It is hardly a shock that the stock market valuations of Europe’s banks have slumped since the pandemic hit the region. Economic growth, the lifeblood of bank earnings, has tumbled into negative territory with the timing and strength of any bounceback uncertain. And losses — from credit cards to large corporate loans — are soaring.
But take a look at the relative valuations of those banks and you’ll spot something surprising. The most prized bank in the EU, measured by share price to book value, is now Italy’s Intesa Sanpaolo.
This is puzzling. Among European nations, Italy was hit first and hard by coronavirus. Its economy is forecast by the European Commission to shrink by 9.5 per cent this year, a far bigger decline than the 6.5 per cent projected for Germany, for example.
The economic malaise has reignited concerns about the solidity of Italy’s government finances. And like other Italian banks, Intesa is still highly exposed to the country’s sovereign debt. Lenders were caught in a “doom loop” during the eurozone crisis eight years ago, when investors took fright over their vast holdings of government bonds, at a time when there was widespread talk of a sovereign default. This month, rating agency Fitch downgraded the big Italian banks to BBB minus, one notch above junk bond status, in line with an earlier government bond downgrade.
Despite these pressures, the ratio of Intesa’s share price to book value — though low in absolute terms at just under 50 per cent — is still as much as double the valuation attached to domestic rivals such as UniCredit and European peers such as Barclays, Santander and BNP Paribas.
Fans of the bank cite the strength of its fee-earning businesses such as asset management and private banking. Its insurance business has boomed, and the health insurance arm may actually benefit from a post-coronavirus pick-up in business, with more people expected to buy policies. Intesa also has stronger capital ratios than many rivals.
Carlo Messina, Intesa’s upbeat chief executive, highlighted the positive when he unveiled results for the first quarter a few weeks ago. The bank even promised a huge dividend payout — 75 per cent of earnings — this year, subject to regulators lifting their ban on payouts.
Striking an optimistic tone is one thing. Being blasé is another. Intesa took barely €800m of loan loss provisions in the quarter. UniCredit, despite being less exposed to the domestic Italian market, set aside €1.3bn.
Analysts at Jefferies point out that Intesa’s forecast credit losses, via its “cost of risk” projections, are far more upbeat too. While UniCredit is expecting a cost of risk of up to 2.4 per cent on its Italian loan book, Intesa is forecasting less than 1 per cent across the board. Some of the difference may be justified by better quality lending, but there seems to be a big leap of faith here too.
At the same time the bank’s trading operations have been thriving, but in part at least, this is because they have been taking on more risk. Jefferies highlights the tripling of “value at risk” in Intesa’s investment bank last year. The value of financial assets on its balance sheet — including corporate bonds for proprietary trading — jumped by nearly a half in that time. In its defence, Intesa has a consistently strong record in its markets and trading business. But even if it avoids problems from greater risk-taking, the market volatility that has helped drive the trading division’s recent outsized profits is unlikely to persist.
If Intesa is indeed painting a more rose-tinted view of the world than many peers, sceptics wonder if there is a particular reason why: the bank does not want to destabilise its unsolicited acquisition of local rival UBI. Intesa dismisses this. It has described the rationale for the €4.9bn bid as “even stronger” because of the coronavirus crisis. And indeed, in notoriously “overbanked” Italy, a combination of two of the top five lenders should give the resultant bank a commanding market share and deliver substantial cost savings. But success is not guaranteed: bank deals in the teeth of a crisis — as Lloyds-HBOS and RBS-ABN Amro would testify — have a nasty habit of turning sour.
Intesa might be fundamentally better run, with stronger capital and a stouter revenue mix than many rivals. But the outperformance would have to be extreme to offset all the headwinds it faces — recession, escalating bad debts and a big exposure to Italian sovereign bonds — and still justify a substantial valuation premium to every other bank in the EU.