August 17, 2018 / 2:29 PM / in 3 months

Caught in the crosshairs, UniCredit lags behind

* Bank has issued just 32% of 2018 funding plan

* Market access hampered by persistant volatility

By Alice Gledhill

LONDON, Aug 17 (IFR) - UniCredit has issued only one third of its €27.5bn funding target for 2018, but fresh volatility unleashed by the Turkish lira crisis showed it is not just fractious Italian politics that may hamper the bank’s efforts to make further headway.

Last year proved a watershed moment for Italy’s largest lender after a €13bn equity raise helped rehabilitate the bank and clean up its balance sheet.

But the election of a Eurosceptic populist government in Italy in March pushed bank funding costs to unpalatable levels, hampering market access for much of 2018.

UniCredit had completed just 32% of 2018’s group funding target by the end of July, according to its latest fixed income presentation. Most European lenders aim to be at least 50% through their plan by this stage of the year.

“It’s not the first time that the Italian banks have had restricted access to the primary market, but I guess the difference here is that 2019 is a year when some of the new requirements such as TLAC kick-in,” said one credit analyst.

Total loss-absorbing capacity (TLAC) is part of a global regulatory drive forcing the world’s largest banks to build up buffers of bail-in-able debt.

Requirements will be phased in from January, but UniCredit falls short of its transitional requirement of over 19.6% of risk-weighted assets (RWAs), which were last reported at €360.7bn.

Uncertainties remain over final calibrations, and further reductions in UniCredit’s RWAs would cut its needs. However, a rough calculation based on its €59.2bn of total capital, €1.5bn of non-preferred senior and €5.6bn of eligible preferred senior nonetheless implies a shortfall of at least €4bn, according to CreditSights.

“The funding plan that we have left for the year is TLAC-driven, so it will happen,” CFO Mirko Bianchi said on last week’s earnings call.

“The plan calls for approximately €4.5bn to €5.5bn in terms of TLAC instruments. Of course, that will depend on the risk-weighted asset levels that we are going to achieve in Q3 and in Q4.”

RUDE AWAKENING

A UniCredit spokeswoman told IFR that the bank is confident of meeting its requirement by January. However, a savage sell-off in the bank’s bonds as the Turkish lira hit a record low against the dollar served as a stark reminder of the volatility that has come to characterise this year’s issuance backdrop.

UniCredit, which owns around 40% of Yapi Kredi, has one of the highest exposures to Turkey of any European lender. Its €1.25bn 6.625% PNC2023 AT1 is quoted at its highest ever yield, around 7.40%, while its only non-preferred senior note - the €1.5bn 1% Jan 2023 - is quoted at 224bp over swaps, having priced at 70bp over in January.

“It’s been quite a rude awakening in terms of what Turkey headlines could do to spreads of European banks,” said Sebastian Angerer, a financials analyst at Western Asset Management.

There are also hurdles closer to home. The political tussle between Italy’s League and Five Star parties as they negotiate the country’s budget next month is likely to rattle BTPs, where spread widening shaved 30bp off UniCredit’s CET1 ratio in the second quarter. 10-year Italian paper has widened 170bp versus Bunds since late April, according to Tradeweb.

“If you use stated sensitivities [regarding the impact on CET1] and assume a widening of BTP spread to their 2011 wides, this would be a meaningful impact on the capital side,” added Angerer.

BREATHING SPACE?

The ramifications of UniCredit falling short of its 19.6% TLAC requirement are unclear. The EU Council warns that any breach should be appropriately addressed and remedied by competent and resolution authorities, but it does so in relatively loose wording.

Added to that, the TLAC requirement is currently only driven by the FSB final term-sheet and is not yet legally binding, said the credit analyst. Even so, there is an element of market pressure to comply.

Nor will there be any let up for UniCredit in 2019. The bank’s final MREL requirement - effectively a European version of TLAC - is equivalent to 26.03% of RWAs, and binding from March 2020.

There are reasons for optimism, however. The Yankee market saw Barclays, BNP Paribas and Lloyds carve out US$8.25bn of debt only last week, and - at the right price - there should be appetite for UniCredit too.

And despite its TLAC shortfall, UniCredit is better positioned when it comes to AT1 and Tier 2. While its 2017-2019 funding plan includes respective €750m and €2.4bn targets for those asset classes, it has no immediate maturities or calls coming up.

“Although it is disappointing for them that they are only 32% through their plan, it is not a concern,” said Mark Holman, chief executive officer at TwentyFour Asset Management.

“The FD and Treasury team and UniCredit also have the task to issue efficiently and I think market conditions for all Italian borrowers have been difficult since the Italian elections, and those that can afford to wait for better funding conditions probably are prudent to do that.”

Reporting by Alice Gledhill, editing by Sudip Roy, Helene Durand

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