UniCredit posted a record 14 billion-euro ($19 billion) loss on March 11 due to huge writedowns on bad loans and past acquisitions as it moved to clean up its balance sheet ahead of an industry-wide health check by European regulators. Italy's biggest bank by assets said full-year provisions against losses from loans totalled 13.7 billion euros in 2013, with 9.3 billion euros in the fourth quarter alone.
"This is a jaw-dropping clean-up," said one banking analyst, who declined to be named. "The company is taking 9.3 billion euros of loan losses. We had (forecast) 4.5 billion euros and thought we were high."
Yet UniCredit shares rallied after an initial drop, as the bank said it did not need to carry out a capital increase and felt it had done more than will be required to get a clean bill of health by regulators when the European Central Bank conducts its asset quality review of the euro zone's 128 biggest banks.
"I believe the group has turned the page. We could have staggered the losses over several years. We decided to take them all in one year," Chief Executive Federico Ghizzoni told reporters.
In addition to the bad loan provisions the bank also booked in goodwill impairments totalling 9.3 billion euros as it effectively wrote down the entire value of its acquisitions since 2005.
That year UniCredit became a major force in Europe through the purchase of Germany's HypoVereinsbank and its extensive operations in Central and Eastern Europe.
The massive net loss, one of the worst suffered by a European bank since the beginning of the financial crisis, was partly mitigated by a 1.2 billion-euro net capital gain recorded for the revaluation of UniCredit's stake in the Bank of Italy, whose accounting treatment is still under discussion.
Analysts had on average expected the bank to report a net profit of 916.5 million euros in 2013, up from the net profit of 865 million euros reported for 2012, according to Thomson Reuters I/B/E/S Estimates.
KITCHEN SINKING
The bank also launched a restructuring plan which aims for 8,500 job cuts by 2018 - nearly 6 percent of its workforce - for which it took a 700 million-euro charge in the fourth quarter.
In addition it will create an internal "bad bank" to manage 87 billion euros of bad and risky loans. These will be reduced to 33 billion euros in the next five years, Ghizzoni said.
The bank will also list a minority stake in its online unit Fineco, issue so-called additional Tier 1 bonds and will propose a scrip dividend of 0.10 euros a share for 2013, payable in shares, to further boost its capital.
"Investors are looking favourably at the kitchen sinking, and how they cleaned up the balance sheet through large loan loss charges, because it allows them to draw a line and move on," said Alberto Gallo, credit analyst at Royal Bank of Scotland.
UniCredit, which unveiled its 2013-2018 business plan along with the results, said it was targeting a net profit of around 2 billion euros for 2014 and an ambitious return on tangible equity (ROTE) of 13 percent in 2018.
Ghizzoni said his hopes for a quick turnaround were based on signs that economic activity in UniCredit's Italian home base was picking up after two and half years of recession.
"For the first time in January we saw a decline in the stock (of bad debts) for corporates," he said, adding that the bank's targets were based on prudent economic forecasts for Italy, where UniCredit makes 40 percent of its revenues.
The bank said that after the clean-up, its impaired loan coverage ratio of 52 percent was the highest in Italy and one of the best in Europe.
UniCredit also said its fully-loaded Basel III Common Equity Tier 1 capital adequacy ratio, a closely-watched measure of a bank's financial strength, stood at 9.4 percent of risk-weighted assets at the end of 2013.
That will rise by 0.3 percentage points once the Fineco listing and other capital boosting moves are completed, the bank said, putting it well above an 8 percent minimum requirement set by the ECB, despite the heavy writedowns.