Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Italy has no shortage of basket case banks. But even the few CEOs who have done the job right are feeling the heat.

Best of the Worst
Shares of Intesa have outperformed domestic peers this year
Source: Bloomberg

Carlo Messina, who has run Intesa Sanpaolo SpA, Europe's tenth biggest bank by market value, for the past three years, has so far dodged the pitfalls that plague his fellow lenders.

Unlike Banca Monte Dei Paschi di Siena SpA, Intesa isn't teetering on the brink of a bailout. Unlike UniCredit SpA, Intesa isn’t racing to raise billions in capital and shrink its international empire. Its market value is bigger than every other Italian bank combined.

Bigger Than All The Rest
Intesa Sanpaolo's market value is bigger than Italy's top publicly traded banks combined
Source: Bloomberg Intelligence

Asset sales and cost cuts have bolstered Intesa's capital. At 13 percent, its Tier 1 common equity ratio surpasses all but one of its domestic peers. A drive into asset management and focus on growing fee income has helped to dull the pain from ultra-low interest rates. The bank even pays a dividend, funded out of earnings and extra cash from asset sales.

Capital Comfort
Q3 Basel III common equity Tier 1 ratio for Italy's top banks
Source: Bloomberg Intelligence

That strength means 54-year-old Messina is one of the few Italian bankers that can talk credibly about the "strong fundamentals" of a financial system burdened with a mountain of bad loans, weak economic growth and political instability. He boasts of running the only Italian lender that can make cross-border acquisitions in this environment. And he found time to recommend some summer reading -- Paul Kalanithi's "When Breath Becomes Air," since you ask.

Messina is a reminder that not all Italy's banking system is broken. But being the best of a bad bunch brings pressures of its own.

Italian Dependence
Italy exposure as a proportion of overall revenues, loans and deposits at Intesa in 2015
Source: Company filings

The first is one he created himself. Messina needs to convince shareholders he will deliver on a promise that has kept them sweet: Delivering 4 billion euros in dividends in 2017.

That already looks like a stretch considering analysts expect the bank to report only 3.57 billion euros in net income next year. Intesa's dividend yield is the highest among European peers, suggesting it may be vulnerable to a cut. Intesa could find itself under pressure to sell assets to avoid just that.

Italy's economy won't make Messina's job any easier: GDP growth is forecast to be less than one percent this year and next. And as strong as the bank is, it still depends on Italy for about 80 to 85 percent of revenue, loans to customers and deposits.

Messina is also trying to convince shareholders he can avoid any direct impact from the turmoil hitting the rest of the country's banking industry.

This, again, looks hopeful. As one of the few banks that can afford it, Intesa has helped foot the bill for rival rescues in the past: Earlier this year it paid 1 billion euros into Atlante, the government-orchestrated fund designed to lighten the bad debts afflicting the country's lenders.

Last year, Intesa paid 376 million euros toward the cost of Italy's rescue of four regional banks. With the country once more preparing a rescue package for its banks and private investors reluctant to keep propping up the likes of Monte Paschi, there's still a risk Intesa will find itself paying for others' mistakes.

Intesa has so far enjoyed the benefit of the doubt from investors. Its shares trade at a 15 percent discount to book value, the narrowest discount of its domestic peer group.

It's not clear how long that can continue. UniCredit is raising the bar with plans for an aggressive balance-sheet clean-up and capital raising. Monte Paschi and other ailing lenders may, eventually, get rescued; and Intesa's own pile of bad loans heralds more losses.

For the cerebral Messina, best in class will be a hard spot to keep -- all the more because so much is out of his hands. Time he added the "Zombie Survival Guide" to his reading list for next year.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net