Intesa Sanpaolo Q1 2021: Strong Earnings Beat; Large Trading Component in Beat Lowers Quality

No-moat Intesa Sanpaolo reported net profits of EUR 1.5 billion for the first quarter of 2021, 32% higher than the EUR 1.2 billion it reported for the first quarter of 2020 and 50% higher than the EUR 1 billion consensus estimate of the analysts polled by Visible Alpha. We do not view it as a particularly high-quality earnings beat. Trading revenue came in substantially higher than expected and was one of the main drivers of the earnings beat. Trading revenue is notoriously volatile and there is poor visibility regarding future revenue. As is the case with most of its peers Intesa has yet to witness any deterioration in credit quality, and it saw its loan loss provisions decline by 43% year-on-year. The gross inflow into the non-performing loan bucket of EUR 600 million is the lowest level it has ever been. Management increased their estimates of potential yearly synergies from the UBI takeover to EUR 1 billion (EUR 700 million cost synergies and EUR 300 million revenue synergies) from the EUR 700 million it expected when it took over UBI. For yield focused investors we highlight that Intesa plans to pay the outstanding 2020 dividend of EUR 2.6 billion (6% of current market value) and that it is accruing 70% of 2021 income for dividends, which we estimate will be a further dividend of EUR 3 billion (7% of current market value). Intesa’s common equity tier one ratio of 15.7% is also comfortably ahead of its newly announced common equity tier one ratio target of 13%. We are likely to increase our EUR 2.10 per share fair value estimate; we maintain our no-moat rating.