Intesa Profit Drops as Record Low Interest Rates Hit Revenue

  • Fees, net interest income seen disappointing going forward
  • Bank reiterates commitment to 3 billion euros in dividends

Intesa Sanpaolo SpA, Italy’s second-largest bank, said first-quarter profit dropped 24 percent as record-low interest rates and volatile markets hurt revenue.

Net income fell to 806 million euros ($921 million) from 1.06 billion euros a year earlier, the Milan-based bank said in a statement on Friday. That beat the 703 million-euro average estimate of nine analysts surveyed by Bloomberg.

Chief Executive Officer Carlo Messina, 53, is seeking to shore up earnings and improve asset quality as negative interest rates and faltering economic growth erode income from deposits and lending. Intesa agreed earlier this year to invest 845 million euros in Atlante, a government-orchestrated rescue fund set up to help the country’s troubled lenders boost capital and reduce bad debt.

“Even if results beat estimates, they confirm the weakness of revenue, due to falling markets and margin compression,” said Stefano Girola, who helps manage about 40 billion euros at Syz Asset Management in Lugano, Switzerland. “The trend of fees and net interest income is disappointing, looking forward.”

Intesa shares swung between losses and gains, trading at 2.22 euros at 4:54 p.m. in Milan, up 0.2 percent. The stock has dropped about 26 percent this year, while Banca Monte dei Paschi di Siena SpA lost 45 percent and UniCredit SpA slumped 39 percent.

Italian lenders, which have been among the worst hit by a market selloff this year, are under pressure to clean up their balance sheets and tackle 360 billion euros in soured loans that are undermining economic growth and lending. Shares have pared some losses since the creation of Atlante, which stepped in to buy the stock of Banca Popolare di Vicenza SpA after investors balked at the lender’s initial public offering.

Intesa forecast “an improvement” in pretax profit for this year as it cuts costs, while reiterating its commitment to distribute 3 billion euros in cash dividends.

“In a challenging environment, we proved a solid performance,” Messina said on a call on Friday. “Improving market conditions provide upside potential ahead.”

‘Really Confident’

The CEO, who targets higher revenue this year partly driven by rising customer loans, said he’s “really confident” in the bank’s ability to boost revenue tied to commissions. Still, expectations of a double-digit growth in fees this year are “difficult to reach, having in mind the dynamics of the first quarter,” he said.

Revenue declined to 4.09 billion euros in the first three months from 4.69 billion euros a year earlier, while income from fees and commissions slipped 5.5 percent to 1.71 billion euros. Operating costs decreased 2.4 percent to 2.07 billion euros.

Monte Paschi on Thursday reported first-quarter profit that beat analysts’ estimates as bad-loan provisions declined to a four-year low. At Intesa, money set aside to cover soured loans dropped 10 percent to 694 million euros from a year earlier. That’s the lowest level since 2011 and down 25 percent from the fourth quarter.

The lender’s common equity Tier 1 ratio, a measure of financial strength, remained at 13.1 percent on a fully loaded basis. Intesa booked 138 million euros in one-time charges, including a contribution to the European single resolution fund for failing banks.

“It’s a beat on costs and provisions but revenues are disappointing,” Marta Bastoni and Rohith Chandrarajan, analysts at Barclays PlC with an overweight rating on the shares, wrote in a note Friday. “The beat is due to better costs and better loan-loss provisions, but net interest income and fees missed expectations.”

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