Huge rights issue at heart of Mustier’s new plan for UniCredit

Mark Baker
Published on:

UniCredit CEO Jean-Pierre Mustier has unveiled his new strategic plan for the bank. With a €13 billion rights issue at its centre, he will need to convince shareholders that this time the bank has a real prospect of breaking free of the country's banking troubles

Just after Jean-Pierre Mustier rejoined UniCredit as its CEO in July, he attended an event organized by a leading Italian entrepreneur. He told Mustier that he did business with UniCredit not only because it was an Italian bank but because it had a large international network and was therefore able to support his development outside the country.

On another occasion, Mustier heard a slightly different story, although no less positive. A client spent time telling him forcefully that his firm had done business with UniCredit for 50 years and was planning to do so for another 50 years. The client was a Mittelstand firm in Germany.

Jean-Pierre Mustier 160x186
Jean-Pierre Mustier,
CEO of UniCredit

It was with these two anecdotes that Mustier opened UniCredit’s marathon capital markets day on Tuesday, which kicked off at 10am in London. For him, the two stories illustrate a key point about the nature of UniCredit. In Italy the bank is welcomed for the international reach it can provide domestic clients, but on the other side of the Alps, it is seen as a local bank that is firmly integrated into the German economy.

This – and a suite of strategic actions that UniCredit announced on Tuesday – is the key message that Mustier is hoping to communicate to investors. The bank is calling its 2016-2019 strategic plan 'Transform 2019’, and it builds on the approach that the bank announced in July after Mustier’s appointment.

It hammers home the picture of a "simple pan-European bank" that delivers a network the bank describes as unique, covering Western, Central and Eastern Europe.

Mustier is building the plan around five strategic pillars. First, strengthening and optimizing its capital. Here he pointed to "bold" actions already taken, such as selling asset manager Pioneer Investments to Amundi – completed earlier this week – and disposing of a 40% stake in Polish bank Pekao to PZU through a sale of a 32.8% stake to PZU earlier this month and a 7.3% disposal through an equity-linked deal.

He has also already sold down 30% of the bank’s stake in online broker Fineco, through sales in July and October.

The key capital action still to be taken is a €13 billion fully underwritten rights issue, which the bank confirmed on Tuesday and hopes to launch early next year. Mustier says the deal would help the bank reach a fully loaded CET1 of above 12.5% by 2019. At the end of September, this stood at 10.8%.

The second pillar is improving asset quality. Here there was an important development overnight, with the bank signing agreements with Fortress Investment Group and Pimco to transfer two portfolios of Sofferenze (non-performing loans) to new organizations in which UniCredit will retain a minority position. The transfers represent gross book value of €17.7 billion.

The bank is also taking about €12.2 billion of one-off charges in the fourth quarter of this year.

Transforming the bank’s operating model, maximizing the value of the commercial bank (which accounts for 75% of UniCredit’s revenues) and adopting a leaner group corporate centre – something that shareholders have grumbled about in the past – make up the three remaining pillars of the strategy.

Costs will be dramatically cut by the planned headcount reductions, which now total 14,000 by 2019 after the addition of 6,500 within Tuesday’s announcements. Maximizing the commercial bank will include a greater effort on leveraging it through the corporate and investment bank, which will see internal joint ventures created to enable CIB products to be more effectively offered to corporate and retail customers.

Mustier also announced a raft of financial targets in addition to the CET1 ratio. He wants compound annual growth of revenues from 2015-2019 to be 0.6%. The cost/income ratio should fall to below 52% in 2019 – it was 59.2% in the bank’s third quarter 2016 results. Net income should be €4.7 billion and return on tangible equity should be above 9% – it was 5.7% for the first nine months of 2016.

Massive rights issue

A key part of the UniCredit’s strategic plan is the €13 billion rights issue that it confirmed on Tuesday morning, which will take place after an extraordinary general meeting (EGM) that has been called for January 12. The deal represents a chunky 75% of the current market cap of about €17 billion, but bankers working on it were quick to express confidence that the market was well positioned for a deal of this size and that it had been well anticipated.

That confidence seemed justified by the positive reaction of equity investors on Tuesday. Some initial softness quickly changing to buying, and the stock was up about 7% by 10am London time. At €2.59, it is still some way off its year’s high of €5.06 in April, but it has risen 14% during the past month.