Delays In Danish Compromise Approval Will Hinder Capital Returns And Pressure EPS

Key Takeaways

• Reliance on acquisitions and regulatory approval challenges could pressure Banco BPM's revenue growth and earnings stability.
  
• Strategic shift towards non-interest income and shareholder remuneration depends on market conditions and regulatory approvals, impacting net margins and earnings predictability.
  
• Banco BPM's diversified model and strategic transactions enhance revenue streams, with improved cost management and stable growth boosting profitability and shareholder confidence.

Catalysts

Provides banking and financial products and services to individual, business, and corporate customers in Italy.

• The integration of Anima Group is expected to contribute an additional €200 million to Banco BPM's net income by 2027, indicating a reliance on acquisitions for revenue growth, alongside an uncertain Danish Compromise impact, which affects capital return plans. This could pressure earnings if regulatory approval is delayed.
  
• Banco BPM plans to achieve a return on tangible equity (RoTE) of over 24% by 2027, but the target is based on conservative assumptions and relies heavily on a shift towards a non-interest income model, which may face market volatility that could impact net margins and earnings predictability.
  
• The bank intends to distribute a minimum of €6 billion in shareholder remuneration over the plan period, contingent on achieving regulatory approvals, putting pressure on capital if requirements are not met, thus affecting earnings per share (EPS) stability.
  
• A forecasted decline in net interest income (NII) due to Euribor rate assumptions requires significant managerial action to mitigate, which could impact margins as reducing sensitivity to interest rate changes requires strategic and cost-effective funding maneuvers.
  
• Banco BPM's strategic plan assumes a steady increase in indirect funding and fee generation, dependent on favorable market conditions and consistent product factory performance, which if unmet could lead to a shortfall in projected fee and commission income, squeezing revenue growth.

Banco BPM Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banco BPM's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 36.9% today to 30.8% in 3 years time.
• Analysts expect earnings to reach €1.8 billion (and earnings per share of €1.17) by about March 2028, down from €1.9 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €2.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from 8.0x today. This future PE is greater than the current PE for the GB Banks industry at 8.5x.
• Analysts expect the number of shares outstanding to decline by 0.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.55%, as per the Simply Wall St company report.

Banco BPM Future Earnings Per Share Growth

Risks

• Banco BPM's transition into a diversified conglomerate with a strong integrated model could enhance its revenue streams, as 50% of its net profit is anticipated to come from commissions and product factories, positively impacting revenues.
  
• The bank's strong net income growth, reaching €2.150 billion by 2027, and its realistic, achievable targets suggest robust earnings potential, making a decrease in share price less likely.
  
• Banco BPM's proactive management and strategic transactions, such as the integration of Anima, are set to boost noninterest income and create a more balanced revenue structure, potentially increasing net margins.
  
• The bank's effective cost management strategies have led to a significant reduction in cost/income ratios and risk, likely leading to increased net margins and sustainable profitability.
  
• A strong track record of outperforming market consensus and exceeding its own targets, with a consistent increase in capital, implies a stable and credible growth trajectory, likely resulting in continued shareholder confidence and earnings growth.

Valuation

• The analysts have a consensus price target of €9.465 for Banco BPM based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €12.0, and the most bearish reporting a price target of just €7.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €5.9 billion, earnings will come to €1.8 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 10.5%.
• Given the current share price of €10.22, the analyst price target of €9.46 is 7.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.