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Italy’s UniCredit braces for coronavirus-led loan defaults

MILAN (Reuters) – Italy’s UniCredit <CRDI.MI> on Wednesday became the first major euro zone bank to write down the value of its loans to reflect the economic impact of the coronavirus crisis.

Italy’s biggest bank by assets said it would book around 900 million euros ($976 million) in additional loan loss provisions in the first quarter to take into account an expected 13% contraction in the euro zone’s 2020 gross domestic product.

The bank said it was applying the IFRS9 accounting rule which requires lenders to book expected, and not just actual, losses.

Regulators have temporarily relaxed the IFRS9 accounting principle in light of the coronavirus emergency and analysts had said there was some confusion among lenders on how to apply it when reporting first-quarter results.

European banks will publish earnings in the next two weeks and they are expected to set aside billions for potential loan losses as well as take profit hits because of the coronavirus crisis.

UniCredit reports on May 6. Its shares rose 1.6% in early trade, slightly outperforming an increase in Italy’s banking index <.FTIT8300>.

The bank said that it expected its cost of risk, which measures loan loss provisions in relation to the risk-weighted value of the loans, to reach 100-120 basis points this year, more than twice its original target of 46 basis points.

In 2021, when UniCredit expects a recovery in the euro zone economy with a 10% expansion, cost of risk is estimated at 70-90 basis points, it said.

Before the virus hit, UniCredit was just emerging from a successful restructuring under CEO Jean Pierre Mustier, who slashed costs and offloaded problem debts and other assets to boost the bank’s balance sheet.

The bank said its core capital buffer would remain well above its 200-250 basis point target range throughout the year.

UniCredit said Mustier, after foregoing a bonus of up to 2.4 million euros for 2020, would cut his salary by a quarter this year, allowing the board to donate 2.7 million euros to the UniCredit foundation to support social initiatives.

(Reporting by Valentina Za. Editing by Carmel Crimmins)