February 6, 2018 / 8:27 AM / 6 months ago

UPDATE 2-Intesa Sanpaolo to halve soured debts under new plan

* Italy is “the place to be” but targets hinge on positive growth

* CEO says cross-border merger not feasible

* Focus is on growing non-motor protection insurance business (Recasts after investor presentation, press conference)

By Valentina Za and Gianluca Semeraro

MILAN, Feb 6 (Reuters) - Italy’s Intesa SanPaolo pledged to halve soured loans under a new four-year plan to tackle its “only weak spot”, while also rapidly increasing revenue and cutting costs to cement its position as one of Europe’s most profitable banks.

First among Italian banks to switch away from their traditional lending activity, Intesa has successfully built a business model centred on fees earned through asset management and insurance.

Chief Executive Carlo Messina said on Tuesday the bank would seek a partnership with a global player in asset management this year, but aimed to retain majority ownership of the business.

Italy’s biggest retail bank, Intesa competes in Europe with France’s BNP Paribas and Credit Agricole and Spain’s Santander.

Unlike other Italian lenders which trade at a discount on fears they may have to raise capital to be able to shed bad debts, Intesa trades in line with its assets’ value thanks to its capital strength and generous dividend policy.

In a move that Messina said was dictated by “strong regulatory pressure”, the bank plans to shed 26 billion euros ($32 billion) in soured debts under the new plan, cutting them to 6 percent of total loans from 11.7 percent in December.

“If you want to be a leader you need to demonstrate to your regulator that you’re moving in a fast and tough way to deal with a problem,” Messina said, adding the plan provided “a clear solution to the bank’s only weak spot.”

“Now that we know these are the rules of the game we’ll play by them.”

The reduction would bring Intesa close to Europe’s 5.5 percent average, while Italian banks hold soured debts equivalent to 16 percent of total lending. Rival UniCredit targets a 7.8 percent impaired debt ratio in 2019.

Messina said Intesa, which has so far bet on recovering bad debts internally, would consider disposals to speed up the clean-up process as requested by regulators but only at prices in line with the loans’ book values.

To ease potential sales, it will book 4.1 billion euros before taxes in writedowns in the first quarter, mostly on loans, taking advantage of the introduction of the new IFRS9 accounting rule.

It sees its core capital ratio at a healthy 13 percent after the writedowns, the same level it targets for 2021 despite a number of negative regulatory impacts.

Intesa first signalled a shift in its strategy last month when it said it was discussing selling a portfolio of bad debts together with a stake in its debt collection unit.

Messina said a decision on that would be taken over the next month.

OVER-DELIVER

Intesa aims to grow its net profit by 58 percent over the next four years to reach 6 billion euros in 2021, with 4 percent annual growth in fee and interest income.

By comparison, UniCredit forecasts 0.2 percent annual revenue growth under its plan to 2019.

“We need to prove once again that we can do things others cannot do,” Messina said. “I think we can over-deliver on the results ... the main challenge is the Italian situation ... a recession would be a major threat to our plan.”

Intesa’s business is concentrated in Italy, where the economy has been gradually strengthening since emerging in 2014 from its worst post-war slump. Economic growth is estimated to have reached 1.5 percent last year, the highest since 2010.

Analysts flag the need for Intesa to diversify away from Italy, but Messina said he did not think a cross-border merger was “a feasible project.”

After rewarding shareholders with 10 billion euros in cash dividends in the past four years, Intesa is planning to pay out 85 percent of this year’s profit as dividends and gradually reduce the payout ratio to 70 percent in 2021.

Investors viewed the bank’s plans positively, pushing its shares up 2.5 percent by 1450 GMT, bucking a 1 percent drop in Italy’s blue-chip index as a global sell-off in equities deepened.

“We believe Intesa ticked all the major boxes,” Goldman Sachs analysts said in a note. ($1 = 0.8077 euros) (Editing by Mark Potter and Susan Fenton)

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