The local picture: disappointing operating performance, slowly improving asset quality
Key aggregates and points of differentiation Italian banks reported an aggregate ROTE of 3.8% in 1Q16 vs. our forecast of 4.3%. The results had two main points in common: preprovision income disappointed, as fees weakened,
adding to the well know NIM pressure; but asset quality improved, with NPLs down for the second quarter running. More in detail:
* Core revenues fell by 5% yoy, missing Inquiry Financial consensus at all except MPS and UBI. ISP stepped away from the 10% fee growth for 2016, given the poor1Q. Weaker trading income compounded the weakeness, with total revenues down 10%. UCG and BPER outperformed peers; BAPO and ISP underperformed
* Costs surprised positively at all banks and decreased by 2% yoy. Yet pre-provision profit was down 20% yoy.
* Asset quality improved, with aggregate LLPs falling by 20 bp (BAPO aside), gross NPLs down qoq and coverage ratio of total NPEs up 30 bp qoq.
Key views, estimate changes and stock calls Overall, we still expect 2016 to show earnings improvement compared to 2015, as lower loan losses and the absence of large one-off charges should more than offset core revenue pressure. However, from a forecast revision perspective, welower our EPS estimates by 8% on softer than previously anticipated revenues resulting mainly from lower fee income.
We are CL-Buy on BPER as it screens comparatively inexpensive (0.4x 2016E TBV vs. 0.9x for the sector), could halve its NPLs with a 25% discount with minimal impact on CET1 (see Readacross from BAPO’s capital raise ahead of
merger; differentiation key, March 24), and once clean, has a stand-alone ROTE potential of 7%-8%,
with consolidation upside.
We also switch our valuation of BAPO and BPM to the merged entity, following the release of the business plan last week and the board approvals of May 24. Whilst the rights issue at BAPO leads us to reduce our target for both banks, we align our rating for BAPO to that of BPM (Buy), given the now fixed exchange ratio for the merger.