Italian Banks
Risks for Italian Banks
􀂃 A difficult 2009. In 2009 Italian banks will have to come to terms with declining net interest
income and increasing costs of risk. Interest income is expected to drop by 6.1% yoy in
2009E, as a result of shrinking spreads, weak volume growth (2% yoy), and costs of recent
acquisitions. Net loan provisions are expected to jump as a consequence of the recession year.
Considering that commission income is expected to remain weak and trading income is still a
question mark, we believe the only way to sustain bank profitability in 2009E will be through
cost cutting.
􀂃 Estimate revision. Recession and decreasing interest rates have lead us to revise down our
expectations on Italian banks. In this report we revised down our EPS estimates by an average
12% in 2008E, 36% in 2009E, and 28% in 2010E. The main revisions relate to: 1) net interest
income, revised down by 3.9% in 2009E and 4.1% in 2010E on average, due to the lower
loan growth and shrinking spreads; and 2) the cost of risk, with loan loss provisions increased
by 25% in 2009E and 24% in 2010E on average.
􀂃 Capital ratios still an issue. The market’s increasing focus on capital ratios will put pressure
on banks to strengthen their capital positions. We estimate an average 2008E core Tier1 at
6.0%. We believe Italian banks will take any opportunity to strengthen their capital ratios,
starting from the distribution of no cash dividend in 2009 and taking advantage of the new
fiscal treatment of goodwill. We believe the main part of Italian banks under our coverage
may consider the Tremonti bond, with the only exception of UBI.
􀂃 Valuation. We revised down our target price by 25% on average, with the main revision
impacting Banco Popolare and MPS (31% and 33% respectively). At current prices we see a
significant upside potential for Banco Popolare, for which we confirm our BUY rating with a
target of EUR 6.4/share (from EUR 9.30/share), and Unicredit, for which we confirm our
ADD rating and target price of EUR 1.66/share (from EUR 2.04/share). Although we still
believe UBI has the lowest risk profile and highest cost flexibility potential among the banks
under our coverage, after last years outperformance and our EPS downward revision, it shows
a modest upside potential: we cut our rating to HOLD, with a target price of EUR
9.69/share (from EUR 12.60/share). We confirm our HOLD rating on BPM, with a target
price of EUR 4.47/share (from EUR 4.3/share) and on MPS with a target price of
EUR 1.04/share (from EUR 1.55/share).
􀂃 Key risks. Our valuations may be affected by a deterioration of the macroeconomic scenario
in Western Europe and CEE and further write-downs due to persisting turbulence on the
financial market. We think corporate actions risk is limited, while recent integrations still carry
some execution risk.

Contents
Risks for Italian Banks 3
Estimates Revisions 12
Valuations 14
Company Section 17