MILAN (Reuters) - Italy's largest lender, UniCredit (CRDI.MI), is set to announce next week the country's biggest bank share issue, worth up to 13 billion euros ($13.8 billion), in what would be a major test of confidence in Italy's wider banking system, sources said.
If successful, the fundraising would be a shot in the arm for a sector overburdened by bad loans, buffeted by political uncertainty and dogged by the risk its third-largest lender, Monte dei Paschi di Siena (BMPS.MI), could be nationalised.
UniCredit, which operates in 17 countries and is the only Italian bank whose health is deemed important to the stability of the global financial system, needs to strengthen its balance sheet to meet tough new regulations designed for such lenders.
"It's a massive amount and the mere fact they're thinking of it means they must be confident of pulling it off," said Roberto Lottici, a fund manager at Ifigest.
Chief Executive Jean-Pierre Mustier, drafted in this year to boost capital and profits at Italy's biggest bank, is set to present his strategic review on Tuesday.
Sources familiar with UniCredit's thinking said he could announce the cash call for early next year.
Mustier would face a harsh investment climate: Prime Minister Matteo Renzi quit this week after a heavy referendum defeat, raising the prospect of early elections, and Monte dei Paschi may need a state bailout after investors balked at funding the bank's own 5 billion euro rescue plan.
Other, smaller banks are also lining up for cash.
On Wednesday, credit rating agency Moody's cut its outlook on Italy, saying prospects for much-needed economic reform had shrunk after Renzi's departure.
"There is a monstrous hangover on Italian banks looking to raise capital, including UniCredit," said Anthilia Capital Partners Chief Investment Officer Andrea Cuturi.
But Mustier has said Renzi's resignation and the threat of early elections next year will not change his thinking.
"The event overnight will not change our strategy and we plan for the long term," he told Bloomberg TV on Monday, after Renzi announced the night before that he would quit to take responsibility for the defeat of his constitutional reform plan.
Some investors are concerned a popular anti-euro party, the Five Star Movement, could come to power at the next general election, which is widely expected to be held in the spring.
Mustier, a former Societe Generale (SOGN.PA) executive, was appointed to run UniCredit in July. The bank has been selling assets and has said a share sale is an option.
"Mustier has got 13 billion euros penciled in but hasn't made a final decision yet," a source close to the matter said.
Two other sources confirmed the amount, saying the CEO wanted to fix the bank's capital concerns once and for all. But another source said Mustier might stop at 10 billion euros.
UniCredit, with a market value of 15 billion euros, has lost more than half its value this year, weighed down by concerns over profitability, bad loans and a weaker balance sheet compared with major European rivals.
In June, a source said Mustier, hired for his experience in managing complex operations at a big bank, was looking to raise core capital - a key measure of financial strength - to 12.5 percent. At the end of September, the bank's fully-loaded CET 1 ratio was 10.82 percent.
UniCredit, which has Europe's biggest bad loan portfolio, is also expected to reveal plans to dispose of as much as 20 billion euros worth of non-performing loans, sources have said.
"The bank could present its plan for clearing out the bad loan book, perhaps indicating who it's talking to," a person familiar with the matter said.
Mustier has begun selling assets and slimming down the bank, making it easier to manage.
It is in exclusive talks with France's Amundi (AMUN.PA) to sell its asset manager Pioneer in a deal that could raise around 3.5 billion euros. On Thursday, it announced deals to exit Polish unit Pekao, raising more than 2.5 billion euros.
More disposals could be on the way.
"We can't rule out another share placement in FinecoBank (FBK.MI)," said a banker who has recently worked on deals with UniCredit. The lender sold 20 percent of its online broker unit in October for around 550 million euros.
The banker said a successful UniCredit cash call could be a prelude to a tie-up with France's Societe Generale.
Any deal would be structured as a merger of equals meaning UniCredit needed to bump up its valuation. "It's too early now but there are good chances this will be the first pan-European bank merger," the banker said.
Rumours about a possible merger between the French and Italian banks have circulated for years but re-emerged after Mustier's appointment. Both banks have declined to comment.
Additional reporting by Paola Arosio and Danilo Masoni; Editing by Mark Bendeich and Mark Potter