Europe News

UniCredit seeks to boost capital with bond as bad debts weigh

UniCredit, Italy's largest bank by assets, is set to unveil plans to raise 2 billion euros ($2.8 billion) on the bond market to boost its capital and offset an expected sharp increase in writedowns on bad loans in the last quarter of 2013.

The lender will announce a U.S.dollar-denominated Additional Tier 1 bond on Tuesday when it releases its full-year results and new business plan, two bankers working on the deal told Reuters IFR service.

(Read more: Badloan triggers key feature in ECB bank test)

Giuseppe Aresu | Bloomberg | Getty Images

The bond, the first of its kind to be issued by an Italian bank, is a new form of hybrid bond that banks are issuing to strengthen their capital bases.

UniCredit, which also has large banking operations in Germany, Austria and central Europe, declined to comment.

(Read more: Bad loans atEuropean banks hit $1.7 trillion)

Like other domestic lenders, UniCredit is trying to keep a lid on defaulting bank loans, which soared to 160 billion euros for the whole of Italy at the end of January as the country struggles to emerge from its longest recession in 70 years.

Analysts expect UniCredit to have set aside at least 4 billion euros to cover rising bad debts in the fourth quarter alone in an effort to clean up its balance sheet ahead of a Europe-wide health check of banks.

Italy's problems are not all sorted: Unicredit CEO
VIDEO2:5002:50
Italy's problems are not all sorted: Unicredit CEO

That would compare with 4.4 billion euros in the first nine months of 2013, bringing the total for the year to more than 8 billion euros.

UniCredit may be able to offset some of the provisions for bad loans by booking a 1.4 billion euro pre-tax capital gain on the revaluation of its stake in the Bank of Italy.

(Read more: )

However, the European Securities and Markets Authority (ESMA) has raised objections over whether Italian lenders should be allowed to book gains in their 2013 results stemming from the revaluation, according to several Italian banking sources.

Asked about its stance, ESMA declined to comment.

Cost of risk in Italy is main focus: Unicredit CEO
VIDEO0:5900:59
Cost of risk in Italy is main focus: Unicredit CEO

On Monday Italian stock market regulator Consob said the accounting of the stakes was a complex matter not explicitly regulated by international accounting rules, adding lenders could choose the method they deemed most fit.

An analyst consensus forecast posted by UniCredit on its website in October estimated full-year net profit of 931 million euros. In a break with the past UniCredit did not post an updated consensus ahead of the results nor a quarterly profit estimate.

That profit risks being wiped out and even turned into a loss if the bank goes ahead in booking heavy loan loss charges and the revaluation of the Bank of Italy stake is not included in the net profit figure.

But even including the boost from the central bank's revaluation, several analysts raised the possibility of a 2013 scrip dividend - paid in shares rather than cash - from the bank as it seeks to bolster its balance sheet.

(Read more: Bank of Italy tells banks inthe red not to pay)

A report by Mediobanca Securities on Monday said a large number of its clients had asked it about the likelihood of a capital increase at the bank, adding however that concerns about the bank's financial strength were misplaced.

Mediobanca forecasts a 9.8 percent core capital ratio according to Basel III requirements for UniCredit, well above the 8 percent minimum set by the European Central Bank as a benchmark for this year's asset quality review.

The bank could also announce plans to list 25-30 percent of its online banking unit Fineco, two sources close to the situation said on Friday.

Analysts say its business plan to 2018 will likely target double-digit return on equity in four years' time, but they caution it may be too early to say whether this is feasible.

Follow us on Twitter: @CNBCWorld