August 1, 2018 / 11:44 AM / 4 months ago

Intesa's weaker revenues, rising loan losses overshadow profit beat

MILAN (Reuters) - Weakening core revenues and rising loan losses overshadowed stronger-than-expected second-quarter net profit at Italy’s biggest retail bank Intesa Sanpaolo (ISP.MI), weighing on its shares.

Chief Executive Carlo Messina told analysts revenue trends would improve in the second half, after the bank said it was on track to meet its midterm goals and close the year with a net profit above 3.8 billion euros (£3.4 billion).

Shares in Intesa closed down 4.6 percent, making it the biggest loser on the European banking stock index .SX7P. Messina put the drop down to a knee-jerk reaction to Tuesday’s 4.1 percent rise which he said had no real driver.

Analysts expressed disappointment that the positive surprise on earnings stemmed from a better-than-expected trading income, traditionally a volatile business for banks.

Intesa’s operating income fell 4.3 percent from the three months through March, with fees, which are key to Intesa’s business model, and net interest income both dropping by around 1 percent.

“The glass is half full,” said Andrea Scauri, fund manager at Ifigest in Milan. “Results were a bit higher than expectations ... but fell slightly short on net interest income and fees.”

Analysts also highlighted a rise in loan writedowns quarter-on-quarter, despite an 11 billion euro bad loan sale Intesa has agreed with Swedish debt collector Intrum Justitia (INTRUM.ST).

The sale, part of a broader deal to set up a loan recovery joint-venture, lowers Intesa’s problematic loan ratio to 9.3 percent, one of the best ones in Italy. But Messina said the bank had increased writedowns further to ease future disposals.

Intesa on Wednesday signed a key accord with trade unions over workers who will moved to the Intrum-controlled joint-venture.

CAPITAL UP DESPITE GOVERNMENT BOND HIT

Intesa, Europe’s third strongest bank in terms of capital, said its core capital ratio rose slightly to 13.6 percent in the quarter despite a 35 basis point hit from falling prices for Italian government bonds.

The bank held 28.4 billion euros in Italian government bonds at the end of June, down from 29.9 billion three months earlier.

Concerns at possible budget slippage as Italy’s new anti-establishment coalition took shape in May and doubts over the country’s euro membership sparked a sell-off in Italian government bonds, hurting the value of banks’ sovereign holdings and driving up their financing costs.

The market is now looking ahead nervously to the next budget law due in the autumn, but Messina said that he was confident Italy would not stray from a commitment to reduce its huge public debt.

Intesa, which Messina said was seen as a safe haven in times of turbulence, had attracted 10 billion euros in new sight deposits in the first half of the year and would look to see if those new clients would buy other financial products.

Intesa’s net profit came in at 927 million euros in the second quarter. That compares with an average 866 million euro forecast in a Reuters poll and 837 million euro profit a year ago, excluding an extraordinary state payment Intesa received to take over two failing regional banks.

Additional reporting by Stephen Jewkes; Editing by Alexandra Hudson and Jane Merriman

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