Shrinking Margins Will Cause Earnings Decline Despite Project NEXT And Recruitment Efforts

Key Takeaways

• Banca Mediolanum's focus on fee-based revenues and fixed income funds could sustain margins and enhance positive revenue and earnings growth.
  
• Strong capital foundation and training initiatives aim to support long-term growth, maintaining dividend distribution and favorable shareholder returns.
  
• Strong growth in net commission income and managed assets inflows highlight Banca Mediolanum's solid market position and potential for continued revenue expansion and operational efficiency.

Catalysts

Provides various banking products and services in Italy.

• Banca Mediolanum's growth in net inflows into managed assets, driven by increased recruitment of Family Bankers and new customer acquisitions, suggests a potential for continued revenue growth, although this is subject to market conditions.
  
• The company's unique business model heavily focused on fee-based revenues is expected to sustain operating margins, even as net interest income declines due to changes in the yield curve, influencing net margins positively.
  
• Mediolanum's promotional campaigns and strategic shifts towards fixed income funds, complemented by strong net inflows, are likely to extend recurring fee growth, impacting revenue and earnings positively.
  
• The continuous recruitment and training programs, such as Project NEXT, aim to boost the productivity of Family Bankers, potentially enhancing sales efficiency and supporting long-term earnings growth.
  
• The strong capital foundation and a high CET1 ratio provide Banca Mediolanum the flexibility to sustain organic growth and maintain dividend distribution, which could favorably affect shareholder returns and support EPS stability.

Banca Mediolanum Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banca Mediolanum's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 56.2% today to 41.3% in 3 years time.
• Analysts expect earnings to reach €953.5 million (and earnings per share of €1.29) by about March 2028, down from €1.1 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 15.5x on those 2028 earnings, up from 9.6x today. This future PE is greater than the current PE for the GB Diversified Financial industry at 8.4x.
• Analysts expect the number of shares outstanding to decline by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.29%, as per the Simply Wall St company report.

Banca Mediolanum Future Earnings Per Share Growth

Risks

• There is significant growth in net commission income, which is up 13% to almost €1.17 billion, indicating strong revenue potential from fee-based activities even if net interest income were to decline. [Revenue]
  
• The company's ability to sustain growth in managed assets inflows, achieving a noteworthy increase in total net inflows of €10.4 billion (46% growth from last year), underscores its strong market position and potential for continued revenue expansion. [Revenue]
  
• Banca Mediolanum's cost-to-income ratio improved to 39%, demonstrating operational efficiency that supports net margins and operational profitability despite potential declines in net interest income. [Net Margins]
  
• With a high CET1 ratio of 23.7% and a solid capital base, the company is well-positioned to weather economic and regulatory changes, ensuring earnings stability and potential for future growth. [Earnings]
  
• The company's strategy of increasing its sales network and customer base supports long-term growth prospects, which may lead to sustained and enhanced revenue streams over time. [Revenue]

Valuation

• The analysts have a consensus price target of €14.42 for Banca Mediolanum based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.3 billion, earnings will come to €953.5 million, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 12.3%.
• Given the current share price of €14.6, the analyst price target of €14.42 is 1.2% lower. 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.