DBRS: Intesa 2014 Results Reflect Strong Commission Income and Lower Cost of Risk

Summary:
• Core banking revenues and lower provisions support 2014 earnings
• 2014-2017 Business Plan is on track
• Liquidity and capital remain solid
• DBRS rates Intesa San Paolo at A (low) with a Negative trend

From DBRS Rating Limited's (DBRS) perspective, Intesa San Paolo’s (ISP or the Bank) results for 2014 confirm the progress achieved under the 2014-2017 business plan. ISP returned to profit in 2014, following a loss in 2013 which incorporated goodwill/ intangibles impairment and higher provisioning in 4Q13. Net profit for the full year 2014 totalled EUR 1.3 billion vs. a loss of EUR 4.6 billion in 2013. On a quarterly basis, net profit fell to EUR 48 million in 4Q14 from EUR 483 million in 3Q14 and reflected one-off staff costs and higher risk charges in Hungary.

ISP’s 2014-2017 business plan began to deliver results in its first year. The strategic focus on assets under management, combined with new commercial initiatives within the domestic retail business, together supported the Bank’s revenue expansion in 2014. In parallel, improved risk management processes helped to mitigate the Bank’s cost of risk.

Despite deleveraging in the loan book and reduced earnings from the securities portfolio, net interest income improved by 3% on an annual basis and benefitted from a combination of lower funding costs and successful loan re-pricing. Concurrently, net commission and fee income rose 10% QoQ and YoY, reflecting strong growth in asset management activities. At December 2014, ISP’s assets under management increased to EUR 302 billion (+4% QoQ, +17% YoY) with growth arising from both market performance and new inflows. The latter benefitted from ISP’s strategy of encouraging customers to shift into investment products from deposits and assets administered by the Bank.

Underscoring ISP’s ongoing risk management efforts, the Bank’s total cost of risk improved to 134 bps in 2014, compared to 207 bps in 2013. Loan loss provisions (LLPs) for 2014 fell 36% YoY and 17% QoQ. Despite lower LLPs, the Bank’s total coverage ratio improved to 46.8% as the Bank’s asset quality deteriorated at slower pace. ISP’s net impaired inflows (from performing loans) decreased to EUR 8.6 billion in 2014 from EUR 11 billion in 2013.

The Bank’s capital and liquidity position remained robust. At end 2014, ISP reported a pro-forma Common Equity Tier 1 ratio (Basel III fully loaded) of 13.3% and a leverage ratio of 7.1%, which compares well with domestic and international peers. In DBRS’ view, the Bank’s liquidity buffers remained solid despite the reduction in total unencumbered assets to EUR 63 billion in 4Q14 from EUR 81 billion in 3Q14.

Notes:
All figures are in EUR unless otherwise noted.