DBRS: Intesa SanPaolo Reports 2013 Loss Driven by Balance Sheet Clean-up

Summary:
• Goodwill/intangibles impairments and higher provisions drive loss of EUR 4.6 billion
• Franchise strength remains resilient
• Progress in de-risking and restructuring core business under new strategic plan
• DBRS rates Intesa San Paolo Senior Long-Term Debt & Deposit at A (low) with a Negative trend.

From DBRS Ratings Limited (DBRS)’ perspective, Intesa San Paolo’s (ISP or the Bank) results for 2013 reflect the challenges facing the Bank due to the on-going weak economic environment in Italy, as well as from the need to meet upcoming regulatory measures at the European level.

The Bank reported a loss of EUR 4.6 billion in 2013 which incorporated EUR 5.8 billion in goodwill/intangibles impairments and EUR 7.1 billion in loan loss provisions. Excluding the goodwill/intangibles impairments, the Bank would have reported a profit of EUR 1.2 billion for year-end 2013, lower than the EUR 1.6 billion profit reported for 2012.

The goodwill/intangibles impairments included EUR 3.9 billion relating to the domestic retail division “Banca dei Territori” which was created via the merger of Banca Intesa and SanPaolo IMI in 2007. The valuation at that time reflected the pre-crisis environment, as well as better market conditions and expected future earnings for the Italian banking system as whole. The remaining goodwill/intangibles impairment for 2013 was distributed across the CIB, Banca Fideuram and International retail banking divisions of the Bank. Following the goodwill/intangibles impairments in 2013, as well as those taken in 2011, the residual amount of goodwill/intangibles on ISP’s balance sheet is roughly EUR 6.6 billion.

Concurrently, the Bank increased its loan loss provisioning for 2013 to EUR 7.1 billion, or by 51%, in preparation for the upcoming European Central Bank (ECB) Asset Quality Review (AQR) and in order to help restore cash coverage ratios to pre-crisis levels. At year-end, ISP’s total coverage ratio improved to 46% (43% in 2012), while the coverage for non-performing loans (NPL) increased to 62.5% from 60.5% at December 2012. DBRS also notes that despite the worsening of NPL ratios during the year, the pace of asset quality deterioration slowed during the second half of the year.

Despite its financial challenges, ISP’s 2013 results also demonstrate the Bank’s capacity to generate core earnings. Although Net Interest Income (NII) remained under pressure, the Bank made progress towards improving commission revenues while also successfully implementing significant cost savings. In the current low interest environment, this combination helped to support profitability while also strengthening the liquidity profile. The latter comprised a solid portfolio of unencumbered assets of circa EUR 88 billion even after fully repaying EUR 36 billion of LTRO funds.

The Bank’s capital position remained solid in 2013 and the goodwill/intangibles impairment measures had no impact on regulatory capital ratios. At December 2013, ISP reported a Common Equity Tier 1 (CET1) ratio, fully loaded under Basel III, of 12.3%. This is well above the Italian banking average and stronger than that of many major European peers. Nevertheless, DBRS notes that the Bank’s CET 1 includes the benefit of a EUR 2.2 billion capital gain derived from the revaluation of ISP’s stake in the Bank of Italy. ISP is the largest shareholder of the Bank of Italy, and the Bank of Italy revaluation provided an additional capital buffer of circa 86 bps according to company estimates. Excluding this additional cushion, DBRS points out that ISP would still be well capitalized and relatively well positioned for the upcoming AQR and EBA stress tests.

DBRS also notes that the 2014-2017 strategic plan presented by the Bank has a number of positive initiatives, including simplifying the domestic retail division, improving the Group’ risk profile by creating a “Capital Light Bank” (internal Non-Core Bank), increasing commissions, as well as conducting a strategic review of the existing retail business abroad. ISP reached an agreement to sell its subsidiary in Ukraine in January 2014, but the Bank is waiting for the regulatory approvals of the transaction. Nonetheless, in DBRS’ view, the overall exposure to Ukraine remains manageable.

DBRS rates Intesa San Paolo’s Senior Long-Term Debt & Deposit at A (low) with a Negative trend.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]