Rome: UniCredit SpA, Italy’s biggest bank, plans to raise €13 billion (Dh47.74 billion; $13.8 billion) in a rights offer, sell off bad loans and slash costs in its deepest overhaul to boost capital levels and profitability.

The bank is targeting €4.7 billion of net profit in 2019 with a return on tangible equity above 9 per cent, the Milan-based company said in a statement on Tuesday. As part of the three-year strategy, the bank plans to shed an additional 6,500 jobs, bringing the total to 14,000, as it aims for €1.7 billion of annual cost savings.

UniCredit Chief Executive Officer Jean Pierre Mustier, a 55-year-old Frenchman, in July took the helm of a lender burdened by a mounting pile of bad loans, record-low interest rates and Italy’s longest recession since World War II. The bank had the slimmest capital buffer among those deemed important to the financial system in the latest European stress tests.

UniCredit has struggled to build up capital, a task compounded by the bank’s complex structure after $60 billion of acquisitions it made in the past decade under previous management. To simplify the bank and boost buffers, Mustier is disposing of assets including the Pioneer Investments fund management business and its Polish unit, Bank Pekao SA.

“We are taking decisive actions to deal with our non-performing-exposure legacy issues to improve and support recurring future profitability,” Mustier said in the statement.

UniCredit shares swung between losses and gains, dropping as much as 5.5 per cent before rising 2.2 per cent as of 9.20am in Milan. The stock has lost about half its value this year, valuing the bank at €15 billion.

“With almost no revenue growth in the foreseeable future, the plan is focused on cutting costs and improving the asset quality and capital levels,” Luigi Tramontana, an analyst at Banca Akros, said in a note to clients. “The rights issue stands at the top of the expectations, given the stronger than expected effort” to boost loan-loss reserves.

Capital Boost

The capital raise will take place in the first quarter of next year, Mustier said on a conference call with journalists. The CEO said he’s confident Banca Monte dei Paschi di Siena SpA’s efforts to increase capital will be resolved this month and will have “no impact” on his own bank’s fund-raising.

The revamp will help UniCredit to increase its common equity Tier 1 ratio to more than 12.5 per cent by 2019 from 10.8 per cent at the end of September. The bank won’t pay a dividend for 2016 and targets a 20 per cent to 50 per cent payout ratio in subsequent years.

Part of the funds the bank is raising will cover losses from disposals of bad loans. UniCredit said it will set aside €8.1 billion for non-performing loans as it plans to move €17.7 billion of soured debt off its books for securitisation and a subsequent sale. The bank said one-offs this quarter will total €12.2 billion.

Fortress Investment Group and PIMCO will take majority stakes in the two units that will take on the non-performing loans, UniCredit said.

“We welcome the focus on cleaning up the balance sheet, although some may have hoped the extent of provisions could have delivered a larger upfront non-performing loan reduction,” Jefferies Group LLC analysts including Benjie Creelan-Sandford said in a note, repeating their buy rating. “Given lack of control over the external environment, we think the focus on capital and costs is important.”

The 4.7 billion-euro profit target compares with a consensus of €3.9 billion for 2019, according to the Jefferies analysts. On comparable basis the bank made €1.5 billion in 2015.

The bank has agreed to deals to raise about €8 billion by selling Pekao, Pioneer and its 30 per cent stake in online lender FinecoBank SpA.

European regulators are stepping up pressure on Italian lenders to clean up their balance sheets, strengthen capital buffers and cut an estimated €360 billion in non-performing loans. UniCredit has sold more than €10 billion of bad loans in the past three years and has set aside almost €25 billion for loan-loss provisions since 2013.

Total net costs will drop to €10.6 billion from €12.2 billion in 2015, the bank said. The bank employed about 123,000 people at the end of September.