Intesa Sanpaolo/Generali: capital buffa Premium
Combining the bank and the insurer would increase risks on several fronts
In the Italian tradition of opera buffa, a heart-rending farce normally has a happy ending. Shareholders in Italian banks, who have suffered enough tragicomedy, may hope that Intesa Sanpaolo’s disclosure that it is mulling “possible combinations” with insurer Generali, leads to a just such a jolly conclusion. ISP’s share price, down 8 per cent this week, suggests otherwise.
Italy’s second-biggest bank by assets has been relatively insulated from the tumult that has rocked the wider sector. ISP’s core capital ratios are strong. Its non-performing loans are low. And almost alone among peers, rising profits enabled managers to double its dividend last year and pledge a generous increase this year.
Thanks to cross-shareholding rules, ISP would have to make an offer for Generali as a whole rather than building up a stake. Given Generali’s market capitalisation of €24.5bn and ISP’s estimated 2016 net income of €3.2bn, a bid would have to be predominantly in shares.
There are some attractions. Faced with a long period of low interest rates and subdued demand for credit, ISP wants to boost its share of non-interest income such as commissions and fees (presently 42 per cent of operating income) from insurance and wealth management. Banks with a higher proportion of such recurring income — like wealth manager UBS — tend to trade at higher valuations. Acquiring Generali would roughly double ISP’s assets under management. The lender could also leverage its large branch network in Italy to sell insurance (currently a modest 15 per cent of pre-tax profits) and wealth products.
The risks are equally obvious. The first is regulatory. Combining their shares of life premiums would give them a third of the Italian market. Second is credit risk. ISP has €90bn in Italian government bond exposure; Generali has €69bn. Together, they would account for nearly 8 per cent of outstanding Italian government debt. Thirdly, their combined asset bases would almost certainly merit a “globally systemically important bank” designation, raising capital charges and putting payouts under pressure. Lastly, ISP is currently domestic focused bank. Combined, it would derive 42 per cent of operating profit from outside Italy.
In the past, European bankers were rewarded for ambition. These days, investors are more interested in avoiding tragedy.