Intesa Sanpaolo: additional thoughts on the BPVI-VB deal

A good bank for ISP: ISP is set to take over the “good” bank stemming from the segregation of some assets of BPVicenza (BPVI) and Veneto Banca (VB) at €1. We estimate that the scope acquired is ~€42.4bn total assets (€28bn RWA) including €4bn “high risk” performing loans which could be given back to BPVI-VB in case these loans become UTP or bad loans within 2020.
Only advantages for ISP: The state will contribute €4.8bn for the recapitalization of the assets conferred to ISP: €3.5bn post-tax contribution to make the deal neutral CET1 wise and €1.28bn as a non-taxed fund for restructuring. The conditions include the full eligibility of ISP to use the DTAs of the banks acquired (€0.6bn). The mechanism is compliant with the EU rules (2013 EU Banking Communication) and does not represent State aid for ISP.
4% earnings accretion is a floor: In 2016, BPVI-VB reported -€0.95bn combined loss at operating level (-€3.4bn bottom line). On a revenue to total assets basis, the clean perimeter before synergies could deliver up to 205bp (2019E) still at huge gap to ISP (250bp in 2016); while on cost to total assets basis we estimate up to 135bp (125bp for ISP). The pre-synergies clean perimeter contribution could be between €95m and €170m in 2018E-19E (or 23bp-40bp ROA vs 50-60bp for ISP). Earnings wise, the accretion is in a range of 2%-4% (2018E-19E). We do not factor in any operational impact in 2017E. The potential funding and cost synergies and productivity alignment could sharply improve the earnings accretion.
Good for ISP’s shareholders, less for tax-payers: ISP was in a strong position to negotiate and obtain all its conditions: that is very positive for ISP’s shareholders. For the Italian tax-payers there could be a potential €4.8bn loss: while the government has hopes for bad bank recoveries, the conversion of the decree into law could be problematic in the Parliament. On a separate note, the €20bn backstop fund could run out of ammunition.

see also: Good deal for Intesa-Sanpaolo, happy end for Italian banks