Italy's biggest bank announced its plans to launch a massive €13 billion rights offer followed by eliminating thousands of jobs in an attempt to escape from the worst banking crisis the country has seen in decades.
UniCredit (MI: UCG) has been named the single most important Italian bank for the global financial industry, yet it could not avoid the devastating influence of the troubled Italian banking sector just as the smaller domestic banks. In the situation when Italy's oldest bank Monte dei Paschi di Siena (MI: BMPS) is on the brink of an abyss after losing 80% of its market cap and the constitutional referendum has left the country without a Prime Minister, the financial health of the country's biggest bank has become more important than ever.
Earlier today, the bank has made an announcement to raise €13 billion as part of the plan to get rid of €17.7 billion of bad loans by selling them in securities bundles to investors, reported the Wall Street Journal. The newly-appointed UniCredit's CEO Jean Pierre Mustier pledged to carry out a major overhaul of the struggling bank to finally boost profits and begin dividend payouts. Bloomberg adds that the decision to raise such massive funds comes as a response to the results of the latest European stress test that showed that UniCredit had the worst "capital buffer" among all strategically important banks in Europe.
However, the success of this plan depends on investors' support. UniCredit has already raised €14.5 billion in a similar initiative back in 2008, when the bank struggled to cope with the global financial crisis. That is why, the decision to raise such a big amount yet again might not be readily supported by investors as a reliable long-term solution. On top of that, investor confidence in Italian banks was further shaken by the resignation of Italy's Prime Minister Matteo Renzi that exacerbated the uncertainty in the troubled industry.
As part of the overhaul, UniCredit expects about €4.7 billion in net profits in 2019 and a 9% return on tangible equities, reports Bloomberg. Next to that, additional 6,500 jobs will be eliminated, bringing the total number of workforce cuts to 14,000, or 11% of the bank's staff. The bank said that these deep job cuts would result in approximately €1.7 billion in costs savings annually. However, the overhaul will also come with significant restructuring costs, which the lender expects to add up to €12.2 billion in the fourth quarter. Mustier said that this was a "pragmatic plan based on conservative assumptions, with tangible and achievable targets."
"The transaction to de-risk a €17.7 billion non-performing portfolio is yet another step in the strategic direction we announced in July this year, and which will be discussed in detail at our Investor Day. We are taking decisive action to deal with our legacy issues to significantly improve the quality of our balance sheet and lay the foundation for future recurring profitability," said UniCredit CEO Jean Pierre Mustier, as reported by The Street.
Mustier added that the capital raise would start already in the first quarter of 2017 whereas Monte dei Paschi's effort to increase capital would "have no impact" on UniCredit's plans, he said. The bank's CEO believes that Monte dei Paschi's plan to attract €5 billion of fresh capital to at least partially compensate for the €28 billion of bad loans will be resolved by the end of the year. Monte dei Paschi has been given time until the end of December to raise the needed funds, says Reuters.
UniCredit's capital raising was supported by a pre-underwriting agreement by such key banks as Morgan Stanley (Milan Stock Exchange: Mediaset [MS]), BofAML (NYSE: Bank of America Corporation [BAC]), JPMorgan (NYSE: JPMorgan Chase & Co [JPM]) and UBS (NYSE: UBS), as this agreement could help the bank to win the support of more investors. Next to that, the bank's bad loans will be distributed among Fortress Investment Group and PIMCO that would take on the majority of the bank's non-performing loans.
Stocks edge higher
Shortly after the bank's announcement, UniCredit shares gained 2% this morning as most experts agreed that Mustier's recovery plan sounded convincing. In total, UniCredit jumped around 8% to €2.61 in Milan today, building on an 18% gain from last week. Bloomberg adds that this is an important stock market reaction, considering that the bank has lost more than half of its value in 2016 and is left with a market capitalization of only €15 billion. This was the first time UniCredit showed any significant growth since the Brexit vote on June 23, say The Street experts.
In addition to that, the broader European stock market also positively reacted to UniCredit's announcement, with Italy's FTSE MIB growing 1.6% at the open today. Likewise, reports The Street, British FTSE 100 gained 50 points by noon whereas Germany's DAX index jumped 95 points, which can be also partially attributed to a 2.5% gain of Deutsche Bank (NYSE: Deutsche Bank [DB]). Italian FTSE Banks Index also got a 2.85% boost on the news of UniCredit's overhaul plan. Monte dei Paschi is also up 2%.