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Not a good week for Unicredit

As a scramble for capital, a potential downgrade and headcount cuts hit Unicredit, its bonds are apparently trading as junk.

In the run of terrible weeks, this week has to be a trying one for Italian bank Unicredit.

On Monday November 14 the group posted it's third quarter 2011 earnings: 


• Including the above mentioned write-downs, the after-tax loss amounts to €10,641 million
• Operating profit of €1,846 million, -27.0% [quarter on quarter] QoQ due to a trading loss of €285 million, caused by wider spreads on Government securities
• Operating income of €5,725 million, a decrease of 11.3% QoQ, again mainly because of the trading loss. Net interest slightly higher net of some positive non-recurring components recorded in the second quarter 2011
• Operating costs of €3,879 million, down 1.2% QoQ
• Loan loss provisions rose to €1,848 million, with the cost of risk at 131 bps, up from 84 bps in second quarter 2011

Obviously, anticipating the echoed gasp around the market, Unicredit simultaneously released its “Strategic Plan” on the same day, which included: 

 €7.5bn rights issue to be proposed to the Extraordinary General Meeting (EGM) on 15th December;

 CASHES restructuring with inclusion in Common Equity Tier 1 of €2.4bn out of €3bn (€0.6bn to be computable as Additional Tier I capital);

 No dividend to be paid for 2011; and

 Focused RWA management via ring-fencing of performing, non-core assets in a €48bn RWA run-off portfolio.

Furthermore, in light of the conservative approach aimed at reducing risk associated with the Plan’s implementation, several additional capital management actions which will bring additional upside to the stated goals are not included in the Plan’s targets, including:

 Run-off of other non-core assets, incremental with respect to what has already been identified above; and

 Further rationalization/disposal of non-core assets and investments

Using various media-friendly terms on its “Strategic Plan”, such as: 

A clear strategy to restore our leadership in a challenging environment


Pillars of the Plan

... and the next day in a press release:


... it has not stopped market participants observing the underlying issues surrounding the large Italian bank.

The fundamental points that market participants have concentrated on include

 €7.5bn rights issue to be proposed to the Extraordinary General Meeting (EGM) on 15th December;

 CASHES restructuring with inclusion in Common Equity Tier 1 of €2.4bn out of €3bn (€0.6bn to be computable as Additional Tier I capital);

 No dividend to be paid for 2011

It also will look to "improve efficiency" by slashing costs via headcount: 

Costs of the Italian Commercial Business perimeter are expected to show a reduction with 2010-15 CAGR of -1.4%, FTEs to be reduced by approximately 6,500 units between 2010 and 2015, of which approximately 5,200 between Sept-2011 and 2015, equivalent to 12% of the current workforce.

Unicredit has also axed its in-house European equities team and is pairing up with Kepler Capital Markets, which allows the French brokerage the right to service its clients.

According to various reports in the media, around 120 jobs will be axed in equities alone. A source close to Unicredit confirmed to Euromoney Skew that “north of 100 jobs” will be axed in the western European equities sales and trading units.

Combining all these issues it seems, Unicredit posted on its website on November 16 that: 

The rating agency Moody’s has today placed UniCredit's “C-“ standalone rating (“Bank Financial Strength Rating” or “BFSR”), the “A2” long-term, the “Prime-1” short-term deposit and senior debt ratings, as well as junior debt ratings on review for possible downgrade. At the same time some of UniCredit’s subsidiaries have been placed under review for possible downgrade.

The market has not reacted well to the news. According to media reports, Unicredit CEO Federico Ghizzoni was quoted in Il Sole 24 saying that: 

“UniCredit SpA is unlikely to be a takeover target, being a systemically important financial institution, Chief Executive Officer Federico Ghizzoni said in an interview with Il Sole 24 Ore today.

Mediobanca SpA’s stake remains “strategic,” Ghizzoni said. There’s no “hypothesis” of mergers and acquisition for the time being, the CEO added.”

However, the statements of capital raising plans, cost reductions and “strategic plans” have not quelled market fears for the entity.

Media reports and Moody’s Analytics service has revealed that Unicredit bonds are trading as junk: 

"Fixed-income investors are pricing the Milan-based lender's bonds at levels that imply a rating of B1, four levels below investment grade and eight steps lower than its A2 ranking, according to Moody's Analytics. The 13.4 billion euros of UniCredit debt securities that are contained in Bank of America Merrill Lynch's Euro Corporates Banking index have lost 2.8 billion euros since the start of June."

Worryingly, Unicredit has the highest amount of bonds maturing in 2012, according to Bloomberg data, which suggests we are going to be hearing a lot more from the Italian bank over the next couple of months. 

- Euromoney Skew Blog

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