UBS | After a few weeks spent focusing on systemic concerns, earnings should offer a chance to go back to fundamentals. We are cautious into results as the recent rally left both banks trading on richer multiples and thus with limited protection against a quarter where underwhelming earnings could lead to consensus downgrades. We also think this quarter is particularly important as it should provide incremental information on the main topic of the market debate: capital (in terms of dividend sustainability for Intesa San Paolo and buffer vs minimum requirements for UniCredit). Moreover, conference calls will likely also offer an opportunity to learn more on the latest system-wide initiatives. We expect a flood of questions on the missing pieces of Atlante, namely: capital treatment of the stakes in the fund, use of leverage, transfer prices of NPLs and who will be selling NPLs.
Revenues: a difficult quarter, all about fees
1Q16 was almost a “perfect storm” for revenues but the main focus should be fees. As flagged in our initiation , fee growth is challenged by weak flows and difficult markets. 1Q16 is likely the worst in the year and we expect fees down YoY and QoQ. Thi s could lead ISP to soften its 10% fees growth guidance (UBSe +4%). Net Interest Income was likely affected by calendar effects and by margin pressure not fully offset by still weak volume growth.
Other lines and asset quality: nothing exceptional
In a quarter without sig nificant (announced) NPL disposals we will see if UniCredit can organically reduce domestic NPL growth. This will be key in the near term also considering the likely cooling-off of the NPL market while waiting for Atlante. We see provisions gradually improving and we expect costs roughly in line YoY. We are not aware of any significant one- off for Intesa San Paolo; however mind the SRF/DGS contribution (mostly charged in 1H) when annualising 1Q16 results.
Capital: unlikely to see much organic generation
Capital built unlikely to be large in the quarter due to subdued earnings and dividend accrual. For Intesa this should be more than net income and therefore CET1 could only improve/remain flat by decreasing RWA. Something we think is difficult for UCI given recent performance (RWA –5% in 2015). We will also be interested to see if banks start to discuss possible measures (e.g. disposals) to offset the likely impact of Atlante.
*Image: Flickr / Gaetano Virgallito.