It turns out the old accounting game of delay-and-pray sometimes works, as much as it pains me to admit this, which is why many banks do it when they get in trouble. They usually don't like to talk about the game while it's in progress, and it often ends badly.
But it has worked out pretty well so far at UniCredit SpA, the Italian bank that yesterday reported a 15 billion-euro ($20.8 billion) fourth-quarter loss. Investors responded by pushing the company's stock price up 6 percent to 6.42 euros. The markets figured out a long time ago that UniCredit was being slow to recognize losses. So the news of its cleanup job was greeted with cheers, although the stock still trades at a 20 percent discount to book value, suggesting investors don't trust UniCredit's balance sheet just yet.
What surprised me was how candid UniCredit has been in explaining why it took the losses. "We did it because our solid capital position allowed us," UniCredit Chief Executive Officer Federico Ghizzoni said, according to an article in the Wall Street Journal. That jibed with what he said in UniCredit's news release yesterday: "Thanks to our solid capital position, we have taken clear and transparent decisions following which our CET1 ratio stands well above Basel 3 requirements." (The acronym stands for "common equity Tier 1" ratio. In plain English, he was saying the bank has more capital than the rules require.)
Maybe something got lost in translation. But Ghizzoni's statement looks like what the political writers call a Kinsley gaffe, where someone makes the mistake of accidentally telling the truth. UniCredit's losses included 8 billion euros to write down the value of goodwill left over from failed acquisitions. Loss provisions for doubtful loans were 9.3 billion euros for the quarter, which curiously was more than double the year-earlier level. And here's the thing: If a bank knows about a loss, it's supposed to take the loss. It isn't supposed to wait until its capital position is strong enough for it to withstand the hit. The bank is supposed to present its numbers neutrally and free from error. Or at least that's how accounting is supposed to work.
But that's so old-fashioned, I know. It's an open secret that troubled banks play the delay-and-pray game (or extend-and-pretend, take your pick) with the full encouragement of regulators. The surprise here is that Ghizzoni said it, not that UniCredit did it.
Of the 28 members of the Euro Stoxx Banks Index, only eight trade for more than book value, while nine trade for 70 percent of book or less, according to data compiled by Bloomberg. So investors see a lot more pent-up red ink that's still waiting to be recognized. But at least UniCredit seems to be coming clean. More European banks should follow its example.
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Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter at @JonathanWeil.
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