Morningstar | Intesa Sanpaolo's 3Q: CEO Strikes Confident Tone During Call, but Revenue Growth Slows
Intesa Sanpaolo reported pretax profits of EUR 1.4 billion for the third quarter of 2018, this represents a 13% increase compared with the corresponding period in 2017. Intesa Sanpaolo CEO Carlo Messina struck a very confident tone during the earnings call, highlighting Intesa’s good growth prospects, profitability, and its strong performance in the European Banking Authority stress tests. He also believes that the fundamentals for the Italian economy remains sound. Messina believes that the market is pricing in an “Armageddon†scenario for Intesa Sanpaolo and for Italy. While we agree with most of his sentiments around the fundamentals of Intesa Sanpaolo, we are less confident that the Italian economy is as robust as he believes. We have consistently argued that Italian banks deserve a risk premium attached to their cost of equity to compensate investors for some of the risks inherent to the Italian economy and its banking sector. We do agree that in the case of Intesa the market is starting to price in a risk premium that is possibly too high, but it is still very far removed from an “Armageddon†risk premium. We maintain our EUR 2.60 fair value estimate and our no-moat rating.Roughly half of the earnings growth for the quarter was the result of lower impairments. Revenue growth of 2% represents a market slowdown from the first half of 2018 when revenue grew by 10%, the 1% decline in fee income was especially disappointing given that Intesa Sanpaolo grew fees by 7% in the first half of the year. The slowdown in top-line growth is somewhat at odds with the optimism from Intesa’s management team.
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