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Cleaning up after a good night can be painful. But Italy's UniCredit is at least offering investors an invite to the party they hope is to come.Italy's largest bank by assets on Tuesday reported its biggest-ever quarterly loss, getting ahead of the European Central Bank's review of bank balance sheets by scrubbing its own clean. UniCredit wrote down [euro]9.3 billion ($12.9 billion) of intangible assets, mostly goodwill, in the fourth quarter.More important, it added [euro]7.2 billion to loan-loss reserves to reflect regulatory changes. Inadequate reserves have dogged Italy's banking system. Now, at 52%, UniCredit's reserve as a percentage of bad loans is well above the Italian average of 38%.And the moves didn't dent the bank's capital too badly. True, UniCredit's core Tier 1 capital ratio, once Basel III rules are fully applied, fell to 9.4% from 9.8% at the end of September. But a tax benefit, cuts to its risk-weighted assets and the revaluation of its stake in the Bank of Italy helped mitigate the hit. The bank still thinks it can reach a 10% Tier 1 ratio by 2016 helped by a float of its online bank, Fineco.UniCredit also struck a confident tone on its growth prospects as the European economy recovers. It aims to triple net profit from a forecast [euro]2 billion this year to [euro]6.6 billion in 2018, expanding its return on tangible equity to 13% from 2% in 2013.The trick will be to show that is achievable. UniCredit plans to cut costs, saving [euro]1.3 billion. But those savings will partly offset rising salary costs the bank can't avoid--and it plans to increase investment in growth areas like Central and Eastern Europe and corporate banking.UniCredit, even after its latest write-downs, trades at about 0.8 times tangible book value, compared with European peers at 1 to 1.7 times, notes Macquarie. With a cleaned-up balance sheet and souped-up growth targets, the Italian bank has taken the first step toward closing that gap.
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