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Unicredit approves deep balance sheet cleanup

by Luca Davi

UniCredit has written down its investment in the Atlante fund and said it expected to record a loss for 2016 of €11.8 billion, €1 billion higher than previously forecast. More importantly, the bank clarified that, any failure of the subscription of its €13 billion capital increase would bring capital ratios below requirements and compromise “conditions for business continuity.”

Among possible scenarios, the bank included the option of a bail-in. This is an extreme scenario, as indicated in the investor prospectus for the offering. It is the result of the valuation of the impact of negative non-recurrent items for €12.2 billion to be recorded in the fourth quarter, €8.1 billion of which are due to loan provisions.

The shock will reduce the bank's Core Equity Tier 1 (CET1) ratio to 8%, below the 10% minimum set by the ECB.

In such an event, the bank said it “may be subject to possibly invasive measures by the supervisory authorities, such as for example, the imposition of restrictions or activity limitations or disposal of activities,” or, additionally, “the disposal of activities that in their view represent excessive risks to the issuer.”

This at least in theory. The €13 billion capital increase is ready to be approved. The board yesterday accelerated the review of preliminary results in order to launch the capital increase next Monday.

The offering should come with a discount of between 30-40% on theoretical ex-rights price (TERP), for a price of around €13-15. The details will be unveiled tomorrow, when the board meets again. Market conditions and investment banks are positive. The market's effective response will be seen in due time.

The project presented to investors by CEO Jean-Pierre Mustier – who will be on a roadshow in London this week – relies on the idea of a bank with a completely clean balance sheet. The manager has therefore decided, in a precautionary move, to take into account “a number of additional negative one-off items amounting to approximately €1 billion,” which will be recorded in 2016.

The main reason behind the loss is the write-down of the investment in the Atlante Fund, in which the bank has committed to paying €845 million, €686 million of which already paid. Sources told Il Sole 24 Ore that the stake should be written down by 60-80% of its original value. In addition, the bank will write down some participations and deferred tax assets for temporary differences and extraordinary contributions to the National Resolution Fund, equal to €215 million.

The write-downs add to €12.2 billion of one-off items already announced on December 13, UniCredit however clarified that €1 billion of extra write-downs “will not impact the targets” of the industrial plan.

The banks aims to confirm the target of a CET 1 ratio above 12.5% in 2019, in line with the guidance disclosed on the capital markets day. In such a context, the bank – whose stock lost 5.45% yesterday - has released part of the documentation related to the recapitalization.

The over 1,000-page long investor prospectus approved by Consob shows how the bank has been and still is in constant conversation with the European Central Bank. Among the issues discussed with the central bank is the possible sterilization of the capital impact of the securitization of a portfolio of gross NPLs of €7.2 billion, called Aspra and Legacy.

The adjustment of the portfolio to calculate the “loss given default” – a necessity shared by the entire Italian banking system that is busy with NPLs, as emphasized by Bank of Italy Governor Ignazio Visco at the Assiom Forex conference last Saturday – requires approval by the ECB. Without this green light, UniCredit has warned of “a negative impact on the capital ratios” of the issuer.

As for the bad loans, the ECB has requested – in line with other Italian banks – to present by next February 28 a strategy for bad loans backed by an operating plan to tackle the high level of NPLs. But the ECB did not stop there. UniCredit said it had been visited several times by ECB officials in 2016, who started seven inspections, four of which between last September-November.

The bank will be informed of the outcome of the inspection on market risk, started in June and completed in July, in the next months. In this respect, checks have concerned the management process of bad loans and the method to calculate the Common Equity. In such respect, in recent weeks the bank presented and discussed possible remedies with central authorities. An action plan will be sent to the ECB by March 31.

From the prospectus, it emerges that the bank until September 30 faced around 26,000 judicial procedures – it has lawsuits open for €12.8 billion related to judicial, tax and labor disputes. In the face of judicial (€11.839 billion) and labor (€481 million) risks, as of September 30 2016 the bank had set aside provision for around €620 million.