UniCredit's heavy write-off could complicate government's efforts to stabilize Italy's banking sector

UniCredit, Italy's biggest bank has heavily written down the value of its 700 million euro ($756 million) investment in Italy's bank rescue fund. The banking major said it had signed a deal with trade unions to cut 3,900 jobs in the country as part of its plan to clean up its balance sheet before it taps the market for 13 billion euros in a share issue next week.

The Italian lender said that it expects net loss of about 11.8 billion euros for fiscal year 2016 after setting aside more money for bad loans and booking one-time charges related to its turnaround plan. To offset fourth-quarter losses stemming mainly from 8.1 billion euros in loan writedowns, UniCredit will sell new shares starting from today in Italy’s biggest ever corporate cash call.

The bank prepares to launch a record 13 billion euro (US$14 billion) share issue this week. UniCredit confirmed that preliminary 2016 full year consolidated results will be submitted for approval to the Board of Directors and published on 9th February 2017.

The losses, just 10 months into government's efforts to shore up the industry, suggest that mending the sector has become a far more painful task than expected by many industry and government officials. Last spring, the government convinced around 70 banks and other financial institutions to put money into Atlante. The fund was set up as a backstop to recapitalize two Veneto-based banks which were struggling to raise funds on the market. UniCredit's move is also likely to discourage the private sector from pumping any more money into Atlante to bail out weaker banks.