Kristian Rouz – Trouble in the Italian banking sector has gained particular prominence amid ongoing speculation of Italy’s possible separation from the EU.
The issue has prompted several nation’s largest lenders to raise additional capital in order to hedge against the risks posed by the overwhelming amount of non-performing loans (NPLs). Italy is Europe’s leader in NPLs, and its banking sector is severely undercapitalised, however, the latest effort to boost reserves by Unicredit SpA has resulted in a relief rally in banking sector stocks.
The European Central Bank (ECB) refused to extend the recapitalisation terms for Italian banks earlier this month, causing a brief panic, amid speculation of a possible Monte Paschi nationalisation and an intensified bank effort to attract additional investor funds.
Unicredit, meanwhile, announced it is planning to cut yearly expenditures by 1.7 bln euros by 2019 – mainly resulting from job cuts, while bad loan sales will facilitate the improvement of balance sheet performance. Apparently, Italian debt collectors are in for an increased amount of work coming their way.
“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 of Banca Akros said, describing the Unicredit situation. “The rights issue stands at the top of the expectations, given the stronger-than-expected effort” to increase loan-loss reserves.
Unicredit also said it would not pay a dividend for 2016. The bank is planning to increase profitability to 4.7 bln in 2019 with equity ROI at above 9pc. In order to reach this goal, the bank must eliminate another 6,500 jobs, bringing total job cut to 14,000.
“We are taking decisive actions to deal with our non-performing-exposure legacy issues to improve and support recurring future profitability," Unicredit CEO Jean Pierre Mustier said in a statement.
Unicredit said it would reserve 8.1 bln euros for NPLs, while 17.7 bln euros worth of bad loans would be securitised and subsequently sold.
"We welcome the focus on cleaning up the balance sheet, although some may have hoped the extent of provisions could have delivered a larger upfront non-performing loan reduction,” Jefferies Group LLC analysts wrote. “Given lack of control over the external environment, we think the focus on capital and costs is important.”
Unicredit’s shares soared on the news in Tuesday’s trading, gaining 9.25pc. However, the Italian banks' relief rally is likely to be short-lived, unless a systemic solution is found for the main issue of concern, Monte Paschi, which is almost certainly heading for a noationalisation.
