trending Market Intelligence /marketintelligence/en/news-insights/trending/sorrfy2dzpggtiw2qhtnda2 content esgSubNav
In This List

Intesa CEO wants EU rules tightened on hard-to-value financial instruments

Podcast

Street Talk Episode 87

Blog

A New Dawn for European Bank M&A Top 5 Trends

Blog

Insight Weekly: US banks' loan growth; record share buybacks; utility M&A outlook

Blog

Banking Essentials Newsletter 2021: December Edition


Intesa CEO wants EU rules tightened on hard-to-value financial instruments

As Italian bank Intesa Sanpaolo SpA detailed a plan to dramatically reduce bad loans over the coming four years, CEO Carlo Messina said EU regulators should turn their attention to hard-to-value financial instruments, which could highlight problems at French and German peers.

Estimates put the overall stock of nonperforming loans in the EU at close to €1 trillion, and Italian banks have faced particular pressure to reduce their piles of this bad debt.

Turin-based Intesa said Feb. 6 that it would cut NPLs by nearly half to €26.4 billion in 2021, gross of adjustments, from €52.1 billion in 2017. It also detailed bullish profit projections in a new business plan and reported a year-over-year increase in net income for the fourth quarter of 2017. Its share price had risen 1.69% at 1p.m. CET, compared to a drop of 2.9% for the STOXX Europe 600 Banks index.

But Messina, speaking on a conference call to discuss earnings, said regulators should assess the problems of other banking systems holding larger quantities of so-called Level 2 and Level 3 assets. The ECB defines the former as corporate debt and other marketable securities, and the latter as assets whose price is not determined by the market or reference models, such as complex bilateral contracts.

"If you move to make disposals to the market, in case of bad loans you have collateral ... it is something you can touch. If you work with Level 3 assets you are working with pieces of paper," he said, adding that the current situation is "unacceptable."

His comments chime with a recent call by the Bank of Italy for a revision of the eurozone's stock of Level 2 and Level 3 assets, whose value is much more difficult to assess. In a paper released in late December, the central bank said these assets share some characteristics with NPLs — such as illiquidity and opacity — and the sheer volume of them at eurozone banks might pose a comparable risk. Existing regulatory reporting standards cannot guarantee an adequate assessment of all associated risks, it said.

German and French banks hold two-thirds of the eurozone Level 2 and Level 3 total, the BOI said.

Focus on NPL reduction, risk profile

Italy's banks had some €173 billion in toxic assets at the end of August 2017, at that point equivalent to 15.4% of outstanding loans, according to Italian central bank figures. The stock of NPLs across the EU is slowly decreasing and the average ratio was 5.1% in December 2016.

Intesa said it has delivered on its previous plan to cut NPLs, and predicted that, on a net basis, its bad loans should drop to €12.1 billion by 2021 from €22.5 billion in 2017.

Messina said the bank's priority is to become "number one in Europe for risk profile." The risk profile ratio, which is measured by dividing fully loaded common equity Tier 1 capital by the amount of illiquid assets, including net NPL volume, net repossessed assets and Level 2 and Level 3 assets, stood at 54% at 2017-end.

This puts Intesa in second place among European peers, and its 2021 target of a 69% risk profile ratio will make it the leader in Europe, Messina said.

Any excess capital will go towards further derisking and not towards dividend payments, Messina said.

"The [main] task is to protect the balance sheet," he said.

Intesa is targeting an 85% dividend payout ratio for 2018 and around 70% in 2021.

It is also aiming for a 13.1% CET1 ratio in 2021, compared to the fully loaded CET1 ratio of 13% booked for 2017. The bank had some €10 billion in excess capital which it decided to use to boost its NPL coverage ratio, which stood at 56.8% at 2017-end compared to 46% at 2013-end, when the previous business plan was launched. By 2021, the NPL coverage ratio should increase to 67%.

Messina expressed confidence that the bank will deliver on his new business plan and said the NPL stock and coverage ratio targets are "absolutely achievable."

"If we [have] delivered €13 billion in a year and three months, why can't we deliver [those targets] in four years time?," he asked. He declined to comment on the percentage of disposals the bank will be looking to make by 2021. The focus will be the acceleration of "internal recovery rates" rather than an acceleration of NPL sales, he said.