Intesa Reports Loss in Balance Sheet Cleanup; Shares Jump

Intesa Sanpaolo SpA, Italy’s second-biggest bank, posted a 5.19 billion-euro ($7.14 billion) fourth-quarter loss, following UniCredit SpA in a balance-sheet cleanup before the European Central Bank’s asset review.

Provisions for doubtful loans jumped to 3.1 billion euros from 1.46 billion euros a year earlier, while impairments, including those on goodwill, amounted to 5.8 billion euros, Milan-based Intesa said today. The shares rose to the highest intraday level in more than three years as investors looked past the charges.

“This is the the right time for a cleanup as the market sentiment has improved,” said Jacopo Ceccatelli, who manages 2.3 billion euros as a partner at JCI Capital Ltd. in London. “This looks like the last move before a credible turnaround, and investors are betting on the future.”

Chief Executive Officer Carlo Messina, who replaced Enrico Cucchiani in September, presented a strategic plan today that includes closing 800 branches through 2017 and reducing costs by 800 million euros. The 51-year-old CEO intends to pay 10 billion euros of cash dividends in the next four years.

“We are ready for growth,” Messina said at an analysts’ meeting in Milan. “The business plan envisages a sharp increase in profitability, deriving from solid revenue creation, cost management and dynamic credit and risk management.” Intesa is targeting net income of 4.5 billion euros in 2017 and plans to dispose of about 2 billion euros of equity assets.

Loan Losses

Intesa rose as much as 5.4 percent in Milan trading and was up 4.1 percent to 2.42 euros at 16:30 p.m. The stock has climbed 36 percent this year, outpacing the 1.6 percent gain in the 43-company Bloomberg Europe Banks and Financial Services Index. The lender held its 2013 dividend at 5 cents a share.

Intesa joined UniCredit, the country’s biggest bank, in reducing the value of intangible assets and increasing provisions for bad loans. Investors looked with favor on UniCredit’s cleanup effort, pushing the shares up 6.2 percent on March 11, the day it announced a record 15 billion-euro loss.

Intesa said it had provisions amounting to 46 percent of non-performing loans at the end of the year, an increase of 1.5 percentage points from three months earlier.

The core Tier 1 capital ratio, a measure of financial strength, rose to 11.9 percent on Dec. 31 from 11.5 percent at the end of September. The bank already meets fully applied Basel III capital rules, with an estimated pro-forma common equity Tier 1 ratio of 12.3 percent, it said.

Net interest income, the difference between revenue from loans and the cost of paying interest on deposits, dropped to 2.04 billion euros in the quarter from 2.18 billion euros a year earlier, and trading income fell to 70 million euros from 682 million euros.

Internal Reorganization

Results were boosted by a one-time gain from the revaluation of its 30 percent stake in the Bank of Italy of 2.56 billion euros.

Intesa plans to reorganize by merging units and moving resources into commercial activities. The bank will reallocate 2,300 employees and reduce its legal entities by combining private banking divisions and asset management units. The CEO is not considering listing the units because there is no need for additional capital.

Messina is targeting 19.2 billion euros of revenue in 2017. The bank sees provisions for loan losses dropping to 3 billion euros by then from 7.1 billion euros in 2013.

“We consider the revenue targets aggressive, while cost and provision targets are cautious and beatable,” Anna Maria Benassi, an analyst at Kepler Cheuvreux, wrote in a note to clients.

Intesa ruled out the conversion of savings shares into common shares, and doesn’t plan to buy back hybrid securities, the CEO said. The bank will dispose of all equity stakes over four years, including holdings in Alitalia SpA, Telecom Italia SpA and RCS Mediagroup SpA.

External Growth

The CEO ruled out acquisitions in Italy, saying he may consider some purchases abroad. Messina said there is no deal on the table at the moment.

Intesa intends to strengthen its presence in “key, high potential markets,” including Slovakia, Serbia, Croatia and Egypt, it said. The lender said it will reconsider its presence in the “countries without adequate scale or in a turnaround situation,” such as Albania, Bosnia, Slovenia, Hungary, Russia and Romania.

Messina, who agreed to sell Intesa’s Ukrainian unit Pravex Bank JSC to a company owned by Ukrainian billionaire Dmitry Firtash, said the local regulator might block the transaction because of legal issues involving the buyer. Firtash, who was arrested in Vienna this month, is wanted in the U.S. on bribery and other charges.

“We are working with local regulator, because the situation of the buyer is not clear,” Messina said. “We are waiting for the approval, and so far there is no evidence of a halt.” Intesa signed a contract with Firtash’s CentraGas Holding Gmbh for 74 million euros on Jan. 23.

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