Italian banks: It’s the end of the world as we know it

Italian banks face some M&A action in the coming months. As BNP analysts commented on Friday:

We are not fazed by the strong rerating YTD as all popolari banks but UBI are still trading below standalone fair values (2015e P/TBV of 0.5x-0.7x). Adding M&A into the framework leaves plenty of upside for all these stocks in our view. Wheels are in motion, the wishes of the government/ECB are clear and we believe mergers will take place regardless of whether or not the government decree will be approved by parliament (by March 25). Rather than speculate on potential targets or acquirers, we believe the best investment strategy is to own more than one popolare bank stock in order to capture the value creation that is likely to emerge in the sub-sector (NPV of synergies). We retain O/P ratings on BPM, BP, BPER and CREVAL and a N/T rating on UBI.

Starting 2015 with a blank sheet

We expect Italian banks to book all/the bulk of the residual AQR provisions in Q4. In our view the AQR has drawn a line under the issue of NPL coverage as collateral values were thoroughly checked by the ECB. With the exception of BMPS, which will launch a rights issue in 2015, the capital ratios of all banks under coverage are in our view adequate.

Poor earnings momentum must take a back-seat

We have expressed concerns about the prospective profitability of Italian banks several times in the past and today reduce our 2015-17e adj. EPS estimates by a further 5% on average. However, investor sentiment should improve as the Italian economic recovery takes hold and the prospect of domestic consolidation is now the primary driver of share prices for most stocks.

Downgrading CREDEM to Neutral

CE remains attractive over the medium term, but we see better value elsewhere. ISP and UCG are trading close to fair value; we have N/T ratings on both but retain a preference for the former. We remain O/P on BMPS; visibility will remain low until Q4 results, but the stock is simply too cheap.

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