Breakingviews-UniCredit's capital options lie eastwards

Mon Sep 19, 2011 2:19pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By George Hay

LONDON, Sept 19 (Reuters Breakingviews) - Federico Ghizzoni needs to make up for lost time. The chief executive of UniCredit (CRDI.MI) missed a good chance to recapitalise the Italian bank in the spring, when most of its peers raised equity. Since then, the euro zone maelstrom has spread to his home country. Fortunately, he still has options.

Ghizzoni might argue that the market wouldn't have given him credit for raising capital sooner. Even though rival Intesa SanPaolo (ISP.MI) raised 5 billion euros in the spring, its shares have still lost almost half of their value since July 1

-- a similar fall to UniCredit’s. The sell-off is instead due to -- a similar fall to UniCredit’s. The sell-off is instead due to Italian banks’ huge exposure to sovereign debt.

But foot-dragging on capital looks dangerous. Italian banks’ short-term funding from U.S. money market funds has been cut back. Although UniCredit can tap unlimited dollar and euro liquidity from the European Central Bank, jittery creditors might seize on any perception of weakness. The cost of insuring UniCredit’s debt for five years is still 25 basis points more than Intesa’s.

Getting UniCredit’s core Tier 1 level up to Intesa’s level of near 10 percent would require over 6 billion euros of new equity –- almost half its market capitalisation. Italian pre-emption rights make just selling a chunk of the business problematic. Ghizzoni has talked of a possible rights issue. But that looks tricky too. Before underwriting, investment banks would almost certainly need the euro zone to turn a corner -- perhaps via an orderly Greek default or an enlarged European Financial Stability Facility.

UniCredit could just sell assets. Its 40 percent stake in listed Turkish lender Yapi Kredi (YKBNK.IS) and 60 percent stake in listed Polish bank Pekao BAPE.WA are currently worth 7.7 billion euros. The bank has denied they are for sale, and without a big premium they also would probably not generate enough new capital. But their faster-growing economies mean they would probably fetch a higher price than selling western assets.

But the best way to recapitalise may therefore be to look east. The Italian bank is a much more enticing proposition than Greek banks that have already attracted Qatari interest. A Middle Eastern investor might well underwrite a rights issue, giving confidence to other investors. Ghizzoni should make overtures before the crisis gets any nastier.

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CONTEXT NEWS

-- UniCredit has denied reports that it is planning to sell its Polish and Turkish operations. A spokesperson for the Italian bank told Reuters on Sept 15 that the reports were “completely groundless”.

-- UniCredit shares were trading at 0.73 euros on Sept 15, 52 percent below their position on July 1, and around 0.4 times its likely annual tangible book value in 2011. Intesa SanPaolo shares trade at 0.99 euros, 45 percent below where they were on July 1.

-- The cost of insuring UniCredit’s senior debt for five years has increased by 101 percent to 400 basis points since July 1. Intesa’s five year senior credit default swaps have risen 132 percent to 376bps.

-- UniCredit could raise its core capital via a rights issue, risk-weighted asset reduction and asset sales, chief executive Federico Ghizzoni told the Financlal Times on Sept 12. He added that the bank was still working on a strategic plan for the business.

-- Reuters story: UniCredit says report on Yapi Kredi, Pekao sale groundless [ID:nL5E7KF0PX]

-- For previous columns by the author, Reuters customers can -- For previous columns by the author, Reuters customers can click on [HAY/]

(Editing by Chris Hughes and David Evans)

((george.hay@thomsonreuters.com)) Keywords: BREAKINGVIEWS UNICREDIT/

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