Investment In Distribution And High-Margin Segments Will Drive Long-Term Profitability

Key Takeaways

• Strategic focus on investment in distribution and higher margin segments aims to boost revenue and improve net margins long-term.
  
• Efforts to enhance capital efficiency, including reducing RWA and share buybacks, are expected to increase EPS and returns on capital.
  
• Increasing costs from expansion and digital investments, high deposit expenses, and net interest income pressures may impact margins and profitability in the near term.

Catalysts

Provides various banking products and services in Italy and internationally.

• Accelerating investment in physical and digital distribution platforms is expected to underpin future revenue growth across Wealth Management, CIB, and Consumer Finance, potentially increasing revenue over the longer term.
  
• Mediobanca is focused on improving fee income, which has already seen a 30% increase year-on-year, driven by Wealth Management and CIB. This emphasis on higher margin segments could improve net margins over time.
  
• The company is actively working on reducing RWA (Risk-Weighted Assets) intensity, particularly in CIB, which could lead to higher returns on capital. This strategic focus on capital efficiency might enhance earnings in the future.
  
• The recent approval and initiation of a €385 million share buyback could boost Earnings Per Share (EPS) as the buybacks reduce the number of shares outstanding.
  
• Growth in Total Financial Assets (TFA) combined with a strategy to convert a greater portion of new inflows into higher margin managed assets (currently at 50% of TFA inflows) could lead to sustained higher fee income and net profits in the Wealth Management segment.

Mediobanca Banca di Credito Finanziario Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mediobanca Banca di Credito Finanziario's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 38.3% today to 34.3% in 3 years time.
• Analysts expect earnings to reach €1.4 billion (and earnings per share of €1.78) by about December 2027, up from €1.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.8x on those 2027 earnings, up from 9.4x today. This future PE is lower than the current PE for the GB Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 1.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.72%, as per the Simply Wall St company report.

Mediobanca Banca di Credito Finanziario Future Earnings Per Share Growth

Risks

• The company's investment in recruitment, opening new branches, and digital channels may temporarily increase costs, potentially impacting net margins and earnings.
  
• The negative trend in net interest income (NII) due to low credit spreads and deferred production in corporate loans could pressure revenue and profitability in the short term.
  
• Mediobanca's focus on growing assets under management (AUM) with ongoing deposit promotions might lead to higher deposit costs, affecting net interest income and overall margins.
  
• The slight increase in the cost of risk driven by a higher mix of personal loans could increase expenses and potentially reduce margins in the Consumer Finance division.
  
• The holding function's lower contribution to net interest income due to the interest rate environment could result in reduced earnings from this segment.

Valuation

• The analysts have a consensus price target of €15.83 for Mediobanca Banca di Credito Finanziario 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 €17.8, and the most bearish reporting a price target of just €14.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €4.1 billion, earnings will come to €1.4 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 12.7%.
• Given the current share price of €14.28, the analyst's price target of €15.83 is 9.8% higher.
• 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.