Italian Banks
Cycle Set to Bite
We assume coverage of the Italian banks with a
cautious view on the near-term outlook. Though
structurally attractive, we see scope for the Italian banks
to surprise negatively in the near term. Our analysis
highlights downside risk to asset quality, from the
highest exposure to corporate lending in Europe, among
the most geared corporates and the prospect of a longer
recession than elsewhere in the euro area. We think this
will demand an average ~150bp provisions run-rate to
2011, which takes our EPS forecasts for ISP, BMPS and
UCI significantly below consensus.
NII and cost savings could surprise positively, and
asset transfers could see strong banks gain share.
NIMs are under pressure for deposit-funded banks, but
we think hedging can mitigate the impact of low rates.
Our analysis of retail efficiency also suggests scope for
cost savings to surprise. The better capitalized banks,
such as ISP, could gain share in the downturn if weaker
players rebuild capital through branch sales.
UCI is a winner among EU banks that is
underappreciated, in our view, despite its strong core
European franchises and exposure to the ‘safer’
markets in CEE. It has the most upside to our price
target, and we rate the shares Overweight.
ISP is a high-quality franchise, but valuation keeps
us Equal-weight. ISP’s relatively strong capital position
and solid liquidity are defensive attractions that also
allow it to exploit opportunities for growth, but the shares
are already pricing in the 15% sustainable RoNAV we
believe the bank can deliver.
BMPS also has defensive appeal in its retail focus
and scope to surprise on cost cuts, but we think the
need to rebuild capital warrants a discount valuation to
peers. We therefore rate the shares Underweight.