UniCredit has raised the bar for other Italian banks by announcing a radical clean-up of its balance sheet through the sale of bad loans worth 17.7 billion euros ($19 billion).
Italy's biggest lender by assets said on Tuesday that it plans to raise 13 billion euros in a share issue early next year to offset the capital hit from 8 billion euros in fourth-quarter loan writedowns to pave the way for the sale of the debt.
The move heaps pressure on the bank's peers to follow suit, with Reuters' calculations based on central bank data showing that Italian lenders as a whole would need 40 billion euros in writedowns to match UniCredit's latest provision levels.
"We've taken some bold actions because self-help is always the best thing," CEO Jean Pierre Mustier said. "It is no secret we had an issue with legacy assets in Italy."
Mustier told analysts he had signed two accords overnight to transfer the bad loans to separate vehicles in which U.S. funds Fortress Investment Group and PIMCO would take majority stakes -- the biggest such deal in Italy so far. The debts would then be sold off gradually.
Italian lenders are under pressure from the European Central Bank (ECB) to offload soured debts, which rose to 356 billion euros after a deep recession.
Banks have held onto them because their book value is higher than their market price, meaning they would be sold at a loss, burning through capital.
Worries about capital needs have sent Italian banking shares down 40 percent this year.
SMOOTHING WAY TO DEBT SALE
UniCredit said in presentation slides that it would raise provisions on bad loans by as much as 16.5 percentage points to 77 percent of their gross book value before transferring the portfolio.
This implies a net book value of 23 cents to the euro, below the 27 cents level at which Monte dei Paschi di Siena is seeking to sell 28 billion euros of bad loans to state-sponsored bailout fund Atlante to comply with ECB demands.
On average, Italian lenders price bad loans on their books at 43 cents to the euro.
UniCredit Chief Risk Officer Massimiliano Fossati said the provisions are designed to ease the disposal of the bad loans being transferred and had taken into account the price of recent deals.
Slides showed the bank now values loans that defaulted before 2009 at as little as 6.4 cents to the euro.
UniCredit said that a group of banks had agreed to backstop its cash call, the biggest ever by an Italian bank. But other weak banks, such as Monte dei Paschi, are struggling to harness investor support in the face of negative interest rates, regulatory constraints and low Italian growth.
The Tuscan lender, which is seeking to raise 5 billion euros this month, is expected to need state aid.
"UniCredit's bad loan sale tells us something we already knew: this is a buyer's market and the ECB doesn't exactly help -- as the Monte dei Paschi saga showed," said Andrea Resti, a professor at Milan's Bocconi university and an adviser to the European Parliament on banking supervision.
"Unfortunately, there is a lot of concern in Frankfurt about de-risking lenders' balance sheets and perhaps not enough about the risk of destabilizing the whole sector."
($1 = 0.9427 euros)
(Editing by David Goodman)