October 8, 2024

DealBook: UniCredit’s Weak Share Offering a Poor Omen in Europe

Federico Ghizzoni, the chief executive of UniCredit, on Saturday attributed the slide in the bank's stock largely to “technical reasons.”Alessandra Benedetti/Bloomberg NewsFederico Ghizzoni, the chief executive of UniCredit, on Saturday attributed the slide in the bank’s stock largely to “technical reasons.”

LONDON — UniCredit, Italy’s largest bank, is undergoing a trial by fire in the stock market, underscoring the challenges that European banks face in trying to right themselves.

Shares of UniCredit have been in free fall as investors have balked at a new stock offering meant to bolster the bank’s capital. Since last week, UniCredit’s market value has plunged by more than 40 percent.

It is a bad omen for struggling European banks. At the behest of regulators, the region’s financial institutions must raise a combined $145 billion by June. But banks may have a tough time convincing investors to plow more money into the beleaguered industry if UniCredit’s experience is any indication.

“I think this should scare policy makers,” said Nicolas Véron, a senior fellow at Bruegel, a research institute in Brussels. “Banks have been saying for some time that it’s impossible for them to raise money collectively in this market.”

Investors remain skittish, as the sovereign debt crisis continues to rattle the markets. On Monday, the German government sold six-month bills at a negative yield, the latest sign that safety is more important than returns in the current environment.

UniCredit is suffering from the same worries. Last week, the bank announced a plan to sell new stock at 1.943 euros a share, in a so-called rights offering. At that level, the company said, the price represented a 43 percent discount to UniCredit’s market value, making certain assumptions about the offering.

On Monday, the first day of trading, investor demand remained weak. The offering closed at 47 euro cents.

“The first problem with UniCredit is that they come from Italy,” said Werner Schirmer, an analyst at Landesbank Baden-Württemberg in Stuttgart. “The timing is really bad.”

Given investors’ fears, the next few months could be rocky for the region’s banks. The European Banking Authority in October began pushing banks to increase their core Tier 1 capital ratios, a buffer against financial shocks, to 9 percent of assets. UniCredit has to raise its reserves by more than $10 billion.

“Some banks will be able to raise capital, but there’s a finite market for these assets,” said Karl Goggin, a banking analyst at NCB Stockbrokers in Dublin.

Many banks had hoped to tap the equity markets to raise money. But “the UniCredit rights issue today was a wake-up call from a lot of other banks,” said a high-level investment banker at a European firm, who was not authorized to talk publicly. “It shows that you want to avoid raising equity through a rights issuance if at all possible.” That leaves banks with just a handful of options, include selling business operations, particularly in overseas markets, and rejiggering their debt holdings to free capital.

Healthier banks should be able to meet the new requirements. On Monday, Grupo Santander of Spain, which had been ordered to raise roughly $19 billion, said it had reached its capital target, six months ahead of the deadline. Santander bolstered its reserves largely by converting 6.8 billion euros in bonds into shares, retaining profits and transferring a stake in its Brazilian unit to an outside investor.

But the Spanish bank has notable advantages over UniCredit. For one, Santander has large overseas businesses, particularly in Latin America and Britain, and a diverse retail deposit base to offset its stagnating home market. By comparison, UniCredit, which has large operations in Italy, Germany and Austria, has suffered because of its established presence in Eastern European countries that have felt the effects of the Continent’s sovereign debt crisis.

Italian banks generally have been under pressure. After the European Central Bank’s decision to offer unlimited funds on a three-year basis, the country’s banks stepped up to the coffers. Italian banks borrowed more than 200 billion euros in December, more than double the amount in November, according to the Bank of Italy.

As banks like UniCredit lumber along, the situation could ripple through the economy. Analysts fear that banks will pull back on their lending, weighing on growth.

“If banks cut lending to achieve capital adequacy, we should expect a really, really big credit crunch and really deep economic downturn to ensue,” said Carl B. Weinberg, chief economist at High Frequency Economics.

“What UniCredit’s plight suggests is that banks that are in a dark situation cannot sell equity shares to the public,” he added. “That is not good for the economy.”

Investors are scared. Since laying out its offering plans, shares of UniCredit have fallen by 45 percent to 2.29 euros. Trading in the bank’s stock was suspended a few times on Monday because of market volatility.

The bank’s chief executive, Federico Ghizzoni, earlier blamed “technical reasons” for the stock weakness, according to a report by Reuters that cited the Corriere della Sera. Prime Minister Mario Monti told France 24 television last week that the bank had “encountered some temporary difficulties” because of the capital increase.

But at the current price, UniCredit’s market value of $9.65 billion is only slightly more than the amount the bank had hoped to raise with its rights issue.

Mark Scott reported from London, and David Jolly from Paris. Landon Thomas Jr. contributed reporting from London.

Article source: http://dealbook.nytimes.com/2012/01/09/unicredits-weak-stock-offering-is-poor-omen-in-europe/?partner=rss&emc=rss

Some German Banks May Fall Short in Stress Tests

FRANKFURT — European banks that fail a checkup by regulators in June will be required to present a recovery plan that could force some weaker institutions, particularly in Germany, to raise more capital or even wind down their operations, according to documents released on Friday.

The European Banking Authority released more details of how it would conduct stress tests of 90 of Europe’s largest banks. The parameters include more rigorous scrutiny of the capital that banks hold in reserve in case of unexpected losses. That is in response to criticism that a similar test last year was too easy and failed to restore confidence in European banks.

Analysts welcomed what they said was shaping up as a more thorough examination of banks. “The quality of capital has improved dramatically,” Silvio Peruzzo, euro zone economist at the Royal Bank of Scotland, said. “That’s a very welcome step.”

However, the rules appear to create a problem for some German landesbanks by disqualifying a part of the funds they now use to meet regulations on shock-absorbing reserves.

The stress tests have become a heated political issue in Germany because they threaten to impose unpleasant choices on the state governments and local savings banks that typically share ownership in the landesbanks. The economics minister of the state of Hessen, Dieter Posch, said this week that the state’s landesbank, Helaba, should boycott the stress test, which it was likely to fail.

It is not up to banks, however, whether to participate, officials said. While banks can opt not to disclose the results of their tests to the public, they must give information to regulators as part of the stress tests and would be required to take action if they failed.

The banking authority said in a statement Friday that it expected any bank “showing specific weaknesses in the stress test, to agree with the relevant supervisory authority the appropriate remedial measures and execute them in due time.”

While political leaders and representatives of the landesbanks have complained about the stress tests, many economists have said that pressure is needed to force the banks to rebuild their capital reserves and avoid the risk of another financial crisis.

The European Banking Authority, created this year to replace the relatively toothless Committee of European Banking Supervisors, seems determined to conduct a more severe test of banking health, said Nicolas Véron, an economist at Bruegel, a research organization in Brussels.

“It’s really all about the implementation,” Mr. Véron said. “But at this stage they are ticking the right boxes.”

The banking authority said that to pass the stress tests banks had to have a capital cushion equal to 5 percent of assets. The authority will also narrow its definition of so-called core Tier 1 equity, considered the most durable form of reserves.

The banking authority said that emergency government aid would still qualify as core capital. That is good news for WestLB, one of the most troubled landesbanks. Its capital buffer includes 3 billion euros ($4.3 billion) it received from the federal government in a bailout.

Commerzbank, a commercial lender in Frankfurt, is another bank that received billions in capital from the German government. The bank said this week that it would issue new shares and take other measures to repay the aid and bolster its capital.

But the stricter definition of capital appears to be bad news for other landesbanks.

The banking authority would exclude so-called silent participations by other shareholders, like the savings banks that provide a significant amount of the funds that many landesbanks use to meet capital requirements. The definition would also exclude silent participations by state governments that were not part of an emergency bailout.

The rules would mean that NordLB, a landesbank in Hanover, would have to exclude about a third of its core capital. The funds are in the form of silent participations by the state of Lower Saxony and local savings banks. The state money predates the financial crisis and so does not qualify as emergency government aid.

“Naturally, silent participations are important to banks that do not have access to the market,” said Dominik Lamminger, a spokesman for the Association of German Public Sector Banks, which represents the landesbanks.

The association has maintained that German landesbanks would pass the stress tests, but it argued that it was unfair to hold the banks to a standard not yet required by law.

A spokesman for NordLB, who could not be named because he was not authorized to speak publicly about the matter, declined to comment on the stress test.

But the bank’s main owner is already taking action to strengthen NordLB’s capital, in a sign that pressure from the stress tests is in fact prompting change.

The state of Lower Saxony will convert silent participations worth 1.2 billion euros ($1.73 billion) in NordLB into ordinary shares, the bank spokesman confirmed. Ordinary shares would count toward core capital for purposes of the stress test as well as for new regulations.

WestLB, based in Düsseldorf, has other problems even before it undergoes the stress test. Joaquín Almunia, European Union competition commissioner, has said that the bank must present a detailed plan to restructure by April 15, or repay the state aid it has received.

Banks that fail the stress tests would have to raise more capital or sell some assets to reduce their level of risk. In extreme cases they might have to wind down their operations.

Article source: http://www.nytimes.com/2011/04/09/business/global/09stress.html?partner=rss&emc=rss