Intesa Sanpaolo is Italy's version of BNP Paribas. Like France's biggest bank, the Milan-based lender has strong liquidity and a top-of-the-range core Tier 1 capital ratio – over 10 per cent under tough new "Basel III" rules. Unfortunately, unlike BNP, its operations are mostly in Italy.
Intesa's €1.6-billion ($2.1-billion) profit in 2012 was an improvement on last year's €8.2-billion loss. But stripping out a huge goodwill writedown in 2011, profit fell 21 per cent. In line with the 2.4-per-cent decline in Italian GDP, Intesa's net interest income fell 3.6 per cent.
At best, the domestic economy will stay flat in 2013. The weak top line depletes Intesa's resources for absorbing loan losses from Italy's army of troubled small businesses. Overall impairments in 2012 ticked up 11 per cent year on year to €4.7-billion. Renewed concerns about Italy's macroeconomic position have increased the cost of insuring Intesa's debt for five years, a proxy for wholesale funding costs, by a quarter since January.
But Intesa has quite a few buffers before it starts to feel the pinch. Its wholesale funding needs this year have already been met. And provisions cover 45 per cent of its €49.7-billion of non-performing loans – way higher than some Italian peers and enough to earn the Bank of Italy's regulatory approval.
Even if the regulator is too kind, Intesa has options. Raising its coverage ratio to the 53 per cent European average would cost around €4-billion, which Intesa could find out of a combination of dropping its core Tier 1 ratio to 9 per cent and retaining some of the €2-billion in net profit forecast on average by analysts in 2013. If all goes well, it would still have enough money to maintain its dividend.
The catch is the dicey Italian political situation. The longer the country is without a government, the more investors will look askance at Intesa's holdings of €57-billion of sovereign bonds and its lack of non-Italian operations. The shares are likely to stay stuck around the current 0.4 times book value, whatever Intesa's merits.