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Capital magic lets Italian pair off hook for Atlante

Federico Ghizzoni 230x

UniCredit and Intesa Sanpaolo both escaped having to deduct the Atlante fund’s rescue of Banca Popolare di Vicenza from their capital. But the firms took very different equity damage from the debut deal, despite each owning a €300m stake. Owen Sanderson reports.

UniCredit put down €118m in capital and rival Intesa put down €225.6m for the €300m stake in the €1.5bn Banca Popolare di Vicenza IPO, which flopped last week and had to be bought instead by Fondo Atlante, a private equity style fund created to shore up the Italian banking system.

Usually, if a bank holds another bank’s equity, it needs to deduct the full size of the holding from ‘own funds’ on a 1:1 basis.

The banks will almost certainly have had to clear their treatment of the stake with the Banca d’Italia, Italy’s the national supervisor, and with the ECB’s Single Supervisory Mechanism (SSM), given its systemic importance.

Treating the Atlante stakes this way creates new regulatory capital without any new money down — UniCredit has put down €118m of equity to create €300m of equity in BPV.

The SSM and Banca d’Italia were not able to comment by the time GlobalCapital went to press. The European Banking Authority (EBA) said it was not aware of any guidance issued to Italian banks, though referred the question to the supervisors.

Moody’s, writing on April 26, said that the treatment of the Fondo Atlante exposures “awaits a decision by the ECB and local authorities”. 

“Usually a bank’s equity investment in another bank must be deducted from its regulatory capital calculation,” it said. “Even if European authorities do not require the deduction, we believe that the ECB could still increase banks’ prudential requirements.”

If UniCredit had taken a capital deduction for the Fondo Atlante investment in Vicenza, that would have a similar effect to the bank adding an extra €2.15bn of risk-weighted assets, based on UniCredit’s 13.98% total capital figure.

This prompted fears for the bank’s additional tier one (AT1) coupon payments, which would be stopped if the bank fell below a supervisory required capital ratio.

“The credit implications of UniCredit’s stake in Atlante are more significant since the bank has a smaller capital buffer than the other banks investing in Atlante,” said Moody’s.

The establishment of Atlante also saved UniCredit from owning the whole deal. The bank committed to underwriting the IPO last autumn, expecting other banks to come in, meaning it could have been stuck with nearly everything.

The bank and the other leads had orders for 7.7% of the trade, but this was too small to be allowed onto the Borsa Italiana. Banks gain an exemption from having to apply capital deduction treatment when they underwrite issues, but it only lasts a limited time. Owning the whole €1.5bn would have added the equivalent of more than €10bn of risk-weighted assets to UniCredit’s balance sheet.

Wicker management

UniCredit managed to lower its capital figure by placing some of the stakes into various regulatory “baskets” where risk weights can be lower, only deducting whatever is left from regulatory capital.

The bank’s “basket” system is based on outstanding exposures to the institution in question — once the baskets are full of a certain financial institution, it pushes the equity exposure to turn into a capital deduction.

UBI Banca, which took a €200m take in the Vicenza rescue, said that meant a 13bp hit to common equity — implying a cost of €79.1m. The firm’s sizable contribution to the rescue is impressive, given a balance sheet just 15% the size of UniCredit’s or 21% the size of Intesa’s.

If UBI Banca’s contribution had been €300m, like the two large banks, it would have had to put down €118m, the same figure as UniCredit, suggesting a consistent regulatory treatment.

Intesa, meanwhile, which allocated more capital to the stake, said that the whole equity stake “bears the risk weighting pertaining to non-significant shareholding in listed or unlisted banks”. It did not mention the use of baskets.

The figures for all three banks come from first quarter results, which UniCredit reported on Tuesday, Intesa last Friday, and UBI Banca on Thursday.

UniCredit chief executive Federico Ghizzoni said the bank’s €300m piece had cost 3bp of common equity capital so far — a figure coming out at around €118m, based on the firm’s €394.4bn reported risk-weighted assets at the end of March.

Intesa Sanpaolo said that it had taken an 8bp hit to capital for its €300m contribution to the deal. Based on its €282bn of risk-weighted assets, this implies the rescue cost €225.6m of common equity.

The two banks have exactly the same commitments to the fund — €300m for Vicenza, €845m in committed capital up to the fund’s initial €4.2bn target size, and €1bn if the fund expands to €6bn, its maximum size.

Both banks risk weight their uncalled committed contributions at 100%, meaning a common equity stake of €56m for UniCredit and €71m for Intesa associated with the unused €545m, given the latter firm’s higher capital ratio.

Maximum damage

The two banks also expect different capital costs for their total €845m committed contributions, but this time Intesa’s figure comes out lower.

Intesa expects it to cost 20bp of capital, or €564m, while UniCredit expects it to cost 16bp, or €631m.

But the strange part is that Intesa sees itself as being much further through this planned capital contribution — 8bp out of 20bp, rather than 3bp out of 16bp.

Ghizzoni said on the results call that if all of the capabilities of the fund are used, drawing it up to a €6bn value split between 70% equity investments and 30% non-performing loans (NPLs), it could cost UniCredit 20bp of capital.

The fund is supposed to be investing in junior notes of the NPL securitization vehicles which are supposed to be buying loans from the banks, helped by a government guarantee on senior notes.

Intesa told GlobalCapital that it understood that portions of the fund invested in NPL SPVs would be deducted from CET1.

If 30% of the fund goes to NPL securitizations, that should knock out close to 7bp of CET1 at both firms leaving Intesa with 5bp in its capital budget (not quite enough for another Vicenza style rescue if it has to apply the same tough treatment) and UniCredit with 6bp (enough for two Vicenzas by its standards).

The next deal

Banca IMI, Intesa’s investment bank, is underwriting Veneto Banca’s €1bn IPO. Other banks have agreed to join if the deal goes ahead, but many in the market think it will also be placed to Fondo Atlante, giving Intesa and UniCredit another €200m slug each and leaving the fund heavily depleted, assuming that the banks still want to spend some of it on NPLs.

BNP Paribas analysts said that they saw UniCredit as having “added contingent risks from additional future contributions to Atlante”.

Ghizzoni, said on the analyst call that the bank had “a number of alternatives that can give us the possibility to fill easily this prospective gap”.

Many of the Italian banks reporting preferred to focus on the benefits of Atlante, rather than its costs.

Even Intesa said in its results that there was the “potential deleveraging of up to €50bn gross NPLs for the market” associated with the fund and with its improvement in the market. It will have, however, just €1.28bn of equity with which to support NPL deleveraging.

Most of the other mid tier banks, such as BPM, Banco Popolare did not mention the costs of the fund.

Monte dei Paschi said that the fund’s establishment had led to it “considering to accelerate and increase bad loans disposal above business plan targets”.

A worked example from the fund’s manager, Quaestio Capital Management, suggested Atlante would buy junior ABS tranches with around a 6% internal rate of return.

The example talked through a portfolio selling at 20.7% without any government help, but this level increasing by 4 percentage points thanks to Atlante’s intervention and a further one point from the government guarantee scheme.

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