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Morningstar | Fee Income Disappoints in Intesa Sanpaolo's 1Q

Intesa Sanpaolo reported net income of EUR 1.1 billion for the first quarter of 2019. This is below the EUR 1.3 billion it reported for the corresponding quarter in 2018; however, those results were inflated by a EUR 246 million nonrecurring gain on disposal. We were disappointed by the revenue decline year on year, especially the softness in fees. We maintain our no-moat rating and EUR 2.70 fair value estimate.

Revenue was under pressure, declining 4% year on year to EUR 4.4 billion if we exclude the nonrecurring gains on disposal. We anticipated the 5% decline in net interest income, given the flattening yield curve, but the sharp 7% drop in fee income compared with the first quarter of 2018 was a negative surprise. Intesa continues to deliver on its cost-cutting strategy as well as making good inroads into its legacy book of nonperforming loans.

The disappointing fee growth numbers from Intesa are concerning to us. We highlighted in our previous note that we believe our bullish earnings estimates for Intesa compared with consensus are largely the result of our confidence in Intesa's ability to achieve its 5.5% compound annual fee growth till 2021. We do not believe that this result warrants a haircut to our estimated fee growth numbers, but it is something that we will monitor closely. Fee income from banking activities increased 3% year on year, but fees from the asset management, stockbroking, and insurance businesses suffered from lower asset valuations and reduced risk appetite from investors, declining 12% compared with the first quarter of 2018.

From a segmental perspective, the Italian retail banking business, which contributes roughly half of earnings, recorded an 8% decline in operating income compared with the first quarter of 2018. Private banking and Intesa's banking businesses outside Italy contribute around 10% of operating income each, and both businesses held performance steady. The asset-management and insurance businesses suffered from weak markets.