UniCredit's restructuring programme has paid off, enabling the Italian bank to return to the market with a handful of regulatory capital deals including two senior non-preferred, an additional Tier 1, and two Tier 2 bonds. David Wigan reports.

Mirko Bianchi

Mirko Bianchi

Just two years ago, Italian bank UniCredit was sagging under the weight of nearly €50bn of bad loans after a deep recession in the country. In the past 18 months, however, the bank has implemented a wide-ranging turnaround programme and has seen startling results.

In February 2019, UniCredit announced its strongest fourth quarter in a decade, helped by higher fee and interest income and lower costs. It also topped expectations with its second all-cash dividend in five years. The bank had exceeded plans for cost cutting and improving asset quality, and completed all of its planned job cuts and 93% of branch closures ahead of schedule, leading to a sharp decline in costs. Fourth-quarter net income, excluding a one-time tax benefit, rose to €840m, beating estimates.

“We have seen a really positive story over the recent period,” says Mirko Bianchi, the bank’s co-chief financial officer. “We are now in the last year of our restructuring programme and we are beating our targets for de-risking, capital and head count.”

Improving fortunes

A key element of UniCredit’s restructuring has been to write down and dispose of a huge volume of non-performing exposures (NPEs), and it managed to reduce its NPE portfolio by more than €36bn between late 2016 and late 2018. As a result, its core bank NPE ratio was 4.1% in the fourth quarter of 2018, against a group-wide ratio of 7.7%. It anticipates the full run off its non-core portfolio by 2021. 

The bank’s improving fortunes have meant that it has been able to tap capital markets with renewed confidence, after being absent for most of 2018. In late November 2018 it returned with a $3bn senior non-preferred five-year bond that it privately placed with a large asset management firm.

“The macroeconomic and political situation in Italy means that spreads tend to be more volatile, so we know it’s important for us to have a conservative strategy. We stayed out of the market until we were comfortable,” says Mr Bianchi. “However, when we came back, we wanted to send a message that we were able to do a large private placement, even when markets were not conducive to it, which was the case late last year.”

The bank’s tactical awareness was also evident as it prepared a slew of new regulatory capital deals into the new year, which included another senior non-preferred, an additional Tier 1 (AT1), and two Tier 2 bonds.

“It’s important to have a proper tactical approach to make sure you don’t put markets into a difficult spot, which means doing the right transaction with a proper structure at the right time,” says Mr Bianchi. “One tactic we employed was to switch between euros and dollars, so that the investor base was not put under strain in terms of having too much paper in one market.”

A different platform

UniCredit is also keen to show it can issue across platforms, for example selling a senior non-preferred bond, Tier 1 capital and pfandbrief alongside each other, and in January announced three such deals on the same day.

Having got up a head of steam, in early March UniCredit decided to come to market with what would be Italy’s first AT1 capital bond since late 2017.

“From a risk and optimisation of structure and cost of funding perspective, and after a few very strong transactions in January and February, we felt that it was the right time,” says Mr Bianchi. “We chose euros, which reflects the fact that we are a euro-based bank, and also that AT1s are more difficult to hedge in dollars.”

The bank opened books on a perpetual non-call June 2026 note at 8% area on the morning of March 12 via Crédit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, ING and UniCredit Bank. The bond was rated B+ by Fitch. Initial price guidance was set at 8% and the book quickly grew to more than €5bn, with in excess of 300 investors involved. The final size was set at €1bn and offered a 7.5% coupon up to the initial call date of June 2026. There was no new issue concession.

“We were pleased to be able to tighten by 50 basis points, and the deal has since performed exceptionally well in the secondary market,” says Mr Bianchi. “We are now done for the year on AT1 and in reality also on total loss-absorbing capacity, so it has been a great start to the year and we feel an acknowledgement among investors that our turnaround plan is working.”

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