Intesa Sanpaolo eyes the number one position in Europe

With sustainability and value creation running through every aspect of the Italian bank’s business plan, Intesa Sanpaolo believes the next four years will see it cement its position as a leading European player

Sophy Buckley

16/03/2018

At the beginning of 2014, with Europe still feeling the ripples of the financial crisis, Intesa Sanpaolo unveiled an ambitious plan for transformation. Now, four years later, the bank has achieved everything it set out to do – from drastically reducing non-performing loans to boosting income.

There is more. Intesa Sanpaolo has its sights on an even greater target – building the number one bank in Europe, all on solid fundamentals and values.

The new plan was unveiled with the results for 2017, the culmination of the previous four years’ hard work and proof that Intesa Sanpaolo can deliver.

These showed the bank met or exceeded its 2014-17 plan targets, including paying out a total of €10bn in dividends, cutting €13bn of non-performing loans and achieving the highest level of net income for 10 years at €3.8bn.[1]

This was all achieved in a difficult market, under the pressure of negative interest rates and slow economic growth.

 

Excellent track record

For Carlo Messina, chief executive officer, the results give great credence to the institution’s new set of ambitions. “When we set a target, we deliver on that target. This is evidenced by what we have achieved in the past,” he says. “We think we can build the number one bank in Europe on solid fundamentals and values.”

The overarching theme is value creation and sustainability. Front and centre of this for the coming four years is to cut non-performing loans (NPLs) by almost half, boost revenues by accelerating growth in asset management and insurance, and cut costs.

Carlo Messina, chief executive officer, Intesa Sanpaolo

Playing a significant role in its efforts to have a bigger presence in Europe and beyond is the bank’s ambition to become a world-class reference model for social and cultural responsibility.

Messina adds: “In the plan we delivered in terms of dividend, but we also over-delivered, which is very important for the country, for the real economy of Italy.”

 

Halving bad loans

The bank’s plan for its gross NPLs will see them fall from 11.9 per cent of total loans in December 2017 to 6 per cent in 2021. In hard numbers, this means a reduction of nearly half from some €52.1bn to €26.4bn – a significant derisking and one that will be achieved at no cost to shareholders.

Instead, Intesa Sanpaolo’s plan is to dip into its capital and sell the loans where it can get a fair price. It has also set up a framework to allow it to adopt a more proactive approach to managing loan recovery. Taken together, the effect will further strengthen the bank and cut the cost of risk by 40 basis points from 81 to 41.

At the same time, Intesa Sanpaolo’s focus will be on costs reduction – with target savings of some €1.5bn over the four years.

“When we set a target, we deliver on that target. This is evidenced by what we have achieved in the past”

Carlo Messina, chief executive officer, Intesa Sanpaolo



Efficiency and simplicity

The cuts are based on improving efficiency and simplifying the business to make it more sustainable. This includes a new headquarters in Milan, closing redundant offices and branches, absorbing 12 subsidiaries into the parent company and adopting new flexible working contracts and practices were appropriate.

Some 5,000 staff will be retrained to fill roles that add more value, while 1,650 new staff will help facilitate the changes and support growth. Also, 9,000 accepted to voluntary exit over the four years’ time course.

Cutting costs and selling bad debt are not enough on their own to make Intesa Sanpaolo the most profitable bank in Europe. To that end, the plan also involves growing revenues from €17.8bn in 2017 to €20.8bn in 2021 – with a particular focus on asset management and insurance.

Messina may consider a strategic partnership with a global player in asset management – but only as a majority shareholder.

Private banking will also be strengthened, with up to 1,100 new financial advisers and private bankers, and the bank is increasing its focus on global corporate clients and international investors, while its operations in China will continue to expand.

Net fee and commission income will rise the fastest from €8.1bn to €10bn, while net interest income is projected at €8.3bn (€7.4bn); other revenues, which include insurance, rise from €2.3bn to €2.6bn.

The effect will be net income up 58 per cent from €3.8bn last year to €6bn in 2021.

“We think we can build the number one bank in Europe on solid fundamentals and values” – Carlo Messina

Digital completion

Over the course of the plan, the bank will spend €2.8bn to complete its digital transformation, resulting in a complete multi-channel client platform. This will see sales via digital channels jump from 2 per cent of the total to 15 per cent and the share of digital banking activities from 10 per cent to 70 per cent, thanks to a wider use of robotics and artificial intelligence.

Equally impressive is the prediction that 100 per cent of the bank’s data will be usable and included in its Data Lake, up from 50 per cent last year.

 

Rewards for all stakeholders

While the market will always have a sharp focus on the numbers, Intesa Sanpaolo is adamant that its success over the coming four years will not be predicated on those alone.

The bank believes its success goes beyond looking at its dividends and share price – it’s about ensuring all the bank’s stakeholders get rewarded. This means nurturing staff, playing a key role in the real economy (it aims to create more than €300bn of value) and finding ways to help improve lives around the world.

For staff, there’s a new long-term incentive scheme as well as an investment of €1bn in training and development. Smart working is also being encouraged, with a target to involve 24,000 staff by 2021, up from 8,000 in 2017. This not only helps staff balance their lives better, but also feeds into the bank’s efficiency programme.

“We want to create something that could be special in this business plan and make a positive impact on society” – Carlo Messina

For people in need

Beyond its immediate ecosystem, Intesa Sanpaolo aspires to make a positive impact on society as a whole. To this end it has four new initiatives that will be rolled out over the coming four years, initiatives that Messina described as strategic, adding: “I think that being the number one NPAT (net profitable after tax) bank in the world is really outstanding in terms of what it allows us to do for people in need.”

This includes becoming the world’s first Impact Bank, whereby Intesa Sanpaolo will allocate 0.5 per cent of its shareholder equity to a fund from which it will lend some €1.2bn by 2021 to groups that find it hard to get credit to fulfil their potential. These include new family businesses, students, research projects and first-time entrepreneurs.

Similarly, it is committed to providing food and shelter for people in need. A new fund will pay for 10,000 meals a day, 6,000 dormitory beds a month and 3,000 items of medicine and clothing. Culture is also included in the plan, with a new specialist unit focused on managing the bank’s 20,000 or so artworks as well as helping to promote culture both in Italy and abroad.

Finally, a new Circular Economy Investment Fund – as well as a dedicated circular economy platform – will ensure the bank fulfils its responsibility to sustainability across all its own activities.

Messina is clear. The plan is designed to seize the opportunity of the coming four years to deliver something more than higher corporate profits. As he says: “We want to create something that could be special in this business plan and make a positive impact on society… We want to play a leading role… and we absolutely consider this a priority for the bank.”

[1] Excluding public cash contribution to offset the impact of the acquisition of certain assets of the two former Venetian banks on ISP’s capital ratios. Including FY17 P&L of the operations of the two former Venetian banks and Morval Vonwiller Group

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