EUR 850.00 For Business Accounts Only

Morningstar | Intesa's Earnings Support From Lower Loan Losses Nearing End

No-moat Intesa Sanpaolo reported net income of EUR 927 million for the second quarter of 2018, far below the EUR 4.4 billion it reported in the corresponding prior-year period. However, the second quarter of 2017 included nonrecurring gains of EUR 3.6 billion. If we restate pretax profits to exclude nonrecurring items, we calculate that Intesa recorded a 10% year-on-year increase in net profits. The reported net income of EUR 927 million was 8% ahead of the EUR 827 million that consensus expected. Some areas of concern took away some of the gloss of the results, though. Earnings support from lower credit losses has slowed, and loan-loss provisions in Italian retail and commercial banking nearly doubled year on year. Our full-year net income estimate of EUR 4.3 billion is ahead of consensus already, and we leave it unchanged. We maintain our fair value estimate of EUR 2.60 and our no-moat rating.

Lower provisions for loan losses have been the main driver of earnings growth for Intesa since 2013. We calculate that of the EUR 4.0 billion increase in pretax profits over this period, EUR 3.8 billion was due to lower loan-loss reserves. That loan-loss reserves declined only 6% year on year for the second quarter of 2018 therefore stood out clearly to us. Our view that loan-loss provisions are close to bottoming is further supported by the fact that after a number of quarters where Intesa booked lower new nonperforming loans, nonperforming loan formation seems to have stabilised over the last three quarters. Intesa's Italian retail and commercial lending book was by far the main source of the legacy nonperforming book. Loan-loss provisions taken against this book have started to rise again over the past two quarters.