|UniCredit CEO Jean-Pierre Mustier|
UniCredit was heading into its highly dilutive €13 billion rights issue against a jittery capital backdrop and a falling stock price at the end of January, as the bank warned that charges to be taken in its fourth quarter 2016 accounts would see it breach European Central Bank capital ratio requirements.
In the registration document for its upcoming capital increase, published on January 30, the bank estimated that its fourth-quarter charge of €12.2 billion would take its end-2016 common equity tier-1 ratio to about 8%, below its 2016 ECB requirement of 10.005%. In addition, it said that it would temporarily breach a number of the capital ratios relating to the ECB’s Overall Capital Requirement (OCR) for 2017, until the rights issue proceeds can be booked.
The bank had warned earlier in January that it was possible that it could breach capital ratio requirements while it awaited the proceeds from the rights issue and the completion of various other measures. But the confirmation in the registration document on January 30 sent its stock lower, with the shares down about 5% in the first few hours of trading on the day.
The precise timetable for the rights issue has not yet been announced, but it is expected to kick off in the first half of February.
The news added to what has already been a stressful time for the bank and highlighted the importance of the rights issue. On January 12 UniCredit had spelled out the potential impact of failing to complete the capital measures it had announced late last year, warning that it would hurt the bank’s ability to pay coupons on its additional tier-1 instruments — as well as threaten its capital ratios.
“If the capital increase and/or the M&A transactions were not realised […] this could have temporarily negative impacts on the capacity of the UniCredit Group to comply with the constraints set by prudential regulations and/or identified by the Supervisory Authority and to pay out coupons on its additional tier-1 instruments,” the bank said on January 12, just hours before an extraordinary general meeting to approve the capital increase.
The EGM subsequently approved the deal through a 99.6% vote in favour. The bank also noted that even if it did complete its rights issue as planned in the first quarter of the year – the formal deadline is the end of the first half – its capital ratios could still temporarily fall below the minimum distributable amount (MDA) and the Pillar 1 and Pillar 2 capital requirements for its tier-1 ratio, as defined by CRD IV.
UniCredit said this was due to the fact that it would be recording hits to its common equity tier-1 ratio in its fourth-quarter 2016 accounts while the rights issue proceeds would not be received until some time in the first quarter.
In a statement, the bank said this temporary drop would be “due to short-term settlement timing difference which is expected to be remediated before the next AT1 coupon payment, due in March 2017”.
Not like Deutsche
In a note published after the January 12 AT1 announcement, analysts at CreditSights said that the bank was expected to wrap up its rights issue ahead of its next AT1 coupon payment (March 10) for its 6.75% euro-denominated bond, callable in September 2021.
The analysts also said that they did not expect UniCredit to experience the same kinds of issues that unsettled Deutsche Bank in early February 2016, when markets began to worry about the German bank’s ability to meet its own AT1 coupon payments.
“We do not expect UniCredit to have any Deutsche Bank-style problems with available distributable items as these amounted to €18.9 billion at FY15 and would only be partially depleted by forseeable FY16 losses,” CreditSights wrote.
The threshold for MDA is a dynamic number rather than being tied to whatever the relevant calculation would have been at the most recent reporting date, meaning that as soon as UniCredit completes the capital increase, it would be free to make coupon payments.
The CreditSights analysts said that the MDA cushion for UniCredit was 1.56% of risk-weighted assets in the third quarter of 2016, taking into account the stress-test methodology for this year but before any other actions.
The resulting €6.1 billion cushion would likely be wiped out by any net loss resulting from the charges that the bank had already said it would be taking in its Q4 results, the analysts said.
Other moves beyond the rights issue that will boost capital, such as the sale of asset management firm Pioneer to Amundi and the sale of another stake in Bank Pekao, are unlikely to be formally completed before March.
“There’s a bit of scare tactics here, but also they are trying to be fully transparent and make sure that all the information is out there,” one bond investor told Euromoney. “The new CEO has had an active and very positive first six months, and this is an important next stage.”
The bank was responding to a request for further information from Consob, the Italian market regulator, following UniCredit’s announcement on December 13 of its new strategic plan to 2019.
That plan was built around five pillars: strengthening capital, improving asset quality, transforming the operating model, maximizing the value of the commercial bank and adopting a leaner group corporate centre. The bank described the rights issue as a “key pillar” of the plan.
The bank reiterated that its moves to improve asset quality would involve taking a loan loss provision of €8.1 billion, which would be booked in the fourth-quarter 2016 results.
The provisions are also related to the bank’s Project Fino transactions, which will see it offload a portfolio of €17.7 billion of bad loans to Fortress and Pimco.
Also hitting the bank’s CET1 ratio in its Q4 2016 numbers were the redundancies the bank announced as part of the plan, which will see it cut an additional 6,500 jobs by 2019.
The reductions involve a further cost of €1.7 billion.