EUR 850.00 For Business Accounts Only

Morningstar | Intesa Sanpaolo Reports Fiscal 2018 Results, Maintains Aggressive Growth Targets

Intesa Sanpaolo reported pretax profits of EUR 4.4 billion for fiscal 2018, an 8% increase compared with the corresponding period in 2017. After updating our model and adjusting for the time value of money, we are increasing our fair value estimate slightly to EUR 2.70 from EUR 2.60 and maintaining our no-moat rating.

Intesas's management has previously provided very detailed earnings guidance out toward 2021, with a net income target of EUR 6 billion for fiscal 2021. Our estimate of EUR 5.4 billion lags Intesa's target, mainly due to the flat current yield curve. However, we are far more bullish than consensus, whose estimate of 2021 net income is 25% below Intesa's target at EUR 4.5 billion. The current Intesa management team has achieved its past targets, and we believe it deserves the benefit of the doubt in its ability to achieve its targets.

One should guard against becoming overly fixated on earnings targets and losing sight of the core fundamentals of a business in the process, though. Intesa remains one of the more profitable banks in Europe, with a low risk business model and an enviable retail deposit funding base.

One cannot disregard the current Italian political situation and its potential impact on the overindebted Italian economy. Intesa holds Italian sovereign debt of EUR 76 billion, which equates to around 10% of its total assets and 1.5 times Intesa's total equity base. It is therefore evident that Intesa would not survive an Italian debt default. The spread of Italian government bonds over German Bunds remains elevated at around 2.4%, but it has pulled back from its October 2018 highs of just over 3%.

We believe the main area where we differ from consensus is Intesa's ability to grow its fee-based income. Intesa is guiding strong fee growth of 5.5% annually compounded till 2021. With the pedestrian growth outlook for the Italian economy, this may seem overly ambitious. But Intesa believes that it has a significant opportunity to recycle clients' retail deposits into asset-management products. We believe that this is a good strategy with interest rates set to remain low. With short-term eurozone interest rates negative, Intesa is not earning anything on its substantial book of retail deposits. Recycling these funds into asset-management products will lead to it generating fee income instead of interest income. This strategy is thus decoupled from the Italian macro and depend more on Intesa's ability to execute its strategy.