Mamma Mia! UniCredit's Fourth Quarter Loss at €15 billion.

We started watching UniCredit in 2012 when its rights offering was greeted less than enthusiastically by equity investors.  Their slide presentation on Q4 FY13 is fairly confusing, as it tries to weave in extraordinarily bad news with the good news to come from the strategic plan out to 2018. A reeling shareholder probably needs to get his feet on the ground first as to where the bank is today, and that is not clear.

For Q4, UniCredit reported a net loss of €15 billion ($20.8 bn), and a full year FY13 loss of €14 billion, which is the fifth biggest loss reported by a European bank since 2005, according to the Wall Street Journal.

The fourth quarter LLP was €9,337 million compared to a provision of €4,516 million in Q4 FY12, an increase of 107%. For the full year, the LLP was €13,658 million, a 47% increase over the prior year.  €6.8 billion in the fourth quarter provision was attributable to Western Europe, of which €5.4 billion came from Commercial Bank of Italy and €1 billion  from Corporate assets.

The company also wrote off €9,368 million in goodwill, covering €8 billion from acquired assets and €1.3 billion from the impaired value of customer relationships.  Operations in Poland, Austria and Germany seem to be good businesses, and deposit gathering in Poland was strong in the quarter, but there is little goodwill left in these operations.

There was a €1.4 billion pre-tax gain from a revaluation of a 22% stake in the Bank of Italy, among the non-recurring items.

Non-performing loan coverage increased from 54.9% in the third quarter to 63.1% in the fourth quarter. Overall, the gross impaired loan portfolio stands at €2.1 billion, and the charge off rate was steady between the first and second halves of 2013.  It's not easy to glean confidence about the asset quality going forward or about the new management's ability to get out ahead of any problems.

On the cost reduction side, 8,455 full time equivalent employees will leave by 2018, with 5,700 of them in Italy and most of these losses coming from the Commercial Bank of Italy operation.

Group revenue increased 6%, as UniCredit's trading operations and presence in syndicated loan markets is still strong. Most of the one-time items were non-cash impacts, and the company's massive additions to provisions were neutral for Basel III capital tests.  The stock price went up after the announcement.

Some U.S. value fund managers who got into UniCredit early have been burned and left.  Some others, like Oakmark, have continued to hold positions in Intesa Sanpaolo, an Italian retail and commercial bank, which had strong fourth quarter 2013 share price performance.

With UniCredit, the value of the equity is a bit opaque. In some ways, it is analagous to Bank of America's position a few years ago.  On the credit side, however, KKR has become engaged with the new management, and this may be the better play in the short-term.