Italian banking dividends: road ahead - IHS Markit · 2018. 7. 31. · Italian banking dividends: road ahead 7 | 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Intesa Unicredit Mediobanca

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Italian banking dividends: road ahead Tuesday, November 07, 2017

Italian banking dividends: road ahead

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Contents

Italian banking dividends: road

ahead 1

Italian banking dividends: road ahead 3

What caused banks to slip and what will drive improvement 4

Key sector metrics and ratios 6

Stock-by-stock analysis and forecast insight 8

Conclusion: 10

References: 11


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Italian banking dividends: road ahead The Italian banking and finance sector has been in a delicate spot for several years

due to a high percentage of Non-Performing Loans (NPLs) and high operational

costs. However, given the recently imposed stricter guidelines by the ECB and

consolidation in the sector, we do see a light at the end of this tunnel. But, is it

enough to say that a sense of normalcy has returned to Italian banks – and what

does it mean for future dividends?

The banking sector constitutes around 25% of index weight in terms of market

cap of the FTSE MIB

We are forecasting a dividend increase of more than 35% for Italian banks in

2018 as a result of an improvement in the overall business environment and

positive outlook

Consolidation in Italian Banking Sector and stricter ECB guidelines have resulted

in an improvement in NPLs and operational costs.

Risks remain – in particular NPLs and low profitability due to lower prevalent

interest rates are some of the challenges facing the sector. The Italian banking

sector had non-performing loan ratio of around 16.4% in Q316 (BNP Paribas,

2017)

Below charts represents aggregate dividend for Italian sector over the years

We are forecasting dividends from banks to grow by 36% next year, regaining its

position as the highest paying sector in Italy. Last year, the Utilities sector was

highest, paying a fraction of EUR 3.75bn. We are forecasting three additional banks

– Banco BPM, Unicredit and BFF Banking group – to pay dividends for FY17. Banco

BPM and Unicredit both suspended dividends for FY16 due to poor economic

conditions, however, for FY17 we are expecting both to resume dividends now that

their fundamentals are in a better position. The CEOs of both companies have

expressed intentions to pay shareholders from FY17 earnings. BFF is a new stock

that was included in the FTSE Italia mid cap, and started trading on Borsa Italia in

April.

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Chart 1: Aggregate Dividend (EUR Million)

FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 ( E )


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Below is the table representing top 5 sectors in terms of aggregate Dividend in Italy

(EUR millions)

Sector FY15 FY16 FY17 (E) FY18 (E) YoY 15/16

YoY 16/17

YoY 17/18

Utilities 3320 3753 4338 4810 13% 16% 11%

Banks 3490 3639 4948 5313 4% 36.% 7%

Oil and Gas 3083 3031 3058 3112 -2% 1% 2%

Insurance 2300 2539 2695 2883 10% 6% 7%

Industrial Goods 1395 1611 1834 2050 15% 14% 12%

For FY15, Italian banks were the top dividend paying sector, given that banks have

the largest weight in terms of constituents. However, for FY16, Utilities was the top

dividend paying sector. The major reason may be attributable to higher energy

prices in recent years and stable or rising consumption demand for these products.

For FY17, we expect banks to regain the top spot, thanks to signals of improvement

in fundamentals and scheduled dividend payments by Banco BPM, Unicredit and BFF

Banking Group.

What caused banks to slip and what will drive improvement

NPLs have weighed on the sector

The banking sector’s high levels of NPLs, along with structurally low profitability,

have been touted as major reasons for the lower capacity of banks to support

economic recovery and investment.

The Return on Equity (RoE) for Italian Banks is among the lowest in the EU. This

weakness in profitability is due to several structural, cyclical and legacy factors.

Structural factors relate to efficiency in the banking sector, and higher operating

costs compared to other European counterparts are a major role in the lower

profitability of Italian banks. Cyclical challenges include difficulties in increasing

revenues in an environment of low nominal growth and low interest rates; legacy

factors include asset quality issues facing Italian banks. Non-performing loans (NPLs)

represent nearly 21% of GDP, although they have declined marginally with stricter

provisioning requirements by the ECB. (IMF, 2017)

The NPL volume in the Italian banking sector is the highest in the European market,

reaching the value of EUR 324bn (GBV) at the end of 2016. NPL in Italian banks

reached their peak in 2015, totalling EUR 341m. However, from 2016 there has been

slight but firm decline in NPL volume (-5%).


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ECB guidelines provide the impetus for consolidation and deleveraging

Ailing banks are going through the restructuring process. In May 2017, UBI acquired

three regional lenders (Banca Marche, BPEL and CariChieti) and Banca BPER

(formerly known as Banca Popolare dell'Emilia Romagna) acquired the regional bank

CariFerrara. This has ultimately resulted in improving the NPL market. There are

other entities which are overburdened with bad loans and are expected to go

through restructuring process in near future. Examples are banks like MPS (EUR

29.4bn), Banca Popolare di Vicenza (EUR 5.1bn), and Veneto Banca (EUR 3.3bn).

These measures are further expected to improve the NPL market in future.

On the other hand, big Italian banks have started to implement deleverage plans to

have cleaner balance sheets and improved NPL ratios. Intesa Sanpaolo, Unicredit

and Banco BMP have implemented plans to sell EUR 2.5bn, EUR 17.7bn and EUR

0.8bn of their NPLS respectively.

These trends signify the importance banks and institutions are placing on the issue

of their “Unlikely to Pay” exposures (portfolios made by a limited number of

borrowers specializing in real estate developments and sale of single names under

restructuring). In this respect, ECB guidelines provide a great opportunity to improve

and renovate management of NPLs. ECB guidelines will require the adoption and

implementation of a renovated strategic management along with a structured

deleverage approach. Further, the recent amendments of the Italian law on

securitization in June 2017, which allowed Special Purpose Vehicles (SPVs) to buy

the asset securing securitized receivables; this will result in a higher volume of

transactions in NPL market. (PWC, 2017).

Improving sentiment reflected in steady share price growth

To understand the investor sentiment for Italian banks, we chart the price level

performance of FTSE Italia All Share Bank index. It tracks performance of all the

banks listed in FTSE Italia All share index.

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Chart 2: Price leve of FTSE Italia All-Share/ Banks

Price Level

Source: Factset

Markit IBoxxwww.ft.com

http://www.ft.com/


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The index reached its peak around September 2015, and took a dip of around 60%

in 2016. This represents the impact of volatility on the sector because of the Euro

zone crisis, and because of the high volume of bad debts and NPLs gripping Italian

banks. From September 2016 however, we see that price levels have been

increasing steadily, which signifies the investor sentiment around the sector –

dipping in 2015/16 and showing steady improvement from 2017 onwards.

Key sector metrics and ratios

Below we analyse the aggregate dividend of the top five dividend paying banks in

Italy. We chart their trend for four years: historic dividend for last two years, FY15

and FY16, and forecasted dividends for FY17 and FY18.

Intesa has been the top payer based on historic as well as future forecasts. Intesa

Sanpaolo is among the top banking groups in Europe, and is the leader in Italy in all

main business areas. It has a market share of no lower than 12% in most of the

Italian regions. In addition, Unicredit which cancelled dividend payments for FY16,

shows an aggregate dividend growth over the years for these top payers.

We now analyse performance and dividend forecasts of these five stocks in brief.

First, we chart three important performance fundamentals for these stocks: net

interest income, CET1 Ratio and Earning per share (EPS).

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Intesa Unicredit Mediobanca FinecoBank

SpA

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Chart 3: Aggregate Dividend (EUR Million)

FY15 FY16 FY17 (E) FY18 (E)

Source: IHSMarkit

Markit

IBoxxwww.ft.com

http://www.ft.com/


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Chart 4: Net Interest Income (EUR Million)

FY14 FY15 FY16 FY17 FY18

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Intesa Unicredit Mediobanca Unione di

Banche

Italiane

FinecoBank

Chart 5: CET1 Ratio (%)

FY14 FY15 FY16 FY17(E) FY18(E)

Source: Factset


Source: Factset


http://www.ft.com/

http://www.ft.com/


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As shown in Chart 3, net interest income, which is the major source of income for

banks, declined for three banks in 2015 and 2016; however, forecasts point to an

upward or stable trend for all five banks. Asset quality represented by the CET1

ratio, as well as EPS, fell for three of the five banks in 2016, as shown in Charts 4

and 5 respectively. However, we see the CET 1 ratio is expected to improve for all

four banks, and consensus data for the CET forecast for Finecobank is not available

presently. Further, EPS is also estimated to show an upward trend for FY17 and FY18

for all five banks. Unicredit Bank will be the one to watch out for; this bank is

expected to move from negative territory in 2016 to positive EPS of EUR 1.16 in

2017.

Stock-by-stock analysis and forecast insight

Intesa Sanpaolo SpA

We forecast an increased dividend of EUR 0.202 for FY17, in line with the company’s

guidance of paying EUR 10bn for the period of 2014-17. Intesa in Q2 posted a

significant YOY increase in net income. A significant portion of this was a contribution

by Italian banks to offset the impact of the acquisition of certain assets and

liabilities, as well as certain legal relationships of Banca Popolare di Vicenza and

Veneto Banca on the Group’s capital ratios. These acquisitions excluded NPLs,

subordinated bonds and shareholdings, and other legal relationships the Bank does

not consider functional to the acquisition. The company recorded a decline in net

interest income, but the contribution by net fees and commission income increased

significantly. The group also showed improvement in its capital ratios. As of 30 June

17, Tier 1 Capital Ratio was 14.3%, compared to 13.9%, and the Total Capital Ratio

was 17.1%, as compared to 17%. The CET1 ratio was 12.5%. In 2017, Intesa is

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Chart 6: EPS (EUR)

FY14 FY15 FY16 FY17 FY18

Source: Factset

Markit

IBoxxwww.ft.com

http://www.ft.com/


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expected to record an increased operating margin, contributed by revenue growth

and continuous cost management.

Unicredit SpA:

Unicredit is a strong European group which follows a simple commercial banking

model focused on Corporate and investment. For FY17, the company has given a

pay-out guideline of 20%, hence we are forecasting a dividend of EUR 0.28 for FY17.

The Group suffered from a net loss in FY16 due to some extraordinary operations it

conducted to de-risk its balance sheet and enhance asset quality. These operations

included selling its 20% share in Fineco, the sale of Pioneer Group to Amundi,

Project FINO (de-risking of EUR 17.7bn of gross bad loans through securitization)

and Project PORTO (increase in the provisioning levels on the non-performing loans

in order to reduce non-performing exposure). The bank also introduced a Transform

2019 plan to deal with a challenging business environment marked by increased

regulatory pressure and a prolonged period of low growth and low interest rates. The

main pillars defining the plan are: strengthen and optimize capital; improve asset

quality; transform the operating model by strengthening their client focus while

streamlining and simplifying products and services; maximize commercial bank

value; adopt a lean but stronger group corporate centre. Transforming their

operating model is expected to result in approx. EUR 1.7bn in net annual savings as

of 2019. The group recorded an increase in net profit of around 40%, up from EUR

1,321m in H116 to EUR 1,853m in H117. Net interest income was down by 2% in

H117, due to lower interest rates on lending to customers. However, net fees and

commission improved by 6% in H117 as compared to H116. As of 30 June 2017, the

company’s CET 1 Capital Ratio stood at 12.9% as compared to 8.2% as of 31 Dec

2016. Tier 1 Capital Ratio was 14.3% as compared to 9% as of 31 Dec 2016 and

total capital ratio also improved from 11.7% at 31 Dec 2016 to 17.3% as of 30 June

2017. The outlook for 2017 seems positive for the group, as it is expected to benefit

from moderate acceleration in economic growth, and leverage from a strengthened

capital position.

Mediobanca SpA:

Mediobanca operates in three main areas of business: investment banking, private

banking and wealth management. Their focus has been to blend tradition and

innovation in all three of their divisions. We forecasted a 15% dividend increase to

EUR 0.40 for FY17. FY16/17 results showed strong growth and an improved business

profile in terms of exposure to businesses which are fees-based, highly specialized,

capital-light and profitable. Accordingly, revenues were up 7% to a record level of

EUR 2,196m, net profit improved by 24% to EUR 750m and Return on Tangible

Equity (ROTE) was up from 7% to 9% ─ the highest amongst all banks under ECB

supervision. Asset quality also improved during the period. Texas ratio, which divides

a bank’s non-performing assets and loans with the firm’s tangible equity plus loan

loss reserve, was down from 15% to 13%, and the cost of risk was down 37 basis

points to 87 basis points. NPLs/bad loans also declined in absolute terms. Capital

ratios were stronger and at the highest levels since the crisis. The CET1 phased ratio

stood at 13.3% and Total Capital phased-in Ratio stood at 16.9%. Development of

its wealth management platform has been given a push with the recent acquisitions


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of CheBanca, MB Private Banking, Spafid/CMB and Cairn, which has launched three

new funds and two new CLOs with Mediobanca’s assistance.

FinecoBank SpA:

FinecoBank is the direct, multi-channel bank of the UniCredit Group. We are

forecasting a dividend of EUR 0.285 for FY17. The bank is expected to maintain a

high payout ratio, close to around 80% based on the average of the last three years.

The bank is in good financial condition, allowing for a high dividend pay-out for

future years. Net profit for H117 from continuing operations was EUR 104.3m, up

3% from H116, if we exclude non-recurring items from the results of H116.

Revenues for the period were also up by 3% YOY and the CET1 ratio as of 30 June

2017 stood at 22.14%. Net interest and net fees, and commission income

contributed to the increase in operating income, with a 3% and 10.1% growth,

respectively. The company expects growth to remain robust in terms of total assets,

assets under management and revenue. The focus of the bank is to provide

advanced financial advisory services, while digitising its offering. The Bank is working

on the project for the constitution of a new, fully owned Irish Asset Management

Company. The aim is to improve competitiveness through a vertically integrated

business model.

Unione di Banche Italiane:

We are forecasting a dividend of EUR 0.115 with a modest increase. The FY16

dividend of EUR 0.11 was kept flat due to decreasing earnings (the bank has gone

through the negative impacts of the business plan cost, and an extraordinary

contribution to all the different funds). But this was in line with the company's plan

of 2020 (12.8% fully loaded), including the absorption of the 3 bridge banks (Nuova

Banca delle Marche, Nuova Banca dell’Etruria e del Lazio and Nuova Cassa di

Risparmio di Chieti). For H117, UBI reported a consolidated, fully loaded CET1 ratio

of 11.32% as compared to 11.29% of UBI stand-alone as of 31 March 2017. This

shows solidity of the enlarged group. Balance sheet figures of UBI + 3 acquired

banks show growth in performing loans and a decrease in non-performing loans. Net

operating income improved by 2%, while net fees and commission improved by 7%.

We are forecasting a dividend for FY19-20 based on the 2019-20 business plan.

Other targets for 2020 are a net profit of around EUR 1.12bn, CET of more than 13%

and Texas ratio of 87%.

Conclusion:

The situation is improving in Italy now with the ECB’s increased focus on de-risking

the balance sheets of all the financial institutions, and an improvement in the

economic and overall business environment. Banks and financial institutions all over

Italy are now focusing on improving their profitability, largely through cost cutting

measures. This has also resulted in a major consolidation in the sector.

With lower NPL ratios, stagnant interest rates, and improved cost efficiency (as a

result of consolidation and an overall improving environment) we see a positive

picture of the sector. However, political instability, high levels of NPLs and lower

profitability in banks – mainly due to high provision costs – signify some of the major

roadblocks facing the sector.


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It will require time and major reforms for the Italian financial sector to reach its pre-

crisis level. The situation seems to be improving for the sector, as signified by our

dividend forecasts and investor sentiments.

References:

BNP Paribas. (2017). The value of Italian non-performing loans. Italy: BNP Paribas.

IMF. (2017). IMF working Paper. London: IMF.

PWC. (2017). The Italian NPL Market- The Place to be . Italy: PWC.


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Contacts:

Surneet Bhatia

Dividend Forecasting

+91 120 611 8864

[email protected]

For further information, please visit www.ihsmarkit.com

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Italian banking dividends: road ahead - IHS Markit · 2018. 7. 31. · Italian banking dividends: road ahead 7 | 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Intesa Unicredit Mediobanca