March 11, 2014 2:42 pm

UniCredit falls to record €14bn loss before stress tests

UniCredit announced a record annual net loss of €14bn on Tuesday as Italy’s biggest bank by assets cleaned up its balance sheet by taking big writedowns on bad debts and goodwill ahead of European stress tests.

Several Italian banks report results on Wednesday, including Monte dei Paschi di Siena, and they are expected to take similar financial hits in preparation for the European Central Bank’s asset quality review and stress tests of the continent’s lenders this year.

Despite the big loss, which wipes out all profit the bank has made in the past decade, UniCredit chief executive Federico Ghizzoni started his press conference with a quip about the unexpected scale of the writedowns at the bank: “Admit it, we’ve surprised you,” he told waiting reporters.

Mr Ghizzoni said he was “very satisfied” with the bank’s “courageous decision” to wipe its balance sheet clean of the impact of the non-performing loans and goodwill related to acquisitions made by his expansionist predecessor Alessandro Profumo.

Announcing plans to start paying its dividend in shares rather than cash to preserve capital, UniCredit said it could “exclude the need of any capital increase”.

The bank had a common equity tier one ratio of 9.4 per cent using the tighter Basel III definitions as of the end of December. This included a €1.2bn after-tax gain on its stake in the Bank of Italy. However, analysts at Berenberg said the bank’s target to achieve a common tier one equity ratio of 10 per cent by 2018 was “too little, too late” and predicted it would need to raise as much as €2.5bn of fresh capital.

UniCredit became the first Italian lender to set up an internal bad bank, housing €87bn of Italian loans, two-thirds of which are impaired. It said that nearly €55bn of the loans would be run down by 2018.

The record annual loss was triggered by a €9.3bn impairment of goodwill and customer relationships, including a full writedown of all goodwill allocated to Italy, Russia, Turkey, Austria and central and eastern Europe.

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One of the most important financial events of this year is the European Central Bank’s Asset Quality Review. The review is the opening act in the central bank’s health check of the eurozone’s biggest lenders, which goes by the glamorous title of the Comprehensive Assessment.

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UniCredit also took €9.3bn of loan loss provisions in the fourth quarter, taking its total for the year to €13.7bn. This reflected pressure from regulators ahead of the ECB asset quality review and stress test to increase collateral on property loans and to reclassify some loans, requiring bigger writedowns.

The bank said its provisions covered 52 per cent of its bad loans at the end of last year, against 45 per cent at the end of September.

It is forecasting a return to the black this year with an expected net profit of €2bn, rising to a profit of €6.6bn in 2018. Shares in UniCredit rose 6.5 per cent to €6.43. Analysts at Citigroup said: “Future profitability is better than what we were expecting.”

Mr Ghizzoni denied the move had been “dictated by external issues”. Crucially, he said that the decision had been made as the bank’s quarterly operating profit rose by 1 per cent for the first time in several quarters.

Nonetheless, Mr Ghizzoni said UniCredit was forecasting only a weak economic recovery in Italy, factoring in only 0.8 per cent compound annual growth until 2018. The bank plans to cut 8,500 jobs during that period as it seeks to cut €1.3bn of costs by shutting branches and moving more of its banking online.

It announced plans for a stock market listing of “up to half” of its mostly online consumer finance bank Fineco and the sale of UniCredit Credit Management Bank, its debt collection business.

Mr Ghizzoni said the ECB’s asset quality review was likely to be “rigorous” but he was confident of having “done more than requested”. He added: “Many other Italian banks are looking at capital increases and writedowns so I expect that the [Italian] system will come through without difficulty”.

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