UniCredit shakes off Italy tag with NPL fire sale
The bank hopes a deal to offload bad debts to Fortress and Pimco will show investors that it is putting its NPL issues behind it
Jean-Pierre Mustier will try to end UniCredit’s label as the biggest of Italy’s bad-debt crippled banks by taking €8.1 billion of fourth-quarter provisions, ahead of a €13 billion rights issue.
To demonstrate just how easily UniCredit can now sell its legacy exposures, the CEO and his team are already cutting risk in €17.7 billion of securitized Italian bad loans, through two new agreements with US asset managers Fortress and Pimco, in a project called Fino.
After the provisions increase coverage on its non-performing book from 53.6% to 68.2%, Mustier hopes newfound freedom from Italian legacies assets will give Italy’s biggest bank more appeal in its rights issue in early 2017. The aim for the next three years is to reduce the ratio of gross non-performing exposures to 8.4%, down from 14.1% at end-September 2016.
In what is becoming classic Mustier style, the disposal of majority vertical tranches of the Fino portfolios closed the night before a carefully choreographed event in London on Tuesday, when he and other top UniCredit bankers unveiled the rights issue and a wider strategic shift.
It added another flourish, as executives repeatedly turned to Mustier to bat off sceptical analysts’ questions, when he could raise an eyebrow to his interrogators and say a press release that morning – which only mentioned a 20% sale – was already outdated.
The provisions and disposals were the result of months of work to sift through non-performing loans and try to get a better sense of what was in there, and what it was worth. Did UniCredit therefore choose to hike its provisions by this much, asked one analyst, because its loans are so much more rotten than those of other Italian banks?
If not – as Mustier suggested – should the market then take UniCredit’s coverage levels as a new benchmark for the sector’s needs? According to Berenberg, if other banks followed suit, Italy’s second biggest bank, Intesa Sanpaolo, would have to write down the most, €8.5 billion. That would be a breeze, given its €39 billion market capitalization, compared with the €5 billion needed at Banco Popolare, almost three times its market capitalization.
However, UniCredit is over-provisioning to get rid of its assets quickly, so it can “have a new start”, thinks Luigi Tramontana, banks analyst at Banca Akros in Milan. Asset quality measures are at least as important to the relaunch as all the new efficiency, IT and cross-selling initiatives announced in December. The Fino transaction, thinks Tramontana, will give Mustier’s grand strategy more credibility.
The €17.7 billion Fino portfolios cover about half of the bank’s bad loans in its non-core portfolio, although UniCredit retains a minority, and some of the more complex situations were excluded.
The various parties have done business before. In 2014, Fortress bought UniCredit’s former NPL servicing unit doBank, which is already working through about €40 billion of UniCredit assets; doBank will manage most of the smaller Fino loans, while the bank will work through the biggest.
Pimco has also recently worked alongside UniCredit on large real estate-backed loans, perhaps indicating the kinds of asset that went into its side of the deal.
According to Massimiliano Fossati, chief risk officer at UniCredit, the measures are part of a new “aggressive and immediate” approach to cutting the asset hangover from the integration of Capitalia after 2007, and typically “volume-driven underwriting” between 2005 and 2010.
The Fino project is supposed to bring “market validation of internal coverage levels” and heralds what will be a continued “acceleration of the rundown of the non-core” division. Mustier added that the legacy assets are “provisioned to sell”.
It was also telling how Fossati drew attention to the 5.7% non-performing ratio in UniCredit’s core bank, which excludes its Italy-dominated non-core division. He underlined, in particular, how close this was to the 5.4% European Banking Authority average. Other big Italian lenders, such as Intesa Sanpaolo and Banco Popolare, are keeping more non-performing loans on balance sheet; Intesa Sanpaolo’s non-performing ratio, however, is closer to UniCredit.
In other words, the request for the rights issue is not to put UniCredit in the category of other godforsaken Italian banks. The challenge for 2017 is getting investors to agree, and keep the momentum after a 17% bounce in UniCredit’s share price on Tuesday.
The well-timed news of Fino was the culmination of a heady six months since Mustier returned to UniCredit and took over from former CEO Federico Ghizzoni in July, amid investor concern over a lack of action to bolster thinning capital levels.
Accelerated-bookbuild sales of 10% stakes in Polish lender Bank Pekao and Italian multichannel bank FinecoBank completed the very day Mustier officially took office, just after announcing a strategic review for late 2016. In October, it sold another 20% of FinecoBank and transferred its Ukrainian lender to Russia’s Alfa-Bank.
As the results of the review, and knowledge of the size of the rights issue, approached, on Thursday the bank sealed an agreement with Poland’s PZU and PFR to sell a 32.8% stake in Pekao for €2.4 billion. Then, on Sunday, came a €3.5 billion sale of its asset management product factory Pioneer to France’s Amundi – Crédit Agricole, Amundi’s majority owner, is underwriting €1.4 billion rights issue to finance the purchase.
Italy remains UniCredit’s biggest market, with 44% of risk weighted assets. It is holding on to its ownership of Germany’s third biggest private bank, HVB. It also remains among the biggest foreign banks in Russia and Turkey.
Despite exiting its Polish bank, which it has long struggled to integrate with the rest of its emerging-Europe network, UniCredit insists its future is to be a “pan-European commercial bank” – so, a different animal to the other more domestic-focused Italian bank.
“UniCredit always tried to differentiate itself from Italian banks, but its problems, its non-core assets, were mostly in Italy,” says Tramontana. “Now maybe they will reach their target.”