Intesa Sanpaolo: Low Risks Visibility And Attractive Return (ISNPY)

tupungato Despite an impressive performance since our initial buy rating, here at the Lab, we still believe in Intesa Sanpaolo’s (OTCPK:ISNPY) (OTCPK:IITSF) (ISP) future stock price appreciation. For our new readers, the group is the largest Italian bank in terms of volumes and branches, with approximately 20% of the market share following the UBI acquisition in 2020. The bank has a strong franchise, both in retail banking activities and in the wealth management division, with an exceptional track record of high shareholder remuneration. Intesa Sanpaolo offers high revenue diversification, which will likely support its earnings as interest rates move downward. For this reason, we still see the Italian bank’s business model as relatively defensive within the sector. Q2 results In H1, the company delivered a net profit of €4.77 billion (Fig 1), with Q2 results of €2.47 billion. This exceeded Wall Street analysts estimate that we forecast a net income of €2.3 billion. Returning to the half-year performance, Intesa’s net operating income improved by 9.6% to €13.6 billion, with net interest income of €7.9 billion and net commissions of €4.6 billion. Intesa reduced its expenses to €5.2 billion on the company’s cost basis, signing a minus -0.1%. This led to a cost/income ratio of 38.3%. Looking at the balance sheet metrics, impaired loans on the total reached a minimum of 1.1% (2.2% gross) (Fig 2). Considering the EBA methodology, including the residual Russian exposure, the bank reached a ratio of 1%. Indeed, the exposure to Russia further decreased by approximately 86% and was classified as stage 2. Still, on a positive note, the CET1 ratio reached 13.5%. These positive results will allow the bank to guarantee a significant cash return for shareholders. In numbers, 3.3 billion in dividends have already accrued in H1. This is combined with the buyback of €1.7 billion, which started in June 2024. Intesa Sanpaolo H1 results in a Snap Fig 1 Lower cost/income ratio evolution Fig 2 Why are we supportive? Starting with the attractive capital return policy, the bank confirmed a higher DPS in 2024 and 2025. Despite decremental interest rates in the future, Intesa also improved its profitability estimates with a net income outlook above €8.5 billion in the next two years. This was confirmed after the ECB cut of 25 basis points. The CEO emphasized the solid bank composition of the total group’s revenue diversification. For example, they reported the bank’s unique position “to drive revenue growth in its Wealth Management, Protection & Advisory business.” Indeed, with “a network of over 16,000 dedicated advisors, cutting-edge digital offerings, and fully owned insurance and asset management companies”, Intesa “identified €100 billion in client financial assets to fuel the expansion of our Group’s asset management business” (Fig 3). Therefore, this positive confirmation of resilient revenues over 2024 and 2025 with net interest income protection is optimal. Strong acceleration in commission backed the company’s downside protection with a supportive and profitable earnings structure. Here at the Lab, we report that 45% of Intesa Sanpaolo’s earnings are unrelated to interest rates (Fig 4). Compared to peers, 20% of ISP commissions are related to AM division and private banking, and we calculate that every ten basis points of higher AUM fee increase boosts profits by approximately 4-5%. Secondly, the cost/income ratio improved clearly. In addition, the company confirmed its status as a zero-nonperforming loan bank. These two peculiarities combined should not detract many earnings power ahead. Thirdly, capital returns are underpinned by higher CET1 projections. Here at the Lab, we forecast an 80-90% sustainable payout in 24/26E. Starting with a comfortable 13.5% CET1 ratio, the company’s organic capital generation should allow the bank to distribute the lion’s share of its annual profits. For this reason, we now include an annual buyback of €1.5 billion in 2025 and 2026. This translates into a company’s yield of 11-12% without significant financial constraints and implies ISP’s value creation of over 14% in the period. This assumes a 2/3% tangible book value increase. In addition, on downside protection, Intesa Sanpaolo’s EPS growth will be supported via a buyback. IPS upside on Wealth division Fig 3 IPS non Interest fee Fig 4 Valuation Last time, we anticipated a higher net profit projection in 2025. Regarding 2024, we confirm our forecast of €27 billion in sales with a net income of €8.45 billion. Following the H1 results, this is well in target. In 2025, Intesa offers a solid earnings profile due to the combination of 1) ongoing cost control mode, 2) resilient turnover prospects in a falling rate environment thanks to a significant fee/insurance top-line sales streams, and 3) limited asset quality deterioration in sight. Backed by the CEO’s comment, we anticipate 2025 earnings of €8.65 billion, with an EPS of €0.50. This also includes our estimates of lower ISP share numbers. In addition, the CEO’s commitment to shareholder remuneration still makes the company one of Europe’s most reliable capital return stories. For this reason, we confirm our target price of €3.75 per share ($25.2 in ADR). This is based on a blended methodology of 7x P/E and a 15% 2025 RoTE estimate. Our P/E target is supported by ISP FWD P/E historical average set at 6.99x (Fig 5). ISP SA Valuation data Risks Our team has a long risks section coverage of ISP (Fig 6). Additional downsides include 1) a worsening of financial market conditions, which would weaken the ISP trading and asset management activities, 2) higher corporate tax related to banks, and 3) lower shareholders’ remuneration in light of the higher Basel 4 impact, and 4) a slowdown of the Italian saving industry. IPS’s previous risks section Fig 6 Conclusion Post H1 results, ISP still scores for low-risk visibility, supportive capital returns, and more robust FCF generation despite rates. For this reason, we continue to buy-rate the company. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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