Intesa Posts Surprise Profit Gain Despite Provision Increase

(Bloomberg) -- Intesa Sanpaolo SpA reported a surprise rise in profit as higher-than-expected revenue helped to offset increased provisions for future bad loans caused by the Covid-19 crisis.

Second-quarter net income climbed to 1.42 billion euros ($1.67 billion) from 1.21 billion euros a year earlier. That beat analyst estimates of 887.3 million euros. Provisions to cover loan losses increased to 1.4 billion euros in the period, with about 880 million euros of that related to the pandemic.

Chief Executive Officer Carlo Messina is seeking to strengthen the bank's leading position in the country, taking over smaller rival Unione di Banche Italiane SpA in a deal that will make the Milan-based bank Italy's biggest lender by assets. The CEO has said he sees significant room for further branch reductions, as the majority of clients have changed their habits during the Covid-19 crisis.

“Higher revenues, lower operating costs and less loan impairments,” helped Intesa to post better than expected profit, said Luigi Tramontana, an analyst at Banca Akros. “The capital position was also stronger than anticipated.”

Intesa rose as much as 4.8% and was up 4.1% at 1.78 euros as of 2:34 p.m., giving the bank a market value of 31.2 billion euros.

The bank will provide a business plan for the combined group with UBI next year, Messina said in a separate statement. Intesa has more than 1.1 trillion euros in customer financial assets, he said.

Intesa stuck with its profit targets for 2020 and 2021 and said it expects to reach at least 5 billion euros of net income in 2022 after it completes its takeover of UBI.

Despite the affects of the pandemic on borrowers, Intesa's non-performing loan ratio was unchanged from the end of March. The CET1 ratio, a key measure of financial strength, rose to 14.9% from 13.44%. Regulators have encouraged banks to tap into their capital buffers to make more money available for lending.

Intesa used a 1.1 billion euro capital gain from its sale of payment systems unit Nexi to help defray the cost of increased provisions.

“We further strengthened our balance sheet, improving our rock-solid capital position and deleveraged NPLs to the lowest level since 2008,” Messina said.

Lenders across Europe revealed weakening loan books and announced increased provisions as lockdown hit economies across the region. Italy was the first country on the continent to impose virus-related controls, with non-essential businesses closed on March 9 and a ban on travel between the country's provinces. The country started the a gradual re-opening businesses on May 4.

Regulators are encouraging banks to be flexible in applying rules, to avoid a spike in provisions, while massive government guarantees also make it easier for lenders to assume lower default risks. Intesa halted dividend distributions to comply with a request from the European Central Bank.

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