unicredit tower.jpg
Photograph: Photo by Gaetano Virgallito, used under CC BY-ND

Italy's largest bank by assets, UniCredit, reported Wednesday higher profit and a reduction in exposure to bad loans, but still suffered stock market falls amid lingering concerns about its financial solidity.

Reported net profit was 916 million euros (1.025 billion dollars) in the April-to-June period, more than double the previous quarter's profit, and higher than the 664 million euros analysts were expecting.

The bank's dubious loans portfolio fell 2.4 per cent compared to the previous quarter, to 77.1 billion euros in gross terms. The figures include 51.3 billion euros of loans gone definitively bad, with a coverage ratio of 61.6 per cent.

However, markets were not impressed: by about 4:30 pm (1430 GMT), UniCredit shares on the Milan stock exchange were down by more than 2 per cent, to little more than 1.8 euros.

Shares have slumped by more than 15 per cent since Friday, when European stress tests showed that UniCredit's CET 1 figure - a key index of financial strength that compares the bank's holdings to its debts - would fall to a lowly 7.1 per cent in case of a severe economic downturn.

UniCredit said its CET 1 ratio now stands at 10.53 per cent, counting recent sales of stakes in Polish bank Pekao and Italy's FinecoBank, and would rise to 10.65 per cent after divesting card processing operations in Italy, Germany and Austria.

The Milan-based lender expects to raise 1.5 billion euros from the three deals.

In a conference call to present Wednesday's results, chief executive Jean-Pierre Mustier said UniCredit would "not hesitate to seize [more] capital enhancing opportunities" but deflected questions on further moves to shore up the bank.

Mustier said he was leading a "strategic review" of operations and that the results would be announced "before the end of the year" at an investors' day event in London. "Hurry without haste aptly describes our current modus operandi," he said.

Due to UniCredit's low capital base relative to peers, analysts expect more asset sales or other recapitalization measures in the near future. They estimate that the lender needs to raise 7 billion euros to 8 billion euros.

The CET 1 figure at UniCredit's main competitor in Italy, Intesa Sanpaolo, stands at around 13 per cent.

UniCredit is not the only Italian lender under pressure. Monte dei Paschi di Siena (MPS) was the worst performer in Friday's stress tests, and has presented a plan to get rid of its most dubious loans and embark on a recapitalization bid of up to 5 billion euros.

Mustier, who has been in the job for less than a month, told analysts there was no need for UniCredit to follow MPS' example and sell off bad loans to a third party. "We feel that the coverage on our non-performing loans [...] is adequate," he said.

Bad loans exposure is problem for most Italian lenders. In addition, UniCredit stressed its already shaky finances earlier this year by agreeing to underwrite the 1.5-billion-euro recapitalization of a smaller peer, Banca Popolare di Vicenza.

That burden was passed on to Atlante, a bank rescue fund financed by private banks with some help from state-controlled entities, in April. Atlante is now involved in efforts to relieve MPS of its bad loans portfolio.

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