Sanpaolo-IMI Hold EUR14.73

Transcription

1 Company Report March 14, 2001 Italian Research Banks & Financial Services Sanpaolo-IMI Hold EUR14.73 Banca Cardine: A Real Opportunity? (Unchanged) Carlo.Digrandi@juliusbaer.com ΠLow Visibility On Cardine Over Next Few Months SPI s interest in acquiring full control in Cardine is well-known. According to press reports, some Cardine shareholders would prefer an alliance with BNL whereas the Bank of Italy s position seems more in favour of BNL. We believe Cardine shareholders will be the final decisions-makers. Our view is neutral. ΠCardine Overvaluation Could Hurt Share Price We set a fair value for Cardine at EUR7.7bn or 2.2x 2001 reported PBV. Adjusting this value for Cardine s free capital (EUR1.1bn), would imply a rating of 1.9x PBV. Although SPI denies that it would pay a top price for Cardine, we are not convinced. ΠSPInvest Listing Might Support Share Price The listing of SPInvest and more disclosure on SPVita might enhance investor interest in the group. Both units are set to post among the highest growth rates in the group and we estimate them to account for nearly 22% of SPI s market capitalisation (EUR1bn for SPInvest and EUR 3.6bn for SPVita). ΠCurrently Undervalued, But We Maintain Our Hold Rating Our DSP and sum-of-the-parts model suggest that the stock is 18% undervalued. PBV and PE criteria point to an overvaluation. The valuation becomes more compelling (70% upside) adjusting the ratio for non-listed holdings. However, we maintain our Hold recommendation, given the low visibility on the Cardine deal as well as uncertainty about asset under management growth. Target price at EUR18. Key Data Year end (Dec. 31) E 2002E Net profit - declared 1,112 1,390 1,526 1,713 EPS GOP/ Share Book value per share RNAV/ Share Dividend P/E P/GOP P/Book P/RNAV ROE 13.0% 17.1% 18.5% 19.1% RORWA 1.4% 1.6% 1.6% 1.7% Yield 3.8% 3.8% 4.2% 4.5% Rel. Performance 1m 6m 12m vs. MIB30(%) (5.0) No. of Shares Market Cap High/Low 1,402m EUR20,920m EUR18.99/14.73 Reuters SPI.MI Share Price Performance Bloomberg SPI IM MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR PRICE PRICE RE L. TO MILAN MIB 30 - PRICE INDEXSource: DATASTREAM JULIUS BAER ITALIA

2 Investment Case Narrow Trading Range Over the last six months the stock lost 10% relative to the DJStoxx and 27% relative to the European sector. We believe this is due to fundamental factors (a fair valuation), low visibility on the Cardine deal and most recently, negative investor perception about asset management. Visibility to Remain Low Management has recently declared an interest in a partnership and/or integration between SPI and Cardine. We believe that SPI would like to achieve full control of the bank. According to press reports, this is, contrary to the wishes of some Cardine shareholders, who would prefer an alliance with BNL. The Bank of Italy s position seems to favour BNL, but we believe that Cardine shareholders will be the final decisions-makers. Our view is neutral. The Cardine Overvaluation Factor Our valuation analysis sets a fair value for Cardine of EUR7.7bn or 2.2x 2001 PBV. Adjusting this value for Cardine s free capital (EUR1.1bn) would imply a valuation of EUR6.6bn. Although SPI has denied that, in case of an acquisition, Cardine would be highly paid, we believe otherwise. Our view is based on the tremendous appeal from an industrial viewpoint for SPI and the competition that SPI is facing on the deal. If SPI pays a premium price, the share price could come under significant pressure. What Could Boost Share Price? The SPInvest listing and better disclosure on SPVita might be enough to buoy the share price and build investor interest in the group. Both SPInvest and SPVita are set to post among the highest growth rates in the group and we estimate they account for nearly 40% of SPI s market capitalisation (EUR1bn SPInvest and EUR3.6bn SPVita). No Earnings Upgrade The group s presentation of its 2003 business plan has not led to any changes in our earnings estimates. The new business plan targets are in line with our expectations. SPI expects ROE to increase from 18% in 2000 to 22%. Our 2003 ROE estimate is 20% versus 16% in This discrepancy is due to differences in calculation but the growth is consistent with SPI s expectations. We expect cost/income (including Banco Napoli) to drop to 51% in 2003 from 62% in Once again, we used a different calculation base and we are probably slightly more aggressive than SPI management. Our forecasts ignore the impact of an integration with Cardine but include the Banco Napoli impact. Currently Undervalued... Our discounted shareholder profit and sum-of-the-parts model suggest that the stock is 18% undervalued. PBV and PE criteria point to an overvaluation. But if we adjust this ratio to take the value of non-listed holdings into account, the valuation becomes more compelling, suggesting that the stock is 70% upside. Our conclusion is that SPI is currently undervalued. We maintain our target price at EUR But We Maintain Our Hold Rating However, we maintain our Hold recommendation, given the low visibility on the Cardine deal as well as uncertainty about asset under management growth. 2 JULIUS BAER ITALIA

3 Valuation Table of Contents :EPYEXMSR 2S'LERKIWMR*SVIGEWXW 6IEGXMRKXS-RGVIEWIH'SQTIXMXMSR 7TMRZIWX0MWXMRKMR# &ERGS2ETSPM8EVKIXW'SRJMVQIH &ERGE'EVHMRI:ILMGPIJSV)\TERWMSR &ERGE'EVHMRI%l1YWXz4EVXRIV# 'SQTER]%GGSYRXW As usual, we used several criteria to value the company. On the basis of our forecasts, our DSP and sum-of-the-parts models suggest an undervaluation. The rating looks unattractive in terms of PBV/ROE and PE/EPS growth. Only an adjusted rating based on the value of non-core holdings suggests that the stock is cheap. We maintain our target at EUR18. Discounted Shareholder Profit Model The model suggests a company value of EUR25bn, at 18% discount to the current share price and 27% higher than our July valuation. The change in terminal value accounts for the discrepancy in valuation since we included 2005 forecasts. We are a little surprised about this result since our forecasts included the effect of Banco Napoli progressively coming into full stream. Table 1: Discounted Shareholder Profit Model (EURm) E 2002E 2003E 2004E 2005E 2006E etc. Gross operating profits 1,867 2,354 2,834 3,335 3,802 4,223 Risk + other provisions (482) (789) (776) (775) (606) (615) PBET 1,385 1,565 2,059 2,560 3,196 3,608 Tax rate 38% 38% 38% 38% 40% 40% Taxes (528) (595) (782) (973) (1,278) (1,443) Minorities (93) (62) (98) (108) (121) (142) Net profits (standardized) ,178 1,479 1,797 2,023 RWAs 82,976 95,209 95,790 99, , , ,443-1% RWAs growth 12, ,319 3,205 2,866 4,264 Minority growth Capital needs (6% RWAs growth adj. minorities) (453) 298 (83) (57) 2 (59) JBI shareholder profits 311 1,207 1,096 1,423 1,799 1,964 29,209 Time period Discount factor PV of shareholder profits 1, ,128 1,300 1,294 19,238 Cost of equity 9.7% Risk free rate 5.2% Beta 1.14 Equity risk premium 4.0% Constant growth after % Cum. PV of FCF ( ) 5,827 Terminal value (2006-onwards) 19,238 Company value 25,065 Equity latent gains, net of 19% 520 Total value 25,585 Market value 20,920 (Discount)/premium -18% Implied growth rate in perpetuity (*) 1.2% Implied exit PE on terminal value 8.21x Implied PE (x) Implied PBV (x) (*) It ignores equity latent gains.90-97&%)6-8%0-% 3

4 The implied growth rate in perpetuity is 1.6%, lower than our forecasts. This is sensibly lower than our previous research (5%). Our sensitivity analysis shows that only in case of an interest rate rise (an unlikely event!!!) the stock would fall into overvaluation territory Table 2: Sensitivity Analysis Cost of Equity 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 2.0% -22% -16% -10% -4% 2% 8% 15% 21% 27% 2.5% -27% -21% -15% -8% -2% 4% 10% 17% 23% LT Growth 3.0% -32% -26% -19% -13% -7% 0% 6% 12% 19% 3.5% -37% -31% -24% -18% -11% -5% 1% 8% 14% 4.0% -42% -36% -29% -23% -16% -10% -3% 3% 10% 4.5% -48% -41% -35% -28% -21% -15% -8% -2% 5% 5.0% -53% -47% -40% -33% -27% -20% -13% -6% 0% Sum-of-the Parts Our sum-of-the-parts model suggests that the stock is 15% undervalued based on normalised 2002 earnings and a growth rate discounted back to the average rate of return for each business area. We expect SPI to achieve returns above the minimum required by the market. Our capital allocation estimate differs from the group s own due to reclassifications of the various business areas. Table 3: Business Division Profits (2002) (EURm) Credit Inv. Banking AUM Insurance Online Free Capital Total Revenue 5, , ,190 Costs (2,901) (96) (884) - (38) - (3,919) Cost/Income ratio 57% 40% 50% - 70% - 55% Others (587) (587) Pretax profit 1, ,748 Taxes (623) (55) (336) (24) (6) - (1,044) Net operating income 1, ,704 Net operating income adjusted ,601 *Adjusted to account for minorities Source: Julius Baer Italia estimates Table 4: Estimated Capital Employed (2002) (EURm) Credit Inv. Banking AUM Insurance Online Free Capital Total Stock* 101, ,329 4, , JBI multiple** 6% 80% 2% 5% 0.2% - - Capital employed 6, , ,617 ROCE 14.6% 27.2% 25.3% 16.0% 5.0% 3.2% 16.6% Free capital in % 6% Capital utilisation (CE/NAV) 94% *RWAs used for Credit and on line businesses, portfolio securities for IB, assets under mngt for Aum, tech reserves for insurance **Estimated European Average of Asset Employed per Business Area Source: Julius Baer Italia estimates &%)6-8%0-%

5 Table 5: Estimated Return and Growth (2002) (%) Credit Inv. Banking AUM Insurance Online Free Capital Total Risk free rate (Rf) 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% Risk premium (Erp) 2.5% 8.0% 4.0% 2.0% 10.0% -2.0% - Total market return (Rm) (1) 7.7% 13.2% 9.2% 7.2% 15.2% 3.2% - ROCE (2) 14.6% 27.2% 25.3% 16.0% 5.0% 3.2% 16.6% Normalized growth rate (20y) 4.0% 7.0% 11.0% 10.0% 20.0% - - Source: Julius Baer Italia estimates Table 6: Sum-of-the-Parts Valutation (EURm) Credit Inv. Banking AUM Insurance Online Free Capital Total Static multiple (2)-(1) Capital employed 6, , ,617 Static valuation 11, , ,550 Growth multiple* Net operating income ,601 Growth adjusted valuation 12,715 1,046 13,135 1, ,831 Discount rate** 8.5% 8.5% 8.5% 8.5% 8.5% - - NPV valuation 10, , ,485 *Based on Gordon Growth Model ** Based on required return weighted by business area Source: Julius Baer Italia estimates Peer Comparison Expensive in PBV/ROE terms... Compared to our previous note (July 2000) the Sanpaolo-IMI share price continues to look unattractive in terms of PBV/ROE standing above the linear regression. The stock stands at 18% premium relative to its Italian and European peers on 2001 estimate, a value that we view as too high even accounting for a higher return expected by the company by Chart 1: Peer Comparison 3.6 Expensive Spain 3.1 Rolo 2001 PBV BP Novara BPCI Germany BCI B Roma BP Bergamo SPI EU Italy Switz. Credem B Lombarda France Intesa BNL BP Verona BPM Unicredito Netherl. MPS Cheap 0.1 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 2002 ROE...as well as using PE/EPS growth The stock looks overvalued in terms of PE and earnings growth. We expect SPI to deliver EPS growth in line with the European average, but the premium (8%) relative to the European average makes it unattractive &%)6-8%0-% 5

6 In our previous report on the company (July 2000), we noted that the accounting rating needs to be adjusted because of the fact that the composite group structure incorporates significant value in other non-listed assets such as SPVita, SPInvest and IMIWeb Trader. Adjusted Valuation Multiple More appropriate valuation for SPVita Our adjusted PBV and PE calculations, to emphasise Sanpaolo-IMI s non-listed assets, appear in the table below. Since our previous report on the company, the value of other non-listed holdings is higher (21% vs. 17%). This is due to different valuation criteria for Sanpaolo Vita (EUR3.5bn vs. EUR2.5bn). In our July 2000 report, we used the Italian insurance market average (1.5x premium). Considering that Sanpaolo Vita focuses on life insurance only, we believed it was more appropriate to use a multiple based on a higher premium (2.0x premium). Table 7: Adjusted Ratings Current Value Value in % Net Profit BV 2001E ROE 2001E (EURm) 2001E (y/e) Sanpaolo IMI 20, % 1,419 7,959 18% Banca Fideuram (9,225) 44% (287) (1,097) 26% Sanpaolo Invest (1,002) 5% (21) (95) 22% On Line finance (211) 1% (7) (204) 3% Sanpaolo Vita (3,586) 17% (40) (248) 16% Equity latent gains (net) (520) 2% Residual value 6,375 30% 1,064 6,314 17% Implicit PE Implicit PBV Sanpaolo IMI ex Fideuram 11,695 1,132 6,862 16% Adjusted PBV Adjusted PE Cheap on adjusted PBV ex nonlisted holdings Our calculations show that the value of SPI excluding non-listed holdings is very attractive, given an implied 17% ROE and 1.0x PBV. Assuming a risk profile for the remaining banking operations in line with other European banks, we believe that SPI without non-listed holdings should trade at 1.7x PBV. This would imply 70% upside potential versus current prices. We believe the stock is very cheap on this criterion. Taking a more conservative approach on the non-listed holdings and adjusting the multiples to account for the Fideuram stake only, we believe that the rating is still attractive with an implied 1.7xPBV on Sanpaolo-IMI ex Fideuram &%)6-8%0-%

7 No Changes in Forecasts Although the bank expects faster asset management growth, we have not made changes in our forecasts. We are a little concerned about profitability deterioration at PFS in 2000, since it is due to IMIWeb loss. ROE recalculation is in line with our forecast for 2000: 16.8% results in line 2000 consolidated results were in line. Our estimates accounted for the Banco Napoli consolidation in the last quarter on a pro rata basis. There is only a marginal difference versus the data provided by Sanpaolo-IMI, which accounted for the Banco Napoli consolidation in H2 (Banco Napoli equity stake impact: EUR16m on consolidated figures). On a comparative basis, SPI posted a better cost/income than our forecast (57% vs. 61%). Because of a different P&L reclassification, our calculation is slightly different from the figure released by SPI (59% including Banco Napoli). Table 8: 2000 Profit & Loss (EURm) Expected Actual Net interest income 2,775 2,571-7% Fees & commissions 2,593 2,638 2% Trading profits and dividends % Other income % Total revenue 6,091 5,684-7% Personnel expenses (2,173) (1,929) -11% General expenses (1,250) (1,146) -8% Depreciation (405) (383) -5% Total costs (3,828) (3,458) -10% Operating income 2,263 2,226-2% Equity method consolidation % Provision for credit loss and others (445) (567) 27% Extraordinaries % Pretax profit 2,218 2,175-2% Tax rate 38% 36% -4% Taxation (843) (791) -6% Minorities (69) (92) 34% Net profit 1,306 1,292-1%, SPI Higher spread pressure, lower earnings quality ROE in line, 16.8% recalculated Net non-performing loans were better than expected, at 1% versus our estimate of 1.6%. Considering that customer loans and deposits were also in line with our expectations, we believe that the pressure on spreads in 2000 was higher than our estimates. On the other hand, provisions and extraordinary income came in well above our expectations, cutting into 2000 earnings quality. Sanpaolo-IMI declared 18.1% ROE, higher than our original estimate of 16.2% and entirely due to some EUR1bn lower reserves. Treasury shares (EUR667m) and consolidation differences (EUR300m) accounted for the discrepancy between our estimate and the actual figure. We therefore recalculated this.90-97&%)6-8%0-% 7

8 ratio using published figures and our methodology (net income/average shareholders equity). On this basis 2000 ROE would be 16.8%, in line with our estimate. Table 9: ROE Calculation (EURm) Share capital 3,926 3,926 Reserves 2,821 3,147 Income for the period 1,050 1,306 Shareholders equity 7,797 8,379 JB ROE (weigthed shs equity) 16.0% Share capital 3,926 3,931 Reserves 3,060 2,115 Income for the period 1,050 1,292 Shareholders equity 8,036 7,338 SPI ROE (weigthed shs equity) 16.8% Improvement in all areas SPI provided a divisional profitability breakdown. As the next table shows, the bank is reshuffling its capital employed, redeploying the amount invested in the corporate centre into more profitable areas such as wealth management and personal financial services. Table 10: Return on Capital Employed ROCE Average Capital (EURm) % Change in Capital Retail banking 16.4% 25.4% 2,464 2,477 1% Wealth management 27.9% 38.0% % PFS 27.7% 24.3% % Wholesale banking 12.9% 15.1% 1,647 1,725 5% Corporate center 18.1% 6.9% 2,631 2,020-23% Group total 17.4% 18.0% 7,517 7,162-5% Source: SPI PFS profitability deterioration due to IMIWeb loss All business areas but one showed a profitability improvement. The exception was personal financial services (PFS): despite 9% net income growth, ROCE deteriorated from 27.7% to 24.3% due to a higher capital employed (+24%). We are little worried about the profitability deterioration at PFS since it is due to IMIWeb losses (EUR29m). Ignoring this negative impact, return in this business area would have risen to 32% &%)6-8%0-%

9 Reacting to Increased Competition In our view, Sanpaolo-IMI is well-positioned to face increasing competitive pressure in AUM and PFS over the next few years. We believe that the bank will maintain its leadership position and slightly gain market share. Increasing distribution costs in AUM sector When we reported on the Italian banking sector in September 2000, we made cautious forecasts in terms of asset management growth for the industry in 2001 (+9%) and 2002 (+8%). Our view was based on a more negative equity market view among consumers as well as the fact that the Italian sector was nearing the end of its dis-intermediation process. In addition to rising competition, we also believe that that the sector will be affected by increasing distribution costs due to the following: Growing acquisition costs incurred in enlarging the financial promoters network. This is due to the limited number of financial promoters available as well as simultaneous moves by all market players. Rising consumer awareness. Consumers are becoming more financially mature and cost-sensitive. It will be increasingly difficult to justify noncompetitive commission levels. SPI is well-positioned to face market trends The demand for financial products is also changing, with consumers requiring a more customised asset allocation and long term asset accumulation. In our view, Sanpaolo-IMI is well-positioned to remain among the market leaders over the next few years. Our opinion is based on the following: Wide and diversified distribution channels. Strong production capacity in both mutual funds and life insurance products. Unlike most competitors, Sanpaolo controls 100% of its life companies. Large customer base. Focus on marketing and customer segmentation. Expertise in all financial service areas. Gaining market share; 13% CAGR expected in AUM by 2003 The bank has set aggressive targets, calling for EUR56bn net inflow over the next three years (+45%). This would imply 13% CAGR, marginally higher than our forecast (+10% CAGR). Assuming that our AUM market forecasts are realistic, this would imply a growing market share (mutual funds only) for the group &%)6-8%0-% 9

10 SPInvest Listing in 2001? SPInvest should be listed this year, although we believe that unfavourable market conditions might push the bank to postpone the move. Using our DCF model and a valuation as a percentage of assets under management, we set a fair value of EUR1.1bn for this company. Listed by year/end AUM growth: +29% from 2001 to 2003 Management confirms that Sanpaolo invest is set to be listed in 2001, although we believe that unfavourable market conditions might push the bank to postpone the move. SPInvest s 2000 figures were in line with our expectations (EUR10.2bn) in assets under management. The company expects AUM to growth by 29% between 2001 and This is higher than our expectations of 21%. In our previous report on Sanpaolo (July 2000) we described our assumptions about company forecasts in detail. We have maintained our assumptions unchanged although we added 2005 figures in order to comply with our DCF model. Table 11: SPInvest P&L (EURm) F 2002F 2003F 2004F 2005F 5Y CAGR FUM 8,277 10,346 12,415 14,898 17,878 20,738 23,642 17% Growth 25% 20% 20% 20% 16% 14% Average commission 0.72% 0.70% 0.70% 0.70% 0.71% 0.72% 0.72% Total revenue % Depreciation & amortization (9) (11) (12) (13) (13) (14) (14) 3% Other costs (27) (38) (44) (46) (50) (54) (57) 7% Total costs (37) (49) (56) (59) (63) (67) (71) 6% Growth 35% 14% 5% 7% 7% 5% Operating income % Others PBT % Tax rate 35% 35% 35% 35% 35% 35% 35% Taxes (11) (9) (11) (17) (23) (29) (35) Net income % Cost/income 61.1% 68.0% 64.5% 56.5% 49.8% 45.2% 41.7% ROE 35% 22% 22% 24% 25% 24% 23% As usual we used two criteria to value this company: a DCF analysis and a comparison with the most recent transactions on international markets. Value of EUR1.4bn on DCF basis Our DCF model suggests a valuation of EUR1.4bn, nearly 50% higher than our previous valuation. This is partially due to a lower discount rate (9.1% vs. 9.7%), but, most importantly, it is linked to a higher terminal value based on a higher FCF in 2005 versus We believe this is a more indicative FCF level given the strong growth phase expected for the company over the next five years. Value of EUR621m on 11% AUM This valuation implies a ratio of 11% of assets under management expected by This is well above the current average of recent transactions on international markets (4.5%) and can only partially be justified by the peculiar &%)6-8%0-%

11 characteristics of the Italian market. Assuming a valuation only slightly higher than this average (5% of AUM) on 2001 figures, the company would be worth EUR 621m. Fair value of EUR1.1bn (+ 25% vs. our previous estimate) Taking the average between the two criteria yields a fair value for SPInvest at around EUR1.1bn (25% higher than our previous estimate). Our assumptions continue to be based on SPInvest on a standalone basis and ignore the possibility of integration with IMIWeb Trader (online banking) which has been rumoured on the market several times. Table 12: SPInvest DCF Model 2001E 2002E 2003E 2004E 2005E 2006E etc. Net income Growth 30% 44% 39% 28% 21% Depreciation & amortization Growth 10% 5% 5% 2% 2% W/C requirement (1) (1) (1) (1) (1) Growth 1% 2% 2% 2% 2% Capex (4) (4) (4) (5) (5) Growth 5% 5% 5% 5% Others Dividends paid Free cashflow to the firm ,796 Time period LT growth 5.0% Discount rate 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% PV factor PV of FCF ,215 Cum. PV of FCF 192 Terminal value 1,215 Intrinsic value 1,406 As % of AUM in % Table 13: Asset Under Management Multiples (% of AUM) 2001E 2002E 2003E 2004E 2% % % % ,037 6% ,073 1,244 7% 869 1,043 1,251 1,452 8% 993 1,192 1,430 1,659 9% 1,117 1,341 1,609 1,866 10% 1,242 1,490 1,788 2, &%)6-8%0-% 11

12 Banco Napoli: Targets Confirmed Management confirms that the Banco Napoli integration is on schedule and that synergies should reach EUR230m per year (pretax) after Banco Napoli cost/income should drop significantly, from 78% in 2000 to 55% by Integration process on schedule, targets confirmed Management confirms that the Banco di Napoli integration is moving ahead in line with the business plan dating back to when the acquisition was announced. The group has already done the following to improve profitability: New management team. The whole organisational structure has been changed, reducing the management levels and appointing new managers to key positions. Adoption of SPI corporate model. In addition to the branch network reorganisation, the group has introduced a new training and incentive action programme for all personnel. Leveraging wealth management. SP Vita products are also distributed from the BN branch network. In addition, a rationalisation in asset management is underway, aimed at regrouping main production functions under one director. Human resources rationalisation. A personnel reshuffle is underway. The group plans 500 early retirement as well as 125 new hires in Early retirements will begin in The company has set a conservative target of a further 1,000 early retirements in the domestic retail network. Non-core activity rationalisation. Disposals of non-strategic activities are also underway for foreign branches as well as other domestic businesses such as BN brokerage operations. EUR230m synergies a year beginning 2003 SPI confirms that synergies should hit EUR230m per year (pretax) once the Banco Napoli integration is fully onstream. The synergies will be split nearly equally between the revenue side, bringing BN s productivity levels in line with SPI, and the cost side, with synergies linked to operating efficiency improvements. The table below looks at this effect in more detail. Table 14: Planned Annual Synergies from 2003 Revenue (EUR108) Focus on retail banking and asset gathering Network reorganisation Product range increase Introduction of marketing models Costs (EUR122m) Non-core activity rationalisation Costs rationalisation Production capacity re-organisation Use of group IT platform &%)6-8%0-%

13 The combined effects of all these moves should allow Banco Napoli to significantly cut its cost/income ratio. We expect the ratio to fall from 78% in 2000 to 55% by This is only slightly higher than our estimate for Sanpaolo-IMI consolidated figure (51%) &%)6-8%0-% 13

14 Banca Cardine: Vehicle for Expansion SPI s interest for Cardine is well known. Visibility on a full-scale acquisition remains low. In our view a merger between the two banks would be a tremendous opportunity. SPI would rank first in Italy in AUM (along with Intesa) while remaining firmly in second place in terms of loans, deposits and total assets. Strengthening distribution network is the top priority Cardine shareholders might discourage a merger with SPI The group has identified some other areas which might offer good growth potential: mortgage lending and consumer credits, small and medium-sized enterprises, wholesale banking. The top priority, however, is still strengthening the distribution network, especially in regions with high income levels and lower branch coverage. The group s agreement with CariFirenze and the open architecture in IMIWeb are two examples of this strategy. SPI bought 10.9% stake in Banca Cardine in October We believe that SPI wants to increase this stake in order to attain full control of the company. Management recently declared its interest in a partnership with Cardine and an integration between the two banks. This is, however, contrary to the wishes of some Cardine shareholders, who would prefer an alliance with BNL. Regardless of the result of this dispute, we attempted to evaluate the impact of a full scale acquisition on Sanpaolo-IMI accounts. Banca Cardine s 778 branches are located in northeastern Italy. The next table looks at Cardine s market positioning and the potential impact on SPI if the two groups decide to merge. Jump in market share (from 1% to 10%) in northeastern regions SPI s market share in terms of branches in northeastern North-Eastern Italy would rise significantly, from 1% to 10%. The bank would also improve its market positioning while remaining focused on the richest region of the country. We also think that Cardine would provide a great distribution network for SPI financial products, considering the bank s more limited product range and low market share in these segments &%)6-8%0-%

15 Table 15: SPI and Banca Cardine Market Positioning Market Share Branches in % SPI Pro-Forma SPI Pro-Forma Piemonte 16% 16% 17% 13% Valle d Aosta 31% 31% 1% 1% Lombardia 9% 10% 24% 18% Liguria 9% 9% 4% 3% Trentino 1% 1% 0% 0% Veneto 2% 14% 3% 14% Friuli 1% 16% 0% 5% Emilia 1% 7% 1% 7% Toscana 1% 2% 1% 1% Umbria 2% 2% 0% 0% Marche 1% 6% 0% 2% Lazio 6% 7% 6% 5% Abruzzi 3% 12% 1% 2% Molise 34% 36% 2% 1% Campania 30% 30% 21% 15% Puglia 16% 16% 9% 7% Basilicata 13% 13% 1% 1% Calabria 10% 10% 2% 2% Sicilia 3% 3% 3% 2% Sardegna 6% 6% 2% 1% NORTH WEST 11% 11% 46% 34% NORTH EAST 1% 10% 5% 26% NORTH 7% 11% 51% 60% CENTER 3% 4% 8% 8% SOUTH 14% 14% 41% 31% TOTAL 8% 10% 100% 100% We also constructed a simple set of pro forma estimates based on our forecasts. The new group would rank second in Italy in terms of loans, deposits, assets and revenue and it would share the top spot with Intesa in mutual funds. Table 16: 2000 SPI/Cardine Pro Forma Figures (EURm) SPI Banca Cardine Pro-Forma Net interest income 2,873 1,033 3,906 Fees & commissions 2, ,214 Total revenue 6,210 1,606 7,816 Total costs (3,856) (1,075) (4,932) Operating income 2,354) 531 2,885 Provisions (525) (93) (618) PBT 2, ,634 Taxes (774) (188) (962) Net income 1, ,567 Cost/income 62.1% 66.9% 63.1% Loans 98,092 23, ,803 Deposits 72,455 23,956 96,411 Total assets 173,710 39, ,789 AUM (ex Bancassurance and BNapoli) 115,571 25, ,489, SPI, Cardine.90-97&%)6-8%0-% 15

16 We believe that these assumptions would provide only a rough guide to investors on the new group: our pro forma totally ignores the impact of synergies, which would be significant in a merger between the two banks. Adjusted fair value up to 2.2x PBV in 2001 Sanpaolo-IMI acquired a 10.9% stake in Cardine, valuing the bank at 1.6x book value. We believe that in the case of a merger which involved a change in the controlling stake, valuation multiples might differ significantly as a premium would be justified. The table below provides an indication of different valuation thresholds using reported shareholders equity and the adjusted figure for Cardine s free capital (EUR1.1bn). On the basis of our 2002 ROE adjusted forecasts (15.8%), we believe that a multiple of 2.2x PBV could be justified. This would imply a fair value of EUR7.7bn (company value + free capital) on reported figures and EUR6.6bn on adjusted figures. Table 17: PBV Valuations (EURm) Reported Adjusted* Book Value ,561 2, x 3,561 3, x 4,273 4, x 4,986 4, x 5,698 5, x 6,410 5, x 7,122 6, x 7,835 6, x 8,547 7, x 9,259 7, x 9,971 8, x 10,684 8,679 *For free capital EUR1.1bn On the basis of our adjusted fair value multiple (2.2x PBV EUR6.6bn) we also calculated the sensitivity to different premium levels which could be paid to Cardine shareholders in case of an acquisition of the bank (excluding free capital). Table 18: Acquisition Premia on 2.2x PBV Adjusted Value (EURm) Implied PBV (x) 5% 6, % 7, % 7, % 7, % 8, % 8, % 8, % 9, % 9, % 9, % 10, &%)6-8%0-%

17 Valuation, at EUR6.5bn, in line with 2001 PBV fair value Given the scant information available, we are unable to make a reliable sum-ofthe-parts calculation for Cardine. We therefore used a DSP model to give an indication on Cardine s absolute valuation. We used a beta in line with the market average, considering that Cardine is not listed; we adjusted the model to also include the free capital effect. The model suggests a valuation in the range of EUR6.5bn (including free capital). This is 15% lower than a valuation based on PBV but it is probably due to our too conservative profit estimates. Table 19: DCF Model (EURm) 2001E 2002E 2003E 2004E 2005E 2006E etc. Gross operating profits Risk + other provisions (191) (155) (159) (163) (166) PBET Tax rate 40% 42% 42% 42% 44% Taxes (187) (238) (270) (296) (333) Minorities (7) (8) (10) (10) (11) Net profits (standardized) RWA 28,483 30,136 32,029 33,452 34,549 RWAs growth on a like-for-like basis 1,837 1,653 1,893 1,423 1,098 Minority growth Capital needs (6% RWAs growth adj. minorities) (103) (91) (104) (75) (55) JBI shareholder profit ,166 Time period Discount factor PV of shareholder profits ,217 Cost of equity 8.8% Risk free rate 5.1% Beta 0.9 Equity risk premium 4.0% Constant growth after % Cum. PV of FCF ( ) 1,061 Terminal value (2005-onwards) 4,217 Company value 5,278 Free capital 1,107 Total value 6,385 Implied exit PE on terminal value 9.15x Implied PE (x) Implied PBV (x) &%)6-8%0-% 17

18 Banca Cardine: A Must Partner? We believe that our Banca Cardine forecasts are conservative. Adjusting ROE for free capital (EUR1.1bn), the bank should post 15.8% ROE in We value the bank at EUR6.5bn. Significant market share and AUM in line with some large players Banca Cardine is the result of a recent merger (February 2000) of seven banks located in northeastern Italy. The group has 778 branches and significant market shares in some of the richest regions in Italy (Veneto and Friuli, with 14% and16% of industry branches respectively). The bank s activity is mainly focused on retail banking (over 60% of total revenue in 2000) although we estimate a mutual funds market share (4%) in line with some other large domestic banks such as Banca di Roma, BNL and MPS. The shareholder base is split as follows: Table 20: Cardine Shareholder Base Foundation CR Padova e Rovigo 41.4% Foundation CR Bologna 28.9% Sanpaolo-IMI 10.9% Foundation CR Udine e Pordenone 4.9% Foundation CR Gorizia 2.0% Foundation CR Venezia 0.8% Foundation CR Carpi 0.4% Unipol 1.8% Others 8.9% Source: Cardine Lack of information = conservative forecasts Rumours of 22% higher net income in 2000 Because of the merger, we based our forecasts on 1999 pro forma data and H figures. In addition, since Cardine is not listed and its management is not required to disclose information to the financial community, we made our forecasts independently, using a very conservative approach from 2000 on. According to press reports, 2000 net income should hit EUR337m. This is significantly higher (+22%) than our estimate. We will update our figures and valuation accordingly once figures will be released &%)6-8%0-% Table 21: Banca Cardine 2000E P&L and CAGR (EURm) 2000E CAGR Net interest income 1,033 4% Fees & commissions % Net trading income (26) - Other income 139 4% Total revenues 1,606 7% Operating expenses (572) 3% Gross operating profit % Net loans provisions (93) 2% Extraordinaries 52 - Net profit % Cost/Income 67% 59%

19 Cost/income should remain higher than average in 2002 ROE depressed by high free capital (EUR1.1bn) We expect the group to post a cost/income ratio slightly higher than the domestic and European sectors in 2000 (67% vs. 63%). On a standalone basis we expect Cardine to remain among the laggards in 2002 as well (60% vs. 55%). Our estimates are based on the minimum time that large mergers require to produce tangible results. On the basis of market experience we estimate that period at months. According to our calculations, ROE should be well below the Italian average in 2000 (8.5% vs. 12%). This is due however to a significant free capital (EUR1.1bn); BIS ratio (12.2%) is far in excess of the minimum required (8%). Assuming a more efficient capital allocation (with a reduction of shareholders equity for the excess capital), ROE would jump to 15% in 2000, well above the market average. In the event of a merger or alliance, the valuation for the bank should be adjusted accordingly. Table 22: ROE Calculation 2000E 2001E 2002E 2003E ROE 8.5% 9.1% 9.9% 11.2% BIS 12.2% 11.5% 11.7% 10.2% Free capital 1,107 1,002 1, ROE adjusted 14.9% 15.7% 16.9% 19.1%.90-97&%)6-8%0-% 19

20 Company Accounts Table 23: P&L Account (EURm) E 2002E 2003E 2004E 2005E Net interest income 2,651 2,032 2,873 3,027 3,167 3,289 3,407 3,555 Fees & commisions 1,751 2,057 2,800 3,164 3,576 3,969 4,326 4,673 Trading profits Dividends Other income Total revenue 4,976 4,666 6,210 6,689 7,254 7,795 8,293 8,811 Personnel expenses (1,543) (1,534) (2,234) (2,171) (2,201) (2,232) (2,263) (2,317) General expenses (1,004) (972) (1,293) (1,319) (1,345) (1,386) (1,427) (1,470) Depreciation (307) (293) (329) (365) (372) (376) (380) (388) Total costs (2,854) (2,799) (3,856) (3,855) (3,919) (3,994) (4,070) (4,175) Operating income 2,123 1,867 2,354 2,834 3,335 3,802 4,223 4,636 Equity method consolidation Provision for credit loss (786) (674) (913) (800) (799) (785) (801) (804) Recoveries Other provisions (134) (82) (100) (112) (117) (82) (87) (93) Write-offs & revaluations (67) (87) (163) (179) (188) (75) (80) (83) Extraordinaries (10) 0 Pretax profit 1,632 1,797 2,164 2,462 2,763 3,355 3,766 4,204 Tax rate 39% 38% 38% 38% 38% 40% 40% 40% Taxation (630) (685) (774) (935) (1,050) (1,342) (1,506) (1,681) Minorities (93) (62) (98) (108) (121) (142) (159) (178) Net profit 909 1,050 1,292 1,419 1,592 1,871 2,100 2,344 Table 24: Balance Sheet (EURm) E 2002E 2003E 2004E 2005E Cash and due from Central banks Inter-bank debts 23,092 22,144 19,534 20,511 21,126 21,971 23,070 23,992 Net customer loans 86,889 73,174 98, , , , , ,495 Government debt securities 24,522 16,937 18,317 25,406 26,169 26,692 27,493 28,318 Securities portfolio 1,206 1,443 6,677 1,337 1,377 1,405 1,447 1,490 Associates & investments 1,322 3,347 3,532 3,532 3,532 3,532 3,532 3,532 Premises & equipment 1,669 1,120 1,775 1,793 1,811 1,829 1,847 1,866 Intangibles Other assets 18,808 21,263 23,118 23,453 23,777 24,392 24,703 25,319 Total assets 158, , , , , , , ,913 Share capital 4,345 3,926 3,931 3,931 3,931 3,931 3,931 3,931 Reserves 3,055 2,821 2,115 2,609 3,159 3,810 4,631 5,608 Income for the period 909 1,050 1,292 1,419 1,592 1,871 2,100 2,344 Shareholders equity 8,309 7,797 7,338 7,959 8,682 9,612 10,662 11,883 Minority interest ,033 1,151 Inter-bank credits 27,763 28,012 30,408 32,232 32,877 34,521 36,937 39,153 Customer deposits 45,117 43,189 72,455 73,904 76,122 77,644 82,303 87,241 Marketable sec. + sub. liabilities 53,722 37,242 36,209 37,295 37,668 38,421 39,574 40,761 Provisions 2,600 2,311 4,566 4,794 5,034 5,286 5,550 5,772 Other liabilities 20,384 21,133 20,572 21,271 22,766 22,730 20,754 18,952 Total liabilities 158, , , , , , , , &%)6-8%0-%

21 .90-97&%)6-8%0-% 21

22 &%)6-8%0-% Company Report: Sanpaolo-IMI March 14, 2001

23 .90-97&%)6-8%0-% 23

24 Activities Total Assets by Region Revenues by Business Area SPI is one of the largest domestic retail banks ranking no. 2 in total assets and AUM. The bank is mainly located in Northern regions although Banco Napoli acquisition provided an exposure to Central Italy. Italy - 75% Other EU - 18% RoW - 7% Net interest income - 44% Fees & commisions - 44% Trading profits - 2% Dividends - 5% Other income - 5% SWOT Analysis Strengths Leading position in asset management, investment banking. Well-positioned in corporate and retail banking. Weaknesses Limited presence in Northeast. Relatively low foreign exposure. Opportunities Banca Cardine acquisition might bring further growth opportunity. Increased market share due to changing landscape in PFS. Banco Napoli integration will allow further economies of scale. Threats Most exposed to AUM inflow slowdown. Profit & Loss Account (EURm) E 2002E Net interest income 2,032 2,873 3,027 3,167 Net fee & commission income 2,057 2,800 3,164 3,576 Net trading income Net insurance income Other net income/expenses Revenues before risk provisions 4,666 6,210 6,689 7,254 GOP 1,867 2,354 2,834 3,335 Provisions (482) (789) (776) (775) EBET 1,385 1,565 2,059 2,560 Extraordinaries Tax (685) (774) (935) (1,050) Associates Minorities (62) (98) (108) (121) Net profit - declared 1,050 1,292 1,419 1,592 Net profit - adjusted 1,050 1,292 1,419 1,592 Balance Sheet (EURm) E 2002E Total assets 140, , , ,990 Risk weighted assets 77,975 95,790 99, ,313 Shareholders fund 7,338 7,959 8,682 9,612 Customers loans 73,174 98, , ,228 Non performing loans 3,125 3,023 2,832 2,775 Due to customers 43,189 72,455 73,904 76,122 Ratios % E 2002E Net interest income/ Total revenues 43.5% 46.3% 45.3% 43.7% Cost/income ratio 60.0% 62.1% 57.6% 54.0% Annual risk provisions as % of GOP 25.8% 33.5% 27.4% 23.3% Total loans as % of total assets 52.2% 57.0% 56.8% 57.2% NPL as % of total loans 4.3% 3.1% 2.8% 2.6% Risk provisions as % of NPL 67.4% 73.1% 79.8% 83.3% BIS Tier 1 ratio 9.6% 7.5% 8.0% 8.5% This publication is for information purposes only and should not be construed as an offer, recommendation or solicitation for sale or purchase. Contents are based on sources we deem reliable. No guarantee, representation or warranty is given and no responsibility or liability as to accuracy or completeness is accepted. Opinions and comments reflect current views of the author, but not necessarily of other Julius Baer Group companies. Investments discussed herein may not be suitable for all investors and may be subject to loss. Historical results do not ensure future success. We or persons close to us may own or have positions in any investment mentioned herein or related thereto and may add to or dispose of any such investment. UK: To the extent that this publication is issued in the UK it is issued by Bank Julius Baer & Co. Ltd. ("BJB"), regulated by the Securities and Futures Authority (SFA) for conduct of investment business in the UK and is for private circulation to BJB clients only. US: Publication distributed in the US by Julius Baer Securities, Inc. ("JBS"). Any transaction in any securities discussed herein should be done via JBS, 330 Madison Avenue, New York, NY 10017, and not with "non-us affiliates". Nothing herein excludes or restricts any duty or liability to a client, which JBS has under applicable law. Italy: Reports on Italian companies listed on the Italian exchange are approved and distributed in Italy in accordance with art. 69 of CONSOB Regulation 11971/1999 for enforcement of the Consolidation Act on financial brokerage (legislative decree 24/2/1998). According to the provisions of this article Julius Baer Italia, the report s author, warns on potential specific interests in securities mentioned. Spain: Reports on Spanish companies are issued and distributed by Julius Baer France, Sucursal en España, registered in Spain by the Comisión Nacional del Mercado de Valores in the foreign investments firms registry (member of the Madrid exchange). JULIUS BAER ITALIA