Increased HR Costs And Asset Quality Challenges Will Undermine Future Profitability

Key Takeaways

• Growth in wealth management fees and successful sales of nonperforming portfolios enhance asset quality and revenue.
  
• Strategic pricing and cost management bolster net interest income, reduce risk, and improve net margins.
  
• High-interest rates, increased HR costs, asset management challenges, and reliance on fee growth could hinder revenue and profit sustainability.

Catalysts

Engages in the provision of retail and commercial banking services in Italy.

• The solid growth in wealth management fees, up by almost 20% year-on-year, sets a foundation for continued revenue growth, capitalizing on strategic business plan assumptions.
  
• The adoption of a selective pricing strategy to optimize deposit costs while maintaining a focus on asset under management growth is expected to enhance net interest income over time.
  
• Successful sales of nonperforming exposure (NPE) portfolios, such as the recent disposal of a €300 million portfolio, improve asset quality and reduce risk, positively impacting net margins.
  
• The strong CET1 ratio of 18.3% indicates ample capital, affording strategic optionality and potential value-accretive acquisitions, which could drive earnings growth.
  
• Commitment to controlling operating costs through non-HR cost optimization, despite wage increases, suggests room for improving net margins by enhancing operational efficiency.

Banca Monte dei Paschi di Siena Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banca Monte dei Paschi di Siena's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 74.9% today to 32.3% in 3 years time.
• Analysts expect earnings to reach €1.2 billion (and earnings per share of €0.97) by about December 2027, down from €2.7 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.9x on those 2027 earnings, up from 3.0x today. This future PE is lower than the current PE for the IT Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 0.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.75%, as per the Simply Wall St company report.

Banca Monte dei Paschi di Siena Future Earnings Per Share Growth

Risks

• A potential risk is the 2.1% decrease in total net loans amid a high-interest rate environment, which could negatively impact future revenue growth as demand softens.
  
• The impact of labor contract renewals is already increasing HR costs, which could further pressurize net margins if not offset by continued cost optimization initiatives.
  
• With the ECB funding reduced to just 7% of total liabilities and generally high liquidity ratios, any misstep in liquidity management could hinder capital efficiency and potentially affect earnings.
  
• The ongoing disposal of nonperforming exposures (NPEs) reflects persistent asset quality challenges, and any failure to effectively manage asset quality could increase cost of risk, affecting net profit.
  
• Heavy reliance on fee and commission growth, particularly wealth management, to drive revenue means a slowdown or competitive pressure in these areas could threaten sustained profitability growth rates.

Valuation

• The analysts have a consensus price target of €6.91 for Banca Monte dei Paschi di Siena 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 €7.83, and the most bearish reporting a price target of just €6.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €3.9 billion, earnings will come to €1.2 billion, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 11.7%.
• Given the current share price of €6.47, the analyst's price target of €6.91 is 6.5% higher. 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.