Italian bank UniCredit is to ask shareholders for 7.5 billion euros ($10.3 billion) in new capital, cut 6,150 jobs and retreat from key business areas in a bid to repair its ravaged balance sheet and return to profit.
Revealing a 10.6 billion euro third-quarter loss along with Europe's largest bank fundraising in over a year, it scrapped its dividend payment for 2011 and joined other lenders with plans to slash its loans.
UniCredit, the only Italian name in a list this month of the most important global banks, is the country's most internationally exposed lender, operating in 22 countries.
But it is bearing the brunt as the euro zone's third-largest economy is sucked ever deeper into the region's debt crisis.
UniCredit holds 38 billion euros of Italian government bonds and its shares have lost half of their value this year, leaving its fundraising representing half of its value and making it painfully dilutive for investors.
Its shares closed down 6.2 percent at 0.77 euros, valuing it at just under 15 billion euros.
Some 5,200 of the jobs will go in its home base of Italy, now in the eye of the euro zone's crisis storm. Another 2,000 could go in Western Europe, including 800 in Austria, partly offset by new jobs in Eastern Europe. About 62,000 of the bank's 160,000 staff are in Italy, with 51,000 in central and Eastern Europe.
The third quarter loss included 9.8 billion euros of writedowns, of which 8.7 billion were linked to ill-timed takeovers in Eastern Europe in the past few years. Goodwill from deals in Ukraine and Kazakhstan was entirely written off. It also announced writedowns on its Greek bond holdings and on a number of brands, including Germany's HVB and Bank Austria.
"It looks like a kitchen sink job... a massive hatchet job across the business," said one analyst who did not want to be named. Another said the refocusing on Italy and Eastern Europe made sense given the bank's strong presence, in contrast to the sub-scale areas it will leave.
The writedowns are an accounting move that will not eat into capital, but even stripping them out the bank made a third quarter net loss of 474 million euros, wiping out a profit of 334 million euros a year ago and worse than analysts' expectations of a 6 million euro profit.
UniCredit, Italy's biggest bank by assets, said on Monday it aims to save 1.5 billion euros in annual costs and will retreat to its core operations, confirming many details that emerged over the weekend.
By strengthening its capital base, reducing investment banking and refocusing on more stable retail and corporate banking in Italy, Austria, Germany, Poland and Turkey, Chief Executive Federico Ghizzoni hopes to reduce volatility and stabilize profit.
It will shut its London-based equity sales and trading business, but plans to keep a leading role in central and Eastern Europe.
The capital increase, to be launched in the first quarter of 2012, will lift the bank's core Tier 1 ratio — a measure of capital strength — to 10.3 percent.
Ghizzoni wants to raise enough money to be on the safe side of the 9 percent Core capital benchmark set for Europe's banks.
"We want to be a rock-solid European commercial bank focused on our franchise with customers, with a conservative risk profile ... What is not core to our business will be abandoned," Ghizzoni said.
UniCredit refused, unlike Italian peer Intesa Sanpaolo, to tap the market when conditions were more favorable, and now must raise funds in a tough market.
UniCredit said it will sell or run off 48 billion euros of risk-weighted assets, joining rivals like BNP Paribas in shrinking in the face of higher capital and funding costs.
But the scale of deleveraging could choke off economic growth at a time when companies need extra credit to be pumped into the economy, industry critics say.
UniCredit's profitability ranks among the lowest in the industry, with return on tangible equity (RoTE) of just 3.6 percent last year. The bank said its turnaround plan should lift RoTE to over 12 percent and net profit to 6.5 billion euros in 2015.
Disposal of minor assets in eastern European countries where UniCredit is not the market leader are also being considered, although the bank said it has no intention of selling its profitable Turkish and Polish units.
Ghizzoni needs to persuade shareholder foundations — which together hold around 13 percent of UniCredit — to back the bank's third capital increase since 2009 and its biggest since the start of the financial crisis.
The bank was in talks with potential new investors from China and Qatar but these parties had not made any commitment to be part of the deal so far, sources familiar with the plan told Reuters at the weekend.
A further problem is the 7.5 percent stake held in UniCredit by Libya's central bank and sovereign wealth fund, which is technically still frozen because of the international sanctions imposed during the country's civil war.
The rights issue will eclipse near 5 billion euro fundraisings by both Intesa and Germany's Commerzbank. Deutsche Bank raised 10.2 billion euros in a rights issue in October 2010.
Mediobanca and Bank of America-Merrill Lynch are leading a consortium of banks in the rights issue.
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