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UniCredit's giant rights issue unaffected by Italian headwinds, CEO says

UniCredit SpA CEO Jean-Pierre Mustier said he is "extremely confident" in the success of the bank's €13 billion rights issue, despite headwinds including political instability in Italy, the struggles of Banca Monte dei Paschi di Siena SpA and the shake-up of Basel III capital regulations.

The bank on Dec. 13 said it would bolster its capital base so it can eliminate crippling nonperforming loans from its balance sheet, and it set a target for a gross nonperforming exposure ratio of 8.4% at the end of 2019, down from 15.1% at Sept. 30, 2016. It will also eliminate 6,500 more jobs, for a total of 14,000, as part of a plan to save €1.70 billion in costs.

Analysts have expressed concern that UniCredit's equity raise might be impeded by the resignation of Prime Minister Matteo Renzi and the installation of a caretaker government, possibly to be followed by early elections sometime in 2017, after Italy voted Dec. 4 to reject constitutional reforms that Renzi had advocated. Monte dei Paschi, meanwhile, is making a last-ditch effort to raise €5 billion from the market and avoid having to be bailed out by the state, a saga that has sent Italian bank shares on a roller-coaster ride in recent days.

Mustier, however, was unmoved, saying UniCredit's approach "did not change from the Saturday before the referendum to the Monday after the referendum."

"Our plan does not depend on the political evolution in Italy, it does not depend on Monte dei Paschi and does not depend on Basel IV," he said at a press conference, adding: "Change is not easy but we will work hard to make it happen."

He noted that political upheaval is hardly uncommon in Italy, "a country which has seen 63 different governments since 1945 and a country which is used to some dynamic political interaction."

Mustier emphasized that UniCredit's strategy will be to focus on mid-tier corporate lending across Italy, Germany and Austria as well as Southeastern Europe, and the bank highlighted in announcing the strategy that it has revamped its Italian commercial underwriting processes over the past few years to reduce the chances that loans will turn sour. UniCredit derives 48% of its revenue from Italy.

"Italy is a very strong country with good companies and unbelievable entrepreneurs," Mustier said, adding that he was confident that Monte dei Paschi's predicament will be resolved before the end of 2016 and that the situation would have no impact on UniCredit's capital increase.

UniCredit will book a full-year 2016 loss after absorbing €12.20 billion in fourth-quarter loan loss provisions and restructuring charges, and it will not pay a dividend for the year. Future dividends will amount to between 20% and 50% of net profit.

The bank will also look to achieve a return on tangible equity above 9% by 2019, with €1.70 billion of cost savings planned through measures including the 6,500 new job cuts, and it will aim for a fully loaded common equity Tier 1 ratio of 12.5%, up from 10.8% as of Sept. 30.

The plan also includes securitizing some €17.70 billion in bad debt, which will be ring-fenced into new, independent entities to be managed and majority-owned by PIMCO and Fortress Investment Group. At least 20% of the bad debt will be sold to third-party investors during 2017, with the rest to go by the end of the strategic plan in 2019.

"These actions are consistent with our expectations, and we think they represent a good trade-off between profitability and capital strengthening," Deutsche Bank analysts wrote in a research note published the same day.

Shares in the bank closed up nearly 16% to €2.81 in Dec. 13 trading in Milan.

Elsewhere Dec. 13, the Basel Committee on Banking Supervision was said to have reached an agreement on the framework of revisions to rules governing how banks calculate risk, a package of measures that has been dubbed "Basel IV." However, Mustier said these rules are likely to only affect a minority of banks, and UniCredit is not in that category.

"We know from the [European] Commission and from the Basel Committee that Basel IV will have a non-significant impact on European banks except for some outliers," he said. "So I checked with the Basel Committee, I checked with the ECB, and UniCredit is not an outlier."