IITSF - Intesa Sanpaolo: Raising Our Q2 Expectation

2023-07-20 09:12:46 ET

Summary

• Intesa Sanpaolo's stock price has risen over 60% since last year. Despite that, year-to-date, the bank is underperforming within the banking sector.
• The bank's Q2 results are expected to show a net profit of €1.9 billion, with a cost-to-income ratio in the 45% area and loan loss provisions set at €0.5 billion.
• Best-in-class cost-income ratio with a zero non-performing loan target and a superior shareholder remuneration profile makes Intesa a clear buy.

Here at the Lab, we have a solid buy rating on Intesa Sanpaolo ( IITSF ). Last year, we provided our first analysis , and since then, the company's stock price has been up by more than 60% (Fig below). This was supported by a " Net Interest Income Development Not Priced In " and a leading position in the Italian landscape with a bottom-down analysis . We also recommend our readers check up on our recent UniCredit publication .

The bank will communicate the Q2 results on 28 July . Here at the Lab, we expect a solid quarter supported, as for the other Italian banks, by a strong trend in the interest margin development. Intesa Sanpaolo's earnings will be driven by higher interest income, and we have decided to raise ISP profit estimates for 2024 and 2025. Before moving on with our forecast, the company " will fully benefit from rising interest rates with an expectation of 2023 net interest margin at €12 billion against a consensus of €11 billion. " Consequently, the 2023 net profit will reach €7.5 billion (we were already above the bank's internal guidance in 2023).

Changes in Estimates

In our Q2 estimates, the interest margin is up by 4% to approximately €3.4 billion, thanks to the further widening commercial spread, with a deposit beta remaining at compressed levels. This represents a +63% on a yearly comparison. Regarding volumes, we do not expect particular discontinuities, with a slight deposit drop and loan disbursements. We should remind the BTP valore impact, which raised at the retail level more than €18 billion in June . On the fees front, we anticipate stable fees quarter-over-quarter, and we expect operating costs to be up 7% due to typical quarterly seasonality. Despite that, we forecast a cost-to-income ratio in the 45% area. Overall, we estimated that Intesa Sanpaolo will close the quarter with a net profit of €1.9 billion, down by 2% on a quarterly basis.

Regarding asset quality, we do not believe that Q2 will show a tangible increase in default rates. However, we expect loan loss provisions to rise to around 50 basis points, combined with 17 basis points in Q1 2023, representing a level consistent with the 2023 guidance in the 35 basis points area. As abs value, our loan loss provisions are set at €0.5 billion. We foresee a CET1 impacted by 10/20 basis points to 13.6% from 13.7% in Q1 2023 on the Solvency ratio.

Why are We Still Supportive?

1. ABI's latest monthly report shows that deposit remuneration rates slightly increased. In numbers, the new fixed-term deposits (i.e., certificates and time deposits) rose to 3.23% in June 2023 to 0.32% from 0.02% a year ago. Banks are lagging in paying clients on deposit.
2. Conversely, bank rates for loans to businesses and households have exponentially increased. In June, the average rate on new home loans almost doubled to 4.27% from 2.05% a year earlier. New loans for business loans reached 4.86% from 1.44% in June 2022.
3. This difference between points 1) and 2) is back to levels seen only before 2005/2006. Intesa Sanpaolo was trading at >€3 per share at that time .

Conclusion and Valuation

While waiting for the financial release accounts, we slightly revised Intesa Sanpaolo's 2023-2025 profit estimates by an average of +2%, positioning us on average by 8% above the FactSet consensus estimate. This is mainly due to a slightly higher interest margin. In particular, a net profit of €7.5 billion is expected for 2023 (it was €4.35 billion in 2022). Therefore, we reaffirmed a buy rating with a target price of €2.7 per share. Since the beginning of the year, Intesa Sanpaolo stock has underperformed within the banking sector (+22% vs. +36%). It is now traded at a tangible book value multiple of 2024 equal to 0.85 times with a RoTE (return on tangible equity) of more than 14.5%. Given the expected results and ISP payout policy, we forecast 29 cent dividend per share in 2023 and 2024, with a predicted dividend yield of 11.7%. Best in class cost-income ratio, with a zero NPL target and a superior dividend yield, makes Intesa a clear buy.

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