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13 January 2009
Italian Banks
Engines running out of petrol
Fabrizio Bernardi
Research Analyst
(39) 02 86379 731
fabrizio.bernardi@db.com
Paola Sabbione
Research Analyst
(44) 207 54 50791
paola.sabbione@db.com
2009 outlook - last, but not least: NII
Entering 2009, our stance on Italian Banks cannot revert to positive for one main
reason: net interest income (NII), the real engine of revenues growth for Italian
banks until today, is now running out of petrol. This bearish stance on Italian banks
is mirrored in our recommendation list with just one top pick (BPMilano) and three
new Sell ideas (BMPS, UBI Banca and Credem).
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Compendium
Table of contents
UniCredit........................................................... Page 31
BMPS ............................................................... Page 38
Banco Popolare ................................................ Page 41
UBI Banca......................................................... Page 44
Banca Popolare di Milano................................. Page 47
Credem............................................................. Page 50
Global Markets Research Company
Low interest rates, not the best framework for Italian banks’ NII
High inflation has suddenly given way to falling interest rates and slowing prices.
For Italian banks, this is not ideal as we believe that they will not be able to offset
deteriorating liability spreads with gains on the asset side. In addition to this, poor
interest rates should have a U-turn effect on volumes from corporate to retail –
less risky, but less profitable.
Government scheme to strengthen capital really needed?
NII should also be penalized by the Italian plan to strengthen banks’ core capital via
expensive hybrids. As it seems that banks believe they do not fully need this help
from the government, “fair” conditions for these hybrids (especially on the
redemption mechanism and on the subordination in interest payment, we believe)
are under discussion, and this should explain the evident delay in approving this
measure. We think that Italian banks are conscious of their higher defensiveness
and safe business structure and thus do not want to continue with re-capitalization
schemes that are seen as likely to be unnecessary today – especially if the
government does not approach this issue in a “neutral” way and aims to obtain
unfair “gains” from it, from banks’ standpoint. In our new estimates, we assume
that all banks reach a core tier 1 ratio of 8% in 2009E, via the issuance of hybrids
to the government (7% yield); we also assume that most of the banks will cut
(likely, again) their DPS on 2009E earnings (payable in 2010E), in order to foster
their repayment.
Italy: pain from weak exports
After almost 10 years of Italian economic underperformance, the Italian corporate
sector showed some signs of change during the summer 2008 due to the
contribution of exports. However, in our 2009 scenario of global recession, where
the euro becomes stronger against foreign currencies, this engine would not
support growth in the Italian GDP. Clearly, for banks, this should translate into a
deterioration of asset quality.
Top picks mirror our bearish outlook; domestic exposure a key risk
Our bearish stance on the Italian banking system is mirrored in our
recommendations: we have just two Buys (Banco and BPMilano, the latter our top
pick), three new Sell ideas (BMPS, UBI Banca and Credem) and a Hold on
UniCredit and Intesa Sanpaolo. Our valuation method is based on a Gordon model
apart from UniCredit, for which we use sum-of-the-parts. Key risks for Italian banks
are related to the economic environment and are exacerbated by their almost
completely domestic exposure.
Table of Contents
Executive summary ........................................................................... 3
Valuation ............................................................................................ 4
Focus on NII ....................................................................................... 8
Government support: needed or not? ........................................... 10
ECB rates: new assumptions .......................................................... 16
P&L line by line: 2009 update ......................................................... 20
Pain from weak exports .................................................................. 26
Company sections ........................................................................... 29
UniCredit .......................................................................................... 31
BMPS................................................................................................ 38
Banco Popolare................................................................................ 41
UBI Banca......................................................................................... 44
Banca Popolare di Milano ............................................................... 47
Credem ............................................................................................. 50
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