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UniCredit dip shows why zombie banks hide losses

There is a simple explanation for why the world’s zombie banks are still reluctant to write off worthless assets and tap the equity markets for fresh capital: they do not want to end up like UniCredit.

This month has been a nightmare for the Italian bank’s shareholders. Since embarking on a e7.5 billion (R77.4bn) stock sale at a steep discount to its January 3 closing price, UniCredit shares have fallen 39 percent to e2.56. It seems no good deed goes unpunished amid Europe’s debt crisis. A little bit of candour about the true state of a company’s finances can hurt a lot.

The incentive now will be to stick with the pretense that all is well and there is no need to raise extra capital. Not that a lot of them have better options. There is only so much private sector capital to go around.

As bad as the share price plunge may be, UniCredit secured an early-mover advantage by acting when it did. Even that might not be enough to ensure its survival.

The offering was partly spurred by UniCredit’s decision in November to take large write-downs for the third quarter, resulting in a e10.6bn loss, the largest disclosed for the period by a euro zone bank.

The markets sense, with good reason, that the latest cash infusion will not be enough. UniCredit’s stock market value stands at e14.8bn. That is frightfully low, considering the company showed e52.3bn of common shareholder equity and e950bn of assets at the end of September.

Investors still see a huge hole in the books that UniCredit executives have yet to admit. Had it taken action sooner it might not be in the precarious position it is today.

This lesson should have been learnt from the 2008 collapses of Lehman Brothers, Fannie Mae and Freddie Mac: come clean about your losses to keep trust, and raise more capital than you think you will need to get through a crisis while you can. UniCredit seems to be coming a tiny bit clean, and raising a smidgen of the money it needs. But at least it is doing something.

Elsewhere in Europe this generally is not the case. On average, the 31 companies in the Euro Stoxx banks index trade at 39 percent of common equity, or book value. France’s Credit Agricole trades at 23 percent of book value. Yet somehow the European Banking Authority concluded last month that it had no capital shortfall.

The situation in the US is better, but not good. Bank of America, for example, trades for 33 percent of book and insists it does not need to sell new common shares, in spite of the markets’ contrary verdict.

A telling example is Regions Financial, which has about $130bn (R1 trillion) of assets and has not repaid its $3.5bn bailout.

The bank pulled out all the stops in the third quarter to sidestep losses on its intangibles, research service FootnotedPro noted. To avoid writing down goodwill, Regions doubled its estimate of the control premium an investor would pay to buy its commercial banking unit, even though its stock market value almost halved in the quarter. Now Regions has a $6bn market capitalisation, slightly more than its $5.6bn of goodwill, and trades for 44 percent of book. So the goodwill supposedly was worth almost as much as Regions itself.

UniCredit was willing to take a hit to the intangibles on its books and raise cash in hopes of saving the company. It is doing the right thing, and its stock is down 74 percent in the past year. Regions did the three-card shuffle, and its shares are down just 34 percent during the same period.

Other struggling lenders in Europe and the US will see both examples as more reason to paper over losses.

Delay-and-pray is never a good strategy, but unfortunately it is the only one a lot of zombie banks have left. – Bloomberg

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