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HEARD ON THE STREET
The UniCredit Exception
By ARINDAM NAG
A DOW JONES COLUMN
Most large European banks have had a good kicking from equity and bond investors. Their share prices have fallen and the cost of insurance against debt default has risen through the year.
But the story is slightly different for Italy's UniCredit.
Credit default swaps of Italy's biggest bank by assets are among the tightest in Europe, but its stock price has underperformed the DJ STOXX Banks Index by 25% this year.
Unlike many of its European rivals, UniCredit is well funded, with no need to refinance its debt until 2010. That's reassuring for the bank's creditors.
One factor putting a strain on the share price is that UniCredit was one of the world's last few big banks whose shares investors could sell short -- until Italy imposed short-selling restrictions of its own late Tuesday.
And even though it has little exposure to subprime-tainted U.S. assets, it is short of capital. To reach a 6.2% Tier 1 capital ratio target by year-end, the bank will have to raise cash, possibly by cutting its dividend or selling stock.
Another problem is that a $75 billion acquisition spree between 2005 and 2007, with buys in Italy, Germany, Ukraine, Kazakhstan and Austria, has resulted in a tenfold jump in the value of goodwill to EUR21 billion. This is straining UniCredit's balance sheet because banking rules exclude goodwill when it comes calculating capital adequacy, leaving it with relatively little tangible equity to support its assets.
These new assets are also unlikely to generate the returns UniCredit was expecting, as the euro zone may tip into recession later this year, with the slowdown sure to spill over to Eastern Europe, where the bank is heavily invested.
UniCredit has promised modest asset sales to raise a slice of extra capital. A more convincing move would be to slash its dividend. Cutting it to 10 cents from 26 cents would raise more than EUR2 billion in tangible equity to add to the balance sheet.
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