UniCredit SpA, Italy's biggest bank, plans to raise 13 billion euros ($ 13.8 billion) in a rights offer, sell off bad loans and slash costs in its deepest overhaul to boost capital levels and profitability.
The bank is targeting 4.7 billion euros of net profit in 2019 with a return on tangible equity above 9 percent, the Milan-based company said in a statement on Tuesday. 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.
Photographer: Antoine Antoniol/Bloomberg
UniCredit Chief Executive Officer 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. The bank had the slimmest capital buffer among those deemed important to the financial system in the latest European stress tests.
UniCredit has struggled to build up capital, a task compounded by the bank's complex structure after $ 60 billion of acquisitions it made in the past decade under previous management. To simplify the bank and boost buffers, Mustier is disposing of assets including the Pioneer Investments fund management business and its Polish unit, Bank Pekao SA.
"We are taking decisive actions to deal with our non-performing-exposure legacy issues to improve and support recurring future profitability,” Mustier said in the statement.
UniCredit shares swung between losses and gains, dropping as much as 5.5 percent before rising 2.2 percent as of 9:20 a.m. in Milan. The stock has lost about half its value this year, valuing the bank at 15 billion euros.
"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.
Capital Boost
The capital raise will take place in the first quarter of next year, Mustier said on a conference call with journalists. The CEO said he's confident Banca Monte dei Paschi di Siena SpA's efforts to increase capital will be resolved this month and will have "no impact" on his own bank's fundraising.
The revamp 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.
Part of the funds the bank is raising will cover losses from disposals of bad loans. UniCredit said it will set aside 8.1 billion euros for non-performing loans as it plans to move 17.7 billion euros of soured debt off its books for securitization and a subsequent sale. The bank said one-offs this quarter will total 12.2 billion euros.
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."
The 4.7 billion-euro profit target compares with a consensus of 3.9 billion euros for 2019, according to the Jefferies analysts. On comparable basis the bank made 1.5 billion euros in 2015.
The bank has agreed to deals to raise about 8 billion euros by selling Pekao, Pioneer and its 30 percent stake in online lender FinecoBank SpA.
European regulators are stepping up pressure on Italian 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 euros of bad loans in the past three years and has set aside almost 25 billion euros for loan-loss provisions since 2013.
Total net costs will drop to 10.6 billion euros from 12.2 billion euros in 2015, the bank said. The bank employed about 123,000 people at the end of September.
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