Italian banking dividends: road ahead

[Pages:12]Italian banking dividends: road ahead

Tuesday, November 07, 2017

Confidential | Copyright ? 2017 IHS Markit Ltd

Italian banking dividends: road ahead

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

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

EUR million

Chart 1: Aggregate Dividend (EUR Million)

6,000

4,000

2,000

0 FY 2012

FY 2013

FY 2014

FY 2015

FY 2016

FY 2017 ( E )

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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Italian banking dividends: road ahead

Below is the table representing top 5 sectors in terms of aggregate Dividend in Italy (EUR millions)

Sector Utilities

FY15

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

YoY 16/17

YoY 17/18

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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Italian banking dividends: road ahead

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.

20,000 18,000 16,000 14,000 12,000 10,000

8,000 6,000 4,000 2,000

0

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

Price Level

Source: Factset

Markit IBoxx

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Italian banking dividends: road ahead

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.

EUR million

Chart 3: Aggregate Dividend (EUR Million)

3,500 3,000 2,500 2,000 1,500 1,000

500 0

Intesa

Unicredit

Mediobanca FinecoBank SpA

Unione di Banche Italiane

FY15 FY16 FY17 (E) FY18 (E)

Source: IHSMarkit 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 leaderMianrkItiat ly in all main business areas. It has a market share of no lower thanIB1o2x%xwwinw.ftm.coomst 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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Italian banking dividends: road ahead

EUR million

Chart 4: Net Interest Income (EUR Million)

14,000 12,000 10,000

8,000 6,000 4,000 2,000

0

Intesa

Unicredit

Mediobanca FinecoBank SpA

Unione di Banche Italiane

FY14 FY15 FY16 FY17 FY18

25.00 20.00 15.00 10.00

5.00 0.00

Chart 5: CET1 Ratio (%)

Source: Factset

Markit IBoxx

Intesa

Unicredit

Mediobanca

Unione di Banche Italiane

FinecoBank

FY14 FY15 FY16 FY17(E) FY18(E)

Source: Factset

Markit IBoxx

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Italian banking dividends: road ahead

Chart 6: EPS (EUR)

4

2

0 Intesa

-2

-4

Unicredit

Mediobanca FinecoBank SpA

Unione di Banche Italiane

-6

-8

-10 FY14 FY15 FY16 FY17 FY18

Source: Factset

As shown in Chart 3, net interest income, which is the major source of iMncaormkite for banks, declined for three banks in 2015 and 2016; however, forIeBcoaxsxtswwpwo.fitn.cotmto 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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