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UniCredit’s Share Offering Is Poor Omen in Europe

Mark Scott and David Jolly|The New York Times
Tuesday, 10 Jan 2012 | 6:04 AM ET

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 sovereigndebt 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’sdecision 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.

Unicredit Will Be Top Bank in Europe: CEO
Federico Ghizzoni , Chief Executive of UniCredit is confident his bank will come out tops from its recent capital raising.

“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.

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