IITSF - Intesa Sanpaolo: Additional Distribution In Sight After The Best 9M Ever

2023-11-26 20:53:54 ET

Summary

• Intesa Sanpaolo ranked as the second-best pick among European banks for 2024 according to SA Quant Ratings.
• The Italian government approved a windfall tax on banks' extra profits, but Intesa Sanpaolo won't have to pay anything due to an important change to the law.
• Intesa Sanpaolo reported its best Q3 ever, with additional shareholder distributions in sight.

Introduction

Intesa Sanpaolo S.p.A. ( OTCPK:ISNPY ) (IITSF), the largest Italian bank and asset manager, keeps on surprising. A few days ago, it was ranked as the second-best pick among the 10 top value plays for 2024 according to SA Quant Ratings. Moreover, Moody's just changed its outlook from negative to stable, affirming its Baa1 rating. The stock has also seen a nice run-up since bottoming in October 2022 and it seems well-positioned to try to take the highs reached at the beginning of last year.

Italian windfall tax update

This summer, we went over some surprising news: because high interest rates are boosting banks' profits, the Italian government approved a windfall tax on banks' extra profits from net interest margin. We immediately tried to forecast how this would impact Intesa Sanpaolo's profits to make a first estimate and calculated Intesa would have paid around €1 billion.

But in September, we had to give an important update because, in the meantime, the ECB delivered a non-binding opinion warning Italy about the impact of the tax. Moreover, the Italian Parliament seemed to be discussing the possibility to exclude from the calculation for the tax the extra profits of the interest from Italian bonds. This led to the conclusion Intesa might have to pay only €650 million.

The best Q3 ever

When Intesa released its Q3 2023 earnings, the bank showcased its best third quarter ever in its history.

Looking at the banks' divisions, we see very strong results for the first 9 months of the year.

As we can see from the slide below, net income increased by 85% YoY to €6.1 billion. As a result, the bank had to upgrade for the third time this year its FY guidance, expecting net income to come in above € 7.5 billion. I wouldn't be surprised to see a final result around € 8 billion.

But what is even more important is the info in the yellow box at the bottom of the slide. It says the one-off windfall tax will be allocated as a non-distributable reserve of €2.1 billion. This is because the Italian Parliament approved as an alternative to the windfall tax the possibility for banks to book to a non-distributable reserve an amount not lower than 2.5x what they would have paid for the tax.

Given the strong momentum the company is seeing, the bank said it may consider additional distributions for 2023 which will need to be quantified at FY results approval in February 2024.

Considering net interest income is now expected to come well above €14 billion in 2023 with further growth expected in 2024 and 2025, I see it very likely for the bank to increase its distributions.

Moreover, the company has achieved the zero-npl bank status, as shown below. Since 2015, the company has addressed this area with a lot of effort and it now reports an NPL inflow from performing loans of just €500 million, down another 28% QoQ. Compared to 2012, NPL inflow is now down 82%, which is a great result.

On top of this, which makes Intesa a very safe bank, we have a fully phased-in CET1 ratio well above the 12% required, since it was last reported to be at 13.6%. This gives even more room for further cash distributions.

But we have Intesa, also on top of the European industry in terms of operating efficiency, with the 4th best cost-income ratio of 41.9%, well below the industry average of 53.2%.

Considering Intesa has not dismissed any of its main divisions, it is a well-structured bank with profitable business lines in insurance, private banking, and asset management. Therefore, it holds and controls an in-house value chain. This shields the bank from being reliant only on high interest rates to be profitable.

Forecast and valuation

Considering the company's net income could actually be around €8 billion and that there are 18.2 billion shares outstanding, we have FY 2023 EPS at €0.44.

For FY 2024, we may expect net income to be around €8.4 billion. Considering a share reduction due to buybacks, we could have 2024 EPS around €0.47. This means the company is trading at a 5.9 fwd 2023 PE and a 5.5 fwd 2024 PE. The sector median is around 9.6, but as we have seen above, Intesa offers quite a bit of safety compared to the industry in general. This is why I have my target price of €3.10, based on a PE of 7.

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