Technological Investment To Boost Bank Efficiency But Macro Uncertainties Loom Large

Key Takeaways

• Intesa Sanpaolo's investment in technology and workforce restructuring aims to enhance efficiency, net margins, and overall earnings.
  
• The bank's strategies in wealth management, capital generation, and hedging aim to boost revenue, shareholder value, and stability.
  
• Potential threats to revenue include reduced net interest income, costly tech transformation, fee growth dependency, staff cuts, and macroeconomic unpredictability.

Catalysts

Provides various financial products and services primarily in Italy.

• Intesa Sanpaolo is significantly investing in technology, with €3.5 billion already deployed and further investments planned, enabling the bank to improve efficiency and reduce operating costs, potentially enhancing net margins.
  
• The bank expects substantial cost savings from a generational workforce change, planning 9,000 exits that will save around €500 million over the next few years, which will positively impact net margins and overall earnings.
  
• With plans to further strengthen its Wealth Management & Protection business, including hiring additional advisors, Intesa Sanpaolo anticipates continued growth in fees and commissions, directly boosting future revenue streams.
  
• The bank is executing a strategy to maintain strong capital generation, including potential significant share buybacks and a robust dividend yield, which could enhance earnings per share and shareholder value.
  
• A resilient hedging strategy and a focus on leveraging internal synergies without relying on acquisitions provide a basis for stable revenue and profitability, especially as the bank navigates a fluctuating interest rate environment.

Intesa Sanpaolo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Intesa Sanpaolo's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 35.2% today to 33.2% in 3 years time.
• Analysts expect earnings to reach €9.0 billion (and earnings per share of €0.45) by about November 2027, up from €8.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €10.2 billion in earnings, and the most bearish expecting €7.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2027 earnings, up from 7.8x today. This future PE is greater than the current PE for the GB Banks industry at 13.0x.
• Analysts expect the number of shares outstanding to grow by 3.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.91%, as per the Simply Wall St company report.

Intesa Sanpaolo Future Earnings Per Share Growth

Risks

• A potential reduction in net interest income from a predicted average Euribor of 2% might impact overall revenue, as management anticipates earnings sustainability based on hedging and trading opportunities.
  
• While a technological transformation may yield future efficiencies, the associated costs could offset these benefits in the short term, potentially affecting net margins.
  
• The bank's reliance on fee and commission growth, particularly with interest rates expected to decrease, poses a risk if market conditions don't support the projected double-digit growth, impacting fee-based revenue streams.
  
• The planned staff reduction and related cost-cutting measures might face implementation challenges, which could delay anticipated cost savings and impact future earnings.
  
• Exposure to unpredictable market conditions and continued macroeconomic uncertainties, including those related to geopolitical factors, could adversely affect revenue through unexpected changes in cost of risk.

Valuation

• The analysts have a consensus price target of €4.53 for Intesa Sanpaolo 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 €5.0, and the most bearish reporting a price target of just €3.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €26.9 billion, earnings will come to €9.0 billion, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of €3.86, the analyst's price target of €4.53 is 14.9% 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.