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Incoming UniCredit CEO Mustier moves fast to plug capital hole

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Incoming UniCredit CEO Mustier moves fast to plug capital hole

Facedwith a potential multi-billion-euro capital hole, new CEO Jean-Pierre Mustieris moving swiftly to beef up the bank's capital and strategy.

Justdays since Mustier, UniCredit's former investment banking chief, took overfollowing Federico Ghizzoni's ousting by the board, a flurry of deals isalready in train. After the placing of 10% of FinecoBank SpA and indications of the revival of a dealinvolving Pioneer Global AssetManagement S.p.A. and Santander Asset Management, UniCredit hasjust announced the sale of a 10%stake in Bank PekaoSA for €749 million.

Acapital benefit of 45 basis points to UniCredit's CET1 ratio might result. TheFinecoBank sale will raise around €328 million and add some 8 basis points tothe CET1 ratio while the Bank Pekao deal will add a further 12 basis points;UniCredit management has said in the past that Pioneer transaction could add afurther 20 to 25 basis points.

Capitallooms large in the strategic review announced July 11 which stated: "Therewill be specific focus on capital optimization opportunities, further costreduction, cross-selling across group entities and above all further improvedrisk discipline."

Currently,UniCredit has a fully-loaded CET1 ratio of 10.85%. It needs 9.75% to meet theminimum set by the ECB's Supervisory Review and Evaluation Process plus afurther 1% because of its status as a globally systemically important bank. Thelatest deals could take UniCredit, whose capital will come under scrutiny inthe European Banking Authority stress test to be announced July 29, to 11.3%.

"Comparedto the Spanish banks it looks well-capitalized but weak compared to otherItalian banks. It needs to go to 13%," a bank analyst observed, pointingto the 13.1% CET1 ratio reported by Intesa Sanpaolo SpA as a benchmark. He calculated that a€7.5 billion raise might be required, varying according to the size of thebuffer above the fully-loaded SREP requirement of 10.75% and to whatever assetsare sold.

Capital shortfall

SocGenequity analysts calculated June 20 that raising the CET1 ratio by 150 or 200basis points would require €5.5 billion or €7.5 billion respectively. Theythought the capital shortfall would be met by "a mix of actions includinga capital hike and one or more asset disposals."

"Theissue is that UniCredit could remain saddled with its bad debts," Jean-LucLepreux, SocGen bank credit analyst, said.

had €79 billion inNPLs at the end of March 2016, the most in the Italian banking system, with aratio of 16.3% of NPLs to tangible common equity and reserves and a coverageratio of 54.6%. Lifting coverage to 60% or 70% would require further capital ofrespectively €4.3 billion or €12.2 billion, respectively.

Giventhat UniCredit earned a return on average equity of 3.1% in the first quarter,the bank looks unlikely to cleanse its balance sheet from earnings. Yet bothmarkets and regulators appear impatient.

"Thereal problem of UniCredit is Italy, where they are not making money. Theycreated core and noncore Italy but it is the same business. Intesa by contrastis very profitable in Italy; it has as cost to income ratio of 45% in Italywhile UniCredit is at 60%. Intesa is more able to absorb credit losses,"Lepreux pointed out.

Thestrategic review release identified Italy, Germany, where UniCredit trades asHypoVereinsbank, central and eastern Europe, and the Corporate Investment Bankas core businesses. Poland, which is not considered part of CEE, Turkey andAustria are evidently not core, Lepreux observed. Selling Turkey and Austrialooks difficult, the equity analyst remarked, while there appears to be no easyroute to lifting profitability and returns. The commercial banksin Germany and Austria both reported losses in the first quarter because ofrestructuring.

"Restructuringis difficult, will take time and there are no easy answers. The board is verysclerotic. The underlying core returns of Italy were lower than Austria andGermany last year," the equity analyst said, observing that Mustier, aninvestment banker, is being asked to undertake a detailed businesstransformation particularly in retail banking.

Theanalyst observed that the bank's capital needs depend crucially upon the speedof restructuring and the view of the ECB as to whether UniCredit has to sellits NPLs quickly. While both will cost money, delaying action is notnecessarily sensible. This points to a capital raise: "If you look at theCET 1 ratio, it is tight and the reason they cannot issue the €2.5 billion Tier1 debt [they require] is because they are basically shut out of the market."