Intesa’s $25bn pledge fails to wow well-served investors

Bloomberg

Europe’s biggest bank payout-plan failed to excite investors who’ve grown accustomed to fat payout ratios and dividends at Intesa Sanpaolo SpA.
The Milan-based lender said it will disburse more than 22 billion euros ($25 billion) to shareholders through 2025. While that put it ahead of Italian rival UniCredit SpA in the contest to offer Europe’s bank investors the most generous returns, it was mostly in line with estimates.
“Intesa’s targets are good, but were already included in the bank’s high valuations that reflect its excellent performance and returns,” said Stefano Girola, a portfolio manager at Alicanto Capital SGR.
Chief Executive Officer Carlo Messina, who has long lured investors with one of the most generous dividend policies among European banks, is seeking to ramp up the incentives for investors amid rising competition on the payout front from European rivals. In December, UniCredit SpA’s chief executive Andrea Orcel pledged a 16-billion-euro payout over four years through 2024 as part of his first strategy revamp.
Intesa plans to pay out 70% of annual earnings to shareholders through cash dividends on earnings generated over five years through 2025, according to a statement. This year it will buy back 3.4 billion euros of shares, it said. The bank also reported better-than-expected quarterly earnings.
Intesa’s plan also aims to cut costs, curb risk and boost fee-based businesses to improve cost-to-income ratio to 46.4% in 2025 and generate a net income of 6.5 billion euros in 2025 with a return on tangible equity of 13.9%.
Banco Bilbao Vizcaya Argentaria SA, Spain’s second largest lender, has increased its payout target to between 40% and 50% of profit, and investors are awaiting news next week from France’s BNP Paribas SA, which is weighing an increase in shareholder returns as part of a new strategic plan.
Strong value creation and distribution will continue to be Intesa’s priority, “with growing cash dividends year by year,” Messina said in a conference call with analysts, adding that additional returns will be evaluated from 2023.
The lender also joins European peers in closing branches as part of a shift to online banking and more flexible working after the pandemic changed client and customer habits. The firm is targeting structural cost reductions by closing 1,500 branches and moving mass
retail clients to online banking.
The bank has already announced agreements with unions for the exit on a voluntary basis of 9,200 people by 2025 as 4,600 people would join by December of that year.
Intesa is pursuing a digitalisation strategy, through 6.5 billion euros of investments through the plan period, while also pushing ahead with its de-risking plan. Its non-performing loan ratio is expected to fall to 1.6% in 2025 from 2.4% as of the end of December. The common equity Tier 1 ratio, a key indicator of banks’ financial strength, is targeted to be above 12% over plan horizon.
Messina’s pivot to focusing on wealth management, private banking and insurance has given Italy’s biggest bank alternative sources of growth while interest rates remain low.
These businesses will remain key in the next few years as he seeks to boost fee-based revenue that bring higher returns.
The chief executive, who led a takeover of smaller rival Unione di Banche Italiane SpA in 2020 to cement the bank’s market-leading position, is targeting up to 20.8 billion euros in revenue by 2025, with growth driven by capital-light activities, which will spur annual fees by 3.9%.
The lender posted net income of 179 million euros in the three months through December, compared with estimates for profit of 107 million euros, according to a statement on Friday. Revenue was also higher than expected. The earnings represented a rebound from a year earlier, when the bank booked a net loss of 3.1 billion euros.
The bank said it expects net income of about 5 billion euros this year, after meeting its target for 2021 of more than 4 billion euros.