EUR 850.00 For Business Accounts Only

Morningstar | Mediobanca 1Q 2019: Lower Risk but Not Risk-Free

Mediobanca reported preprovision profits of EUR 308 million for first-quarter 2019 (fiscal year-end June), which is 6% higher than the comparable period. The results were broadly in line with our expectations, but after some minor changes, we cut our estimates for fiscal 2019 by 4%. We maintain our fair value estimate at EUR 10, along with our no-moat rating.

Mediobanca believes it is less exposed to the Italian macroeconomic picture than the market perceives. We are sympathetic to this view to an extent, especially with regard to the immediate impact of wider credit spreads, but if the budget crisis leads to a contraction in the Italian economy, we do not believe Mediobanca will be immune.

Mediobanca believes that its consumer finance business is decoupled from Italian gross domestic product, or GDP. This might well be true for revenue/book growth--consumers tends to borrow more when times are tough--but we fail to see how this can be true for credit losses. When GDP declines, unemployment tends to pick up; this would be negative for asset quality.

Mediobanca has limited exposure to Italian government bonds. Its EUR 2.8 billion holding accounts for only 6% of its total assets and 25% of its equity. Only EUR 1.6 billion of the bonds are subject to mark-to-market accounting, and with a short duration of 2.5 years, the fair value adjustment due to wider government bond spreads will be low.

Mediobanca owns 13% of Italian insurer Generali, which it equity-accounts in its results. Mediobanca confirmed that even if Generali writes down the value of its bonds, this would not affect Mediobanca's own capital adequacy, thanks to the wonders of Basel III. However, any write-down would still hit Mediobanca's balance sheet. We also highlight that should Generali require capital, Mediobanca will be diluted if it does not follow its rights.

Net profit declined by 18% year on year, but the gain on disposal of Garanti shares booked in the comparable period in fiscal 2018 flattered the base significantly. Excluding gains on sale from the base suggests a 9% increase in net income, which we believe is more indicative of underlying performance.

The consumer finance business, Compas (40% of revenue), increased profit before tax by 11%, largely the result of a 10% increase in provisions for loan losses. At 1.8%, the credit loss ratio of this division is now below Mediobanca's 2% midcycle guidance. Credit quality metrics for this business remain sound.

Corporate and investment banking contribute a fourth of Mediobanca's revenue, but consume 40% of its capital. Profit declined by 9% year on year.