As Italy's Banco BPM SpA exits a second insurance partnership, one team of analysts has raised doubts about the wisdom of the lender's new long-term strategy, suggesting that both earnings and capital generation are weakening.

The bank's Aug.25 withdrawal from Avipop Assicurazioni SpA, a joint venture with the UK's Aviva Plc, triggered a put option by the British insurer for its 50% stake. The deal comes after Banco BPM's decision earlier in August to sell Aletti Gestielle SGR SpA, an asset management company, to Anima Holding SpA, and the termination of a life insurance joint venture with Unipol Gruppo SpA at the end of July, prompting warnings from Berenberg analysts that BPM is hurting its long-term business potential for the sake of bolstering its capital base in the short term.

"Asset sales to boost its CET1 ratio come at the expense of long-term earnings. Considering the uncertainty about asset values and share count, we believe BAMI [Banco BPM] is a value trap," the researchers wrote in a note to investors on Aug. 25, assigning a "sell" rating to the stock.

The two insurance split-ups will cost the bank 74 basis points in common equity Tier 1 capital, due to its contractual obligation to buy out Aviva and Unipol, and the Aletti deal will increase its CET1 by 91 basis points, thanks to a total of €950 million due to be received in exchange for the subsidiary. As part of the Aletti sale, BPM is in talks to transfer a chunk of its insurance reserves to the buyer, in exchange for €150 million or roughly 15 basis points of CET1 capital, sacrificing however between €7 million and €9 million a year in income, according to the analysts.

Berenberg estimated BPM will finish 2017 with a CET1 ratio of 12.6%, up from 12.3% in 2016, while total revenues will drop to €4.66 billion in 2017 and €4.61 billion in 2018, from 2016's €4.73 billion.

Strategic reorganization

For its part, BPM said the changes are part of a "strategic reorganization process" of its insurance arm, promising that new distribution partnerships with other specialized insurers will yield significant efficiency gains.

BPM needs all the profits and capital it can get in the meantime, as it battles to eliminate a toxic loan portfolio amounting to more than a fifth of its book. Under pressure from the ECB, it has committed to selling €8 billion of nonperforming loans by 2019, having disposed of €2.5 billion already. But even if this target is achieved, the bank will be looking at a gross NPL ratio of 17.9% at the end of the program, which, Berenberg points out, is more than three times the European average.

"Banco BPM’s asset values remain uncertain with a gross NPL ratio of 22.6%, more than four times the European average," the analysts wrote. "We see a risk that BAMI is forced to reduce NPLs faster as reducing NPLs is one of the [ECB]’s explicit goals. As a result, we forecast a €3 billion capital shortfall in our numbers, down from €3.5 billion due to progress BAMI has made reducing NPLs and increasing coverage ratios."

BPM, which appeared as a result of an early-2017 merger of Banca Popolare di Milano and Banco Popolare, booked a second-quarter 2017 net loss of €21 million, down from a profit of €46.8 million in the same period of 2016.