Intesa Sanpaolo and UniCredit - Under a cloud, but buyers of ISP capital strength
We believe YTD share price correction creates a buying opportunity in ISP. At 1x PTBV, we see value in
ISP's improving return profile (c10% ROTE in 17E vs. c8% in FY15 despite slowing fees), strong capital
(12.5% UBSe FLCET1 ratio) and best-in-class cash dividend profile (90-95% payout, 7-10% yields).
Although a 0.5x PTBV multiple implies limited downside, we do not see UCI as the "value option", as
earnings upside looks modest, and existing gaps with ISP appear unlikely to narrow in terms of
profitability (c6% ROTE17E) and dividend (9% of market cap returned in 2016/17E, vs. 17% at ISP).
* Fee story slowing, but still resilient; earnings upside related to LLPs
We believe AUM fees (15-25% of revenues) are poised to slow to low/mid-single digit growth (from 10-
20% in 14/15), driven by lower AUM inflows (-30% over 15/18E). That said, we believe recent savings
migration towards AUM is unlikely to be reversed, providing ISP/UCI with a large, stable revenue stream.
We are materially below management's targets (double-digit AUM fee growth, 7-10% total fees),
though current prices appear to discount a more conservative outlook than UBSe. In this report we have
reviewed the fee structure of c.2,000 fund share classes and most popular bancassurance products.
* P&L provisioning support in place, more insulated from loss recognition fears
We believe Italian delinquencies are close to their peak, ISP's/UCI's coverage ratios look adequate, and
both banks are proactively managing their NPLs. That backs our view about gradual LLP declines (c.55bps
by 2018E vs. 80-90bps in FY15), and reduced risk of ECB pressures to accelerate loss recognition.
Extensively analysed in the report, we do not include benefits from government NPL measures, with
shorter recovery times appearing most effective.
* Different capital position, different dividend discussion
Improved earnings and modest RWA growth allow for faster capital formation, with maths still working
in ISP's favour (c330bps over 16-18E; c170bps for UCI), given its structural return advantage. We believe
ISP can afford to distribute its entire 16/17E earnings stream as cash dividends, though slowly eroding
solvency. For us, the main question relates to ISP's policy beyond 17E, when earnings tailwinds fade and
loan growth might accelerate. On UCI, we think previous market concerns about solvency look overdone
after a 90bps CET1 pick-up in FY15, though buffers vs. SREP and unexpected impacts remain moderate.