UniCredit Soars on Plan to Raise $13.8 Billion, Slash Costs

(Bloomberg) -- UniCredit SpA jumped the most in six years after it laid out a plan to boost profitability that relies on cutting costs and shedding bad loans as Italy’s slow growth holds back revenue.

The stock rose 16 percent to 2.81 euros in Milan trading, paring the year’s decline to 44 percent. Deutsche Bank AG analyst Paola Sabbione described the plan, which includes a 13 billion-euro ($13.8 billion) rights offer, as “a good trade-off between profitability and capital strengthening.”

The bank is targeting 4.7 billion euros of net profit in 2019, more than triple that of last year, Milan-based UniCredit said in a presentation of its strategic plan on Tuesday. As part of the three-year strategy, the lender plans to shed an additional 6,500 jobs, bringing the total to 14,000, as it aims for 1.7 billion euros of annual cost savings.

“Given lack of control over the external environment, we think the focus on capital and costs is important,” Jefferies Group LLC analysts including Benjie Creelan-Sandford said in a note, repeating their buy rating. The bank’s “net profit target for 2019 is well ahead of consensus expectations.”

UniCredit Soars on Plan to Raise $13.8 Billion, Slash Costs

Jean Pierre Mustier on December 13.

Photographer: Simon Dawson/Bloomberg

UniCredit Chief Executive Officer Jean Pierre Mustier, a 55-year-old Frenchman, in July took the helm of a lender burdened by a mounting pile of bad loans, record-low interest rates and Italy’s longest recession since World War II. The bank had the slimmest capital buffer among those deemed important to the financial system in the latest European stress tests.

UniCredit said it will set aside 8.1 billion euros for non-performing loans as it plans to move 17.7 billion euros of soured debt off its books for securitization and a subsequent sale. The bank said one-offs this quarter will total 12.2 billion euros.

‘Party’ Size

The sale of bad loans was more aggressive than many analysts expected, and the bank’s target for profit in 2019 -- when it aims to have a return on tangible equity above 9 percent -- compares to net income of 1.5 billion euros last year. Royal Bank of Scotland Group Plc Chairman Howard Davies expressed confidence that the capital increase will succeed.

“Jean Pierre Mustier is a very experienced and very smart guy; I presume he wouldn’t give that size of party unless he thought some guests were going to show up,” Davies said in a Bloomberg TV interview on Tuesday.

The capital increase will take place in the first quarter of next year, Mustier said on a conference call with journalists. UniCredit plans to hold a special shareholders’ meeting on Jan. 11. The CEO said he’s confident Banca Monte dei Paschi di Siena SpA’s efforts to raise capital will be resolved this month and will have “no impact” on his own bank’s fundraising.

While the bank expects annual costs to drop, it sees revenue rising by just 0.6 percent per year through 2019. UniCredit sees falling net interest income, with growth coming from fees and commissions, it said in a presentation in London.

“With almost no revenue growth in the foreseeable future, the plan is focused on cutting costs and improving the asset quality and capital levels,” Luigi Tramontana, an analyst at Banca Akros, said in a note to clients. “The rights issue stands at the top of the expectations, given the stronger-than-expected effort” to boost loan-loss reserves.

Mustier is already disposing of assets including the Pioneer Investments fund management business, Polish unit Bank Pekao SA and its 30 percent stake in online lender FinecoBank SpA.

Capital Boost

The revamp will help UniCredit to increase its common equity Tier 1 ratio to more than 12.5 percent by 2019 from 10.8 percent at the end of September. The bank won’t pay a dividend for 2016 and targets a 20 percent to 50 percent payout ratio in subsequent years.

Total net costs will drop to 10.6 billion euros from 12.2 billion euros in 2015, the bank said. The bank employed about 123,000 people at the end of September. Excluding businesses the bank is selling, headcount was 99,500 at the end of the third quarter, and will fall to 87,000 by 2019. UniCredit plans to close 944 branches in western Europe by 2019.

Mustier will receive no bonus this year and will get no severance payment if he leaves, according to the presentation. Mustier will also see his fixed salary cut by 40 percent to 1.2 million and will invest 2 million euros in the bank’s shares.

Fortress Investment Group and Pimco will take majority stakes in the two units that will take on the non-performing loans, UniCredit said.

Italy Struggles

Banks across Italy are contending with expectations of low economic growth, pressure from European regulators to meet stricter capital standards and political instability following the fall of Matteo Renzi’s government. The prospect that Monte Paschi may need a state rescue if its capital plan fails has also affected confidence in Italian lenders across the board.

"If you look at UniCredit, it’s in an economy that hasn’t grown for 20 years,” said RBS’s Davies. “The banks are mirrors to their own economies, and there’s not a great deal you can do as UniCredit about the state of the Italian economy."