Madoff suit could hit UniCredit's capital boost

UniCredit, Italy's largest listed bank, could find its ability to raise key capital ratios hampered by the U.S. trustee seeking to recover billions of dollars for victims of Bernard Madoff's epic fraud.

Earlier this month, Unicredit was named on a lawsuit seeking $19.6 billion in damages alongside Sonja Kohn, who the suit described as Madoff's "criminal soul-mate", and 55 other defendants.

Kohn is the founder of Vienna's Bank Medici, a small private bank which is 25 percent owned by UniCredit's unit Bank Austria.

"Of course, the trustee will try to get the money back from the deep pockets, which is UniCredit, not Bank Medici," said Edouard Fremault, senior analyst at Brussels' Deminor International, a consultancy representing 2,500 European investors seeking damages from the Madoff fraud.

While any possible payout is likely years away, potential set-asides to cover losses from the lawsuit could hamper UniCredit's efforts to boost capital ratios that lag European peers, analysts said.

The lawsuit filed this month by Irving Picard, the U.S. bankruptcy trustee for Madoff's firm, dwarfs in size similar Madoff cases against HSBC, JP Morgan or UBS and comes as UniCredit faces a core home market recovering only slowly from the worst economic downturn since World War Two.

Evolution Securities has estimated that each $1 billion in provisions for a potential settlement would cut 17 basis points from UniCredit's 8.61 percent Core Tier 1 ratio, a key measure of bank capital that needs strengthening in view of tougher new global bank capital rules.

"Any impact coming from potential provision by UniCredit to deal with the Madoff issue would be significant, because the bottom line is very, very weak," said one analyst who spoke on condition of anonymity.

"This is on top of the issues that are already impacting on UniCredit's ability to generate capital," the analyst said.

UniCredit has already tapped shareholders twice for cash during the global credit crisis and is redefining its strategy after the acrimonious ousting of long-term boss Alessandro Profumo.

The lawsuit could also hinder selling or finding a partner for UniCredit's Pioneer, Italy's second-biggest asset manager, which has been named in the suit and its disposal is part of moves to boost ratios under Basel III capital guidelines.

CLOSE RELATIONSHIP

Madoff, 72, is serving a 150-year prison sentence for orchestrating a massive Ponzi scheme in which early investors were paid with the money of new clients. U.S. prosecutors estimated the international fraud took in about $65 billion over at least two decades. The trustee has put the amount investors lost at about $20 billion and this month ramped up his global search for money.

In the lawsuit, filed in the U.S. Bankruptcy Court in New York, Picard alleged that Bank Medici had fed billions of euros of other people's money into Madoff's scheme and was a "de facto branch of Bank Austria," Bank Medici's institutional partner.

The lawsuit also describes how Kohn boasted of her close relationship with Profumo, who built the Italian bank into a multi-national lender.

UniCredit has said it will defend itself vigorously against the lawsuit. Kohn's lawyers have called Picard's claims "completely unfounded."

LAGGING RATIOS

Analysts have lamented a lack of detail in predicting the impact of new Basel III bank rules when UniCredit reported lower-than-expected third-quarter results.

UniCredit's Tier 1 ratio is seen reaching 9.7 percent this year, according to Keefe, Bruyette & Woods, in line with Italian peers but well below a 11.4 percent average for European banks.

UniCredit, the biggest lender in eastern Europe, tapped investors for a total of 7 billion euros during the financial crisis and cut back on dividends to shore up ratios.

Investors would not easily digest another capital increase, leaving the bank with little options other than asset sales.

"We believe selling Pioneer is a vital option to raise cash without facing a potentially dilutive capital raise," KBW said in a research report.

KBW estimated that a Pioneer sale would add 65 basis points in Core Tier 1 if the unit were valued 3 billion euros.

French newspaper Le Figaro reported on Friday that Unicredit had picked three bidders -- Ameriprise Financial Inc and French groups Natixis and Amundi.

A spokesman for UniCredit said on Friday there was no deadline and the goal was still to explore "strategic partnerships and other strategic options" for Pioneer.

Asked about the U.S. suit's impact, John Arnold, chief investment officer at AFG International Advisors in Dublin, said UniCredit's Italian business remained solid and money flows into the key eastern Europe market were strong.

"These court cases come and go ... I would imagine it will be bogged down in the courts for a good five years," said Arnold, who oversees funds with about 27 million UniCredit shares.

(Editing by Erica Billingham)