Italian Big Picture: Almost There

- 2Q10 NII Flattish, But Euribor Rising in 3Q — "2Q results are likely to show still
flattish trend on NII as repricing is limited and Euribor is flat QoQ, with also volume showing limited growth. In July, the 3-month Euribor is rising (+13bp since end of June), and also the Euribor expected curve implied by the forward contract shows an uplift for the first time in the past 2 years, as a result of ECB measures on liquidity. This could possibly result in better trends in 3Q NII."
- Too Early for a Turning Point in Asset Quality — "We expected rising bad debt
provisions QoQ (c110bp on loans in 2Q) and also a worsening of the asset quality, with possibly positions migrating towards worse classes of impaired loans (eg flows from Incagli into Sofferenze). In addition to improving macro, a key variable, to observe in future quarters, would be the potential impact of recoveries."
- Difficult Trading Conditions — "The recent results of European and US investment banks reflected the deterioration in capital markets in 2Q. Trading profits could be under pressure, as well as brokerage commissions."
- Economy Marginally Improving? — "Our Citi economists expect GDP growth of c0.8% in 2011 and 0.9% in 2011. Italian corporates could benefit from a recovery in global trade given their export-oriented activities, but domestic demand could remain weak. Business confidence is recovering and industrial production is up MoM, but consumer confidence is still decreasing."
- Marginally More Positive Long Term on Italy — "2Q results could still show weak
asset quality and flattish NII and also weak trading income. But Italy is one of the few European markets, with France, with limited need of deleveraging, and relies significantly on retail funding. The rise in market rates, recent evidence from lending data and some encouraging macro news (business confidence at 2-year high and rising industrial production), are positive indicators, but asset quality is likely to remain challenging until year end."
- Intesa Top Pick — "Intesa is our top pick given the bank’s higher recurrent profitability, better asset quality, and scope for further cost cutting. ISP’s P&L is geared on rising Euribor and improving macroeconomic conditions in Italy. ISP also has solid funding/balance sheet, and adequate capital position. ISP shares look attractively valued at c1.0x P/TBV vs 1.2x for European sector."
- Updating Estimates and Target Prices — "In this note we increase our target prices to reflect a decrease in the cost of equity, and also update our EPS marginally for the recent industry trends (see data summary table)."
Citigroup Italian Big Picture 20100730

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