While The Mediobanca Merger Will Drive Value Creation, Execution Risks Could Impact Profitability

Key Takeaways

• The merger with Mediobanca is expected to catalyze growth through a diversified product offering and expanded market reach, boosting revenue and operational efficiency.
  
• Strategic focus on wealth management growth and cost optimization could improve net margins and enhance earnings sustainability amidst varying interest rate scenarios.
  
• Declining interest income and cost pressures, along with reliance on asset management and merger execution risks, could impact profitability and future earnings growth.

Catalysts

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

• The innovative business combination with Mediobanca is positioned as a major catalyst for future growth, expected to drive industrial development and value creation. This could significantly impact revenue growth as the merger could lead to a more diversified and complementary product offering and market reach.
  
• The focus on wealth management and advisory, which experienced 19% growth year-on-year, indicates a strong strategic direction and could continue to drive an increase in fees, thus positively impacting future net margins and earnings.
  
• Plans to optimize the cost of funding could potentially improve overall profitability, with a forecasted improvement to funding costs. This would help sustain net interest income and provide a buffer against the anticipated interest rate scenario.
  
• Strategic emphasis on improving the cost-to-income ratio through effective cost management and non-HR cost optimization suggests potential for increasing net margins further, enhancing earnings sustainability.
  
• The anticipated synergies from the Mediobanca merger, estimated at €700 million, are expected to drive significant value creation through expanded revenue streams and operational efficiencies, likely resulting in an enhanced earnings outlook and accelerated growth trajectory.

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 2.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 53.9% today to 32.7% in 3 years time.
• Analysts expect earnings to reach €1.3 billion (and earnings per share of €1.01) by about March 2028, down from €2.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, up from 4.3x today. This future PE is greater than the current PE for the IT Banks industry at 7.7x.
• Analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.53%, as per the Simply Wall St company report.

Banca Monte dei Paschi di Siena Future Earnings Per Share Growth

Risks

• The expected decrease in net interest income due to the interest rate scenario suggests a potential decline in future revenue streams, as a high single-digit decline in net interest income is anticipated.
  
• The anticipated slight increase in costs, driven by investments in technology and the full impact of a new labor contract, may pressure net margins unless offset by corresponding revenue growth.
  
• The focus on maintaining cost discipline amidst inflationary pressures could prove challenging, potentially impacting profitability if costs outpace revenue growth.
  
• Declining asset management inflows or challenges in sustaining fee revenue growth could affect earnings and buffer losses in net interest income, highlighting reliance on this income stream for profitability.
  
• Synergies from the merger with Mediobanca carry execution risk, with potential revenue dis-synergies due to operational distractions, impacting future earnings if not managed effectively.

Valuation

• The analysts have a consensus price target of €7.462 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 €8.7, and the most bearish reporting a price target of just €6.35.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €3.9 billion, earnings will come to €1.3 billion, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 10.5%.
  
• Given the current share price of €6.68, the analyst price target of €7.46 is 10.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.