Against All Adversity, Unicredit Struggles On

UniCredit SpA, Italy's second biggest bank, fell again in Milan trading this morning after analysts at banks including Citigroup Inc. and JPMorgan Chase & Co. cut their share-price estimates. The bank dropped 14 cents, or 4.8 percent, to 2.78 euros as of 12:52 p.m., after being suspended in earlier trading. Unicredit shares have now fallen 51 percent so far this year. Unicredit lead the charge down, and stock were off by as much as 5.2 percent at one point, although Italy's S&P/MIB Index reversed earlier losses to gain slightly by the close, adding 64, or 0.3 percent, to 23,840.

UniCredit Chief Executive Officer Alessandro Profumo recognised yesterday that the bank had underestimated the scale of the global financial crisis. The Milan-based company has cut its profit forecast and is being forced to raise 6.6 billion euros ($9 billion) in capital, days after saying there was no plan to issue new shares.

JPMorgan cut the price estimate to 4.07 euros from 5.2 euros, while Citigroup today lowered its target for UniCredit to 3.3 euros from 4.1 euros. Analysts at Deutsche Bank AG, Exane BNP Paribas, Keefe Bruyette & Woods, Banca Leonardo and Euromobiliare also reduced their estimates.


As I explained in my lengthier post yesterday, Unicredit shares have been under almost constant pressure over the last week, being down as much as 16 percent at one point in Milan trading yesterday, following a 3 day 24% fall last week.

The most recent share drop follows a capital boost of 6.6 billion euros decided on at an emergency board meeting held Sunday afternoon, where among the exceptional measures decided on to raise the cash was the idea of paying this years dividends to shareholders by giving them more company shares.

The "shares for dividends decision" forms part of a battery of measures which includes significant cost cuts and asset sales in order to try to guarantee that the core Tier I capital ratio, a measure of the banks' financial strength, rises to 6.7 percent by the end of the year, from 5.7 percent now. A core Tier I of 6 percent or higher is generally considered an adequate minimum for banks, while anything below it starts to raise eyebrows.


Among other relevant details in the present drama it is important to grasp that UniCredit is owner of Germany's HVB Group, since one of the issues arising from the first (failed) Hypo bail-out attempt was whether or not UniCredit would be asked to contribute funds, a development which could have negative consequences for Unicredit's capital position. Hypo Real Estate was in fact spun off from the Unicredit owned HVB Group in 2003.

But Unicredit is also exposed due to the extent of its lending in Eastern Europe - which is estimated to amount to one quarter of the banks total lending operations. Unicredit is deeply involved right across Eastern Europe via its ownership ofthe HVB group, as well as via it's ownership of Bank Austria Creditanstalt. Among other issues Unicredit is evidently exposed in the Baltics, given the fact that as of September 1, 2007 ASUniCredit Bank Estonian took over the business of HVB Bank Tallinn. But the extent of Unicredit East European lending is much more extensive than this, and with property markets in one EU10 country after another now likely to "correct" the problem is about to become considerably larger than simply the German Hypo Real Estate one. Unicredit made direct acquisitions in 2007 in Kazakhstan and Ukraine, while extending its position in the Russian banking sector. The first of these counries had a financial "sudden stop" in September 2007, while the latter two are in the process of a major domestic credit "unravelling.

Fitch Ratings last Thursday downgraded the Outlook on UniCredit to Negative from Positive. At the same time Fitch changed the Outlook on Unicredit's main subsidiaries - Germany-based Bayerische Hypo- und Vereinsbank AG (HVB) and Austria-based Bank Austria Creditanstalt AG - to Negative from Positive. Fitch stressed as reasons for the downgrade the poor macroeconomic outlook in Italy and Germany and in particular the less benign outlook for some central and eastern European markets. Fitch also regards UC's current capitalisation (end-H108 Basel 1 core Tier 1 ratio of 5.55%) as tight in relation to its risks especially given thatconditions in the wholesale funding market remain "extremely challenging".