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Intesa Sanpaolo: Big Upside Remains, Driven By Buyback Demand And Income Growth

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Aerial position of Turin astatine sunset

Aerial position of Turin astatine sunset pinch Intesa Sanpoalo's office opinionated retired successful nan skyline.

pcruciatti/iStock via Getty Images

Intesa Sanpaolo (OTCPK:ISNPY), Italy's largest slope by marketplace capitalization, has gained 19.3% twelvemonth to day arsenic it remains 1 of nan superior beneficiaries of nan liking complaint bonanza boosting European banks' stock prices this year. Intesa Sanpaolo outperformed its European peers successful nan STOXX 600 Banks Index, which roseate by 17.0% complete nan aforesaid period. That, successful turn, outperformed nan broader STOXX 600 Index, which is up by 8.2% YTD successful euro terms. In my view, Intesa Sanpaolo's banal value still has plentifulness of room to appreciate driven by nan bank's ongoing EUR1.7bn buyback operation, arsenic good arsenic nan prospects for nett liking income maturation owed to nan tightening of monetary argumentation by nan ECB.

Intesa Sanpaolo's tangible P/B stands astatine 0.76, which is supra nan tangible P/B ratios of banks successful its adjacent group specified arsenic Unicredit (OTCPK:UNCRY) and BNP Paribas (OTCQX:BNPQY), which waste and acquisition astatine 0.62 and 0.72 times tangible book, respectively. However, Intesa Sanpaolo benefits from nan precocious stock of nett interest and committee income opinionated astatine astir 50% of full gross arsenic of Q4 2022, compared to nan mean successful its adjacent group of 30%. Thus, Intesa Sanpaolo is weighted arsenic a operation betwixt an security company, an plus guidance company, and a bank. In addition, Intesa maintains amended plus value than galore of its peers.

Better-Than-Expected Q4 Results Fuel Generous Shareholder Returns

Looking astatine Q4 results, Intesa Sanpaolo reported better-than-expected nett profit successful Q4 astatine EUR1.07bn, exceeding expectations of analysts polled by Bloomberg for a profit of USD897.8mn. In 2022 arsenic a whole, nan slope reported nett profit of EUR4.4bn, of which EUR3.0bn will beryllium paid arsenic dividend. In addition, nan institution confirmed nan 2nd EUR1.7bn tranche of its EUR3.4bn buyback scheme and started to execute it connected Feb. 13. As of Feb. 17, nan slope has purchased immoderate 86.46mn shares astatine an mean value of EUR2.51/share.

The buyback by Intesa Sanpaolo will tally until May 22, which is nan ex-dividend day for nan dividend paid from 2022 nett income. In total, Intesa Sanpaolo plans to return to shareholders immoderate EUR5.3bn successful 2023, which amounts to a full output of astir 11.0% erstwhile taking into relationship nan existent marketplace capitalization of nan banal astatine EUR48bn.

The expected EUR5.3bn payout to shareholders successful 2023 will see nan EUR1.7bn from nan buyback, EUR1.6bn from nan May interim dividend payment, and nan remainder from nan adjacent dividend costs successful November 2023 paid from 2023 nett income. Net income successful 2023 is expected to transcend EUR5.5bn, and nan slope remains committed to pursuing nan 70% dividend payout ratio group successful its 2022-25 business plan, which suggests astatine slightest EUR3.85bn dividend from 2023 income.

European Banks' Net Interest Income Expected to Surge

As nan European Central Bank keeps raising rates to rein successful inflation, European banks are good positioned to use from nan expected summation successful liking complaint margins, moreover arsenic nan European system enters a play of slow growth. Intesa Sanpaolo projects that it will accumulate nett liking income maturation of EUR2.5bn successful 2023 compared to EUR1.6bn nett liking income maturation achieved successful 2022.

Income maturation Intesa Sanpaolo

Net liking income capacity (Intesa Sanpaolo 2022 Results Presentation)

Intesa Sanpaolo's nett liking income forecast assumes that nan full-year mean of nan one-month Euribor will summation to 2.5% successful 2023 from 0.09% successful 2022. Note that nan one-month Euribor already stands astatine 2.38% arsenic of Feb. 20, and is expected to emergence further fixed that ECB is readying different 50bps complaint hike successful March.

Overall, Intesa Sanpaolo seems much than tin of achieving its nett profit guidance successful 2023. There is sizeable upside consequence that nett profit will transcend forecasts connected nan backmost of nan widening liking complaint margin. Net profit successful 2022, excluding nan provisions for Russia's exposure, has already reached EUR5.5bn.

Dirty Work of Reducing NPLs Already Completed

Intesa Sanpaolo entered 2023 aft a agelong play of reducing its nett non-performing indebtedness vulnerability and nan elimination of complete two-thirds of its consequence vulnerability to Russia successful 2022. Intesa Sanpaolo cleared much than EUR4.6bn of gross non-performing loans successful 2022, and its nett NPL ratio reached grounds debased of 1.0% astatine year-end 2022 - which is amended than nan ratios of galore of its peers. In addition, it allocated EUR2.6bn of its gross income successful 2022 to derisking its Russian exposure, which has been reduced by 68% since nan opening of nan conflict successful Ukraine. Thus, Russia's vulnerability will beryllium importantly little impactful for net going forward.

NPL diminution Intesa Sanpaolo

NPL simplification achieved by Intesa Sanpoalo (Intesa Sanpoalo 2022 Results presentation)

Main Risks Relate to Potential Recession successful Euro Area

The main downside consequence for Intesa Sanpaolo relates to imaginable drastic deterioration of nan maturation outlook 2023, which will escalate nan costs of consequence and unit nan ECB to reconsider its argumentation of raising liking rates. The baseline script remains that nan Italian system will decelerate to 0.6% maturation successful 2023 from 3.9% successful 2022, according to Bank of Italy's latest forecast. In specified a case, indebtedness nonaccomplishment provisions should stay debased arsenic Italian banks and businesses are utilized to operating successful a low-growth environment.

Nonetheless, nan elevated economical uncertainty is apt to punctual Intesa Sanpaolo to return a much cautious attack erstwhile it comes to distributing money to shareholders, successful peculiar pinch respect to early buybacks. According to a report from Bloomberg dated Jan. 20, nan slope will person to trim its risk-weighted assets by astir EUR20bn aft nan ECB recovered inconsistencies successful nan measurement Intesa Sanpaolo calculates risk. However, Intesa Sanpaolo already reduced RWA by astir EUR29bn successful Q4, truthful nan further simplification required by nan ECB is improbable to beryllium a awesome issue. ECB is known for opposing stock buybacks by European banks arsenic they weaken their resilience to early shocks.

On nan affirmative side, Intesa Sanpaolo maintains a coagulated CET1 ratio 13.5% arsenic of nan extremity of December 2022, which is 120bps higher than mean of nan banks successful its adjacent group. The company's buffer complete nan SREP requirements group by nan ECB is 460bps. The buffer will summation by further 30bps owed to nan absorption of DTAs complete nan 2023-25 period.

Reduced Prospects for Cross-Border M&A Reduces Risk

Intesa Sanpaolo is improbable to prosecute successful immoderate cross-border M&A activities successful nan adjacent term, which I deliberation is simply a affirmative for nan banal arsenic it reduces downside risks. CEO Carlo Messina said successful an interview connected Feb. 7 that he sees nary opportunities for M&A successful nan European banking abstraction because location are nary suitable targets to acquire. This makes nan banal much predictable arsenic a imaginable merger pinch different non-Italian bank, opportunity Credit Suisse (CS), would summation drastically risks for nan stock. Intesa Sanpaolo has been rather successful successful consolidating Italian banks complete nan past 16 years and will stay a low-risk banal if it continues to do so.

Conclusion

In my view, Intesa Sanpaolo remains a bargain astatine slightest until it goes ex-dividend connected May 22, 2023. After that, I urge that investors reassess nan prospects facing nan banking assemblage successful Europe. I will move neutral connected Intesa Sanpaolo if I spot a displacement successful ECB's monetary argumentation stance aliases a motion that nan Italian system is group to participate a heavy recession. Overall, I deliberation that Intesa Sanpaolo's stock value will scope EUR3.00 this twelvemonth driven by coagulated betterment successful nan EPS and BVPS metrics.

Assuming Intesa Sanpaolo buys backmost shares astatine nan existent value of EUR2.51/share, it will annul astir 677mn shares and trim nan number of outstanding shares to astir 18.31bn. At nan aforesaid time, if Intesa Sanpaolo's nett income increases to EUR5.5bn successful 2023, which is simply a blimpish estimate, its guardant EPS complete nan adjacent 12 months will guidelines astatine EUR0.30 compared to EPS of EUR0.23 successful 2022. The book worth per stock will besides increase, arsenic nan buyback will beryllium carried retired while nan banal trades beneath nan existent book worth per stock of EUR3.37 (as of Q4 2022). Thus, location is important imaginable for stock value appreciation moreover if nan existent P/E and P/B multiples of 10.9 and 0.76, respectively, are maintained.

At nan aforesaid time, I judge that owning European banks successful your portfolio this twelvemonth will beryllium beneficial arsenic they tin supply much-needed diversification - particularly if you person a batch of vulnerability to maturation stocks that are apt to underperform during a play of precocious liking rates. There is simply a lawsuit to beryllium made that European slope stocks should person higher multiples successful nan existent macroeconomic environment, arsenic they will support beardown profitability arsenic agelong arsenic liking rates stay astatine nan existent aliases higher levels and nan system does not participate a heavy recession.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

Konstantin Arestov floor plan picture

Economist pinch 10-year acquisition doing sell-side investigation connected euro-area and emerging marketplace economies. My credo is that doing your homework is basal erstwhile investing and seeing arsenic galore viewpoints arsenic imaginable tin only thief you make amended finance decisions. I dream I tin do my portion to guideline you done nan markets!I person passed nan CFA Level 3 exam. I person a Bachelor's Degree successful Economics. Disclaimer: I DO NOT supply financial advice. All opinions expressed connected financial instruments are my ain and whitethorn not beryllium suited for your circumstantial financial goals, consequence tolerance aliases circumstances. Perform your ain owed diligence and put astatine your ain risk.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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