The IPO of Banca Popolare di Vicenza might come to be remembered as the nadir for UniCredit: the moment when, after years of drift and procrastination, a fundamental shift in its business model became unavoidable.
Even after April’s launch of a partly state-orchestrated fund that allowed the bank to dodge the full impact of its misled agreement last year to underwrite BPV’s IPO, UniCredit’s capital ratio still fell by around 10 basis points in first quarter results, heightening capital worries.
UniCredit’s contribution alongside other Italian banks to the Atlas fund was one cause of the capital dip, based on its one fifth share in Atlas and commensurate indirect equity stake in BPV. Unexpectedly high loan growth also hurt the ratio. All this has accentuated fears of a dilutive capital raising, eroding shareholders’ patience with chief executive Federico Ghizzoni, who is stepping down after months of speculation over his fate.
Without rapid action, things could get worse before they get better. Atlas will probably cause UniCredit a further deduction of around 16bp, as its contribution rises to €1 billion and the fund recapitalizes other troubled banks and funds junior tranches of bad-debt securitizations. Without a dramatic change in direction, by 2018, Barclays reckons UniCredit’s tier-1 ratio will be almost three percentage points below the European average.
Judging by UniCredit’s own targets and average European capital ratios, UniCredit lacks around €6 billion in equity, according to Barclays. That is almost a third of its market capitalization, after its shares have lost about half their value in the past year. Most urgently, UniCredit has Europe’s thinnest buffer before it must restrict coupon payments on its additional tier-1 bonds, according to CreditSights.
The best shareholders might hope for now is a package of measures to minimise a capital raising – moves capable of transforming perceptions of the institution, and raising its humiliatingly low valuation (about 0.4 times book).
The sale of Polish bank Pekao is one of UniCredit’s less attractive options; it is the crown jewel of its central and eastern European network. But it would attract buyers. A sale of its 40% stake in Turkish lender Yapi Kredi would do less damage to the franchise and might similarly find readily available buyers (BBVA, for example, has been increasing its investment in Turkey, gaining a 40% stake in Yapi Kredi’s domestic peer Garanti).
An outright sale of the German unit, HVB, might be harder. Germany’s banking regulator has blocked equity transfers from HVB, but perhaps UniCredit could list it instead. It could also look at a sale, or at least a listing, of Bank Austria, and a further market sell-down of its highly successful Italian online broking and banking unit, FinecoBank.
Investors, meanwhile, need to see movement on the fate of the Pioneer asset management unit. Ghizzoni announced a joint venture between Pioneer and Santander more than a year ago, but it is still waiting regulatory approval. This was supposed to bring UniCredit 25bp in additional capital, but as it drags on, some analysts reckon it would be better to call off the deal.
Last but not least, it needs to reinvigorate its strategy on bad debt, about 15% of loans: put more resources into a better-demarcated non-core unit, for example, and use the state’s new guarantee on senior tranches of bad-debt securitizations, alongside Atlas’s offer to buy junior tranches.
It would be wrong to blame everything on management, but Intesa Sanpaolo’s rise shows how far even an Italian bank can thrive. A strategy of waiting it out, relying on cost-cutting and loan expansion – let alone Italy’s recovery – has proved insufficient at a time of increased regulatory demands and enduring investor scepticism. Ghizzoni’s successor must have a mandate to take much bolder steps.