UniCredit Sets Aside $980 Million for Potential Virus Hit
UniCredit Takes Additional $980 Million in Loan Loss Provisions
(Bloomberg) -- UniCredit SpA became the first big European bank to try to quantify the impact of the coronavirus, setting aside 900 million euros ($977 million) to cover potential loan losses stemming from the outbreak.
Italy’s biggest bank said it will book the provisions for possible soured loans after estimating that the pandemic will cause a 13% contraction in the eurozone’s economy this year. That’s even after widespread government efforts to blunt the impact, including billions to help failing businesses and bank guarantees.
UniCredit, like most of its Italian peers, faces the possibility that the economic crisis due to the lockdown could undo years of reforms that improved their balance sheets and reduced piles of bad loans. Provisions will be a major focus for European lenders in the first quarter as officials urge them to be flexible in their accounting to keep credit flowing.
Europe’s banks are likely to report small increases in loan loss reserves compared with their U.S. peers, Bloomberg reported last week, citing senior bankers and regulators. The biggest U.S. lenders collectively set aside $25 billion for soured debt in in the first quarter.
Given its strong capital buffers, UniCredit can afford a conservative approach by “taking a material anticipation” of provisions in the first quarter, Benjie Creelan-Sandford, an analyst at Jefferies, wrote in a note. “Pressure is now on peers to follow, despite regulatory flexibility to avoid.”
Credit Suisse Group AG will be the first major European bank to release first quarter earnings when it reports on Thursday.
Cleanup Interrupted
UniCredit has made cleaning up its balance sheet a major priority, writing down and selling billions of euros of bad loans in recent years. At the end of 2019, the bank’s NPL ratio was 5% of total loans, the lowest among its Italian peers. Its CET 1 ratio, a key financial measure, was above 13% as of Dec. 30.
UniCredit rose as much as 2.4% in Milan trading and was up 0.4% as of 11:59 a.m. The stock is down 51% this year, compared with a 43% decline of the STOXX Europe 600 banking index.
The coronavirus cataclysm has blown a hole in Chief Executive Officer Jean Pierre Mustier’s blueprint outlined in December, which anticpated higher profits and more generous payouts to shareholders. Earlier this month the bank reached an agreement with workers to cut 5,200 existing jobs in Italy through 2023.
UniCredit was already expected to post a large loss in the first quarter after it announced in December that about 1.1 billion euros of one-time charges related to Italian job cuts would be booked this year. The bank’s first quarter net loss was expected to be about 1.5 billion euros, according to a company survey of 21 analysts published earlier this week.
The lender also revised its cost-of-risk estimates to about 110 basis points in the first quarter and 100 to 120 basis points for the full year. It currently expects a 10% economic recovery in the euro area next year, when it sees the cost of risk falling to 70 to 90 basis points. The cost of risk is the ratio between loan-loss provisions and assets weighted for credit risk in a specified period. A lower figure indicates less risk on a bank’s books.
Mustier proposed lowering his 2020 salary by 25%, or about 300,000 euros, after having already renounced his bonus the year. That brings the total reduction of his remuneration to 2.7 million euros, which will be donated to the UniCredit Foundation.
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