UniCredit announced on Tuesday a major restructuring plan to raise €13 billion in capital to return the Italian bank to profitability, hoping that a balance-sheet cleanup and cost cuts will persuade investors that Italy’s biggest bank can restore profitability even without much revenue growth. As part of the three-year strategy, the bank plans to shed an additional 6,500 jobs, bringing the total to 14,000, as it aims for 1.7 billion euros of annual cost savings. The bank is targeting 4.7 billion euros of net profit in 2019 with a return on tangible equity above 9%, Milan-based UniCredit laid out in a presentation this morning.
UniCredit's new CEO Jean Pierre Mustier, a 55-year-old Frenchman, in July took the helm of a lender burdened by a mounting pile of bad loans, record-low interest rates and Italy’s longest recession since World War II. According to Bloomberg, the bank had the slimmest capital buffer among those deemed important to the financial system in the latest European stress tests.
“We are taking decisive actions to deal with our non-performing-exposure legacy issues to improve and support recurring future profitability," Mustier said in a statement.
The capital increase will take place in the first quarter of next year, Mustier said on a conference call with journalists Bloomberg reported. The CEO said he’s confident Monte Paschi’s efforts to raise capital will be resolved this month and will have “no impact” on his own bank’s fundraising. The UniCredit CEO also insisted political turmoil in Italy will put obstacles in the way of the plans. “The referendum was a No but it doesn’t change our business model,” Mustier told the Financial Times.
While the bank expects annual costs to drop, it sees revenue rising by just 0.6 percent per year through 2019. UniCredit sees falling net interest income, with growth coming from fees and commissions, it said in a presentation in London. “With almost no revenue growth in the foreseeable future, the plan is focused on cutting costs and improving the asset quality and capital levels,” Luigi Tramontana, an analyst at Banca Akros, said in a note to clients. “The rights issue stands at the top of the expectations, given the stronger-than-expected effort” to boost loan-loss reserves.
UniCredit will focus on organic growth and doesn’t plan further acquisitions, the CEO said at a press conference, ruling out acquisitions. The company’s German unit, formerly Hypovereinsbank, is a strategic asset in a country that is core to the bank, Mustier said, adding that he also isn’t looking to sell the company’s shipping business or other major operations.
The restructuring will help UniCredit to increase its common equity Tier 1 ratio to more than 12.5 percent by 2019 from 10.8 percent at the end of September. The bank won’t pay a dividend for 2016 and targets a 20 percent to 50 percent payout ratio in subsequent years.
The main "use of proceeds" from the newly raised funds will be to cover losses from disposals of bad loans. UniCredit said it will set aside €8.1 billion for non-performing loans as it plans to move €17.7 billion of soured debt off its books for securitization and a subsequent sale. The bank said one-offs this quarter will total €12.2 billion. Fortress Investment Group and Pimco will take majority stakes in the two units that will take on the non-performing loans, UniCredit said.
"We welcome the focus on cleaning up the balance sheet, although some may have hoped the extent of provisions could have delivered a larger upfront non-performing loan reduction,” Jefferies Group LLC analysts including Benjie Creelan-Sandford said in a note, repeating their buy rating. “Given lack of control over the external environment, we think the focus on capital and costs is important.”
Italian banks, some of the continent's worst performing stocks of 2016, have been contending with expectations of low economic growth, pressure from European regulators to meet stricter capital standards and political instability following the fall of Matteo Renzi’s government. The prospect that Monte Paschi may need a state rescue if its capital plan fails has also affected confidence in Italian lenders across the board.
The bank's €4.7 billion profit target compares with a consensus of €3.9 billion for 2019, according to the Jefferies analysts. On a comparable basis the bank made €1.5 billion in 2015.
Whether or not UniCredit can reach its lofty asipirations remains to be seen, but the market's initial reaction was positive, with the bank’s 1 billion euros of 6.75 percent additional Tier 1 bonds, the first notes to take losses in a crisis, rising 2.5 cents to about 92 cents, near a 2016 high, according to data compiled by Bloomberg. They fell to as low as 70 cents in February. The stock was up as around 8% following the news.
Italian and European regulators have been pushing lenders to clean up their balance sheets, strengthen capital buffers and cut an estimated 360 billion euros in non-performing loans. UniCredit has sold more than €10 billion of bad loans in the past three years and has set aside almost €25 billion for loan-loss provisions since 2013.