Intesa Sanpaolo : Solid fundamentals and consistent strategic plan dwarf political risk from uncertain election outcome; ‘Buy’ recommendations maintained

The outcome of Sunday’s general elections in Italy appears uncertain, fuelling widespread speculations. Given the fragmented political landscape and the (untested) electoral system, no clear majority is expected to emerge, leading to a potentially protracted period of negotiations between parties, along with a certain degree of market volatility. Unless a coalition emerges between populist parties (a remote risk though), we do not see this as a major issue for the leading Italian bank with solid fundamentals and a consistent strategic plan for 2018-2021 which includes substantial derisking ambitions. Economic outlook is pretty good for Italy and should not be impacted by political uncertainties, while aggressive tax programmes could face reality checks. - IntesaSP’s delivered good 2017 results and its new strategic plan entails a significant derisking pillar consisting in halving the NPL ratio to 6% by 2021. We do not believe the ECB will ask for more, as the NPL strategy appears ambitious enough. NPL coverage has benefited from the first-time application (FTA) of IFRS9 and has increased to 57% (69% for sofferenze), which should help IntesaSP offload NPL at low to minimal costs. IntesaSP’s targeted CET1 ratio of 13.1% by 2021 (13% fully-loaded at 1st January 2018, including IFRS9’s FTA) is credible and solid, offering substantial distances to SREP requirements (9.33% by 2021). - Current valuations of IntesaSP’s debt securities remain attractive in our view, and we maintain our ‘Buy’ recommendations on the bank’s senior debt, legacy Tier 1 and AT1. We are even upgrading our recommendation on the Tier 2 (BA1/BB+) to ‘Buy’ from ‘Neutral’, as we believe they offer attractive yields (6.625% 09/2023 YTM 1.94%) and could outperform the index when the electoral dust settles, and investors’ attention returns to the fairly good domestic economic outlook. We are confident enough to recommend buying IntesaSP’s debt securities at today’s spreads, although some temporary widening post-elections could create investment opportunities. Spreads tightening seems less likely in our view, not least because we believe markets have been fairly complacent about political risk and Italian assets, including IntesaSP’s debt. In any case, this would benefit investors having invested before Sunday. - >Support Factors - - Strong and diversified franchise in Italy (leading positions in retail banking and asset management, insurance and private banking and CIB) providing resilient revenues and the ability to attract business volumes, among others customer savings.- Solid capital position and (demonstrated) willingness to maintain it so. - Derisking identified as the first pillar of the 2018-2021 strategic plan, targeting a substantial reduction in NPL which should meet ECB expectations on balance sheet cleaning.Points to watch - - Asset quality set to improve on better economic conditions and voluntary derisking ambitions but still weak today by international standards.- MREL issuance expected to be fairly modest according to recent statements, potentially exposing to senior (preferred) bondholders to losses in a resolution.