An upbeat assessment by the Chief Executive of UniCredit of its heavily discounted 7.5 billion euro (6.2 billion pound) rights issue failed to stem a second day of steep losses that unsettled investors in other European banks.

Italy's largest bank by assets has lost almost 30 percent of its market value since setting the terms of a capital increase meant to shore up its ravaged balance sheet.

Its shares were at their lowest since the bank was created from the merger of several Italian lenders in 1998, dragging down the broader European banking index <.SX7P>.

Bank recapitalisations are the main worry on investors' minds all over Europe. All banking stocks are suffering, a Milan-based trader said.

Under tough new European banking regulations aimed at bolstering capital, UniCredit needs to raise 8 billion euros, a smaller capital shortfall only than Spain's Santander .

We expect the share to be under significant pressure over the next few weeks, with a likely convergence towards the theoretical ex-rights price (3.41 euros), reflecting the very poor timing of this long overdue deal, said Natixis, which cut UniCredit to reduce from neutral on Thursday.

UniCredit plans to offer new shares at a 69 percent discount -- much larger than that used by its peers in recent rights issues.

But the bank's boss Federico Ghizzoni told Il Sole 24 Ore newspaper he was confident the market would take up nearly all of the rights issue -- the biggest by a European bank in more than a year and a litmus taste of market appetite for banking stocks in the new year.

I'm optimistic, he said. The capital increase is guaranteed by a consortium of banks.

To spread the risk of part of the offer not sold into the market, the consortium underwriting the issue has been broadened and is now made up of 27 lenders.

Just under a quarter of UniCredit's shareholders have already committed to take up the rights issue, below some analysts' expectations. Days before the issue announcement, private equity group Blackrock cut its stake in the bank to 1.7 percent from 4 percent.

Ghizzoni said some large U.S. investors had reduced exposure to Europe in the last few months due to sovereign risks.

But we still have important U.S. and Anglo-Saxon funds among our shareholders and many have shown an interest in investing, he said.


The two-day crash in UniCredit's shares unsettled investors in other banks, who fretted that more lenders would need to follow its example to meet tougher requirements by the end of June. The European banking stock index <.SX7P> fell 1.6 percent, with Italian banks among the biggest losers.

Deutsche Bank shares dropped 4 percent as traders cited talk that Germany's biggest lender needs to raise cash.

The European Banking Authority (EBA) has told Deutsche it needs to find 3.2 billion euros to reach a core capital level of 9 percent by the end of June, which the bank has said it can do organically. Two people familiar with Deutsche Bank's finances told Reuters it has no plans at the moment to issue new shares.

Banks need to tell the regulator their plans by January 20.

Declining profits in investment banking and higher loan losses will make it tougher for banks to fill the shortfall organically, analysts said.

Italy's Il Messaggero daily said on Thursday that the Bank of Italy had forwarded a letter from the EBA to the four Italian banks who need to boost their capital asking them to submit their recapitalisation plans to the central bank by the established January 20 deadline.

The EBA's request to mark to market government bond holdings has met with strong criticism in Italy, whose banks own large amounts of the country's public debt.


Ghizzoni said UniCredit planned to keep holdings of Italian government bonds at current levels, quashing speculation that a longer-term cash injection by the ECB could fuel banks' purchases of troubled government bonds.

On (Italian) government bonds we will continue to do what we did in 2011 at auctions. If necessary we will buy at auctions and we'll then contribute to sell on the market. The idea is to keep volumes in our portfolio at current levels, he told the paper.

UniCredit is one of 20 specialist primary dealers with exclusive rights to buy Italian debt at auctions. Italy plans to sell some 450 billion euros in new debt this year.

Analysts say the ECB has indirectly supported Italy's primary issuance through its purchases of Italian bonds on the secondary market. Primary dealers buying new debt at auction can keep their holdings stable by selling part of them to the ECB.

Ghizzoni reiterated his position that cash provided by the ECB should be used chiefly to lend to companies and households.

(Reporting by Valentina Za in Milan; Additional reporting by Steve Slater in London; Editing by Jodie Ginsberg)