Insurbanking And Intermonte Expansion Will Heighten Earnings Cyclicality And Long-Term Business Risks

Catalysts

About Banca Generali

Banca Generali is an Italian private bank focused on wealth management, advisory services and investment solutions for affluent and high net worth clients.

What are the underlying business or industry changes driving this perspective?

• The aggressive expansion into investment banking and structured products through Intermonte significantly increases earnings cyclicality and reliance on capital markets activity. As a result, a prolonged period of muted deal flow or lower risk appetite for certificates and derivatives could prevent the targeted doubling of Intermonte net banking income and cap group revenue growth.
• The strategic push to internalize margins via in-house funds, Luxembourg wrappers and protected products heightens concentration risk in proprietary solutions. Any underperformance, regulatory scrutiny on product governance or misalignment with investor needs could trigger asset rebalancing back to third party products and compress fee margins.
• The Insurbanking initiative with Alleanza assumes steady penetration of a large insurance client base. However, operational complexity, slower than expected training of 2,700 potential financial advisers and possible channel conflicts could delay the planned EUR 7 billion of assets, limiting incremental advisory fees and net interest income.
• Expanding into the affluent segment and Swiss private banking with new senior bankers and young talent requires sustained recruitment and retention at attractive productivity levels. Any slowdown in net inflows or higher payout requirements could erode the currently low cost to income ratio and put pressure on net margins.
• The business model increasingly depends on rising assets under management and custody across wrappers, certificates and SME related services. Weaker wealth creation, smaller than expected generational wealth transfers or competitive pricing from larger banks could materially undercut the projected revenue uplift from Intermonte and Alleanza and weigh on long term earnings growth.

Assumptions

This narrative explores a more pessimistic perspective on Banca Generali compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Banca Generali's revenue will grow by 1.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 41.0% today to 41.3% in 3 years time.
• The bearish analysts expect earnings to reach €426.7 million (and earnings per share of €3.56) by about December 2028, up from €407.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.4x on those 2028 earnings, up from 15.8x today. This future PE is greater than the current PE for the GB Capital Markets industry at 13.0x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.47%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The bank is already delivering record recurring net profit with a cost to income ratio at one of its lowest levels and operating costs under tight control, which, if sustained, would support resilient earnings and could justify a higher valuation over time and therefore a higher share price through strengthened net margins and net profit.
• Management expects stable net interest income around EUR 320 million in both the current and following year, supported by rising deposits and a diversified bond portfolio with moderate duration. If realized, this would underpin recurring revenue and earnings rather than lead to a deterioration.
• The strategic initiatives with Intermonte and the Insurbanking partnership with Alleanza are positioned as transformative growth engines, targeting a doubling of Intermonte net banking income and EUR 40 million to EUR 50 million of additional net banking income from Alleanza by 2030. If these long term projects succeed, they could drive sustained revenue growth and improved operating leverage.
• Long term secular trends in Italian private banking, including growing assets under management, strong client inflows above EUR 6 billion and large generational wealth transfers, combined with Banca Generali’s growing presence in wrappers and in house funds, could support structural expansion of fee based revenue and higher earnings.
• The recruitment of both young talent and senior Swiss private bankers, alongside increasing specialization in areas such as sustainable advisory and corporate investment banking, may enhance productivity and deepen client relationships. This could translate into higher inflows, stronger fee revenue and more robust net margins over the long term.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Banca Generali is €44.7, which represents up to two standard deviations below the consensus price target of €57.31. This valuation is based on what can be assumed as the expectations of Banca Generali's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €67.0, and the most bearish reporting a price target of just €44.7.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €1.0 billion, earnings will come to €426.7 million, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 13.5%.
  
• Given the current share price of €56.65, the analyst price target of €44.7 is 26.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.