UniCredit to cut 700 investment banking jobs

UniCredit will axe 700 jobs at its investment banking arm, a source close to the matter said on Tuesday, as the bank's shares slipped for a second straight day as analysts questioned earnings targets and called for better external communication.

The job losses represent around a fifth of its employees in its Markets and Investment Banking (MIB) division, whose poor performance was the biggest factor in the bank's cut in 2008 forecasts to 39 euro cents per share from 52 euro cents.

UniCredit declined to comment on the report of job cuts. A large part of the reductions could be made at its German unit HVB, the source added. Shares in UniCredit had fallen so hard on Tuesday they were suspended for excessive losses before recovering to close down officially 4.02 per cent at 2.797 euros as the DJ Stoxx index of banks lost 3.95 per cent, despite the bank's plan to boost capital by 6.6 billion euros, announced on Sunday.

Moody's downgraded UniCredit to AA3 from AA2 and cut its financial strength rating to C+ from B-, citing "the notable deterioration of its profitability during 2008, which ... indicates a greater sensitivity to weaker operating environments" and to capital market activities. UniCredit, which has been pounded into second place in value among Italy's banks behind Intesa Sanpaolo, announced its plans to boost capital on Sunday in a U-turn prompted by rapidly deteriorating global markets, which have hit other international banks.

It will offer 3 billion euros of shares and pay out stock to investors as a 2008 dividend, allowing it to put 3.6 billion euros instead into its own pockets. It also slashed its earnings per share forecast with over half the reduction as a result of writedowns at its MIB unit.

"The real disappointment is the earnings reduction largely coming from the MIB division," JP Morgan analysts wrote in a research note, adding they welcomed a switch to cost cutting as the bank reins in expansion in central and eastern Europe (CEE).

Moody's added that prospects were for "a sustained period of difficult economic and market conditions which are also likely to lead to further pressure on profitability and on asset quality in Italy, Germany and across the CEE region." UniCredit reaps over half its revenues from outside its home base and had bet on growth in "dynamic" CEE countries when it announced its strategy for the next three years in June.

At the time, it said it would create 11,500 jobs in CEE by opening retail branches, but Chief Executive Officer Alessandro Profumo has now put that expansion on hold. It also said it would cut 9,000 jobs out of 100,000 in Germany, Austria and Italy. It had around 177,570 employees at Aug. 12, 2008, according to its Website.

Profumo, once hailed as a model for the next generation of Italian bankers for taking his bank onto the international stage, admitted mistakes in a two-page interview splashed in La Repubblica daily on Tuesday. Next to a half-page photograph of him rubbing his eyes, Profumo said "our first mistake" was to buy Italian lender Capitalia just before the global crisis started last year.

"With hindsight, I would certainly say yes," Profumo said when asked if the bank had over-extended itself with that multi-billion euro buy after acquisitions in Ukraine and Kazakhstan and buying out minority shareholders from operations in Germany, Russia and Austria.

"The second mistake was not to see that the global crisis would be so deep and last so long," he added. Analysts suggested another error was poor corporate governance and communication. Senior executives had ruled out a capital increase or a cut in the dividend as recently as Friday.

"Recovering from the current position will take corporate governance strengthening and radical cost-cutting," said UBS analysts in a note. "We think external communication must be improved significantly, with the CEO having a better control on what is communicated externally," Keefe, Bruyette and Woods said. Profumo took the unusual step of appearing on national television a week ago to slap down rumours that he would quit.

"If there were a call for a change in management, I would not cling on to my chair ... but ... I felt and feel the support and confidence of everyone, from executives to shareholders," he told La Repubblica. Profumo added the bank was now better placed to deal with the crisis. "We had some difficulties, but the bank has always been very solid, and now even more so," he said, adding that the Italian banking system was "absolutely solid."

Economic Times