Cost cutting announced by BP-PMI is insufficient to cover COE medium term after the revenue erosion seen in the last 2 quarters in our view. We believe PMI is worse off and downgrade to EW. Our 2019E ROTE for the combined entity is 6.6% (vs. 9% guidance) vs. a 0.5x TBV 2016E which merits an EW.
- We continue to believe M&A is the best way to accelerate balance sheet clean up and cut costs;
- Banco Popolare's NII is down 12% since Q2 last year as a result of lower rates.
- Combined coverage of 37% pre-writeoffs is below the 50% of best in class.
- We reach a €6.2bn valuation, 0.5x TBV 2016E, which implies 23% combined upside.
The merger agreement stipulates a 54/46 split of the new company BP/PMI, which would imply a valuation for Banco Popolare of €3.4bn, for 25% upside adjusting for the capital raise, and hence we move from UW to EW. For Pop Milano, the merger reduces the upside to 20%, as we no longer factor in an excess capital position. We move from OW to EW.
- We remain cautious on the mid cap space, ISP is our top pick.