MILAN: Italian lender UniCredit’s balance sheet will soon be free of the dead weight of €17.7 billion of deteriorated credit. The bank announced yesterday that it had signed the definitive agreements with Pimco and Fortress that will allow it to sell the huge portfolio of non-performing loans (NPLs) to securitization vehicles created for the purpose, which will be financed with the issue of three tranches of asset-backed securities subscribed 50.1% by the two international partners and 49.9% by UniCredit.
As foreseen, the operation will be completed by the end of the month once the vehicles will have registered at the Bank of Italy and will be able to issue the asset backed securities. Therefore Phase 1 of the Fino (“Failure is not an option”) project is in the home stretch. This is one of the pillars of the process of de-risking of UniCredit, promoted by Jean Pierre Mustier, the bank’s chief executive and the cornerstone of the “Transform 2019” strategic plan of the lender, which also involved the successful €13 billion capital increase.
From August, the Fino plan will pass to Phase 2: UniCredit’s objective is to sell, also to third party investors, part of its own share in the securitization vehicles, to the point of falling below 20%. To do so, the lender will have to assess how to optimize the financial structure of the securitization, also evaluating the potential advantages deriving from the application of the GACS public guarantee scheme to the senior and mezzanine tranches.
UniCredit announced that it will ask the European Central Bank for recognition of the “significant risk transfer” that could translate into a benefit of 10 basis points on the fully-loaded Common Equity Tier 1 ratio, thanks to the transfer of the risk of the Fino portfolio to third parties.
The bank also confirmed the expectation for a negative impact on the co-efficient of 40 basis points by the end of the year. As a consequence, the experts see UniCredit’s the Cet1 ratio at 12.3% at the end of the year versus 11.45% in the first quarter and a 2019 objective “higher than 12.5%.”
Returning to the Fino portfolio, whose book value had fallen to €16.2 billion at June 30, 2017, the informative prospectus on the capital increase had revealed that the agreements between Pimco and Fortress foresee an average sale price of about 13% (or €2.3 billion versus €17.7 billion of NPLs). That is below the level that some similar operations closed at in recent months, but that the bank will try to adjust upwards with the further sale of its own quota in Phase 2.
Mustier himself underlined that there are already investors interested. The coverage of the portfolio was in any case already aligned with the value of 13%, an operation that, along with other measures, had led UniCredit to register €8.1 billion of provisions in the fourth quarter of 2016. These were necessary sacrifices therefore to reach the targets of the strategic plan, which fix a relationship between gross deteriorated credit and total credit for 2019 at 8.4%, down from 15.1% in September 2016 (fall to 4% from 7.9% for net NPLs).
“Non core” deteriorated exposure is expected to shrink by €37.2 billion (to €19.2 billion): the €17.7 billion of Fino is about half of the total objective.
Yesterday the market took in the news without any big shocks. In Milan, UniCredit shares closed 0.59% lower compared to a FTSE Mib which was down 0.03%.
