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EU stress tests: Will UniCredit need to raise more capital?

Already the rumour mill is whirring that Italy’s banks may fail the EU’s stress tests due on Friday, with none more vulnerable than UniCredit.

The country’s biggest and most important lender continues to see its share price struggle.

Trading in its shares was temporarily suspended earlier today (July 12) after falling 7% in Milan.

This follows a 20% drop over the past week.

Italian banks’ share prices have been hit by fears that Italy will become the next country to be sucked into the eurozone debt crisis. The 10-year spread between Italian and German sovereign debt has widened to 258 basis points, a new high since the launch of the euro.

Many of UniCredit’s domestic rivals have raised capital through rights issues in recent months, including second biggest bank Intesa Sanpaolo, taking its core tier 1 ratio to 10%.

But chief executive, Federico Ghizzoni, has repeatedly stressed that UniCredit would not follow suit, saying that it makes little sense to ask shareholders to stump up more money while there’s still so much uncertainty about the regulatory environment.

One of the key issues facing UniCredit is whether it will be classified as a systemically important financial institution – one of the big banks that might be required to hold additional capital buffers.

“We need to have greater clarity about the new regulations, including Sifis,” Ghizzoni told Euromoney earlier this year. 

“Then we’ll also have the results of the stress tests. So I’d like more information about these two new important events. In addition, we are working on our new strategic plan that should be presented to the financial community by the end of the year. So I think once we get clarity on the new regulations and after we’ve finished our plan we will be able to better assess the overall situation.”

He adds: “Our aim is to increase our core tier 1 ratio. We want to do it, but not necessarily through a capital raise. You can also generate capital organically and by working on management actions.”

UniCredit’s core tier 1 capital ratio was 9.06% as at the end of March, up half a percentage point on the previous quarter. It already meets the Basle III requirements eight years ahead of schedule, even if its core tier 1 was diluted thanks to the new rules.

Ghizzoni forecasts that by January 1 2013, UniCredit’s core tier 1 ratio will be 8.45%, if Basle III rules are applied – the figure boosted by an expected 115 basis point increase, according to analysts’ consensus, from retained earnings over the preceding two years.

Bank of Italy governor, Mario Draghi said last week that his country’s lenders are sufficiently capitalized.

“I am sure, on the basis of our analysis, that Italy's banks will pass the European stress tests by a significant margin, confirming the adequacy of their capitalization,” Draghi, who will succeed Jean-Claude Trichet as the head of the European Central Bank in November, said in the statement.

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