Intesa Sanpaolo is the largest banking group in Italy, also with presence in East Europe, Russia and Egypt.

It’s a bit unusual bank as its main revenue generator is assets management and insurance, strategy that has worked very well in a low interest economy.

The company is one of the best capitalized banking group in Europe, allowing acquisitions and large dividends close to 10%

Carlo Messina (Intesa CEO) is often considered among the top world bankers with Jamie Dimon

Why should you be interested in this company?

European Banking industries has suffered tremendously during the last decade. Every small crisis in Europe was a roadblock in their way to recover previous feasts.

Intesa, being part of this economy, had to cope with multiple problems:

  • Low interest rates
  • Low growth economies
  • Very indebt countries
  • High default rate in 2009 and 2012 created a huge NPL (Non Performing Loans portfolio)

This situation has limited its share price expansion, but it didn’t affect its ability in creating huge profit and distributing large dividends in the last 5-6 years.

This is an amazing achievement if you compare with most of the large banking groups in Europe, and those below might be its secrets:

  • Best top management in Europe
    • Carlo Messina is often considered in the top world banker with Jamie Dimon
    • This is Intesa’s biggest competitive advantage
  • Very well capitalized with a CET1 above 15%
  • Efficient structure with the cost/Income below 50%, only Spanish banks can compete
  • Multiple services models where Asset management and Insurance are dominant in its revenue generation
  • Timely and ad-hoc acquisitions to create synergies and add revenue

My “Fab 4 “

  1. Free Cash Flow yield higher than 10%
    1. in the banking, FCF is not used, so the most similar one is the Net Profit
    2. today Intesa is projecting to generate 6B€ Net Profit in 2023 with a 45B€ capitalization
  2. Debt or Financial solidity
    1. As mentioned, Intesa is one of the best capitalized banks in Europe
    2. Only Swedish banks have higher CET1
  3. Strong and trusted management
    1. Carlo Messina is the best CEO in the banking system
    2. His leadership and vision have created value for the company and for the whole Italian economy
  4. Margin of safety
    1. It’s easy to understand that Covid has depressed companies evaluation for the European banking system
    2. 2021 is a perfect year to start a position and wait for a potential inflation and interest rate increase

 

Risks

As in every investment, there are some risks associated. Here the main ones:

  • Banking system is the first one to be affected in any crisis
  • Even inflation could be negative if it grows too fast too high, causing high default rates among credit

 

Conclusion

Even in those difficult times, Intesa was able to keep distributing large dividends and expanding its business. The smartest always get stronger.

Moreover, if inflation comes and interest rates get reasonable around 2-3% in the mid-terms, Intesa could increase its Net Profit 2-3%, with a potential share price increase and a big bump in its dividend