Bloomberg News

UniCredit May Need 6 Billion-Euro Share Sale to Meet Rules

June 15, 2011

(Updates with stress tests details in sixth paragraph, analyst comment in seventh.)

June 15 (Bloomberg) -- UniCredit SpA, the only Italian bank facing stress tests that hasn’t announced plans to sell new shares, will need to raise 6 billion euros ($8.7 billion) to meet regulators’ stricter capital requirements, analysts said.

The Milan-based lender, the country’s biggest, will probably approve a capital increase for that amount this year, according to the median estimate of 20 analysts surveyed by Bloomberg. The estimates ranged from 3.9 billion euros to 8 billion euros.

While the “considerable capital generation is encouraging, concerns about a possible capital increase are unlikely to subside in the near term,” Andrea Vercellone, a London-based analyst at Exane BNP Paribas, wrote in a May 16 report. The brokerage firm estimates a capital shortfall of 7 billion euros.

Chief Executive Officer Federico Ghizzoni, who will present a new business plan by the end of the year, has repeatedly said that the bank has adequate capital to comply with the Basel III rules announced so far. UniCredit is reviewing its strategy to increase profitability after last year’s management shakeup led Ghizzoni to replace Alessandro Profumo at the top job.

“Basel III may create huge problems,” Ghizzoni said at a June 9 conference. “I agree with stricter rules, but the problem is that investors expect banks to have today the ratios required by regulators in 2019.” A UniCredit spokesman said the company has no new comment to make on the topic.

Stress Tests

UniCredit is among 90 European banks under review in a second round of stress tests. The lender is expected to maintain a core Tier 1 capital ratio of at least 5 percent under the stress-test scenarios, according to the EBA, which is carrying them out. This year’s examinations will include a review of how lenders would handle a 0.5 percent economic contraction in the euro area in 2011 as well as a 15 percent drop in European equity markets.

“Even if UniCredit is able to pass the test, the market is expecting a capital increase,” said Alessandro Frigerio, a fund manager at RMJ Sgr in Milan who doesn’t hold UniCredit shares. “Tests and capital expectations are not linked. Investors expect from the biggest banks more than regulators require.”

UniCredit dropped as much as 3.3 percent in Milan trading today and was down 2.9 percent at 1.47 euros at 4:30 p.m. The shares have declined 5 percent this year, while the 48-member Bloomberg Banks and Financial Services Index has fallen 6 percent in the period.

SIFIs

The Basel Committee on Banking Supervision last year approved preliminary stricter rules for banks, which need to hold core capital equivalent to 7 percent of their assets by the end of 2018. The committee is also discussing forcing so-called global systemically important financial institutions, or SIFIs, to hold additional capital buffers equivalent to as much as 3 percent of risk-weighted assets, people familiar with the negotiations said in March.

“UniCredit could be considered as a SIFI and asked to keep the same level as Intesa’s common equity Tier 1 ratio,” Paola Sabbione, an analyst at Deutsche Bank AG, wrote in a May 5 report. “This means that a capital increase between 6 billion euros and 7 billion euros might be needed.” Intesa Sanpaolo SpA is Italy’s second-biggest bank.

CEO Ghizzoni said on May 13 the company is still waiting to see if it’s considered as a SIFI by regulators and what the requirements are for such banks.

Investors Waver

UniCredit, whose first-quarter profit rose 56 percent to 810 million euros, said its core Tier 1 ratio, a key measure of financial health, rose to 9.06 percent as of March 31 from 8.58 percent at the end of December. Intesa forecasts a ratio of 10 percent by 2011 following a planned 5 billion-euro share sale.

Bank of Italy Governor Mario Draghi in February urged the country’s banks to raise money ahead of this year’s stress test, which should be completed in July. Intesa, Monte dei Paschi di Siena SpA, Unione di Banche Italiane ScpA and Banco Popolare SC have asked investors for a total of 10.5 billion euros this year to strengthen finances in response to the Bank of Italy’s call.

UniCredit already has raised 7 billion euros in the last three years through two capital increases, including a rights offer and a convertible-bond sale.

“It could be a problem for UniCredit to ask for money from investors for the third time in few years,” said Wolfram Mrowetz, chairman of Alisei SIM in Milan, which oversees 200 million euros and doesn’t own shares of the bank. “Investors may consider this possibility only if UniCredit presents compelling reasons.”

‘Make Do’

Banking foundations, non-profit entities which hold more than 11 percent of UniCredit, bought new shares and bonds to finance the lender after credit markets froze following the bankruptcy of Lehman Brothers Holdings Inc. in 2008, while renouncing the right to dividends.

“If the banks need capital, they’ll have to make do,” Dino De Poli, chairman of Fondazione Cassamarca, which owns 0.8 percent of UniCredit, said in March.

UniCredit is renegotiating 3 billion euros of convertible bonds known as CASHES so they can continue to be considered as core capital under the new Basel III rules. The company also plans to see how it can get the most value from assets including its Pioneer Global Asset Management unit.

--With assistance from Francesca Cinelli in Milan. Editors: Stephen Taylor, Frank Connelly

To contact the reporter on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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