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UniCredit, Italy’s Largest Bank, Posts Surprisingly Big Loss UniCredit, Italy’s Largest Bank, Posts Surprisingly Big Loss
(about 5 hours later)
FRANKFURT — UniCredit, Italy’s largest bank, reported Tuesday a stunningly large fourth-quarter loss of 15 billion euros, or about $21 billion. The bank acknowledged that its holdings were far less valuable than previously thought and set aside a huge sum to cover problem loans. FRANKFURT — Italy’s biggest bank reported a huge loss on Tuesday, foreshadowing the possibility that many financial institutions across Europe could be forced to acknowledge the full extent of their own problems under increased regulatory scrutiny.
The net loss came as a surprise, but may portend similar shocks from other euro zone banks as they face imminent scrutiny of their books by the European Central Bank. The unexpectedly large fourth-quarter loss of 15 billion euros, or about $21 billion, posted by the Italian bank, UniCredit, which is based in Milan, came just hours after the European Central Bank disclosed details of its plan to dig deeper into the books of banks operating across Europe.
The report by UniCredit came on the same day that European leaders took further steps to repair the euro zone banking sector and to create a more coherent financial system. The timing of UniCredit’s announcement appeared to be coincidental, but it highlighted the vulnerabilities still lurking within the balance sheets of many institutions more than five years after the financial crisis led to a recession from which Europe and its banks have still not fully emerged.
The European Central Bank in Frankfurt announced details of its plan to force lenders to confront their problems, while negotiators in Brussels neared a deal for winding down failing banks. The E.C.B., newly empowered to oversee euro zone banks, plans to finish its review of institutions under its jurisdiction by October. Analysts say they expect more banks to write down the value of their bad loans and other troubled assets in coming months.
The central bank said that it would release results in October of a review intended to make sure that banks are properly valuing assets like real estate or government bonds in their portfolios, and that they are setting aside enough money to cover possible losses. Mario Draghi, the central bank’s president, and other top euro zone officials have warned that some banks may be declared insolvent and forced out of business. Italy’s banking industry in particular is thought to have many potentially problem cases, as that politically unsettled country continues to labor with chronically slow growth and entrenched special interests that have impeded efforts to overhaul the economy. But even more stable and economically potent countries like Germany are thought to have some banks with problems too deep seated to endure.
Saying that it would be impossible to examine all assets, the central bank plans to use spot checks to draw conclusions about the health of banks. The so-called asset quality review will examine assets the banks have valued at €3.72 trillion. That is nearly 60 percent of the assets held by the 128 large banks subject to scrutiny, the central bank said. The specter of heightened European Central Bank scrutiny, in contrast to sometimes lax oversight by national regulators in the past, has set internal auditors scrambling with euro zone banks, trying to put their books in order, according to consultants and regulators. Like UniCredit, at least some of these banks are expected to own up to problems and take corrective action — before the E.C.B. forces them to.
UniCredit’s announcement Tuesday suggested that the central bank’s review may be prompting lenders to take a hard look at their books and to disclose problems voluntarily rather than be forced to do so. If so, the long-slumbering euro zone economy could only benefit. After the financial meltdown of 2008, the United States forced an overhaul of its banks the following year, which is one reason the American the economy has recovered more quickly. The lack of a comparably rigorous bank cleanup in Europe has hobbled growth by causing a dearth of lending to consumers and crimping credit to businesses.
Investors seemed to applaud UniCredit’s move to deal with past problems. The company said that it expected to make a profit of about €2 billion this year, and announced a five-year turnaround plan. After initially falling, shares in UniCredit, which is based in Milan, rose more than 5 percent. In some countries, regulators were overly protective of their own banks and allowed them to avoid dealing with bad loans or other problems. As a result, many banks were too weak to lend, creating a credit crunch that is particularly acute in countries like Italy. In addition, there was no system to shut down sick banks in an orderly way that did not require a taxpayer bailout. In Ireland, for example, the cost of bank rescues helped cripple the economy.
“For UniCredit, 2013 was a turning point and we are now poised to further increase our lending and support of the real economy in Italy and in Europe,” Federico Ghizzoni, the chief executive of the bank, said in a statement. “It’s about time Europe caught up and got on the same level as the U.S. in terms of bank regulation,” said Alem Husain, a European bank analyst at SNL Financial, a research firm in Charlottesville, Va.
UniCredit booked a €9.3 billion loss from a revaluing of its holdings in Italy, Austria and Eastern Europe, while it set aside an additional €7.2 billion to cover losses from problem loans. Loan loss provisions now total €9.3 billion, the bank said. At the same time, though, there could be shocks in store as new vulnerabilities in the European banking system come to light. Many lenders in Europe are struggling, including Austrian banks exposed to Ukraine or Russia, other Italian banks like Monte dei Paschi di Siena and German banks with holdings in the depressed shipping industry.
The losses were partly offset by operating profit that UniCredit put at €2.1 billion. The European Central Bank said Tuesday that it would release in October the results of a review intended to make sure that banks are properly valuing assets like real estate or government bonds in their portfolios, and that they are setting aside enough money to cover possible losses. The review will examine assets that the banks, so far, have valued at 3.72 trillion euros. That is nearly 60 percent of the assets held by the 128 large banks subject to scrutiny, the central bank said.
While the European Central Bank did not offer any major surprises on Tuesday regarding its review of the banking system, it did give lenders more detail about what kind of work-up to expect and underscored the bank’s determination to do a thorough job to restore trust in the sector. Although UniCredit’s loss came as a shock, investors seemed to applaud its courage in exposing the scale of its problems. After initially falling, shares in UniCredit rose almost 7 percent. The bank said it expected to make a profit of about 2 billion euros this year and announced a five-year turnaround plan that aims to more than triple profit by 2018.
The central bank, along with national bank regulators in the 18 countries of the euro zone, will disclose in October the results of stress tests to determine whether banks could withstand shocks like a financial crisis or recession. Federico Ghizzoni, the chief executive of UniCredit, said Tuesday that it was encouraged by recent signs of an economic revival in Italy and the euro zone and called 2013 a turning point for the bank. UniCredit also has major holdings in Eastern Europe as well as Germany and Austria. "We see some recovery coming," he said during a conference call with analysts. “It makes sense to present a plan if you see some stabilization.”
Banks found to have problems will then be forced to take remedial action, like raising more capital or even shutting down. It is also possible that banks will be forced to act sooner, if regulators discover hidden problems in the course of the review. UniCredit booked a ¤9.3 billion loss from a revaluing of its holdings in Italy, Austria and Eastern Europe, while it set aside an additional ¤7.2 billion to cover losses from problem loans. Loan loss provisions now total 9.3 billion euros, the bank said. The losses were partly offset by operating profit that UniCredit put at 2.1 billion euros. Some analysts questioned the bank’s decision to book a 1.4-billion-euro gain from its stake in the Bank of Italy, the central bank. Without that gain, the loss would have been even greater.
Banks could also be compelled to restate their financial results if regulators decide that the lenders have not properly valued their portfolios. While the European Central Bank did not offer any major surprises on Tuesday regarding its review of the banking system, it did give lenders more detail about what kind of scrutiny to expect and underscored the bank’s determination to do a thorough job to restore trust in the sector. In October, the central bank, along with national bank regulators in the 18 countries of the euro zone, will disclose the results of stress tests to measure whether banks can withstand shocks like a financial crisis or recession.
In Brussels this week, European finance ministers moved closer to setting up a system for shutting down terminally ill banks without creating a financial crisis. Banks found to have problems will then be forced to take remedial action, like raising more capital or even shutting down. It is also possible that banks will be forced to act sooner, if regulators discover hidden problems in the course of the review. Banks could also be compelled to restate their financial results if regulators decide that the lenders have not properly valued their portfolios.
The Economic and Financial Affairs Council of the European Union, made up of the finance ministers and central bank officials of the 28-nation bloc, was discussing Tuesday the final shape of the banking resolution authority, called the Single Resolution Mechanism, that ministers agreed to create in December. In Brussels this week, European finance ministers moved closer to setting up a system for shutting down terminally ill banks without creating a financial crisis. The Economic and Financial Affairs Council, which is made up of the finance ministers and central bank officials from the 28 member nations of the European Union, met on Tuesday to discuss the final shape of the banking resolution authority, the Single Resolution Mechanism, that ministers agreed to create in December.
Along with the European Central Bank’s new supervision of systemically important banks, the Single Resolution Mechanism is intended to help end the links between banks and sovereign states that contributed to the euro crisis. The resolution mechanism will eventually have a €55 billion war chest. The Single Resolution Mechanism is meant to help end the links between banks and sovereign states that contributed to the euro crisis. The mechanism will eventually have a 55-billion-euro war chest. But the system is subject to the approval of the European Parliament and has been held up by debates including how much say member states will have in any decision to shut down big banks. Jeroen Dijsselbloem, the Netherlands’ finance minister, who speaks on behalf of the finance ministers for the 18 countries that use the euro, expressed optimism on Monday night that a deal would be reached this week.
The Single Resolution Mechanism is subject to the approval of the European Parliament, but that has been held up by disagreements over the speed at which the fund will be financed and over how much say member states will have in any decision to shut down big banks. Jeroen Dijsselbloem, who speaks on behalf of the 18 euro zone finance ministers, on Monday night expressed optimism that a deal would be reached this week. On Tuesday, Yiannis Stournaras, Greece’s finance minister, said the Economic and Financial Affairs Council had agreed on a common position and that he and Mr. Dijsselbloem would present on Wednesday in Strasbourg, France, where the European Parliament has its main seat. Mr. Stournaris declined to lay out the details of the proposal, saying only that if he did not believe a compromise was possible, “I would not go to Strasbourg.”
The central bank and the ministers are trying to address flaws in the European banking system that were exposed by the euro zone debt crisis.
In some countries, regulators were overly protective of their own banks and allowed them to avoid dealing with bad loans or other problems. As a result, many banks are too weak to lend, creating a credit crunch that is particularly acute in countries like Italy.
In addition, there was no system to shut down sick banks in an orderly way that did not require a taxpayer bailout. In Ireland, for example, the cost of bank rescues helped cripple the economy.
There is general agreement that Europe needs to create a banking union to replace the piecemeal system of the past. But progress has been slow because countries like Germany have resisted plans that would involve sharing the cost of bank failures in other euro zone members.