UniCredit 3-day share plunge reaches 37 percent

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MILAN (Global Markets) - Shares of UniCredit (CRDI.MI), Italy's biggest bank by assets, sank for a third day as investors punished the stock after the lender priced a 7.5 billion-euro ($9.5 billion) rights issue at a deep discount.

The shares closed down 11.1 percent at 3.98 euros on Friday, the last trading day before the new share offer takes effect on Monday, extending losses over the past three days to 37 percent.

Since it priced the rights issue on Wednesday, UniCredit's market capitalization has fallen from 12.2 billion euros to 7.68 billion, a shade above the total amount of the new share offer.

UniCredit's rights issue is a litmus test of investor appetite for banking stocks at a time when many European lenders are under pressure to shore up their capital buffers to withstand a spreading debt crisis.

To meet the new requirements, UniCredit must plug an 8 billion-euro capital shortfall -- the biggest shortfall for a single bank after Spain's Santander (SAN.MC).

The Milan-based lender, the first big European bank to launch a share offer since the tougher capital requirements were introduced, priced its two-for-one rights issue at 1.943 euros per share.

That represents a 43 percent discount to the theoretical ex-rights price, a much higher discount than that offered by peers in recent rights issues.

The shares are trading at their lowest since UniCredit was created in 1998 through the merger of several Italian lenders.

"Everyone's selling part of their shares now to buy back through the rights at 1.943 euros," a Milan trader said.

Prime Minister Mario Monti defended Italy's banking system, which he said was among the most stable in Europe and said the turbulence encountered by UniCredit was the result of temporary problems linked to its capital increase.

"The Italian banking system is among the most solid," he told France 24 in an interview on Friday, noting that Italian banks had little exposure to the complex financial instruments that have undermined banks in some other countries.

"I think the difficulties of UniCredit were above all linked to the capital raising exercise, which in this market situation, encountered some temporary difficulties, but the Italian banking system is fundamentally solid," he said.

The three-day drop highlights the struggle European lenders face to raise funds and may deter them from tapping the market as the debt crisis continues.

"After the collapse in the UniCredit share price, many banks will now be looking at other ways to raise capital," said Neil Dwane, chief investment officer in Europe for RCM, a unit of Allianz Global Investors.

The Italian stock exchange said after the close that UniCredit's share price, adjusted for the rights issue, will begin trading on January 9 at 2.622 euros.

The new share offer ends on January 27 and is guaranteed by a pool of 27 lenders, meaning they will take up any portion of the offer that might go unsubscribed.

($1 = 0.7865 euros)

(Additional reporting by Stephen Jewkes and Michel Rose; Editing by David Hulmes and Steve Orlofsky)