Summary
- Intesa Sanpaolo overdelivered on net income in Q4 2022, as well as reaffirmed its dividend and buyback plans.
- Demand for the stock should remain robust at least until it goes ex-dividend on May 22, 2023.
- A significant increase in net interest income is expected in 2023 as the European Central Bank keeps raising interest rates.
- Even though a lot of good news has been already priced in, I believe the share price still has upside until EUR3.00.
Editor's note: Seeking Alpha is proud to welcome Konstantin Arestov as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Premium. Click here to find out more »
Intesa Sanpaolo (ISNPY), Italy's largest bank by market capitalization, has gained 19.3% year to date as it remains one of the primary beneficiaries of the interest rate bonanza boosting European banks' share prices this year. Intesa Sanpaolo outperformed its European peers in the STOXX 600 Banks Index, which rose by 17.0% over the same period. That, in turn, outperformed the broader STOXX 600 Index, which is up by 8.2% YTD in euro terms. In my view, Intesa Sanpaolo's stock price still has plenty of room to appreciate driven by the bank's ongoing EUR1.7bn buyback operation, as well as the prospects for net interest income growth due to the tightening of monetary policy by the ECB.
Intesa Sanpaolo's tangible P/B stands at 0.76, which is above the tangible P/B ratios of banks in its peer group such as Unicredit (UNCRY) and BNP Paribas (BNPQY), which trade at 0.62 and 0.72 times tangible book, respectively. However, Intesa Sanpaolo benefits from the high share of net fee and commission income standing at nearly 50% of total revenue as of Q4 2022, compared to the average in its peer group of 30%. Thus, Intesa Sanpaolo is valued as a mix between an insurance company, an asset management company, and a bank. In addition, Intesa maintains better asset quality than many of its peers.
Better-Than-Expected Q4 Results Fuel Generous Shareholder Returns
Looking at Q4 results , Intesa Sanpaolo reported better-than-expected net profit in Q4 at EUR1.07bn, exceeding expectations of analysts polled by Bloomberg for a profit of USD897.8mn. In 2022 as a whole, the bank reported net profit of EUR4.4bn, of which EUR3.0bn will be paid as dividend. In addition, the company confirmed the second EUR1.7bn tranche of its EUR3.4bn buyback plan and started to execute it on Feb. 13. As of Feb. 17, the bank has purchased some 86.46mn shares at an average price of EUR2.51/share.
The buyback by Intesa Sanpaolo will run until May 22, which is the ex-dividend date for the dividend paid from 2022 net income. In total, Intesa Sanpaolo plans to return to shareholders some EUR5.3bn in 2023, which amounts to a total yield of around 11.0% when taking into account the current market capitalization of the stock at EUR48bn.
The expected EUR5.3bn payout to shareholders in 2023 will include the EUR1.7bn from the buyback, EUR1.6bn from the May interim dividend payment, and the rest from the next dividend payment in November 2023 paid from 2023 net income. Net income in 2023 is expected to exceed EUR5.5bn, and the bank remains committed to following the 70% dividend payout ratio set in its 2022-25 business plan, which suggests at least EUR3.85bn dividend from 2023 income.
European Banks' Net Interest Income Expected to Surge
As the European Central Bank keeps raising rates to rein in inflation, European banks are well positioned to benefit from the expected increase in interest rate margins, even as the European economy enters a period of slow growth. Intesa Sanpaolo projects that it will accumulate net interest income growth of EUR2.5bn in 2023 compared to EUR1.6bn net interest income growth achieved in 2022.
Net interest income performance (Intesa Sanpaolo 2022 Results Presentation)
Intesa Sanpaolo's net interest income forecast assumes that the full-year average of the one-month Euribor will increase to 2.5% in 2023 from 0.09% in 2022. Note that the one-month Euribor already stands at 2.38% as of Feb. 20, and is expected to rise further given that ECB is planning another 50bps rate hike in March.
Overall, Intesa Sanpaolo seems more than capable of achieving its net profit guidance in 2023. There is considerable upside risk that net profit will exceed forecasts on the back of the widening interest rate margin. Net profit in 2022, excluding the provisions for Russia's exposure, has already reached EUR5.5bn.
Dirty Work of Reducing NPLs Already Completed
Intesa Sanpaolo entered 2023 after a long period of reducing its net non-performing loan exposure and the elimination of over two-thirds of its risk exposure to Russia in 2022. Intesa Sanpaolo cleared more than EUR4.6bn of gross non-performing loans in 2022, and its net NPL ratio reached record low of 1.0% at year-end 2022 - which is better than the ratios of many of its peers. In addition, it allocated EUR2.6bn of its gross income in 2022 to derisking its Russian exposure, which has been reduced by 68% since the beginning of the conflict in Ukraine. Thus, Russia's exposure will be significantly less impactful for earnings going forward.
NPL reduction achieved by Intesa Sanpoalo (Intesa Sanpoalo 2022 Results presentation)
Main Risks Relate to Potential Recession in Euro Area
The main downside risk for Intesa Sanpaolo relates to potential drastic deterioration of the growth outlook 2023, which will escalate the cost of risk and force the ECB to reconsider its policy of raising interest rates. The baseline scenario remains that the Italian economy will decelerate to 0.6% growth in 2023 from 3.9% in 2022, according to Bank of Italy's latest forecast. In such a case, loan loss provisions should remain low as Italian banks and businesses are used to operating in a low-growth environment.
Nonetheless, the elevated economic uncertainty is likely to prompt Intesa Sanpaolo to take a more cautious approach when it comes to distributing money to shareholders, in particular with respect to future buybacks. According to a report from Bloomberg dated Jan. 20, the bank will have to reduce its risk-weighted assets by around EUR20bn after the ECB found inconsistencies in the way Intesa Sanpaolo calculates risk. However, Intesa Sanpaolo already reduced RWA by around EUR29bn in Q4, so the additional reduction required by the ECB is unlikely to be a major issue. ECB is known for opposing share buybacks by European banks as they weaken their resilience to future shocks.
On the positive side, Intesa Sanpaolo maintains a solid CET1 ratio 13.5% as of the end of December 2022, which is 120bps higher than average of the banks in its peer group. The company's buffer over the SREP requirements set by the ECB is 460bps. The buffer will increase by additional 30bps due to the absorption of DTAs over the 2023-25 period.
Reduced Prospects for Cross-Border M&A Reduces Risk
Intesa Sanpaolo is unlikely to engage in any cross-border M&A activities in the near term, which I think is a positive for the stock as it reduces downside risks. CEO Carlo Messina said in an interview on Feb. 7 that he sees no opportunities for M&A in the European banking space because there are no suitable targets to acquire. This makes the stock more predictable as a potential merger with another non-Italian bank, say Credit Suisse (CS), would increase drastically risks for the stock. Intesa Sanpaolo has been quite successful in consolidating Italian banks over the past 16 years and will remain a low-risk stock if it continues to do so.
Conclusion
In my view, Intesa Sanpaolo remains a buy at least until it goes ex-dividend on May 22, 2023. After that, I recommend that investors reassess the prospects facing the banking sector in Europe. I will turn neutral on Intesa Sanpaolo if I see a shift in ECB's monetary policy stance or a sign that the Italian economy is set to enter a deep recession. Overall, I think that Intesa Sanpaolo's share price will reach EUR3.00 this year driven by solid improvement in the EPS and BVPS metrics.
Assuming Intesa Sanpaolo buys back shares at the current price of EUR2.51/share, it will annul around 677mn shares and reduce the number of outstanding shares to around 18.31bn. At the same time, if Intesa Sanpaolo's net income increases to EUR5.5bn in 2023, which is a conservative estimate, its forward EPS over the next 12 months will stand at EUR0.30 compared to EPS of EUR0.23 in 2022. The book value per share will also increase, as the buyback will be carried out while the stock trades below the current book value per share of EUR3.37 (as of Q4 2022). Thus, there is significant potential for share price appreciation even if the current P/E and P/B multiples of 10.9 and 0.76, respectively, are maintained.
At the same time, I believe that owning European banks in your portfolio this year will be beneficial as they can provide much-needed diversification - especially if you have a lot of exposure to growth stocks that are likely to underperform during a period of high interest rates. There is a case to be made that European bank stocks should have higher multiples in the current macroeconomic environment, as they will maintain strong profitability as long as interest rates remain at the current or higher levels and the economy does not enter a deep recession.
For further details see:
Intesa Sanpaolo: Big Upside Remains, Driven By Buyback Demand And Income Growth