Company Reports

Intesa Sanpaolo is the best-run bank in Italy, and with the benefit of higher interest rates, it is now one of the most profitable European banks we cover. Retail deposits make up the bulk of Intesa's funding. Retail, and especially sight deposits, tend not to track market interest rates. Zero or negative interest rates have obscured the benefit to Intesa of having a vast source of cheap funding for more than a decade. Rather than being a highly profitable product, deposit-taking became a loss-making activity.

No-moat Intesa Sanpaolo reported a net profit of EUR 7.7 billion for fiscal 2023, slightly below our EUR 7.9 billion estimate, with wage inflation driving operating expense growth ahead of our expectations. Intesa slightly increased its net profit guidance for 2024 and 2025, and guidance is also slightly ahead of our expectations. Management came across as confident that it can keep growing net interest income. In sharp contrast to some of its peers, Intesa believes it can keep a lid on the cost of deposits while its hedging program will also shelter it from the initial expected decrease in interest rates. Even in the event of a sharp decline in interest rates, Intesa believes it can make up for lower net interest income by migrating deposits into its asset-management and life insurance operations.

We estimate that Intesa Sanpaolo has a fair value of EUR 3.00 per share, equal to 1.3 times Intesa's 2022 tangible book value and 8 times the EPS we estimate Intesa will record for 2023. We estimate that Intesa can generate a midcycle return on tangible equity of around 13%.

Intesa Sanpaolo is the best-run bank in Italy, and with the benefit of higher interest rates, it is now one of the most profitable European banks we cover. Retail deposits make up the bulk of Intesa's funding. Retail, and especially sight deposits, tend not to track market interest rates. Zero or negative interest rates have obscured the benefit to Intesa of having a vast source of cheap funding for more than a decade. Rather than being a highly profitable product, deposit-taking became a loss-making activity.

The direct exposure of European banks to Russian and Ukrainian clients is insignificant. According to the Bank for International Settlements, claims on Russian counterparties from the major developed European countries' banks amount to 0.7% of the European banks' total claims reported to the BIS.

No-moat Intesa Sanpaolo reported a pretax profit of EUR 434 million for the fourth quarter of 2021, compared with EUR 822 million a year earlier and sharply lower than the EUR 1.9 billion it reported for the third quarter of 2021. However, the results include EUR 1.3 billion of additional provisions that Intesa took to dispose of EUR 8 billion of legacy nonperforming loans. After Intesa's second-quarter results, we highlighted the risk that the bank might need to take further provisions against its legacy NPL book. However, we believe it is the correct decision to reduce the sizable NPL book, which has been one of the critical risks we have highlighted to investors. The legacy NPLs have weighed on Intesa's rating by the market. As a percentage of gross customer loans, NPLs are now down to 2% from 17% in 2015 and 4.4% a year before. Intesa's NPL ratio is now in line with that of the rest of the eurozone banks we cover.

No-moat Intesa Sanpaolo performed reasonably well under the recent European Central Bank stress test. Its 2023 common equity Tier 1 ratio of 9.4% under the adverse scenario of the stress test is above the 8.6% regulatory minimum that Intesa needs to keep to pay dividends. Its stressed 2023 CET1 ratio was 4.6 percentage points lower than the 14% that Intesa reported for 2020, a similar decline to that of the average European bank we cover. If we compare Intesa’s operational performance under the base and adverse scenarios, revenue held up better than its peer group but it saw a greater increase in loan-loss provisions. We maintain our no-moat rating and EUR 2.70 fair value estimate.

No-moat Intesa Sanpaolo reported net profits of EUR 1.5 billion for the second quarter of 2021--the highest second-quarter profits that the bank has reported. Pretax profits from continued operations came in at EUR 1.7 billion for the quarter, double the predetermined EUR 827 million Intesa disclosed for the second quarter of 2020--this number was restated to include the profits of UBI Banca in the base. There was a possible red flag in the results, however. Intesa booked loan-loss provisions of EUR 599 million for the quarter; of this, EUR 200 million relates to provisions taken against legacy nonperforming loans or NPLs that were sold during the quarter. To our mind, this could be a sign that the still sizable NPL book is overvalued and that Intesa will have to raise further provisions as it winds down its NPLs. We maintain our EUR/share fair value estimate and our no-moat rating.

We increase our fair value estimate for Intesa Sanpaolo to EUR 2.70/share from EUR 2.10/share previously. This is due to two factors. First, we reduce our estimate of Intesa's cost of equity to 11% from 13% previously and second, we now believe near-term loan losses are going to be less than we initially feared. Under our new capital allocation methodology, we award Intesa an Exemplary rating. We also believe there is now less uncertainty around our valuation and we now have a high uncertainty rating in place, compared with very high previously. However, we still do not believe Intesa enjoys the benefit of an economic moat.

Intesa Sanpaolo is the best-run bank in Italy, but the weakness of the Italian banking system erodes whatever competitive advantage Intesa may have.

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.

For all intents and purposes, the European Central Bank has extended its shareholder distribution suspension for European banks until September 2021. Supervisors did give a small concession in the form of reduced dividend distributions for 2020, but essentially the suspension remains in place. We think the ECB has struck middle ground in its decision, trying to appease banks and their shareholders as well as securing financial stability in uncertain times. We also believe the distribution limit has been set to such a level that all banks could stomach it. This is important from a supervisory standpoint as it avoids any potential signaling of which bank is currently under higher capital constraints. Because of this signaling effect, we expect banks to bend over backwards to pay the maximum allowed dividends in 2020 if permitted by supervisors. With the exception of the banks we anticipate to be loss-making this year, and therefore not eligible to pay dividends under the new guidance, we estimate that all banks under coverage have the capacity to pay up to the maximum amount allowed. Our fair value estimates and moat ratings across the board are unchanged.

Intesa Sanpaolo is the best-run bank in Italy, but the weakness of the Italian banking system erodes whatever competitive advantage Intesa may have.

No-moat Intesa Sanpaolo reported net income of EUR 3.8 billion for the third quarter of 2020. The result is however, materially inflated by the "negative goodwill" gain of EUR 3.2 billion that Intesa recorded on its purchase of a controlling stake in UBI. On a like-for-like basis Intesa saw its third-quarter 2020 net profit decline by 51% compared with the same period last year. The revenue weakness experienced in the second quarter continued--revenue declined by 10% year on year. Loan-loss provisions increased by 80% year on year to EUR 853m for the quarter. This is however, appreciably lower than the EUR 1.5 billion provisions that Intesa raised in second-quarter 2020. We maintain our EUR 2.10 per-share share fair value estimate and no moat rating.

No-moat Intesa Sanpaolo reported net income of EUR 1.4 billion for the second quarter of 2020, 16% higher than the EUR 1.2 billion it reported for the second quarter of 2019. Revenue declined year on year by 12%, with trading revenue pulling back sharply after an extraordinarily strong first quarter. Fee income was also under pressure as client transactional activity came to a standstill due to the lockdown measures. Fee income already showed signs of recovery in June when the lockdown measures were eased. Costs were well controlled. After surprisingly seeing little increase in the first quarter of 2020, loan-loss provisions came in at 2.5 times what they were in the second quarter of 2019. The increase in provisions is forward-looking, however, and the actual performance of the lending book showed no signs of deterioration yet with the nonperforming loan ratio declining. Pretax profits declined 60% year on year, excluding the EUR 1.1 billion gain on the disposal of Intesa's merchant acquiring business to Nexi. We maintain our no-moat rating, and despite some adjustments to our model, our EUR 2.10 fair value estimate remains the same.

Intesa is the best-run bank in Italy, but the weakness of the Italian banking system erodes whatever competitive advantage Intesa may have.

European banks have never been this cheap. Ever. Even at their 2008 nadir, investors believed European banks were worth more than they do today. The average multiple of European banks fell by half after the 2008 global financial crisis, which was justified as their profitability was also halved. There is no indication of such a step change in profitability happening now. It seems investors are fretting about the prospect of large-scale asset impairments, which may force banks to once again pass the cap around for a capital injection. We published an Observer, "Impact of Coronavirus on Credit Quality, Capital Adequacy, and Profitability Is Manageable; European Banks Remain Undervalued" on July 6 to explore the valuation, credit quality and capital adequacy of European banks in more detail.

No-moat Intesa Sanpaolo reported net income of EUR 1.2 billion for first-quarter 2020, 10% higher than the EUR 1.1 billion it reported in first-quarter 2019. The consensus of analysts polled by Visible Alpha only expected net profits of EUR 805 million for the quarter. Revenue growth of 12% year on year was buoyed by trading income more than doubling. With operating expenses declining by 3% Intesa booked a 27% year-on-year increase in preprovision profits. Despite loan-loss provisions increasing more than twofold, Intesa still managed a 9% increase in pretax profits, which struck an optimistic tone in its results presentation. Intesa indicated it would seek to pay out 75% of earnings as a dividend in 2020 and a 70% pay-out ratio in 2021, and it will also pay out the suspended 2019 dividend if it gets permission from the regulators to do so. Intesa is also going ahead with its planned acquisition of UBI Banca. These are all bullish indicators, but we would have preferred that Intesa place the UBI acquisition on the back burner and possibly also not be too fixated on paying a dividend. This year should be all about preserving the franchise without having to tap shareholders for support or damaging long-term profitability. If Intesa, or any European bank for that matter, can achieve these objectives it will exceed the market expectations implied by the 40% discount that Intesa is currently trading at, to its tangible book value. Intesa will argue that they are already doing that and they can achieve these objectives and manage to complete a complex acquisition while paying out generous dividends. We are just concerned that they might end up with too much on their plate. We maintain our no-moat rating and EUR 2.10 fair value estimate.

We have recently updated all our European banking models to incorporate the effects of the coronavirus. We now forecast that the median bank that we cover will book a 38% earnings decline in fiscal 2020 compared with 2019. We then, however, forecast a solid recovery in 2021 and 2022, with median earnings growth of 31% and 17% respectively. A sharp median increase of 125% in loan-loss provisions is the main driver of the expected decline in earnings, but we also anticipate that median revenue will decline by 4%. Importantly, we do not believe that any of the European banks we cover, with the exception of Deutsche Bank, will record a loss for 2020.

Intesa is the best-run bank in Italy, but the weakness of the Italian banking system erodes whatever competitive advantage Intesa may have.