UniCredit SpA dropped in Milan trading after it said the European Central Bank had demanded an improved plan for dealing with bad loans by the end of February.
The bankâ€™s strategy for shoring up its finances may not adequately address the ECBâ€™s concerns about credit quality, according to a filing on Monday detailing UniCreditâ€™s plans for a 13 billion-euro ($13.9 billion) capital increase. Under the strategy announced in December, the lender intends to use about 8 billion euros to absorb losses on loans that it expects to sell to investors at a discount.
UniCredit sees its phased-in capital ratio at the end of 2016 at about 8 percent for common equity Tier 1. That wonâ€™t meet ECB requirements because of fourth-quarter charges to cover bad loans. The bank reiterated on Monday that it would take a 12.2 billion-euro hit in preparation for the balance sheet cleanup, a move it reiterated in the statement.
The strategy includes reducing risk as outlined by the ECB in its 2016 review of the bankâ€™s capital needs, UniCredit said. There is currently a risk that the steps the bank has already taken are â€œnot enough to counter such weaknesses.â€
The shares fell as much as 6 percent and were down 5.1 percent 26.29 euros as of 1:07 p.m. in Milan. That compares with a decline of 1 percent in the Europe Stoxx 600 Banks index. The European Central Bank and Italian government are ramping up pressure on the nationâ€™s financial sector to offload bad assets amid concern that some of the weakest lenders will fail. UniCredit won permission from investors last month for a rights offer to carry out a turnaround strategy under Chief Executive Officer Jean Pierre Mustier. The offer represents almost as much as the bankâ€™s market value of 16.5 billion euros.
The bank plans to transfer 17.7 billion euros of debt in two packages to newly created firms controlled by Fortress Investment Group LLC and Pacific Investment Management Co. UniCredit would own a minority stake in the two companies.