March 9, 2015
Italy: Banks
Equity Research
Popolari consolidation warrants differentiation; Buy BPM/BPER
Government reform sets the stage for restructuring
Public capital injections in Italy have been relatively limited owing to the
slow recognition of losses. However, public intervention (or fear of
outsized involvement) has been a decisive trigger in a number of countries
for market consolidation or restructuring, which has been lacking in Italy.
Having “missed” this opportunity, Italy’s state involvement is following a
legislative path: the bank reform bill announced in January 2015 requires
the Popolari banks to become joint stock companies. We believe this will
trigger a wave of mergers, initially among the Popolari, and possibly later
involving foreign banks, as Popolari, even merged, remain fairly small.
In aggregate, without M&A, the upside for Popolari seems limited
Since the announcement of the bill the Popolari shares have risen 39%,
leaving them on 0.8x 2014 P/TBV. We believe this adequately reflects our
“reasonably normalized” ROTE estimate of 7% (current pre-impairment
profit and normal loan losses). Past transactions suggest cost synergies
have the potential to increase ROTE to 9.2% and capital optimisation can
release significant value at certain banks. However, the group is on 8.4x
cum synergy profits which is no longer excessively cheap.
Bank-by-bank, uniform multiples leave room for differentiation
The four Popolari banks under our coverage trade within +/-2% of the
average P/TBV of 0.8x. However their stand-alone returns differ: we see a
range of 6%-9% on our reasonably normalized profit estimates; cost
synergies could add more at BPM and BPER compared to UBI and BMPS;
and capitalization discrepancies are high: on CET1, the banks are in a
narrow range, but on leverage the best capitalized banks (BPM and BPER)
hold almost twice as much equity as BMPS and BAPO.
Switching from BAPO (B to N) into BPER (CL-Buy), BPM (B)
We downgrade BAPO to Neutral after outperformance and initiate on BPER
with a CL-Buy as we see significantly more value into the consolidation
phase. The shares have risen by a similar amount ytd, but we see BPER as
offering: 1) the cheapest P/E on stand-alone earnings (8.6x), 2) the lowest
efficiency base, and 3) potential capital release of c.20% of its market cap.
All in, we estimate a trade buyer could achieve a c.22% ROI by acquiring
BPER at the current share price. BPM moves to Buy on a similar premise.
SUMMARY OF RATINGS AND PRICE TARGETS
* denotes Conviction List membership
Source: Datastream, Goldman Sachs Global Investment Research.
RELATED RESEARCH
Popolari reform: Will this time be different? Buy Intesa (on
CL) and BAPO, January 20, 2015
Popolari reform (continued): This time appears to be
different – Buy ISP (CL), BAPO, January 20, 2015
COVERAGE VIEW: NEUTRAL
Jean-Francois Neuez +44(20)7552-9362 [email protected] Goldman Sachs International Goldman Sachs does and seeks to do business with
companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Willis Palermo +44(20)7552-8394 [email protected] Goldman Sachs InternationalJacqueline Cheung +44(20)7552-5949 [email protected] Goldman Sachs International
The Goldman Sachs Group, Inc. Global Investment Research
Rating Price 12m PT Potential
New Old New Old upside
UCG N N 6.07 7.00 6.90 15%
ISP B* B* 2.95 3.60 3.60 22%
BMPS N N 0.57 0.62 0.52 10%
BPM B N 0.85 1.01 0.73 20%
BAPO N B 13.65 15.10 16.30 11%
UBI N N 7.12 7.80 6.70 10%
BPER B* -- 7.27 10.30 42%
This is a redacted version of our report published on March 9, 2015
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 2
Table of contents
Overview: Popolari consolidation the logical result of AQR & recaps 3
Ratings and valuation summary 5
Mapping the landscape 7
Step no.1: Assessing stand-alone “reasonably normalized” earnings power
– fairly valued in aggregate but differences exist 9
Step no.2: Synergies – cost saving can boost profits materially, range of funding costs already narrow 11
Step no.3: Capital optionality – synergies for some, dissynergies for others 15
Valuation: Incorporating our M&A screen into price targets 18
Banca Popolare Emilia Romagna (EMII.MI): Initiating with CL-Buy 19
Banca Popolare di Milano (PMII.MI): Up to Buy from Neutral 22
Intesa (ISP.MI): Reiterate Conviction List-Buy 25
UniCredit (CRDI.MI): Neutral 28
Banca Monte Paschi di Siena (BMPS.MI): Neutral 31
UBI Banca (UBI.MI): Neutral 34
Banco Popolare (BAPO.MI): Down to Neutral from Buy 37
Appendix: Balance sheet unknowns – relative size of NPL books can make a difference for consolidation 40
Appendix: Recent trends in P&L developments 43
Appendix: Detailed earnings changes 45
Disclosure Appendix 46
The prices in the body of this report are based on the market close of March 5, 2015.
The authors would like to thank Mridul Gupta for its contribution to the report.
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 3
Overview: Popolari consolidation the logical result of AQR & recaps
The Italian banks we cover have made an aggregate loss since 2008, but public intervention
has been limited as losses have been slow to filter through, giving banks time to
recapitalise on their own. However, public intervention (or fear of outsized involvement)
has been a decisive trigger in a number of countries for market consolidation or
restructuring (Spain, the UK, Ireland, Greece). Thus, unsurprisingly, little restructuring has
taken place: Italy is still the second most fragmented market in Europe
Having “missed” this opportunity, Italy’s state involvement is following a legislative path:
the bank reform bill announced in January 2015 requires the Popolare banks to become
joint stock companies. We believe this – and the market ingredients – will trigger a wave of
mergers:
Low profitability: we expect Italian banks to be some of the least profitable in the
sector, on our estimates, and among them, Popolari to be less profitable than large
banks.
Fragmentation: even if the 10 Popolari concerned were to consolidate into just two
banks, neither would feature among the Euro area’s top 20 by assets.
Exhibit 1: Concentration of Italian banks is low … Herfindahl index for credit institutions, 2013
Exhibit 2: …ROTE also among the lowest ROTE 2015-17E
Source: ECB.
Source: Goldman Sachs Global Investment Research.
Exhibit 3: Popolari are small in an Italian and a European context: even the two biggest together would not feature in
the Euro area’s top 20 Assets, 2013, € mn
Source: EBA, Company data.
94
83.8
70.664
56.2
45.9 43.739.6
30.6
GRE NET POR BEL SPA FRA UK ITA GER
14.3% 14.0% 13.8%13.0%
11.6%11.0% 10.7%
10.3% 10.2% 10.0%9.1%
7.7%
SWI CEE NOR SPA UK AUS IRE POR BEN FRA ITA GER
16
40
15
81 14
56
11
42
11
17
10
65
85
0 78
7 67
4 58
75
61
53
95
37
37
03
35
31
63
05
29
52
74
26
62
65
25
62
41
23
92
23
19
91
99
19
81
98
18
91
77
16
21
61
14
71
47
14
51
31
12
61
25
12
41
22
12
01
18
11
61
09
10
91
02
10
19
89
29
18
98
48
28
27
77
77
67
57
47
37
1 63
62
60
59
54
54
53
53
53
49
48
46
46
45
45
44
43
42
41
40
37
37
37
37
37
36
35
35
35
33
32
30
29
28
27
27
25
25
23
23
16
16
13
13
10
BN
PP
DB
K
CA
SA
SO
CG
SA
N
BP
CE
UC
I
ING
RA
BO
BB
VA
CB
K
CM
ISP
AB
N
CA
IXA
DZ
B
ND
AFI
ML
IE
LB
BW
BA
NK
IA
1/2
Po
po
lari #
21
BM
PS
#2
7
BA
PO
#3
8
UB
I #4
0
ME
DIO
#5
8
BP
ER
#6
4
PM
I #7
2
ICC
R #
74
VIC
EN
#76
VE
NE
T #
84
CA
RI #
85
SO
ND
#9
2
PIC
C #
97
ET
RU
#1
03
BA
RI #
10
7
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 4
Valuations have risen and converged…
With the exception of BMPS on 0.7x, the domestic Italian banks we cover are trading in a
narrow P/TBV range of 0.80-0.82x on 2014. Arguably, this is logical, given their business
plans which all target similar long-term returns (9% ROTE); however, on our assessment of
“reasonably normalized” profits (that is, current pre-impairment profits and average loan
losses), we believe that:
At this level of valuation (a P/E of 10.8x), the standalone upside potential is limited for
this group of banks
However, stock picking opportunities do exist, as their earnings power varies: on 8.4x
‘’reasonably normalized’’ P/E (step 1), we believe BEPR is still relatively attractive
… But in an M&A scenario, cost and capital synergies warrant
differentiation
We attempt to estimate the value that can be released for each of the domestic banks in a
consolidation scenario. Overall, we find that materially more value can be released at BPM
and BPER. We screen them on two metrics: cost and capital synergies:
On costs, we estimate that the average increase in cum synergy profits could be 31%
higher than on a standalone basis and ROTE would gain 2.5 points. BPER and BPM are
the least efficient vs. peers.
On capital, BPER’s and BPM’s capital requirements are still significantly higher than
peers, owing to delayed adoption of the latest regulatory calculation standards. Using
the most recent benchmarks set by UBI, we estimate they could release c.20% of their
market cap. Conversely, BMPS’s and BAPO’s extra capital requirements would
increase by c.30% of their market cap, on the same measure.
Exhibit 4: On 10.8x stand-alone P/E, upside appears limited, but taking into consideration potential value release
through consolidation, selected opportunities appear Scenario P/Es
Source: Goldman Sachs Global Investment Research.
Step 1 Step 2 Step 3
P/E on “reasonably normalized” profits expectations Nomalized P/E including cost synergies Nomalized P/E including cost and capital synergies
13.2x12.5x
10.8x 10.5x
8.6x
11.0x
BPM UBI BMPS BAPO BPER Total
10.2x9.4x
8.1x 8.0x
6.8x
8.5x
UBI BPM BMPS BAPO BPER Total
11.5x
8.9x 8.8x
6.4x
4.6x
8.4x
BMPS BAPO UBI BPM BPER Total
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 5
Ratings and valuation summary
Initiating coverage of Banca Popolare Emilia Romagna (BPER) with a Buy rating
and adding to the Conviction List as we see significantly more value potential going
into the consolidation phase than for peers. The Popolari shares have risen by a similar
amount this year, but we believe BPER offers (1) the cheapest P/E on stand-alone
earnings (8.6x), (2) the lowest efficiency starting point and (3) capital release potential
of c.30% of its market cap. All in, we estimate a trade buyer could achieve a c.22% ROI
by acquiring BPER at the current share price.
Upgrading Banca Popolare di Milano to Buy: similarly to BPER, BPM is a relatively
small bank, where potential cost and capital synergies are significant; we estimate it
would trade at 6.0x P/E on normalized provisions, cum cost synergies and after
harmonizing its capitalization to our benchmark.
Banco Popolare down to Neutral from Buy: in our view the value release potential in
a consolidation scenario at BAPO is more limited owing to the risk that its
capitalization could suffer from higher risk weight assignment in the future, as is taking
place at peer UBI, also noting that BAPO’s starting risk weight position was lower.
After a period of out-performance we therefore take the shares to Neutral from Buy.
Intesa remains Conviction List-Buy: our investment thesis is based on the attractive
dividend prospects: we forecast an average yield of 8% over the next five years, rising
to 13% including excess capital. This yield is credible in our view given (1) on the
earnings side: current pre-provision profit growth and falling impairments and (2) on
the capital side: sector-leading ratios and relative lack of complexity on three important
counts – a less international footprint, less wholesale business and smaller in the
context of its central bank, making the capital more accessible to shareholders in our
opinion.
Unicredit, BMPS and UBI remain Neutral.
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 6
Exhibit 5: Summary of ratings, price targets and estimates € per share
* denotes Conviction List membership
Source: Datastream, Company data, Goldman Sachs Global Investment Research.
Rating Price 12m price target Potential GS EPS GS P/E
new old new old upside 2014 2015E 2016E 2017E 2018E 2019E 2014 2015E 2016E 2017E 2018E 2019E
UniCredit N N 6.07 7.00 6.9 15% 0.34 0.44 0.64 0.77 0.85 0.92 18.0x 13.7x 9.5x 7.8x 7.1x 6.6x
Intesa San Paolo B* B* 2.95 3.60 3.6 22% 0.09 0.23 0.29 0.31 0.33 0.35 33.2x 12.6x 10.1x 9.4x 8.9x 8.4x
Banca Monte dei Paschi di Siena N N 0.57 0.62 0.5 10% -0.83 0.02 0.06 0.07 0.08 0.08 nm 37.2x 9.7x 8.4x 7.5x 7.5x
Banca Popolare di Milano B N 0.85 1.01 0.7 20% 0.05 0.04 0.06 0.07 0.08 0.08 16.0x 20.5x 14.8x 12.2x 11.3x 10.6x
Banco Popolare N B 13.65 15.10 16.3 11% -4.16 0.81 1.22 1.50 1.73 1.83 nm 16.9x 11.2x 9.1x 7.9x 7.5x
UBI Banca N N 7.12 7.80 6.7 10% 0.19 0.32 0.51 0.63 0.74 0.79 36.8x 22.1x 13.9x 11.3x 9.6x 9.1x
Banca Popolare dell'Emilia Romagna B* 7.27 10.30 42% 0.03 0.41 0.68 0.83 0.91 1.00 225.3x 17.5x 10.6x 8.7x 8.0x 7.3x
Italian banks - - - - - - - - - - - 31.5x 14.9x 10.4x 9.0x 8.3x 7.8x
GS EPS v. consensus GS EPS (old) % change
2015E 2016E 2017E 2018E 2019E 2014 2015E 2016E 2017E 2018E 2019E 2014 2015E 2016E 2017E 2018E 2019E
UniCredit -4% 12% 10% 0% na 0.38 0.55 0.68 0.80 0.90 -10% -19% -6% -4% -5% na
Intesa San Paolo 29% 26% 19% 18% na 0.09 0.23 0.29 0.31 0.33 0.35 0% 0% 0% 0% 0% 0%
Banca Monte dei Paschi di Siena -55% -5% -25% -58% na -0.83 0.01 0.05 0.06 0.07 0.06 0% 16% 16% 16% 16% 16%
Banca Popolare di Milano -12% -1% 5% 12% na 0.06 0.05 0.06 0.07 0.08 -4% -22% -8% -2% -4% na
Banco Popolare 8% 5% 7% 18% na -0.53 1.07 1.64 1.97 2.38 nm -25% -25% -24% -27% na
UBI Banca -20% -4% 0% 7% na 0.12 0.45 0.56 0.72 0.84 59% -28% -9% -12% -12% na
Banca Popolare dell'Emilia Romagna 5% 24% 14% 27% na na na na na na na
Italian banks -- -- -- -- -- - - - - - - -- -- -- -- -- --
TVBPS P/TBV GS ROTE
2014 2015E 2016E 2017E 2018E 2019E 2014 2015E 2016E 2017E 2018E 2019E 2014 2015E 2016E 2017E 2018E 2019E
UniCredit 7.16 7.44 7.82 8.33 8.79 9.27 0.85x 0.82x 0.78x 0.73x 0.69x 0.65x 5% 6% 8% 10% 10% 10%
Intesa San Paolo 2.23 2.42 2.61 2.73 2.82 2.90 1.32x 1.22x 1.13x 1.08x 1.05x 1.02x 4% 10% 12% 12% 12% 12%
Banca Monte dei Paschi di Siena 1.07 0.81 0.87 0.92 0.98 1.04 0.53x 0.69x 0.65x 0.61x 0.57x 0.54x nm 2% 7% 7% 8% 7%
Banca Popolare di Milano 1.01 1.06 1.10 1.14 1.18 1.22 0.84x 0.80x 0.77x 0.74x 0.72x 0.69x 5% 4% 5% 6% 6% 7%
Banco Popolare 16.61 17.39 17.13 17.73 18.46 19.31 0.82x 0.79x 0.80x 0.77x 0.74x 0.71x nm 5% 7% 9% 10% 10%
UBI Banca 8.91 9.47 9.33 9.62 9.99 10.42 0.80x 0.75x 0.76x 0.74x 0.71x 0.68x 2% 3% 5% 7% 8% 8%
Banca Popolare dell'Emilia Romagna 10.38 10.44 10.81 11.15 11.57 12.03 0.70x 0.70x 0.67x 0.65x 0.63x 0.60x 0% 4% 6% 8% 8% 8%
Italian banks - - - - - - 1.04x 0.98x 0.93x 0.88x 0.85x 0.82x 4% 7% 9% 10% 10% 11%
Price target Target multiple
Method Horizon Risks
UniCredit ROE/COE 12m Unforeseen change in sovereign, macro, asset quality and regulatory situation, either way P/TBV = 0.9x 2015E TBVPS
Intesa San Paolo ROE/COE 12m Renewed sovereign concerns, deteriorating macro outlook and asset quality, adverse regulatory changes P/TBV = 1.5x 2015E TBVPS
Banca Monte dei Paschi di Siena ROE/COE 12m Unforeseen change in sovereign, macro, asset quality and regulatory situation, either way P/TBV = 0.8x 2015E TBVPS
Banca Popolare di Milano ROE/COE 12m Renewed sovereign concerns, deteriorating macro outlook and asset quality, adverse regulatory changes P/TBV = 1x 2015E TBVPS
Banco Popolare ROE/COE 12m Unforeseen change in sovereign, macro, asset quality and regulatory situation, either way P/TBV = 0.9x 2015E TBVPS
UBI Banca ROE/COE 12m Unforeseen change in sovereign, macro, asset quality and regulatory situation, either way P/TBV = 0.8x 2015E TBVPS
Banca Popolare dell'Emilia Romagna ROE/COE 12m Renewed sovereign concerns, deteriorating macro outlook and asset quality, adverse regulatory changes P/TBV = 1x 2015E TBVPS
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 7
Mapping the landscape
The Popolari banks operate under a relatively unusual governance system in which
shareholders have the same voting rights, independent of their percentage of ownership in the
banks. This prevents large shareholders influencing the management of these institutions and
therefore, in our opinion, diminishes their appeal as investments, all else equal. In any event, a
number of the Popolare banks have limits on maximum ownership. This has, in our opinion,
contributed to limiting M&A among the banks and therefore the Popolare banks, which are
typically smaller participants in a fragmented market:
According to the data available for the banks subjected to the AQR, seven Popolari
banks were tested, representing 54% of the total number included in the sample, but
controlling only 29% of domestic exposure
The data from the Popolari banks association shows a c.25% market share of loans and
deposits for this group (vs. a 29% natural market share) in Italy
Among the main Euro area countries, the Herfindahl index of the Italian system is the
lowest, second only to Germany, and we forecast Italian banks’ returns to be the
second lowest within our coverage universe
In Exhibit 6, we present key data for the 10 banks subject to the reform.
Exhibit 6: Mapping the Italian banking landscape: Popolare banks are small and numerous Exposures at default, € mn, as of end 2013 – (MV as of March 4, 2015)
Source: Company data, EBA, Datastream.
Bank Market Cap Assets Loans P / TBV P / Deposits
€mn 2013 2013 2015E 2016E 2015E Latest available
UBI Banca 6,200 124,242 88,421 17.1x 12.9x 0.7x 8.4%
Banco Popolare 4,853 126,043 86,149 18.0x 11.5x 0.7x 6.8%
Banca Popolare Dell'Emilia Romagna 3,441 61,758 50,508 17.7x 12.7x 0.7x 7.6%
Banca Popolare Di Milano 3,652 49,382 33,345 17.7x 14.3x 0.8x 11.3%
Banca Popolare di Vicenza 45,234 32,233
Veneto Banca 37,306 27,995
Banca Popolare di Sondrio 1,814 32,770 25,235 na na na 6.2%
Creval 1,412 27,198 21,517 21.9x 16.3x 0.7x 7.0%
Popolare dell' Etruria 16,445 8,487
Popolare di Bari 10,319 6,886
P / E
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 8
Exhibit 7: ISP is as large as all the Popolare banks on total
Italian exposure combined… Total exposure
Exhibit 8: …and on customer loan exposure Retail and corporate exposures
Source: EBA.
Source: EBA.
Exhibit 9: Concentration of Italian banks among the lowest as
per Herfindahl index… Herfindahl index for credit institutions
Exhibit 10: …and as measured by share of the top 5
banks Share of total assets of five largest credit institutions
Source: ECB.
Source: ECB.
Exhibit 11: The presence of Popolari banks is not
homogeneous across Italy... Branch market share
Exhibit 12: ...accounting for almost one quarter of the
banking business, but less than their natural market
share suggests Loans/Deposits/Branch market share
Source: Assopopolari.
Source: Assopopolari.
ISP
UCG
MPS
Medio
Carige
Iccrea
UBI
BAPO
BPER
BPM
BPViVeneto BPSo
ISP
UCG
MPS
Medio
Carige
Iccrea
UBI
BAPO
BPER
BPMBPVi
Veneto BPSo
0
500
1,000
1,500
2,000
2,500
GRE NET POR BEL SPA FRA UK ITA GER
2009 2013
0
10
20
30
40
50
60
70
80
90
100
GRE NET POR BEL SPA FRA UK ITA GER
2009 2013
25.30%
24.60%
29.30%
Deposits Loans Branches
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 9
Step no.1: Assessing stand-alone “reasonably normalized”
earnings power – fairly valued in aggregate but differences exist
Italian banks are still reporting relatively high loan losses both compared to their European
peers and to their history, implying a high degree of profit normalization going forward.
However we also think that the shares of Italian banks already price this in full: based on
the current earnings power, adjusted for the depressed provisions component (that is,
applying a normal level of provisions to 2014’s clean pre-provision profits), we find the
smaller banks trade on 10.8x P/Es, a touch higher than the larger banks. In the absence of
M&A, there seems to be little upside potential in aggregate for the group, in our opinion.
We believe that an M&A screen is particularly relevant now that the risks related to asset
quality have reduced owing to the banks’ large AQR-related provisioning in 2014, which
followed years of already fairly heavy reserving. Banks, indeed, are all guiding to lower
loan losses going forward. We run a scenario analysis as follows:
We first clean the 2014 earnings for exceptional items (of which there were many).
We then apply the cost of risk seen in the 2006-08 period. We peg it at 0.66% for all
banks by taking all banks back to the peer group average, as opposed to reverting
provisions to each one’s own trough level, to reduce differences that could be a result
of one bank’s exceptional write backs or write offs. We note that this cost of risk
includes provisions for bad loans, as well as the so-called provisions for risk & charge,
but not impairments on financial assets.
Finally, we work out the ROTE on normalized provisions and compare the banks’ P/Es
on this earnings scenario.
Exhibit 13: In our view the eventual reduction of provisions is the most powerful earnings
driver for Italian banks € bn; P = Provisions
Source: Company data, Goldman Sachs Global Investment Research.
Our conclusions are as follows:
The normalized provisions level implies a €16 bn pretax uplift on 2014 in aggregate for
the seven banks we cover. This is a reduction in provisions of two thirds.
The ROTE springs from a cumulative breakeven result for the group (adjusting for the
one-off losses) in 2014, to 8.7% with larger banks earning more (9.4%, driven by Intesa)
than smaller banks (7.1%).
€ bn Loans, ave. LLP+R&C Cost of risk (% of loans) P Gain [Δ] New P P decrease
4Q13-4Q14, avg 2014 2014 Avg ( 06-08) 2014 - avg 100% @ 0.66% %
[A] [B] [C] [D] [E]=[C] - [D] [F]= [E]x[A] [G]=[F]-[B] [G]/[B]-1
Unicredit 476.6 4.7 0.98% 0.61% 0.32% 1.5 3.1 -33%
Intesa 338.3 5.1 1.50% 0.63% 0.84% 2.9 2.2 -56%
BMPS 128.4 8.0 6.23% 0.78% 5.57% 7.1 0.8 -89%
UBI 86.6 0.9 1.08% 0.45% 0.42% 0.4 0.6 -39%
BAPO 84.0 3.6 4.23% 0.94% 3.57% 3.0 0.6 -84%
BPM 32.6 0.4 1.31% 0.66% 0.65% 0.2 0.2 -50%
BPER 45.3 0.9 1.88% 0.55% 1.22% 0.6 0.3 -65%
Larger banks 814.9 9.7 1.19% 0.62% 0.54% 4.4 5.4 -45%
Domestic banks 376.9 13.8 3.65% 0.67% 2.99% 11.3 2.5 -82%
Aggregate Provisions 1191.8 23.5 1.97% 0.66% 1.31% 15.6 7.8 -67%
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 10
Among the smaller banks, the spread is large: on normalized provisions, in 2014 UBI,
BMPS and BPM would have returned a still low 6%-6.5% ROTE, while ISP would have
shown a ROTE above 10%. Among the smaller banks, BEPR screens best.
From a valuation stand point:
o Among the smaller banks, share prices already reflect the blue sky scenario for
provisions, as their capital adjusted P/Es are on average at 10.8x. In our view this
multiple does not offer much upside for the group in the absence of M&A.
o As for P/E, the bank-by-bank scenario valuation spread is also very wide, ranging
from 8.6x at BPER to 13.2x at BPM, pro-forma on 2014. We therefore believe that
on this basis, owning BPER is still more attractive on a relative basis, because a
reduction in provisions can still drive BPER’s shares. Peers, however, must achieve
stronger delivery on pre-provision profit for the shares to perform from here, and
we consider this more challenging to achieve than falling LLPs.
Exhibit 14: Taking provisions back to their benign pre-crisis levels would drive ROTE closer to COE, but P/Es would still
look fairly full
Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 15: A wide range of returns post provisions
normalization Net income, based on 2014 clean profits + provision
normalization
Exhibit 16: P/E post provision normalization are also
wide-ranging Net income, based on 2014 clean profits + provision
normalization
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
€ bnPretax income,
underlying(+) Upside sources
(=) Pretax
profit, Blue sky(-) Taxes
(-)
minorities
(=) NI, Blue sky
potential
P/E, Blue sky
earningsP/TBV
ROTE
potential
Banks 2014(+) Costs
synergies(+) Provisions pro-forma
NOT capital
adjusted
NOT capital
adjusted
NOT capital
adjusted
Unicredit 4.1 -- 1.5 5.6 -1.7 -0.4 3.5 10.1x 0.81x 8.0%
Intesa 3.4 -- 2.9 6.3 -2.2 0.0 4.1 11.5x 1.25x 10.9%
BMPS -6.3 -- 7.1 0.9 -0.3 0.0 0.5 10.8x 0.70x 6.4%
UBI 0.6 -- 0.4 1.0 -0.4 -0.1 0.5 12.5x 0.80x 6.4%
BAPO -2.2 -- 3.0 0.8 -0.3 0.0 0.5 10.5x 0.82x 7.9%
BPM 0.2 -- 0.2 0.4 -0.2 0.0 0.3 13.2x 0.84x 6.3%
BPER 0.1 -- 0.6 0.6 -0.2 0.0 0.4 8.6x 0.80x 9.3%
Larger banks 7.5 -- 4.4 11.9 -3.9 -0.4 7.6 10.8x 1.01x 9.4%
Smaller banks -7.6 -- 11.3 3.7 -1.4 -0.1 2.2 11.0x 0.78x 7.1%
Total -0.1 -- 15.6 15.6 -5.2 -0.5 9.8 10.9x 0.95x 8.7%
10.9%
9.3%
8.0% 7.9%
6.4% 6.4% 6.3%
9.4%
7.1%
8.7%
Inte
sa
BP
ER
Un
icre
dit
BA
PO
BM
PS
UB
I
BP
M
La
rger
ba
nks
Sm
all
er
ban
ks
To
tal
13.2x12.5x
11.5x10.8x 10.5x 10.1x
8.6x
10.8x 11.0x 10.9x
BP
M
UB
I
Inte
sa
BM
PS
BA
PO
Un
icre
dit
BP
ER
La
rger
ba
nks
Sm
all
er
ban
ks
To
tal
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 11
Step no.2: Synergies – cost saving can boost profits materially,
range of funding costs already narrow
With the potential for consolidation clearly established, we assess the benefits that could
arise from a potential wave of mergers, with emphasis on cost synergies that could be
extracted in market consolidation. For the domestic banks under our coverage, we estimate
a potential uplift to ROTE of 2.5 pp to a level of c.9.2%, considering only cost synergies.
Italian in-market mergers have typically targeted 22% cost synergies...
Exhibit 17 shows the targeted synergies of the main mergers of Italian banks during the
pre-crisis period. On average cost synergy targets were 22% of the cost base of the junior
partner in the merger. Meanwhile, revenue synergies were targeted at 10%, but were
usually less predictable as they were typically less within management’s control. Therefore
our analysis does not take this into account when estimating return accretion through
consolidation. We also show later in this note that funding does not seem to be a source of
synergies as its cost has in aggregate fallen significantly already, and also, the differences
between the banks which existed in the peak crisis years have now most disappeared.
Exhibit 17: On average the most recent Italian domestic transactions were based on cost
synergy targets of 22% Synergies / SmallCo’s Operating Costs
Source: Company data, M&A Monitor, Datastream, Goldman Sachs Global Investment Research.
…but efficiency gains already significant since 2008, possibly
limiting synergies compared to the past
In this section, we highlight that costs have already been a key source of structural
improvement in returns for Italian banks since the crisis. This caveats our previous analysis
somewhat by potentially reducing synergy potential going forward as we recognize that
part of the work has already been completed.
Since 2008, cost cuts saw Italian banks improve potential ROTE by 2.5 pp. We consider the
ratio of total expenses to customer volumes (customer loans + customer deposits + AUM)
rather than cost / income ratio: in aggregate, Italian banks have structurally increased their
efficiency per unit of business volume by 12% since 2008, which in our view was mainly a
result of branch cuts.
Italian banks are targeting further cost savings going forward: Exhibit 20 shows business
plans for network rationalization and cost growth for the banks under our coverage.
6%7%
19%
14%
9%7%
8%
18%20% 20%
23%24%
25%27%
BP
Vero
na
&
BP
No
vara
MD
PS
&
An
ton
ve
ne
ta
BP
VN
& B
PI
BP
BG
& B
PC
I
BP
U &
B.L
om
ba
rda
Un
iCre
dit
& C
ap
itali
a
Inte
sa
& S
PIM
I
Revenue Synergy (%) Cost Synergy (%)
Mean:
22%
Mean:
10%
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 12
Exhibit 18: BMPS appears to be the most efficient Italian
bank on business volume… Total expenses as a % of business volumes, last four
quarters
Exhibit 19: …owing to stronger cost cutting undertaken
through the crisis years
Change in expenses as % of business volumes in bp, 4Q
rolling, since 2008
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 20: Branch closures and cost CAGR are similar among banks Summary of Italian banks’ business plans
Note: for UCG and ISP this table shows retail branches in Italy; network definition and scope may vary from bank to bank. Costs are at group level, except non-core for UCG; BPER as of 2014
Source: Company data.
Exhibit 21: Smaller Popolare banks are less productive
overall… Cost per unit of customer volume (loans + deposits + AUM)
Exhibit 22: …mainly because they manage less volume in
each branch… Volumes per branch, € mn
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
1.23%1.36%
1.48% 1.49% 1.51% 1.55%
1.72%
1.44%
BM
PS
Inte
sa
BA
PO
UB
I
Un
icre
dit
BP
M
BP
ER
To
tal -45.9
-36.7
-19.6-17.2
-14.9-13.1
-8.2
-16.9
BM
PS
BP
M
Inte
sa
BA
PO
BP
ER
UB
I
Un
icre
dit
To
tal
Branches Costs (€ bn)
2013 Plan target % change 2013 Plan target CAGR
ISP 4,100 3,300 -20% 8.4 8.8 1.4%
UCG 3,505 3,100 -12% 13.7 14.1 0.6%
BPM 716 670 -6% 1.0 1.0 0.5%
BMPS 2,334 2,200 -6% 2.8 2.6 -1.7%
BAPO 1,990 1,920 -4% 2.3 2.2 -0.2%
UBI 1,725 1,597 -7% 2.1 2.1 -0.2%
BPER 1,273 1,143 -10% 1.4 1.2 -3.9%
1.9% 1.9%
1.6% 1.7%
1.5%
1.7%1.6%
1.7%
1.6%1.5% 1.5%
1.3%1.2%
1.4%
BPER BPM UBI BAPO Intesa (It) BMPS Total
4Q08 4Q14
91.4
76.1 73.381.0
61.255.1
78.9
126.5
98.2
89.785.9
75.4
63.2
99.4
Intesa (It) BMPS BPM UBI BAPO BPER Total
4Q08 4Q14
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 13
Exhibit 23: … their per capita staff costs can vary too… €,000, personnel expense / staff
Exhibit 24: …despite each branch costing less to run € mn, total cost per branch
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
Blending it in: 2.5 pp increase in ROTE on lower costs
We assess the potential improvement in earnings and returns for each of the domestic
banks we cover: we estimate that earnings would increase by c.31% and ROTE would
increase by 2.5 pp to 9.2% on average. In order to establish this potential, we proceeded as
follows:
Normalization of LLPs, as per the previous section.
We then apply the synergy potential, with two scenarios and average them:
(1) First, 20% cost synergies as per recent Italian deals as per the past in market
transactions.
(2) Second, the productivity of each of these banks converges to that of BMPS, the
most efficient domestic bank under our coverage and the most recent example of
in-market M&A in Italy. The highest increase is seen at BPM and BPER as they are
the least efficient.
The average of these two scenarios would result in a c.31% increase to earnings
and a 2.5 pp increase in ROTE to c.9.2% on average.
Exhibit 25: Cum synergies and normal LLPs, the returns
of BAPO and BPER would be highest ROTE cum cost synergies and normal LLPs
Exhibit 26: Cum synergies and normal LLPs, small banks
would trade on 8.5x P/E, BPER most attractive Scenario P/E cum cost synergies and normal LLPs
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
79.0
70.075.0
68.9
61.2
73.170.6
78.774.2
71.2 69.7 67.763.5
69.6
BPM BAPO UBI Intesa (It) BPER BMPS Total
4Q08 4Q14
1.32
1.45
1.311.27 1.27
1.03
1.25
1.61
1.36
1.23 1.19 1.19
1.07
1.33
Intesa (It) BPM UBI BMPS BMPS BAPO Total
4Q08 4Q14
11.8%
10.3%
8.9% 8.6%7.8%
9.2%
BP
ER
BA
PO
BP
M
BM
PS
UB
I
To
tal
10.2x
9.4x
8.1x 8.0x
6.8x
8.5x
UB
I
BP
M
BM
PS
BA
PO
BP
ER
To
tal
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 14
Exhibit 27: We estimate that cost synergies would result in a 2.5 pp increase in ROTE and a c.31% increase in earnings,
albeit from a still depressed base € mn, summary 2014 P&L, adjusted for one-offs
Source: Company data, Goldman Sachs Global Investment Research.
Funding synergies: We see limited potential
In this section, we attempt to quantify the funding synergies that mergers between
Popolare banks could release. We observe the following:
First, the “mark downs” (i.e., the liability margins charged to customers) have
converged already, compared to what was the case at the height of the crisis, to the
extent that we do not believe that much can be extracted, on a pro forma basis
Second, none of the banks has excess deposits, therefore there is no obvious way for a
bank in deficit of deposits to extract synergies from merging with a bank which would
have an excess
Exhibit 28: Funding cost already comparable Mark down
Exhibit 29: None of the Popolari have excess deposits Loan to deposit ratio, 4Q14
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
€ mnPretax income,
underlying
(+) Upside sources (=) Pretax
profit, scenario(-) Taxes
(-)
minorities(=) NI, scenario P/E, scenario P/TBV
ROTE
potential
Banks 2014(+) Costs
synergies(+) Provisions
Cost +
Provisions
NOT capital
adjusted
NOT capital
adjusted
NOT capital
adjusted
BMPS -6.3 0.3 7.1 1.2 -0.4 0.0 0.7 8.1x 0.70x 8.6%
UBI 0.6 0.2 0.4 1.2 -0.4 -0.1 0.6 10.2x 0.80x 7.8%
BAPO -2.2 0.2 3.0 1.0 -0.4 0.0 0.6 8.0x 0.82x 10.3%
BPM 0.2 0.2 0.2 0.6 -0.2 0.0 0.4 9.4x 0.84x 8.9%
BPER 0.1 0.2 0.6 0.8 -0.3 0.0 0.5 6.8x 0.80x 11.8%
Smaller banks -7.6 1.1 11.3 4.8 -1.8 -0.1 2.9 8.5x 0.78x 9.2%
0
20
40
60
80
100
120
140
160
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14
UBI BAPO BPM BPER
145%
121% 119%112%
104%
BMPS BAPO UBI BPER BPM
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 15
Step no.3: Capital optionality – synergies for some, dissynergies for
others
Popolare banks have reasonably similar Basel 3 fully loaded CET1 ratios (Exhibit 30). But
they have very different leverage ratios, meaning that their risk weights are extremely
varied: BPM is less than twice as levered as BMPS, despite having only a c.30% higher
CET1 ratio. This is explained by very different risk weighting applied to the assets of these
banks. The differences stem primarily from one factor: the capital requirement calculation.
There are two groups of banks among the smaller domestic Italian banks:
Those applying an advanced, internal approach, for the calculation requirements
(BMPS, BAPO, UBI): their RWAs / asset range from 39% to 52%.
And those using standardized approaches (BPM, BPER). These banks typically have
higher capital requirements, with risk weights ranging from 67% to 70%.
Exhibit 30: CET1 ratios are within a narrow range… CET1 ratios, fully loaded, end 2014 (pro-forma for BMPS)
Exhibit 31: … but leverage varies widely across banks TE/TA, end 2014 (pro forma for BMPS)
Source: Goldman Sachs Global Investment Research.
Source: Goldman Sachs Global Investment Research.
An obvious way to release synergies therefor would be for a bank in the “advanced” group
to acquire a bank in the “standard” group, and apply their model to obtain lower RWAs.
However, we also believe that the opposite may also be true and is a risk for two banks in
the advanced group BAPO and BMPS: these banks have much lower capital requirements
than UBI, which in turn, just increased its own risk weights as it now uses more
conservative assumptions for future losses. We therefore run an analysis in which we
harmonize the capital requirements by products/loan categories to those of UBI (the most
conservative bank among those using the advanced approach to capital requirement
calculations), under the assumption that (1) banks in the standard group eventually adopt
the advanced approach and (2) banks that are currently less conservative than UBI also
adopt more conservative capital requirements. We find that:
If BAPO and BMPS had to converge to UBI, the additional capital required to maintain
their core tier 1 at the same level as currently would equate to 18% and 23% of their
market cap respectively
Applying the same method to BPM and BPER, we estimate they could release 38% and
26% of their market cap respectively
13.3%12.4%
11.5% 11.5%10.9%
10.0% 9.7%
Intesa BPM BAPO UBI BPER UniCredit BMPS
HIghest CET1 28% above
lowest
8.7%
7.3%
6.0%5.7%
4.9%4.5%
4.0%
BPM BPER UBI Intesa UniCredit BAPO BMPS
HIghest leverage 115% above
lowest
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 16
Exhibit 32: Converging risk weights to UBI is positive for
BPER and BPM but negative for BMPS and BAPO Increase/decrease in RWAs, based on 2013 data, € bn
Exhibit 33: BPM and BPER to yield capital synergies;
BMPS, BAPO at risk Change in capital requirements as % of market cap
Source: Goldman Sachs Global Investment Research.
Source: Goldman Sachs Global Investment Research.
Exhibit 34: Cum synergies and normal LLPs, the returns
of BPM and BPER are the highest ROTE cum cost synergies and normal LLPs
Exhibit 35: Cum synergies and normal LLPs, small banks
are on 8.4x P/E, BPER cheapest Scenario P/E cum cost synergies and normal LLPs
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 36: At current market price, post synergies and capital relief, a trade buyer would acquire BPER on 4.6x P/E,
BMPS on 11.5x € bn
Source: Company data, Datastream, Goldman Sachs Global Investment Research.
-10.8-8.9
0.0
12.7
22.7
BPER BPM UBI BAPO BMPS
-38%
-26%
0%
18%
23%
BMPS BAPO UBI BPM BPER
16.0%
12.1%
9.5%8.8%
6.6%
9.3%
BP
ER
BP
M
BA
PO
UB
I
BM
PS
To
tal
11.5x
8.9x 8.8x
6.4x
4.6x
8.4x
BM
PS
BA
PO
UB
I
BP
M
BP
ER
To
tal
€ mnPretax income,
underlying
(+) Upside sources (-) Taxes
(-)
minorities(=) NI, scenario P/E, sceanrio P/TBV
ROTE
potential
Banks 2014(+) Costs
synergies(+) Provisions Capital adjusted
NOT capital
adjustedCapital adjusted
BMPS -6.3 0.3 7.1 -0.4 0.0 0.7 11.5x 0.70x 6.6%
UBI 0.6 0.2 0.4 -0.4 -0.1 0.6 8.8x 0.80x 8.8%
BAPO -2.2 0.2 3.0 -0.4 0.0 0.6 8.9x 0.82x 9.5%
BPM 0.2 0.2 0.2 -0.2 0.0 0.4 6.4x 0.84x 12.1%
BPER 0.1 0.2 0.6 -0.3 0.0 0.5 4.6x 0.80x 16.0%
Smaller banks -7.6 1.1 11.3 -1.8 -0.1 2.9 8.4x 0.78x 9.3%
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 17
Exhibit 37: Corp. loans’ risk weights vary across banks…Risk weighted assets / exposure at default, 2013
Exhibit 38: …as do those for retail exposures Risk weighted assets / exposure at default, 2013
Source: EBA, Goldman Sachs Global Investment Research. Source: EBA, Goldman Sachs Global Investment Research.
Exhibit 39: Corporates - of which: SME Risk weighted assets / exposure at default, 2013
Exhibit 40: Retail – Secured on real estate property Risk weighted assets / exposure at default, 2013
Source: EBA, Goldman Sachs Global Investment Research. Source: EBA, Goldman Sachs Global Investment Research.
Exhibit 41: Corporates (Other, mainly large corporates) Risk weighted assets / exposure at default, 2013
Exhibit 42: Retail – Other Retail (mainly consumer loans)Risk weighted assets / exposure at default, 2013
Source: EBA, Goldman Sachs Global Investment Research. Source: EBA, Goldman Sachs Global Investment Research.
46% 49%
66%
93%
107%
BAPO BMPS UBI BPER BPM
19% 20%
33%
57%
72%
BAPO BMPS UBI BPER BPM
33%39%
56%
96%
118%
BMPS BAPO UBI BPER BPM
14%17%
24%
42%
72%
BMPS BAPO UBI BPER BPM
53%
65%72%
89% 91%
BAPO BMPS UBI BPER BPM
24%
28%
57%
71% 73%
BAPO BMPS UBI BPER BPM
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 18
Valuation: Incorporating our M&A screen into price targets
We incorporate the findings of our consolidation screens into our price targets as follows:
Step no.1: Stand-alone valuation:
o Valuation of earnings stream: We arrive at a multiple of tangible book value by
comparing our expected ROTE with COE over our five-year forecast horizon. We
now incorporate 2019E for all seven banks under coverage.
o Capital adjustments: We adjust the value of the earnings stream according to
the banks’ respective capital positions. Capital above or below our threshold is
added or deducted from the value of the earnings streams.
Step no.2: Consolidation adjustment:
o We start from the post-tax cost synergies estimated earlier in the report
o We apply a P/E of 10x to them (the long-term P/E of the banks)
o We finally ascribe a percentage attribution of these synergies to the banks which
varies according to their size: smaller banks, which we see as more likely junior
partners in mergers, are ascribed a greater share of these synergies
We detail these assumptions in Exhibit 43:
Exhibit 43: Price target methodology and assumptions
Source: Goldman Sachs Global Investment Research.
Banks Earnings stream valuation + Capital adjustment + Consolidation factor
ROTE / COE = P/TBV Threshold Ave. level
Post tax
synergies, €
per share
x P/E x
Share
attributable
to bank
Assets
(€bn)
BMPS 7.4% 10.0% 0.7x 10.5% 11.6% 0.02 10.0x 20% 183.4
BAPO 8.1% 10.0% 0.8x 10.0% 10.2% 0.40 10.0x 25% 123.1
UBI 6.5% 10.0% 0.6x 10.0% 12.4% 0.15 10.0x 25% 121.8
BPER 8.0% 10.0% 0.8x 10.0% 13.2% 0.22 10.0x 40% 60.7
BPM 6.1% 10.0% 0.6x 10.0% 16.1% 0.03 10.0x 40% 48.3
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 19
Banca Popolare Emilia Romagna (EMII.MI): Initiating with CL-Buy
Source of opportunity
We initiate coverage of BPER with a Conviction List-Buy. BPER screens
well in our M&A analysis: it screens as having ample cost and capital
synergies that can be released in an in-market merger. We find that at
the current share price, BPER trades on 4.6x “reasonably normalized”
earnings and cum cost and capital synergies, or a c.22% ROI for a trade
buyer acquiring it at its current valuation. Its relatively small size vs
peers makes it an attractive franchise for a trade buyer in our view. The
additional attraction in BPER, compared to BPM and to the other peers,
is that its stand-alone profitability looks more attractively priced: it is on
8.6x P/E, on current pre-impairment profits and normal loan losses,
compared to peers on 10.8x.
Catalyst
The banks reform law announced in January is likely to become
definitive in mid-March. Assuming that the law does not change in
substance, the Popolari banks will then have 16 months to transform
into joint stock companies (SpAs). We expect the consolidation process
to start soon afterwards, and share prices to react positively as the first
transactions approach and get underway.
The next set of results is on May 12. As for peers, we expect BPER to
report an improvement in impairment charges, driving bottom-line
growth.
Valuation
We set our 12 month ROE-COE price target at €10.3, implying 42%
potential upside. As for peers, our valuation is based on the expected
profitability over our forecast horizon (to 2019E) and is adjusted for
excess capital over 10% fully loaded CET1 ratio. It further reflects the
findings of our M&A screen (Exhibit 43). Our price target implies a
P/TBV multiple of 1.0x 2015E.
Key risks
Key risks to our view include renewed macro, sovereign and asset
quality concerns. Further risks include uncertainty linked to the
Popolare reform and the outcome of the consolidation phase.
Source: Company data, Goldman Sachs Global Investment Research, FactSet.
Growth
Returns *
Multiple
Volatility Volatility
Multiple
Returns *
Growth
Investment Profile
Low High
Percentile 20th 40th 60th 80th 100th
* Returns = Return on Capital For a complete description of the investment
profile measures please refer to the
disclosure section of this document.
Banca Popolare Emilia Romagna (EMII.MI)
Europe Banks Peer Group Average
Key data Current
Price (€) 7.27
12 month price target (€) 10.30
Upside/(downside) (%) 42
Market cap (€ mn) 3,496.7
Tier 1 ratio (%) 11.3
12/14 12/15E 12/16E 12/17E
GS Net income (€ mn) 40.6 223.7 403.3 477.6
GS EPS (€) 0.03 0.41 0.68 0.83
DPS (€) 0.00 0.04 0.34 0.42
BVPS (€) 10.09 10.14 10.52 10.86
GS P/E (X) 204.6 17.5 10.6 8.7
Dividend yield (%) 0.0 0.6 4.7 5.7
GS ROE (%) 0.3 4.1 6.6 7.8
P/BV (X) 0.5 0.7 0.7 0.7
380
400
420
440
460
480
500
520
540
560
580
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
Mar-14 Jun-14 Sep-14 Dec-14
Price performance chart
Banca Popolare Emilia Romagna (L) FTSE World Europe (EUR) (R)
Share price performance (%) 3 month 6 month 12 month
Absolute 23.8 6.1 (8.1)
Rel. to FTSE World Europe (EUR) 10.8 (5.7) (21.3)
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 3/05/2015 close.
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 20
Exhibit 44: Loan book breakdown 2Q14; € bn
Exhibit 45: Liabilities, funding breakdown 4Q14; € bn
Source: Company data.
Source: Company data.
Exhibit 46: Impaired loans ratio breakdown
Exhibit 47: Coverage breakdown
Source: Company data.
Source: Company data.
Exhibit 48: Branch distribution 2014 year end
Exhibit 49: P&L breakdown Revenue, expenses and PBT compared with averages RWAs
Source: Company data. Source: Company data.
38.9
16%
0%
56%
27%
1%
Current accounts Repos Mortgages
Other Debt securities Impaired
60.7
11%
56%
17%
8%8%
Deposits from banks Deposits from customers
Debt securities in issue Shareholders' equityOther
3.9
%
5.7
%
6.5
% 8.1
%
10
.9%
13
.4%
7.2%
11.2%12.9%
16.0%
20.2%22.6%
6.3%
10.0%11.7%
14.2%
18.5%
20.7%
4Q
08
4Q
10
4Q
11
4Q
12
4Q
13
4Q
14
NPL Doubtful Restructured
Past-due Total NPL + Doubtful
64.6
%
57
.6%
52
.8%
54.9
%
55.0
%
56.6
%43
.1%
36.8
%
33
.8%
36.8
%
37.3
%
40.7
%
4Q
08
4Q
10
4Q
11
4Q
12
4Q
13
4Q
14
NPL Doubtful Restructured Past-due Total deteriorated
5.0%
3.4%
-0.7%
-4%
-2%
0%
2%
4%
6%
8%
10%
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
Revenue/avg RWA Expenses/avg RWA PBT/avg RWA
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 21
Banca Popolare Emilia Romagna (EMII.MI): Model summary
Exhibit 50: Banca Popolare Emilia Romagna model summary € mn
Source: Company data, Goldman Sachs Global Investment Research.
P&L (In € mn) 2013 2014 2015E 2016E 2017E 2018E 2019E Assets 2013 2014 2015E 2016E 2017E 2018E 2019E
Net interest income 1,290 1,292 1,241 1,294 1,354 1,423 1,499 Cash 489 451 451 451 451 451 451
Net fees & commissions 698 691 715 736 758 781 805 Loans to banks 1,588 1,709 1,709 1,709 1,709 1,709 1,709
Trading and Equity inc. 72 37 4 0 0 0 0 Loans to customers 46,515 43,920 44,805 46,149 47,533 49,435 51,412
Other income 187 198 169 120 120 120 120 Securities 9,106 10,302 10,302 10,302 10,302 10,302 10,302
Non interest income 957 926 888 856 878 901 925 Other earning assets 4 37 37 37 37 37 37
Total recurring revenues 2,247 2,217 2,129 2,151 2,233 2,324 2,424 Interest earning assets 57,212 55,968 56,853 58,197 59,581 61,483 63,460
Rev / avg. earning assets 3.9% 3.9% 3.8% 3.7% 3.8% 3.8% 3.9% Tangible assets 1,273 1,287 1,287 1,287 1,287 1,287 1,287
Staff -787 -787 -764 -761 -765 -782 -801 Intangible 491 498 498 498 498 498 498
General administration -405 -404 -398 -398 -402 -406 -410 Other assets 2,293 2,450 1,999 1,548 1,548 1,548 1,548
Depreciation & other costs -66 -70 -73 -74 -76 -77 -79 Total assets 61,758 60,653 61,087 61,981 63,365 65,266 67,244
Total operating expenses -1,259 -1,261 -1,235 -1,233 -1,242 -1,265 -1,290
cost income ratio (%) 56% 57% 58% 57% 56% 54% 53% Liabilities 2013 2014 2015E 2016E 2017E 2018E 2019E
Operating income 988 956 894 918 991 1,059 1,134 Due to banks 7,821 6,480 6,480 6,480 6,480 6,480 6,480
Provision -877 -858 -532 -364 -328 -339 -353 Customer deposits 33,681 33,964 35,343 36,404 37,496 38,621 39,779
provisioning charge (%) 1.85% 1.90% 1.20% 0.80% 0.70% 0.70% 0.70% Securities in issue 10,187 10,518 9,300 8,824 8,879 9,417 9,976
Other provisions -30 -39 -12 -10 -10 -10 -10 Financial liabilities 3,150 1,944 1,944 1,944 1,944 1,944 1,944
Net exceptionals -15 -1 0 0 0 0 0 Other interest bearing liabilit 38 13 75 75 75 75 75
Profit before tax 67 58 349 544 653 709 771 Interest bearing liabilities 54,877 52,919 53,142 53,726 54,873 56,536 58,254
Taxes -52 -28 -146 -210 -246 -265 -286 Other liabilities 2,848 2,864 2,864 2,864 2,864 2,864 2,864
tax rate (%) 78% 49% 42% 39% 38% 37% 37% Shareholders' equity 4,033 4,870 5,082 5,391 5,628 5,866 6,126
Minorities & others -9 -15 -4 -5 -5 -5 -5 Capital 4,026 4,855 4,882 5,062 5,226 5,427 5,647
Net income 6 15 200 329 402 439 480 Net profit of the period 7 15 200 329 402 439 480
GS Net income 19 16 200 329 402 439 480 Total equity and liabilities 61,758 60,653 61,087 61,981 63,365 65,266 67,244
Per share data (EUR) 2013 2014 2015E 2016E 2017E 2018E 2019E Asset quality 2013 2014 2015E 2016E 2017E 2018E 2019E
EPS 0.02 0.03 0.41 0.68 0.83 0.91 1.00 Gross NPLs 10,214 11,006 11,340 11,114 10,891 10,673 10,460
GS EPS 0.05 0.03 0.41 0.68 0.83 0.91 1.00 NPL Coverage ratio 37% 41% 42% 42% 42% 42% 42%
DPS 0.00 0.00 0.04 0.34 0.42 0.46 0.50 Net NPL ratio 13.8% 14.9% 14.7% 14.0% 13.3% 12.6% 11.8%
Book Value per share 10.98 10.12 10.56 11.20 11.69 12.19 12.73
Tangible Book value 9.64 9.08 9.52 10.17 10.66 11.15 11.69 Capital and key ratios 2013 2014 2015E 2016E 2017E 2018E 2019E
Tier 1 capital 3,991 4,592 4,790 4,955 5,156 5,375 5,615
Valuation 2013 2014 2015E 2016E 2017E 2018E 2019E Preference shares 23 11 11 11 11 11 11
P/E 361.3 x 229.4 x 17.1 x 10.4 x 8.5 x 7.8 x 7.1 x RWA 43,351 40,692 32,819 34,127 35,013 36,230 37,812
GS P/E 137.7 x 220.5 x 17.1 x 10.4 x 8.5 x 7.8 x 7.1 x Equity Tier 1 ratio 9.2% 11.3% 14.6% 14.5% 14.7% 14.8% 14.8%
P/B 0.6 x 0.7 x 0.7 x 0.6 x 0.6 x 0.6 x 0.6 x
Tang. P/B 0.7 x 0.78 x 0.7 x 0.7 x 0.7 x 0.6 x 0.6 x Products penetration 2013 2014 2015E 2016E 2017E 2018E 2019E
Dividend Yield 0.0% 0.0% 0.6% 4.8% 5.9% 6.4% 7.0% Customer loans / deposits 1.38 x 1.29 x 1.27 x 1.27 x 1.27 x 1.28 x 1.29 x
Market cap / deposits 10% 10% 10% 9% 9% 9% 9% Customer loans / Tot. assets 0.75 x 0.72 x 0.73 x 0.74 x 0.75 x 0.76 x 0.76 x
Cust. Dep. / Tot. Earning asse 0.59 x 0.61 x 0.62 x 0.63 x 0.63 x 0.63 x 0.63 x
Profitability ratios 2013 2014 2015E 2016E 2017E 2018E 2019E
NIM (NII / avg. RWA) 2.98% 3.07% 3.38% 3.87% 3.92% 3.99% 4.05% Loans per branch (EUR mn) 35.6 34.5 35.2 36.8 37.9 39.5 41.0
Net fees / avg. RWA 1.61% 1.64% 1.95% 2.20% 2.19% 2.19% 2.17% Loans per employee (EUR m 4.0 3.8 4.0 4.3 4.4 4.5 4.7
Revenue / avg. RWA 5.18% 5.28% 5.79% 6.43% 6.46% 6.52% 6.55% Deposits per branch (EUR m 25.8 26.7 27.8 29.1 29.9 30.8 31.7
Cost / avg. RWA 2.90% 3.00% 3.36% 3.68% 3.59% 3.55% 3.48% Deposits per employee (EUR 2.9 2.9 3.2 3.4 3.5 3.6 3.6
NII / tot. revenues 57% 58% 58% 60% 61% 61% 62%
Net fees / tot. revenues 31% 31% 34% 34% 34% 34% 33%
Securities inc. / tot. revenue 3% 2% 0% 0% 0% 0% 0% Distribution network 2013 2014 2015E 2016E 2017E 2018E 2019E
Cash RORWA 0.01% 0.04% 0.54% 0.98% 1.16% 1.23% 1.30% Number of employees 11,718 11,593 11,143 10,823 10,823 10,873 10,923
ROA 0.01% 0.02% 0.33% 0.53% 0.64% 0.68% 0.72% Number of branches 1,308 1,273 1,273 1,253 1,253 1,253 1,253
ROAE 0.1% 0.3% 4.0% 6.3% 7.3% 7.6% 8.0% Employee / branch 9.0 9.1 8.8 8.6 8.6 8.7 8.7
Tang. ROAE 0.5% 0.3% 4.5% 6.9% 8.0% 8.4% 8.7% Avg. staff costs (EUR) 66,872 67,495 67,240 69,257 70,642 72,055 73,496
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 22
Banca Popolare di Milano (PMII.MI): Up to Buy from Neutral
Source of opportunity
BPM screens well in our M&A analysis: it has ample cost and capital
synergies that can be released in an in-market merger. We find at the
current share price, BPM trades on 6.4x “reasonably normalized”
earnings and cum cost and capital synergies. It is also relatively small
by assets and focused on the most active regions of Italy, making it an
attractive franchise for a trade buyer.
Catalyst
The banks reform law announced in January is likely to become
definitive in mid-March. Assuming that the law does not change in
substance, the Popolare banks will then have 16 months to transform
into joint stock companies (SpAs). We expect the consolidation process
to start soon afterwards, and share prices to react positively as the first
transactions approach and get underway.
The next set of results is on May 12, 2015. We expect BPM to report
lower impairment charges supported by an improving macro backdrop,
paving the way for profitability improvement. This being said, we also
believe that on a standalone basis, we do not see very significant
upside for BPM as these profitability trends are already well priced, in
our opinion. In this regard, we believe BPER offers a more attractive
risk/reward.
Valuation
Our 12 month ROE/COE price target increase from €0.73 to €1.01. We
downgrade our estimates to reflect slightly lower revenues, but this is
offset as we incorporate the findings of our M&A analysis in our
valuation, driving the increase. We value BPM on a P/TBV multiple of
0.9x 2015E and add an M&A factor as per Exhibit 43.
Key risks
Key risks to our view include renewed macro, sovereign and asset
quality concerns. Further risks include uncertainty linked to the
Popolare reform and the outcome of the consolidation phase.
Source: Company data, Goldman Sachs Global Investment Research, FactSet.
Growth
Returns *
Multiple
Volatility Volatility
Multiple
Returns *
Growth
Investment Profile
Low High
Percentile 20th 40th 60th 80th 100th
* Returns = Return on Capital For a complete description of the investment
profile measures please refer to the
disclosure section of this document.
Banca Popolare di Milano (PMII.MI)
Europe Banks Peer Group Average
Key data Current
Price (€) 0.85
12 month price target (€) 1.01
Upside/(downside) (%) 20
Market cap (€ mn) 3,720.9
Tier 1 ratio (%) 11.6
12/14 12/15E 12/16E 12/17E
GS EPS (€) New 0.05 0.04 0.06 0.07
EPS (€) Old 0.06 0.05 0.06 0.07
DPS (€) New 0.03 0.02 0.03 0.03
DPS (€) Old 0.01 0.01 0.03 0.04
GS P/E (X) 11.0 20.5 14.8 12.2
Dividend yield (%) 5.2 2.2 3.4 4.1
GS ROE (%) 5.7 3.9 5.3 6.4
P/BV (X) 0.5 0.8 0.8 0.8
380
400
420
440
460
480
500
520
540
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
Mar-14 Jun-14 Sep-14 Dec-14
Price performance chart
Banca Popolare di Milano (L) FTSE World Europe (EUR) (R)
Share price performance (%) 3 month 6 month 12 month
Absolute 41.7 30.4 50.3
Rel. to FTSE World Europe (EUR) 26.9 15.8 28.9
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 3/05/2015 close.
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 23
Exhibit 51: Loan book breakdown 2Q14; € bn
Exhibit 52: Liabilities, funding breakdown 4Q14; € bn
Source: Company data.
Source: Company data.
Exhibit 53: Impaired loans ratio breakdown
Exhibit 54: Coverage breakdown
Source: Company data.
Source: Company data.
Exhibit 55: Branch distribution
as of 3Q 2013
Exhibit 56: P&L breakdown
Revenue, expenses and PBT compared with averages RWAs
Source: Company data.
Source: Company data.
28.9
13%
1%
54%
31%
1%
Current accounts Repos Mortgages
Other Debt securities Impaired
48.3
7%
57%
19%
9%8%
Deposits from banks Deposits from customers
Debt securities in issue Shareholders' equity
Other
1.7
%
2.6
%
3.5
% 5.3
% 7.2
% 8.8
%
3.9%
7.6%8.5%
11.5%
14.9%
16.9%
3.4%5.4%
6.2%
9.5%
12.1%13.6%
4Q
08
4Q
10
4Q
11
4Q
12
4Q
13
4Q
14
NPL Doubtful Restructured
Past-due Total NPL + Doubtful
65.5
%
51
.0%
47
.1% 55.8
%
55.5
%
55.9
%
40
.8%
24
.2%
28.1
%
34
.3%
36
.1%
38.5
%
4Q
08
4Q
10
4Q
11
4Q
12
4Q
13
4Q
14
NPL Doubtful Restructured Past-due Total deteriorated
4.8%
3.0%
0.1%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
Revenue/avg RWA Expenses/avg RWA PBT/avg RWA
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 24
Banca Popolare di Milano (PMII.MI): Model summary
Exhibit 57: Banca Popolare di Milano model summary € mn
Source: Company data, Goldman Sachs Global Investment Research.
P&L (In € mn) 2013 2014 2015E 2016E 2017E 2018E 2019E Assets 2013 2014 2015E 2016E 2017E 2018E 2019E
Net interest income 838 800 805 862 920 972 1,016 Cash 363 323 323 323 323 323 323
Net fees & commissions 544 557 579 596 614 632 651 Loans to banks 1,813 985 985 985 985 985 985
Trading and Equity inc. 248 211 175 175 175 175 175 Loans to customers 33,345 32,079 33,052 34,374 35,749 37,179 38,666
Other income 53 53 52 53 54 55 56 Securities 10,857 11,689 11,689 11,689 11,689 11,689 11,689
Non interest income 845 821 806 824 843 863 883 Other earning assets 188 199 199 199 199 199 199
Total recurring revenues 1,683 1,622 1,611 1,686 1,763 1,834 1,898 Interest earning assets 46,204 44,951 45,924 47,246 48,621 50,051 51,538
Rev / avg. earning assets 3.52% 3.56% 3.55% 3.62% 3.68% 3.72% 3.74% Tangible assets 1,134 1,022 1,022 1,022 1,022 1,022 1,022
Staff -609 -612 -615 -636 -653 -671 -688 Intangible 96 96 96 96 96 96 96
General administration -305 -286 -284 -284 -287 -290 -293 Other assets 1,584 1,880 1,557 1,557 1,557 1,557 1,557
Depreciation & other costs -73 -75 -74 -76 -77 -79 -81 Total assets 49,382 48,272 48,922 50,244 51,619 53,049 54,536
Total operating expenses -987 -974 -974 -996 -1,018 -1,040 -1,062
cost income ratio (%) 59% 60% 60% 59% 58% 57% 56% Liabilities 2013 2014 2015E 2016E 2017E 2018E 2019E
Operating income 696 648 637 690 746 795 837 Due to banks 5,914 3,319 3,319 3,319 3,319 3,319 3,319
Provision -590 -319 -292 -270 -245 -255 -265 Customer deposits 26,423 27,703 28,828 29,693 30,583 31,501 32,446
provisioning charge (%) 1.73% 0.98% 0.90% 0.80% 0.70% 0.70% 0.70% Securities in issue 10,114 8,982 8,286 8,574 8,879 9,214 9,571
Other provisions -10 -4 -12 -10 -10 -10 -10 Financial liabilities 1,440 1,843 1,843 1,843 1,843 1,843 1,843
Net exceptionals 0 0 0 0 0 0 0 Other interest bearing liabilit 75 75 75 75 75 75 75
Profit before tax 97 325 333 410 490 530 561 Interest bearing liabilities 43,967 41,921 42,350 43,503 44,699 45,951 47,253
Taxes -67 -92 -147 -154 -181 -195 -206 Other liabilities 1,789 1,814 1,814 1,814 1,814 1,814 1,814
tax rate (%) 70% 28% 44% 38% 37% 37% 37% Shareholders' equity 3,626 4,537 4,757 4,927 5,105 5,283 5,469
Minorities & others 0 -1 -4 -5 -5 -5 -5 Capital 3,596 4,304 4,576 4,676 4,801 4,953 5,118
Net income 30 232 182 251 304 330 350 Net profit of the period 30 232 182 251 304 330 350
GS Net income 30 232 182 251 304 330 350 Total equity and liabilities 49,382 48,272 48,922 50,244 51,619 53,049 54,536
Per share data (EUR) 2013 2014 2015E 2016E 2017E 2018E 2019E Asset quality 2013 2014 2015E 2016E 2017E 2018E 2019E
EPS 0.01 0.05 0.04 0.06 0.07 0.08 0.08 Gross NPLs 5,279 5,853 6,029 5,908 5,790 5,674 5,561
GS EPS 0.01 0.05 0.04 0.06 0.07 0.08 0.08 NPL Coverage ratio 36% 39% 42% 42% 42% 42% 42%
DPS 0.00 0.02 0.02 0.03 0.03 0.04 0.04 Net NPL ratio 10.1% 11.2% 10.5% 9.9% 9.4% 8.8% 8.3%
Book Value per share 1.00 1.03 1.08 1.12 1.16 1.20 1.25
Tangible Book value 0.97 1.01 1.06 1.10 1.14 1.18 1.22 Capital and key ratios 2013 2014 2015E 2016E 2017E 2018E 2019E
Tier 1 capital 3,333 3,921 4,021 4,146 4,299 4,464 4,639
Valuation 2013 2014 2015E 2016E 2017E 2018E 2019E Preference shares 262 214 214 214 214 214 214
P/E 102.2 x 15.7 x 20.1 x 14.5 x 12.0 x 11.1 x 10.4 x RWA 42,611 33,700 24,123 24,955 25,822 26,723 27,659
GS P/E 102.2 x 15.7 x 20.1 x 14.5 x 12.0 x 11.1 x 10.4 x Equity Tier 1 ratio 7.2% 11.0% 15.8% 15.8% 15.8% 15.9% 16.0%
P/B 0.8 x 0.8 x 0.8 x 0.7 x 0.7 x 0.7 x 0.7 x
Tang. P/B 0.9 x 0.82 x 0.8 x 0.8 x 0.7 x 0.7 x 0.7 x Products penetration 2013 2014 2015E 2016E 2017E 2018E 2019E
Dividend Yield 0.0% 2.6% 2.2% 3.4% 4.2% 4.5% 4.8% Customer loans / deposits 1.26 x 1.16 x 1.15 x 1.16 x 1.17 x 1.18 x 1.19 x
Market cap / deposits 14% 13% 13% 12% 12% 12% 11% Customer loans / Tot. assets 0.68 x 0.66 x 0.68 x 0.68 x 0.69 x 0.70 x 0.71 x
Cust. Dep. / Tot. Earning asse 0.57 x 0.62 x 0.63 x 0.63 x 0.63 x 0.63 x 0.63 x
Profitability ratios 2013 2014 2015E 2016E 2017E 2018E 2019E
NIM (NII / avg. RWA) 1.95% 2.10% 2.78% 3.51% 3.62% 3.70% 3.74% Loans per branch (EUR mn) 46.6 45.4 46.8 48.7 50.6 52.7 54.8
Net fees / avg. RWA 1.27% 1.46% 2.00% 2.43% 2.42% 2.41% 2.40% Loans per employee (EUR m 4.2 4.1 4.3 4.4 4.6 4.7 4.9
Revenue / avg. RWA 3.92% 4.25% 5.57% 6.87% 6.95% 6.98% 6.98% Deposits per branch (EUR m 36.9 39.2 40.8 42.1 43.3 44.6 46.0
Cost / avg. RWA 2.30% 2.55% 3.37% 4.06% 4.01% 3.96% 3.90% Deposits per employee (EUR 3.4 3.6 3.7 3.8 3.9 4.0 4.1
NII / tot. revenues 50% 49% 50% 51% 52% 53% 54%
Net fees / tot. revenues 32% 34% 36% 35% 35% 34% 34%
Securities inc. / tot. revenue 15% 13% 11% 10% 10% 10% 9% Distribution network 2013 2014 2015E 2016E 2017E 2018E 2019E
Cash RORWA 0.07% 0.61% 0.63% 1.02% 1.20% 1.26% 1.29% Number of employees 7,846 7,740 7,740 7,800 7,850 7,900 7,950
ROA 0.06% 0.48% 0.37% 0.51% 0.60% 0.63% 0.65% Number of branches 716 706 706 706 706 706 706
ROAE 0.8% 5.7% 3.9% 5.2% 6.1% 6.4% 6.5% Employee / branch 11.0 11.0 11.0 11.0 11.1 11.2 11.3
Tang. ROAE 0.8% 5.3% 4.0% 5.3% 6.2% 6.5% 6.6% Avg. staff costs (EUR) 75,346 78,586 79,472 81,857 83,494 85,164 86,867
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 46
Disclosure Appendix
Reg AC
We, Jean-Francois Neuez and Willis Palermo, hereby certify that all of the views expressed in this report accurately reflect our personal views about
the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly,
related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
Investment Profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and
market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites
of several methodologies to determine the stocks percentile ranking within the region's coverage universe.
The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate
of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend
yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.
Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for
in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.
GS SUSTAIN
GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list
includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and
superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate
performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the
environmental, social and governance issues facing their industry).
Disclosures
Coverage group(s) of stocks by primary analyst(s)
Jean-Francois Neuez: Europe-Pan-Euro Banks. Willis Palermo: Europe-Pan-Euro Banks.
Europe-Pan-Euro Banks: Alpha Bank, Arrow Global Group, Banca Monte dei Paschi di Siena, Banca Popolare di Milano, Banca Popolare Emilia
Romagna, Banco BPI, Banco Comercial Portugues, Banco Popolare, Banco Popular Espanol, Banco Sabadell, Banco Santander, Bank Handlowy, Bank
of Ireland, Bank of Piraeus, Bank Pekao, Bank Zachodni WBK, Bankia, Bankinter, Barclays plc, BBVA, BNP Paribas, CaixaBank SA, Commerzbank AG,
Credit Agricole SA, Credit Suisse, Danske Bank, Deutsche Bank, DNB, EFG International, Erste Bank, Eurobank Ergasias SA, HSBC, ING Groep N.V.,
Intesa Sanpaolo, Investor AB (B), Julius Baer Group, KBC Group NV, Komercni Banka, Lloyds Banking Group Plc, Mbank, National Bank of Greece,
Natixis, Nordea, OTP Bank Plc, PKO BP, Provident Financial, Raiffeisen Bank International, Royal Bank of Scotland, SEB, Societe Generale, Standard
Chartered, Svenska Handelsbanken, Swedbank, UBI Banca, UBS Group AG, UniCredit, Virgin Money Holdings, Vontobel.
Company-specific regulatory disclosures
Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this
compendium can be found in the latest relevant published research
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
Global 33% 54% 13% 44% 38% 32%
As of January 1, 2015, Goldman Sachs Global Investment Research had investment ratings on 3,483 equity securities. Goldman Sachs assigns stocks
as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell
for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.
Price target and rating history chart(s)
Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this
compendium can be found in the latest relevant published research
Regulatory disclosures
Disclosures required by United States laws and regulations
See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager
or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-
managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes a
market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.
The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,
professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of
coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking
revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their
households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S.
March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 47
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March 9, 2015 Italy: Banks
Goldman Sachs Global Investment Research 48
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