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Business and Politics

‘Win-win’ Bond: UniCredit Earns More than ECB, Zaba Pays Lower Corporate Tax

Author: Tomislav Pili

July 24, 2024

Zaba, Zagrebačka banka / Image by: foto

The majority owner of Zagrebačka banka has found a convenient way to grow its capital at a significantly higher rate than it would receive by depositing it with the European Central Bank (ECB), and our largest bank will also benefit financially from this. Zaba announced this week on the Zagreb Stock Exchange its intention to issue a ten-year bond worth 160 million euros, intended for allocation as a supplementary capital instrument. According to the bank’s claims, the bonds will be fully subscribed by Italian UniCredit, which, let us remind you, holds more than 96 percent of Zaba’s shares.

Regulatory Requirement

In simpler terms, this is a bond that the bank issues to meet regulatory requirements, specifically the MREL (Minimum Requirement for own funds and Eligible Liabilities) requirement. This is an international standard created in 2013 as one of the lessons learned from the global financial crisis of 2008/2009, which shook a good part of the large global banks. The MREL requirement is a regulation that requires banks to hold a sufficient amount of securities that can be written off or converted into capital in the event of a bank resolution. Issuing such debt is not a new phenomenon in local banking frameworks – MREL bonds have already been issued by Erste Bank and Nova Ljubljanska Banka.

As explained by Zagrebačka banka, the goal of the issuance is ‘to optimize the capital structure and support further business growth and expected regulatory changes.’ They add that the issuance of this bond is not related to the capital reduction mentioned in the financial report published this week. – The mentioned issuance is not related to the reduction of total capital and reserves of 148 million euros in the semi-annual financial reports since the mentioned reduction does not reflect in the regulatory capital. The regulatory capital of Zagrebačka banka has historically consisted solely of common equity capital, whereby the planned issuance of a supplementary capital instrument as part of the Bank’s regulatory capital follows the usual practice of the EU, as well as the Croatian market – emphasize the largest domestic bank.

Since the issuance of such bonds is already a regulatory obligation, for UniCredit and Zagrebačka banka, this will be a ‘win-win’ situation. As for UniCredit, the investment of 160 million euros is practically a symbolic amount, and given that it is the majority owner of Zaba, holding these bonds is practically risk-free. The favorable tax treatment of such earnings should not be overlooked either. From Zaba’s perspective, the annual interest payment to UniCredit will be treated as an interest expense that will reduce the corporate tax base.

Up to six percent annually

When asked about the coupon, or the interest rate that the bonds will yield, Zaba only reveals that the coupon rate will be defined on the issuance date, as a variable reference rate plus a margin that will be calculated based on current market conditions applicable to that type of instrument, maturity, and currency. Financial analysts informally indicate that this bond could yield about 200 basis points more than a comparable government bond. Specifically, around 5.5 percent annually, and perhaps even six, according to current market trends.

In that case, around nine million euros will flow into UniCredit’s account annually until 2034. Compared to the dividend that the Italian banking giant withdraws from Zagrebačka banka, this is ‘pocket change.’ Just this year, UniCredit received a dividend of 431.3 million euros, on which it had to pay 12 percent tax. However, that 160 million euros will yield almost double the return than if it were deposited with the ECB, which currently offers 3.75 percent on overnight deposits.