Intesa Quality of Earnings Fails to Impress After Profit Beats

(Bloomberg) -- It was the result investors wanted to see, but how Intesa Sanpaolo SpA got to the profit beat was less convincing.

The bank’s core profit generators -- net interest income and commissions -- were seen as a disappointment. Instead, profit was bolstered by businesses such as trading and financial assets.

“Core line items -- net interest income, fees and provisions -- look slightly disappointing, Jefferies analysts Benjie Creelan-Sandford and Marco Nicolai wrote in a report. There are “some potential one-off elements to quantify.”

Intesa beat analyst estimates with a second-quarter profit of 927 million euros ($1.1 billion). The stock was down 3.6 percent in Milan trading as of 3:30 p.m., making it the worst performer on the Bloomberg Europe 500 Banks Index.

Chief Executive Officer Carlo Messina is seeking to beat 2017 earnings through a cost-reduction plan that targets 1.5 billion euros ($1.75 billion) of savings through 2021. Intesa, which gets more than three-quarters of revenue from the domestic market, is seeking to boost businesses that bring high returns as low interest rates continue to restrict income from lending.

“An increase in revenues, continuous cost management and a decrease in the cost of risk are envisaged as the drivers of the expected performance of net income,” the bank said in the statement.

Trading Income

Operating costs declined while group revenue was up on higher income from trading and financial assets and liabilities designated at fair value. Intesa’s year earlier profit was adjusted to exclude the 3.5 billion euros that the bank received from the Italian state to take over two failing banks from the Veneto region, while including their pro-forma contribution to revenue and costs.

Intesa declined as much as 1.9 percent and was down 1.7 percent to 2.59 euros as of 2:30 p.m. in Milan trading, giving the bank a market value of 45 billion euros. Intesa is trading at about 0.93 times its tangible book value compared with a 0.62 times of Italian rival UniCredit SpA.

Messina plans to improve asset quality and expand the bank’s more lucrative insurance and wealth-management divisions. In June, after a Financial Times’ report that BlackRock was in talks to buy a minority stake in Intesa’s asset-management unit Eurizon, the CEO said that the bank was reviewing options with several global players.

Capital Quality

Intesa has made strides improving the quality of its books, speeding up the reduction of soured debt and increasing its bad-loan coverage. This year it took 10.8 billion euros of non-performing loans off its books and sold the majority of its platform for servicing them. Intesa seeks to cut bad loans to 6 percent of the total in 2021 from 9.3% at the end of June. The bank’s common equity Tier 1 ratio, a measure of financial strength rose to 13.6 at the end of June from 13.4 percent at the end of March.

“Optical beat with CET1 ratio. However, we lack details for the the calculation and note that the press release mentions that is a pro-forma number so it could just be reflective of recent deals,” said Hugo Cruz, an analyst at Keefe, Bruyette & Woods.

  • 2Q net interest income EU1.84b vs estimate EU1.89b, down 2.7% y/y
  • 2Q fees and commissions EU1.99b vs estimate EU2b, unchanged y/y
  • 2Q revenue EU4.6 billion vs estimate EU4.42b, up 1.9% y/y
  • 2Q operating costs EU2.3b, down 5.4% y/y
  • 2Q loan-loss provision EU694 million vs estimate EU627.2 million, down 6% y/y
  • 2Q CET1 ratio fully-loaded 13.6% taking into account the total absorption of deferred tax assets as well as to the non-taxable public cash contribution related to the purchase of Veneto banks
  • Sees 2018 cash dividend corresponding to 85% of net income

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