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Banco Bpm outperforms the objectives and relaunches on bad loans

04 June, Market Insight

Banco Bpm closed its first year since its constitution, 2017, with results better than expected, and it managed to outperform almost all the objectives while setting new and challenging targets at the same time. Among these, there are the optimization of the corporate structure, the significant cut of the impaired loans through the equity increase, the relaunch of profitability whose focus shifted towards commissions and operational efficiency.

Let’s proceed in order remembering that in the last 17 months Banco Bpm carried out a complex migration for the redesign of its IT system as planned for the next quarters. The step is included in an integration process between two very different companies such as Banco Popolare, already the product of a series of complicated mergers, and Bpm, which in the last few years had overcome with determination the challenges of the market.

Two very different realities both in terms of history and way of operating, even though both have originated from two “old” cooperative banks of Italian banking. The leadership is based on two main drivers. The first is asset management and insurance, with the transfer respectively of Aletti Gestielle to Anima – of which Banco Bpm remains the main shareholder with a 15% stake – and a 15- year partnership with Cattolica Assicurazioni, as well as with the private banking activity currently provided by Banca Aletti.

The second driver is the corporate area, divided in turn into two segments, medium-large companies and big corporations, along with the investment banking services of Banca Akros, recently enhanced with the constitution of a M&A team.

Such organisation has been achieved after a long work according to a set roadmap leading the recovery process and the development of the new group and setting ambitious targets on the medium term. The 2019 business plan includes these objectives, as well as the progressive reduction of bad loans, where the bank achieved brilliant results in the first phase of the program. The results positively surprised the investors, as they outperformed the set targets, undoubtedly improving the risk profile of the group.

On the starting date of the project, 1st January 2017, the group was burdened with NPL for nearly 19 billion. After only 18 months, through transfers and the active management of the portfolio, the band loans dropped to approximately 10 billion, considering the securitisation for 5 billion currently in process which is meant to take place in June.

A lot of work, and it’s not over yet. There is still the transfer for other 3.5 billion NPL to reach the 13-billion objective that the Ceo Giuseppe Castagna set at the beginning of the year, starting from the 8 billion set in the initial plan. If the market conditions are favourable, such objective might be changed and raised even higher.

These achievements have been possible thanks also to the restructuring of the group which permitted to increase the equity for about 2 billion, together with the adoption of risk assessment internal models.

Giuseppe Castagna, Banco Bpm Ceo, profiles the drivers for the growth

“We’ve figured out a development path for the next years, whose milestone is represented by the 2019 business plan. The bank is proceeding according to what is set in the plan and the results are rather comforting. General situation permitting, the path ahead is clear and we can meet, even exceed, the expectations of the plan, even though with some adjustments due to the corporate reorganisation”, comments Giuseppe Castagna, Banco Bpm Ceo.

The drivers for the growth will be supported by the development of the asset management division, the results of the new joint venture with Cattolica concerning insurance, and the consolidation of the activities in the corporate sector.

“The first phase of the plan, on which we worked in 2017, concerned the reorganization of the group. The second phase of the operational reorganisation will start in 2018 and it will set the foundations for our development. At the same time, we’ll focus on the de-risking activity. So far, we’ve brought the bad loans down by 5.4 billion, having these dropped to 24.6 billion at the end of the first quarter of 2018 and they’re expected to further reduce by 5 billion by June with the securitisation”.

2017, first year of the company: reorganisation completed and set the foundation for growth

“2017 was the first year of the company, during which we were completely absorbed by the internal reorganisation. A tough work, done in a short time, that led us to overcome many operational challenges and that reshaped the group. In this period, we worked on raising the necessary capitals to implement the ambitious de-risking plan we announced to the market”, explains Castagna.

“In only 12 months, we managed to redefine the insurance division through the strategic partnership with Cattolica Assicurazioni, we sold the asset management business Aletti Gestielle to Anima, yet keeping a 15% stake, and we completed the migration to an IT platform shared by the whole group, an essential condition for the global management of the various networks”, lists Castagna.

“As a result, we’ve been able to achieve a 1.3 billion capital gain which, summed to earnings for about 700 million originated from the internal risk- assessment models, allowed us to raise the two billion equity that the market deemed necessary for the implementation of our plan”, comments satisfied Castagna, stressing that “we’ve internally created the necessary resources, without requesting them on the market, and we still have reserves. Hence, there is no need for a capital increase”.

The de-risking program is the foundation of the plan

“We’ve soon realized that in order to meet the market’s expectations we’ll have to anticipate the deadlines of the de-risking program. For this reason, we focused on transfers and on improving the bad loan management. In this way, we’ve been able to reduce by 5 billion the NPL stock in the first year from the start of the plan.

A positive result that, along the solid capital indicators, allowed to increase the NPL reduction target from 8 billion to 13 billion.

We’ll complete the securitisation of 5 billion by June, bringing the bad loan reduction to 10 billion after one year and a half since the launch of the plan. It’ll be a crucial step and we hope that it will lead to a revaluation of the shares on the stock exchange. Investors have positively judged our program, but we believe that the shares could be de-rated as we proceed with the business plan.

By completing the securitisation of bad loans for 5 billion, we’ll be able to look forward and set new objectives”, anticipates the Ceo.

Ready to further improve the NPL reduction targets

“The Intesa-Intrum operation has made a difference in the industry. After the agreement was announced, many operators made us too interesting offers for our platform”, says the Ceo.

Whenever deemed appropriate, Banco Bpm might replicate the same strategy adopted by Intesa, namely selling the servicing platform together with an NPL portfolio. The dimension of such portfolio might be also big, over 3 billion, namely the amount left after the securitisation in order to achieve the 13-billion target.

“We’ll be ready to take advantage of the momentum to proceed even more quickly with the NPL reduction. For this reason, we’re open to evaluating the opportunities that might arise to speed up the process and outperform the objectives of the plan”, repeats Castagna.

A solid capital with some internal reserves to strengthen the Cet1

The de-risking plan will be paired with the strict monitoring of the capital. The objective included in the program, coherent with the target of 8 billion impaired loans, was to achieve a fully phased Cet1 equal to 13% by 2019.

Now the bank has set an undoubtedly more ambitious goal and keeps a tight control on the balances.

“We took advantage of the first time adoption period granted by the new accounting principle Ifrs9, as of 1st January 2018, to set aside 1.25 billion necessary to increase the transfer plan which is totally risk-free regarding economic impact since the beginning of the year”, explains Castagna. “The impact of these provisions on Cet1 will be of 180 basis points against a capital generation of 200 basis points in 2018”.

According to the forecasts, as well as some operations already agreed that will impact the figures in the second and third quarter, such as the transfer of the depository bank and that of the insurance division to Anima, the fully loaded pro-form Cet1 is set around 12% for 2018, above the Srep requirement of 8.875%.

Flexibility in the generation of capital

“We benefit from a certain flexibility thanks to some potential operations that we might implement if we want to strengthen the capital to increase the re-risking activities”, notes the manager.

2018 is the year of reorganisation and commercial relaunch

“After the restructuring phase concluded in 2017, this year we’re focused on the group’s reorganisation, thanks to the centralisation of the IT network and the incorporation of the Bpm branches.

From a commercial point of view, we’ve started this year as only one bank, and we’ve been able to figure a new territorial organisation. This work involved 10,000 employees, 3,000 of which cover now new roles, consistent with the plan of reducing resources and branches.

We expect excellent commercial results from this reorganisation”, says Castagna, “the foundation for the restructuring was the focus on customers. The local managers got more commercial, decisional and pricing power to take quicker and more effective decisions regarding the clients’ needs”.

Asset management and insurance will grow in the second part of the year

“In the first quarter of 2018, commissions have been lower than those for the same period of 2017 for a series of reasons. But we expect to recover in the next quarters. Hence, we confirm our collection targets.

I believe that we’ll be able to fill the gap in the commissions”, anticipates Castagna, explaining the reasons for the slow down: “we must consider that the reorganisation of the network and the many changes of roles of the staff initially led to an adjustment phase. Moreover, these results can be partly explained by the change in the approach towards the product. Once the attitude was to favour up-front commissions, now the focus is on the recurrent fees of the portfolio.

The benefits of this change will be visible later on. Finally, there has been a natural slackening in the insurance division since the new joint venture with Cattolica, named Vera, started only in April. We expect great results. Besides, we’ll be presenting new damage and healthcare insurance products to meet the customers’ requirements better. Let’s not forget that in the first quarter of 2017 the commissions were particularly high due to the stall of the commercial activity registered at the end of 2016 due to the merger”.

Stronger investment and private banking thanks to Banca Akros and Banca Aletti

“To complete the corporate organisation, we’ve profiled the role of Banca Aletti which will operate in private banking, while Banca Akros will play the part of the investment bank for the group.

In Banca Akros, the M&A team has been strengthened. We offer now a full range of services addressed to mid-cap companies, obtaining already the first mandates.

Meanwhile, the corporate area has remained internal to the bank, even though enhanced by an origination team. There is a critical pipeline whose results will come next. Also, we’ve introduced in the international markets divisor a new manager with an international background.

The interest margin is growing for the fifth quarter in a row

“The interest margin has been showing positive results for the fifth quarter in a row, also without counting the elements of discontinuity due to the introduction of the Ifrs9”, observes the Ceo. “An important contribution has come from the cost cuts in funding originated from the stock of obligations of the former Banco Popolare, which had very high costs. These obligations will be renewed only in part when they will reach the maturity through a gradual process that made possible already in the first year to save the amount expected to save in the next three years”.

There are still negative and positive aspects of the market, also because the expected recovery of the interest rates hasn’t happened yet, while the spread remains under pressure. “The problem is the little demand for credit which keeps the completion on prices very high”, notes Castagna.

The targets are confirmed

“The activity trends show that we’re aligned the expected growth of the profits included in the business plan, considering though some discontinuity, such as the transfer of business divisions and a different forecasted scenario concerning interest rates (especially regarding the Euribor returning to the positive sign in 2019)”, explains the Ceo. “We’ll be able to meet the set targets, even though with a different mix of the components in the income statement. The profits will be slightly lower than expected due to the little growth of credits, although the interest margin is still good. The trend of commissions, net of the effects of the transfers, will be aligned with the plan, while the costs will further reduce”.

More in detail, the saving made possible with the merger, initially assessed in the three-year plan around 320 million, has been raised to 400 million. In two years, 170 branches have already closed, and other 312 are planned to close by June. In this way, we’ll be already 44% ahead of the plan for 2019. Besides, also the staff reduction plan is ahead of schedule.

“Also concerning risk, which was assessed at 63 basis points in 2019 with an 8-billion reduction of NPL, will likely report a better performance since the NPL reduction will be higher than planned”, clarifies Castagna.

The analysts: “buy” prevails

Deutsche Bank confirmed its “buy” recommendation with a target price of 3.8 euro after the presentation of the results for the first quarter of 2018, which “showed a further progression in the reduction of the NPL stock thanks to the capital management operations. The target NPL ratio set for 2020 is “perfectly feasible”.

Equita Sim kept the “buy” rating with a target price of 3.9 euro after the quarterly results, as the bank has “a considerable capital buffer supporting its acceleration of the de-risk process after having shown already a lot of progress”.

Intermonte hasn’t changed its rating of “outperform” with a target price of 4.40 euro after the first three months results, “aligned with our expectations. The results obtained confirm the considerable progress in improving the quality of the assets thanks to the excellent work made by the management. This process is meant to accelerate even more with only a limited impact on productivity. For the next quarters, we expect that the banking income will benefit from the commercial strategies and the partnership in the insurance division”. Due to the political crisis, prices fell to 3.60 euro.

Goldman Sachs confirmed its “buy” recommendation with a target price of 4 euro, thanks to “the improved quality of the assets”. After the recent political events that caused the Btp-Bund spread to increase, the rating was changed into “neutral”, and the target price dropped to 3.30 euro.

Finally, we must note that, of the 13 brokers considered by Bloomberg, more than the half recommended to buy the shares.

Stock exchange: the shares grew by over 30% since their debut before the political crisis

Banco Bpm, born from the merger between Banco Popolare and Bpm, debuted on Piazza Affari on 2nd January 2017.

Since the first day of trading, the shares registered progress for about 5%, while the Ftse Italia Banche and the Ftse Mib gained respectively 10% and 16%.

We must keep in mind, however, that all the shares of the financial segment were impacted by the political uncertainty connected to the new government that caused a dramatic spike in the Btp-Bund spread.

Without considering the last weeks of May, the shares were valued over 30% higher from the first day of trading. Throughout this period, the Banco Bpm outperformed the Ftse Mib and the Ftse Italia Banche till October 2017, reaching the highest peak of 3.51 euro on 29th September 2017.

Investors mainly appreciated the acceleration in the de-risking operations that will make possible for the bank to reach way ahead of schedule the Npe ratio set on the business plan. Moreover, the market liked the reorganisation of the various business divisions.

Source: Market Insight

Translator: Cristina Ambrosi

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