The "misinterpretation" - that lead to a 15 cents, or 7.3 percent, drop to 1.85 euros of Unicredit shares in trading today in Milan - was the result of a report from Moscow-based Interfax to the effect that UniCredit was about to sign an agreement with Russia's central bank to get compensation for losses on interbank operations. The source for the Interfax story was UniCredit Russia Chief Executive Officer Mikhail Alekseyev. But as Marcello Berni points out Alekseyev was referring to possible support the Russian central bank has offered to financial institutions in case of losses on the interbank market, and it should not be read as meaning that such losses had already been incurred, only that Unicredit have hat-tipped the central bank to be readying the money up just in case they do.
The real roots of this problem are to be found in the fact that Unicredit has very substantial exposure to losses in a number of key Central and East European countries, and the Italian government, which already has a debt to GDP ratio of over 100%, is in no position - especially with an economy which looks set to shrink all the way through from here to 2011 - to offer much in the way of cash to support the bank. As I point out in this post, Austria (which is a much smaller country than Italy, but which has similar East European exposure) has already lined up an initial 100 billion euros to support its banks, while the Italian government has remained hesitant to be specific about anything, but seems to be talking about support which only amounts to something like 20 billion euros. So we are left with the rather undignifying spectacle of the leaders of the eurozone's third largest economy having to rely on Muammar Abu Minyar al-Gaddafi and Vladimir Putin for vital support to keep one of Italy's leading banks alive.
Unicredit used to also be Italy's leading bank by market value, but since their stock has now declined by 59 percent in the last six months, and the company's market value stands at 24.7 billion euros ($31.3 billion), it now lies behind Italian rival Intesa Sanpaolo SpA. I repeat, as far as I can see Unicredit currently constitutes the greatest systemic risk to the eurozone banking system, and people somewhere ought to be thinking very carefully about just what the plan 'B' is going to be if all this goes horribly wrong.
Update: HVB Group Won't Need Funding Either
HVB Group, which is UniCredit's German banking unit, doesn't plan to tap Germany's government rescue fund for capital either, according to Theodor Weimer, head of global investment banking and chief executive officer designate for HVB in an interview yesterday.
"With a core capital ratio of 15 percent HVB doesn't need to ask the German bank rescue fund for capital, and we also won't need to sell toxic assets to the fund"... although...."Should German banks tap the fund for liquidity in an industry-wide effort, we would participate.''
HVB boosted its capital position last year by transfering its Bank Austria Creditanstalt AG business directly to UniCredit, and this month reported a third-quarter loss of 258 million euros ($325 million) as it wrote down assets. UniCredit acquired HVB in 2005 and now plans to eliminate 700 jobs in its investment-banking division (one-fifth of the unit's staff) which is now centralized at HVB.
``Investment banking doesn't need the manpower it had in the past and those who have adjusted to that early will emerge stronger from the crisis,'' Weimer said. ``Areas such as structured products, high-leverage and proprietary trading are completely different today.''