March 17, 2013 4:50 pm

Italian banks: valuation gap

Underlying picture of last week’s results at Unicredit and Intesa was bleak

A troubled economy, electoral stalemate and a central bank talking about higher bad loan provisions and lower dividends. No wonder Italy’s banks are the cheapest in Europe. Unicredit and Intesa Sanpaolo, the two biggest, trade on multiples of 0.5 and 0.6 times forecast tangible book value respectively, against an average of about 1.0 for the European banking sector. Even Spain’s banks attract higher multiples. Much of the damage is recent. Shares in Unicredit and Intesa are down 5 per cent and 17 per cent respectively in the past year, against a 12 per cent rise in the FTSE Eurofirst banking index.


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But does not Warren Buffett tell us to be greedy when others are fearful? Is this not the time to grab a bargain? Bringing the two Italian banks’ ratings into line with those in Spain would add 60 per cent to Intesa’s share price and almost double Unicredit’s.

Anyone buying now would have to have at least a shred of confidence that results from the two last week offered glimmers of hope that better times are ahead. For the optimists such glimmers were indeed there. Operating income at both banks edged up, they have been cutting costs, and their Basel III capital ratios – 10.6 per cent for Intesa and 9.2 per cent for Unicredit – look comfortable enough.

But the underlying picture was bleak. Bad loan provisions rose by a 10th at Intesa and two-thirds at Unicredit (although bulls would argue that such provisions are a lagging indicator). Income from interest and fees fell at both banks. The increases in operating profit were the result of a big jump in trading income at Intesa and bond buy-backs at Unicredit. There is no guarantee that either can be repeated. With so much uncertainty swirling around Italy, it is possible that the valuation gap with other European banks will be closed not by rising share prices but by further falls in earnings.

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