero.

A spokesman for UniCredit declined to comment.

UniCredit has struggled to build capital since spending $60bn on acquisitions in the past decade.

The Italian bank’s complex structure has made the
task tougher.

To simplify operations and boost buffers, Mustier is selling assets including its Pioneer Investments fund management business and its Polish unit, Bank Pekao.

Bloomberg

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