Italian banking crisis moves on to Unicredit’s €13bn cash call

New test of confidence follows Monte dei Paschi’s failure to raise funds on the market

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 won permission from investors on Thursday for a €13 billion rights offer – almost as much as its market value – to carry out a turnaround plan under chief executive Jean Pierre Mustier. Shareholders meeting in Rome also approved the conversion of every 10 shares into one new share after the stock dropped more than 45 per cent last year.

It is the latest test for Italy’s battered banks after Monte Paschi’s failure last month to raise €5 billion, followed by its government bailout, renewed doubts about their ability to deal with hundreds of billions of dollars in bad debt. Like its smaller rival, UniCredit intends to use most of the money – € 8.1 billion – to absorb losses on loans that the bank is selling to investors at a discount. Unlike Monte Paschi, UniCredit is seeking the funding for a cleanup, not for its immediate survival.

"The plan has been well-devised," said Francesco Castelli, a London-based fund manager at Banor Capital. He cited bonus restrictions, cost-cutting and risk reductions as reasons to support the strategy.


Mr Mustier, a 55-year-old Frenchman who took over in July, said he has met more than 200 investors in recent weeks and plans to start the offer before March 10th. Many European and US institutional investors have shown interest, he said in a interview on Thursday in Italian newspaper La Stampa.

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

No more revenue

One thing investors won’t find in Mr Mustier’s plan is expectations for more revenue. With much of Europe still in low-growth mode, the bank sees revenue rising just 0.6 per cent until 2019. Instead the chief executive is counting on cost cuts to deliver €4.7 billion in net income in 2019, almost triple its earnings in 2015.

The bank plans to use some of the €5 billion left over from its writedown on bad loans to finance the departure of thousands of employees through early retirement and voluntary redundancy plans. The rest will go to 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 euro zone’s latest health tests. The bank may not be able to pay coupons on its contingent convertible bonds if the capital increase falls short, the lender said in a statement Thursday.

It is not the first time UniCredit has tapped shareholders for a large amount. The bank raised €7.5 billion in 2012 at the behest of regulators. UniCredit has struggled to build capital since spending $60 billion (€56 billion) on acquisitions over a decade. To plump up reserves, Mr Mustier is selling assets including its Pioneer Investments fund management business and its Polish unit, Bank Pekao.

The bank has said it will book €12.2 billion in clean-up and restructuring charges next month, leading to its first quarterly loss since 2013. That year the bank posted a €15 billion loss for the final three months, after setting aside provisions for bad loans and writing down goodwill from acquisitions.