UNCRY - Intesa Sanpaolo: Record Year Reiterating Buy

Summary

• Intesa Sanpaolo published its fourth-quarter accounts and beat consensus expectations. €5.3 billion expected as shareholders' remuneration (including dividends and buyback).
• At the stock price level, ISP declined for a 2023 guidance below Wall Street average forecasts.
• Based on a 2.5% EURIBOR, we slightly increased our target price to €2.6 per share. 10% earning yield to add, and we reiterate our overweight.

Here at the Lab, we have a good grip on the EU banking system. Intesa Sanpaolo (ISNPY) and UniCredit (UNCFF) were strong buys and recorded impressive results at the stock price level. Following our recent UniCredit Q4 update called record results , yesterday was Intesa Sanpaolo day. With no surprise, the leading Italian bank delivered excellent performances and further strengthened its balance sheet. Since our overweight , the company delivered (including dividends) a 52% capital appreciation (16.6% gain since the beginning of the year).

Results analysis and valuation

1. In 2022, at the aggregate level, Intesa Sanpaolo delivered revenues and net profit of €21.470 billion and €4.35 billion respectively (Fig 1). Looking at the Q4, ISP net income reached €1.07 billion and was above Bloomberg consensus (€897.8 million). In detail, the operating profit was supported by net interest income development, which reached €3.06 billion (vs estimate at €2.63 billion). This fully supports our previous insight called Net Interest Income Development Is Not Priced. Whereas, net fee and commission income were in line with expectations (€2.22 billion vs estimated at €2.21 billion). On a positive note, we should also recall the cost/income ratio, which stood at 55.2% thanks to lower operating costs at -0.4% on a yearly basis;
2. Looking at the company's note, 2022 profit reached €5.499 billion, in our numbers, we adjusted the bottom line in order to consider Russia and Ukraine's development. Important to note is the fact that cross-border loans to Russia are now largely performing and classified at Stage 2 (low risks);
3. In line with our thesis was the bank capital index. CET 1 ratio reached 13.8%. If we are adjusting for dividend and buyback, the fully loaded CET 1 ratio is at 13.5% (there is also a positive 125 basis points increase thanks to some deferred tax assets). However, loan loss provisions were recorded at $1.19 billion, while non-performing loans were slightly below our internal consideration;
4. Going to the shareholders' remuneration, there is a remaining buyback of €1.7 billion authorized by the ECB to implement. At the next ordinary shareholders' meeting, the board will propose the distribution of €3.047 billion on the 2022 profit, equal to a payout ratio of approximately 70%. In 2023, the CEO confirmed a total remuneration policy of €5.3 billion following 1) €1.6 billion dividend payment in May, 2) share repurchase competition for a total amount of €1.7 billion (as previously stated), and 3) the interim dividend which, as usual, ISP will pay in November, based on the forecast of over €5.5 billion in profit for 2023;
5. Even considering Russia's development (Fig 3), this is the best balance sheet of ISP's story;
6. Here at the Lab, we expect the bank's interest margin will continue to benefit from rising interest rates. As for 2023 guidance, NIM is expected at €12 vs a consensus of €11 billion. Based on an average 1-month EURIBOR at 2.5%, we decided to slightly increase our target price to €2.6 per share. This is also supported by a 10% yield (considering dividend and buyback)- Major risks are provisions and higher costs; however, given the bank's track record , we are not worried (Fig 2).

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