B.ca Carige ITALY / Banks

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1 B.ca Carige ITALY / Banks Company update HOLD (Unchanged) Target: 0.61 (prev. 0.95) Risk: Medium STOCK DATA Price 0.58 Bloomberg code CRG IM Market Cap. ( mn) 482 Free Float 75% Shares Out. (mn) week range Daily Volumes (mn) PERFORMANCE 1M 3M 12M Absolute 11.6% -52.4% -72.6% Rel. to FTSE all shares 4.2% -39.9% -56.7% MAIN METRICS E 2017E PE -2.7 x -5.2 x x Adj PE -1.5 x -5.2 x x P/BV 0.2 x 0.2 x 0.2 x P/TE 0.2 x 0.2 x 0.2 x MULTIPLES E 2017E Adj Roe -8.5% -3.8% -1.9% Adj RoTE -11.1% -3.9% -2.0% NIM (bps) REMUNERATION E 2017E CET1 fully phased 12.1% 11.9% 11.4% Assets/Equity Loans/Direct Collection 94% 89% 87% PRICE ORD LAST 365 DAYS ANALYSTS Matteo Ghilotti m.ghilotti@equitasim.it March 29, 2016 #128 APOLLO S UNSOLICITED OFFER FOR THE NPLS Carige confirmed that it has received a non binding and preliminary offer from Apollo, ready to purchase for 20 cents all NPLs and to underwrite a 550 mn capital increase. Carige pre-increase is evaluated x PTE. Post increase the PTE grows to 0.4x. If apollo buys and cleans-up Carige one of the issues in the Italian banking system would be solved. This is a net positive for the sector. Yet we believe it is appropriate to maintain a cautious stance on Italian banks. We decrease the target to 0.61 that is the highest price offered by Apollo. Neutral view confirmed. Apollo makes an offer for all NPLs and to underwrite a 550 mn capital increase Carige confirmed in a press release that it has received a non binding and preliminary offer from Apollo Management International. The newspaper Il Messaggero provides more details about the offer made by Apollo, offering that the ECB has invited the Carige board of directors to consider. Apollo has offered to purchase for 20 cents all NPLs (3.5 bn gross) for a price of 695 mn and to underwrite a 550 mn capital increase of which 500 mn reserved to Apollo and 50 mn open to existing shareholders. Apollo would become the largest shareholder of Carige with a stake between 52% and 59%. Clearly a mandatory takeover bid would follow. NPLs priced at 20 cents. Carige pre-capital increased valued per share Apollo s offer allows us to make some calculations: - It is confirmed that at 20 cents there are buyers of NPLs (banks, however, have a book value of cents). - Carige pre-increase is evaluated x PTE. Per share it means between 0.46 (19% downside from the last price) and 0.61 (7% upside). - Post increase the new PTE is between 0.37x and 0.42x. Carige would have a CET1 of 14% and a texas ratio of 109% (but made only of less risky unlikely to pay). The deal would solve one of the issues in the Italian banking sector, but others remain If apollo buys and cleans-up Carige one of the issues in the Italian banking system would be solved. This is a net positive for the sector. Yet, despite this, we believe it is appropriate to maintain a cautious stance on Italian banks since: - The deal proposed by Apollo underlines that a multiple of 0.2x the tangible book is not too low if the bank has structural weaknesses. - The ECB is stepping up its efforts to recapitalize banks with weaker asset quality and this dilutes their multiple and makes aggregations more difficult. - In case of aggregations we only see paper deals and we expect small premiums (if any) compared to market prices (in our opinion Apollo would accept a modest premium in case of M&A). - Aggregations are not necessarily positive for stock prices: it depends on the business model of the combined entity. Target price down to Hold confirmed The deal proposed by Apollo and the fact that the ECB is asking the board to consider it underline the fact that Carige has very few strategic options. This led us to decrease the target price from 0.95 to 0.61, that is the highest price offered by Apollo. Neutral view confirmed. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 1

2 CRG: MAIN FIGURES mn E 2017E 2018E 2019E Net Interest Income Growth -44% -5% 1% 7% 11% 11% Net Fees Growth -10% 8% 5% 7% 10% 8% Trading Total income Growth -30% -4% -5% 6% 10% 9% Operating costs Growth -23% 1% -9% 1% 1% 2% Operating profit Growth n.m. -37% 30% 43% 53% 31% Loan Loss Prov Net income reported Net income adjusted Growth -46% -58% -49% -50% -89% -903% VOLUMES E 2017E 2018E 2019E Client loans 23,682 21,472 21,904 22,889 23,919 25,115 Growth -7% -9% 2% 4% 4% 5% RWAs 20,473 20,500 20,295 20,802 21,322 21,962 Growth -5% 0% -1% 2% 2% 3% STOCK DATA E 2017E 2018E 2019E Eps - cents Eps adj - cents Growth % -50% -89% -903% Dps ord - cents Tang Eq ps PROFITABILITY E 2017E 2018E 2019E Roe -32.4% -4.8% -3.8% -1.9% -0.2% 1.7% Adj Roe -25.8% -8.5% -3.8% -1.9% -0.2% 1.7% Adj RoTE -78.7% -11.1% -3.9% -2.0% -0.2% 1.7% NIM (bps) GEARING & FUNDING E 2017E 2018E 2019E CET1 fully phased 8.3% 12.1% 11.9% 11.4% 11.1% 10.9% Assets/Equity Loans/Direct Collection 93% 94% 89% 87% 86% 86% ASSET QUALITY RATIOS E 2017E 2018E 2019E LLPs (bps) NPLs % 5.4% 6.4% 6.6% 6.6% 6.7% 6.7% Coverage of NPLs 58% 60% 61% 61% 61% 61% Coverage of tot impaired loans 40% 42% 43% 44% 44% 45% Texas ratio 181% 141% 151% 155% 158% 159% MARKET RATIOS E 2017E 2018E 2019E PE -0.8 x -2.7 x -5.2 x x x 12.0 x Adj PE -1.0 x -1.5 x -5.2 x x x 12.0 x P/TE 0.4 x 0.2 x 0.2 x 0.2 x 0.2 x 0.2 x Div. Yield ord 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% EFFICIENCY E 2017E 2018E 2019E Cost income 85.8% 90.7% 87.2% 82.8% 76.0% 71.1% Adj Cost income 78.9% 83.4% 79.5% 75.3% 68.9% 64.4% RoRWAs -2.7% -0.5% -0.5% -0.2% 0.0% 0.2% STRUCTURE E 2017E 2018E 2019E Branches Employees 5,222 4,922 4,622 4,530 4,439 4,350 Source: Equita SIM estimates and company data. * Excluding the insurance business IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 2

3 BANCA CARIGE - BUSINESS DESCRIPTION BREAKDOWN OF REVENUES BY BUSINESS 2015 NII 53% Net fees 44% Div idends and trading 3% Gruppo Banca Carige today is Italy's 7th largest banking group boasting around 630 branches throughout the country and around 2 million clients. Carige used to be controlled by a foundation, but two capital increases in 2014 and 2015 led to a complete reshuffle of the shareholders base. Now the main shareholder is the Malacalza family with a 17% stake, the second one is Mr Volpi (5%) and the foundation now controls only 2% of the bank. The group's focus has always been on families, self-employed professionals and small-to-medium-sized firms. BREAKDOWN OF FEES BY BUSINESS 2015 AM 32% Other 1% Traditional banking business 67% Distribution is very strong in Liguria (35% of the branches), while other important regions are Lombardy, Tuscany, Sicily and Piedmont. Between 2000 and 2002 Carige concluded three operations to acquire branches from other banks: 21 branches from Banco di Sicilia, 61 from Gruppo Banca Intesa and 42 from Gruppo Capitalia. In January 2004, it consolidated its presence in the area of Tuscany with the acquisition of Cassa di Risparmio di Carrara Spa. In 2008 two significant acquisitions were completed: 79 Gruppo Intesa Sanpaolo branches and 40 Gruppo Unicredit branches in Lazio, Sicilia, Emilia Romagna, Veneto and Umbria. The most recent expansion was in 2010 with the acquisition of 22 Banca Monte dei Paschi di Siena branches. Such an expansion plan in a period in which bank branches were paid dearly created a sizeable goodwill and had a negative impact on core tier1. In order to boost capital and absorb a significant increase in coverage Carige performed two capital increases totalling 1.5 bn. The foundation that historically was the majority shareholder got diluted and now controls only 2% of the bank. Today the main shareholders are Mr. Malacalza (17%) and Mr. Volpi (6%). A new management was appointed at the end of 2013 with the task to relaunch Carige and manage a potential consolidation. The CEO Montani, with a long track record in bank restructuring, put the bank on safer footing with a deep work on the loan book, which resulted in better classification of impaired loans, more conservative valuation of collaterals and improved coverage. Mr Montani will step down and will be substituted by Mr. Bastianini, former chairman of Banca Profilo. Strengths / Opportunities Highly fragmented loans and deposits due to a large proportion of retail/small business/sme customers. Strong market position in Liguria. Change in governance. Open to aggregations. Weaknesses /Threats Revenues concentrated in Italy Wide exposure to the retail/small business segment, which is affected more than average by the crisis Limited organic capital generation Weak market position outside Liguria. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 3

4 Apollo makes an offer for all NPLs and to underwrite a 550 mn capital increase Carige confirmed in a press release that it has received a non binding and preliminary offer from Apollo Management International. The newspaper Il Messaggero provides more details about the offer made by Apollo, offering that the ECB has invited the Carige board of directors to consider. Apollo has offered to purchase for 20 cents all NPLs (3.5 bn gross) for a price of 695 mn and to underwrite a 550 mn capital increase of which 500 mn reserved to Apollo and 50 mn open to existing shareholders. Apollo would become the largest shareholder of Carige with a stake between 52% and 59%. Clearly a mandatory takeover bid would follow. NPLs priced at 20 cents. Carige pre-capital increased valued per share Apollo s offer allows us to make some calculations: - It is confirmed that at 20 cents there are buyers of NPLs (banks, however, have a book value of cents). - The sale of NPLs implies a net loss of 500 mn, exactly compensated by the capital increase. - Carige pre-increase is evaluated x PTE. Per share it means between 0.46 (19% downside from the last price) and 0.61 (7% upside). - Post increase the PTE increases because the tangible book does not change (the loss on NPLs is offset by the capital increase), while the number of shares increases. The new PTE is between 0.37x and 0.42x. Carige would have a CET1 of 14% and a texas ratio of 109% (but made only of less risky unlikely to pay). CARIGE: THE DEAL PROPOSED BY APOLLO ( mn) Gross NPLs 3,511 Price paid 695 Price in cents 20% Current coverage 60% Pre tax loss -695 tax shield 30% Net loss -487 Capital increase 550 Stake in CRG 52%-59% Texas ratio 164% New texas ratio 109% CET1 12% New CET1 14% Value per share max 0.61 Value per share min 0.46 PTE post cap increase max 0.41 PTE post cap increase min 0.36 Source: Equita SIM estimates and company data. Some preliminary considerations - Despite several reforms so far private equity firms do not raise bids on NPLs above 20 cents, probably counting on the fact that the weakest banks have little bargaining power and especially tight schedules. - According to our estimates Carige post increase could generate 83 mn of profit or 3.3% Rote. We have assumed that Carige will save 3% of funding cost on bn of cash-in ( 695 mn from disposal of NPLs and 550 mn from share sale) and 2 bn of bond maturities thus boosting its NII by 97 mn. On the other hand, we have assumed that LLPs will collapse to 42 bps or 100 mn. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 4

5 CARIGE: 2018E P&L POST CLEAN-UP AND CAPITAL HIKE ( MN) 2016E Recap and Cleanup 2018E Interest Margin Dividends Trading Activities Net Commissions Change 5.3% 10.0% Non Interest Income Total Income Staff Costs Other Costs Depreciation Total costs Change -8.5% 1.0% Operating Profit LLPs Other Provisions 0 0 Extraordinary Items 0 0 Pre-Tax Profit Taxes Minorities 0 0 Net Profit RoTE 3.3% Source: Equita SIM estimates and company data. - Apollo's plan is clear: buy NPLs at steep discount and have a bank recapitalized and without problems of asset quality so that it is relatively easy to sell it to those who can further reduce costs and try to improve revenue per branch (UBI? BPE?). - The ECB's pressure shows that the regulator intends to deal with complicated cases in the course of 2016, that it considers necessary a reduction of NPLs and a capital increase (see also the case of BP) and that the protection of shareholders is not at the top of its priorities. - Given the pressure of the ECB (see letter on the funding plan, business plan etc.) we think that Mr. Malacalza has little alternative but to accept the proposal, possibly with an earn-out on NPLs in favor of Carige, or promote himself a capital increase. However, this second option is risky unless they already have a pre-agreement for an aggregation after the capital increase. - The valuation of Carige at 0.4x P/TE post recap will be a benchmark for the 4 good banks (that by the way have a CET1 <10%). This would imply a loss of c660mn for the three banks that financed for 1.65bn the rescue fund (ISP, UCG, UBI) that bought them at c0.8x P/TE. In the end this loss should be covered by CdP. - Apollo owns the insurance companies recently sold by Carige and this creates some conflicts of interests that need to be addressed. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 5

6 The deal would solve one of the issues in the Italian banking sector, but others remain If apollo buys and cleans-up Carige one of the issues in the Italian banking system would be solved. This is a net positive for the sector. Yet, despite this, we believe it is appropriate to maintain a cautious stance on Italian banks since: - The deal proposed by Apollo underlines that a multiple of 0.2x the tangible book is not too low if the bank has structural weaknesses. - The ECB is stepping up its efforts to recapitalize banks with weaker asset quality and this dilutes their multiple and makes aggregations more difficult. - In case of aggregations we only see paper deals and we expect small premiums (if any) compared to market prices (in our opinion Apollo would accept a modest premium in case of M&A). - Aggregations are not necessarily positive for stock prices: it depends on the business model of the combined entity. Target price down to Hold confirmed The deal proposed by Apollo and the fact that the ECB is asking the board to consider it underline the fact that Carige has very few strategic options. This led us to decrease the target price from 0.95 to 0.61, that is the highest price offered by Apollo. Neutral view confirmed. STATEMENT OF RISK The main factors that could adversely or positively affect our neutral view on CRG are as follows: 1. Major asset quality problems/improvements; 2. Adverse/Favourable changes in sector regulation; 3. Failure to deliver/significant outperformance vs. business plan targets; 4. Significant increase/decrease in short-term rates; 5. Significant deterioration/improvement in the macroeconomic environment; 6. Significant increase/decrease in sector competition. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 6

7 INFORMATION PURSUANT TO ARTICLE 69 ET SEQ. OF CONSOB (Italian securities & exchange commission) REGULATION no /1999 This publication has been prepared by Matteo Ghilotti on behalf of EQUITA SIM SpA (licensed to practice by CONSOB resolution no of December 22nd 1998 and registered as no. 67 in the Italian central register of investment service companies and financial intermediaries) In the past EQUITA SIM has published studies on Banca Carige EQUITA SIM is distributing this publication via to more than 700 qualified operators from March 30, 2016 The prices of the financial instruments shown in the report are the reference prices posted on the day prior to the date indicated on cover page. EQUITA SIM intends to provide continuous coverage of the financial instrument forming the subject of the present publication, with a semi-annual frequency and, in any case, with a frequency consistent with the timing of the issuer s periodical financial reporting and of any exceptional event occurring in the issuer s sphere of activity. The information contained in this publication is based on sources believed to be reliable. Although EQUITA SIM makes every reasonable endeavour to obtain information from sources that it deems to be reliable, it accepts no responsibility or liability as to the completeness, accuracy or exactitude of such information. If there are doubts in this respect, EQUITA SIM clearly highlights this circumstance. The most important sources of information used are the issuer s public corporate documentation (such as, for example, annual and interim reports, press releases, and presentations) besides information made available by financial service companies (such as, for example, Bloomberg and Reuters) and domestic and international business publications. It is EQUITA SIM s practice to submit a pre-publication draft of its reports for review to the Investor Relations Department of the issuer forming the subject of the report, solely for the purpose of correcting any inadvertent material inaccuracies. This note has not been submitted to the issuer. EQUITA SIM has adopted internal procedures able to assure the independence of its financial analysts and that establish appropriate rules of conduct for them. Furthermore, it is pointed out that EQUITA SIM SpA is an intermediary licensed to provide all investment services as per Italian Legislative Decree no. 58/1998. Given this, EQUITA SIM might hold positions in and execute transactions concerning the financial instruments covered by the present publication, or could provide, or wish to provide, investment and/or related services to the issuers of the financial instruments covered by this publication. Consequently, it might have a potential conflict of interest concerning the issuers, financial issuers and transactions forming the subject of the present publication. Equita SIM S.p.A. has undertaken an underwriting agreement in the framework of the share capital increase of Banca Carige S.p.A. In addition, it is also pointed out that, within the constraints of current internal procedures, EQUITA SIM s directors, employees and/or outside professionals might hold long or short positions in the financial instruments covered by this publication and buy or sell them at any time, both on their own account and that of third parties. The remuneration of the financial analysts who have produced the publication is not directly linked to corporate finance transactions undertaken by EQUITA SIM. The recommendations to BUY, HOLD and REDUCE are based on Expected Total Return (ETR expected absolute performance in the next 12 months inclusive of the dividend paid out by the stock s issuer) and on the degree of risk associated with the stock, as per the matrix shown in the table. The level of risk is based on the stock s liquidity and volatility and on the analyst s opinion of the business model of the company being analysed. Due to fluctuations of the stock, the ETR might temporarily fall outside the ranges shown in the table. EXPECTED TOTAL RETURN FOR THE VARIOUS CATEGORIES OF RECOMMENDATION AND RISK PROFILE RECOMMENDATION/RATING Low Risk Medium Risk High Risk BUY ETR >= 10% ETR >= 15% ETR >= 20% HOLD -5% <ETR< 10% -5% <ETR< 15% 0% <ETR< 20% REDUCE ETR <= -5% ETR <= -5% ETR <= 0% The methods preferred by EQUITA SIM to evaluate and set a value on the stocks forming the subject of the publication, and therefore the Expected Total Return in 12 months, are those most commonly used in market practice, i.e. multiples comparison (comparison with market ratios, e.g. P/E, EV/EBITDA, and others, expressed by stocks belonging to the same or similar sectors), or classical financial methods such as discounted cash flow (DCF) models, or others based on similar concepts. For financial stocks, EQUITA SIM also uses valuation methods based on comparison of ROE (ROEV return on embedded value in the case of insurance companies), cost of capital and P/BV (P/EV ratio of price to embedded value in the case of insurance companies). MOST RECENT CHANGES IN RECOMMENDATION AND/OR IN TARGET PRICE (OLD ONES IN BRACKETS): Date Rec. Target Price ( ) Risk Comment 15 February 2016 HOLD (HOLD) 0.95 (1.42) Medium Lower M&A multiple and lower earnings 8 February 2016 HOLD (HOLD) 1.42 (1.72) Medium Lower M&A multiple 12 November 2015 HOLD (HOLD) 1.72 (1.99) High Lower earnings 8 June 2015 HOLD (HOLD) 1.9 (7.0) High Capital increase 18 May 2015 HOLD (HOLD) 7 (0.07) High Reverse stock split DISCLAIMER The purpose of this publication is merely to provide information that is up to date and as accurate as possible. The publication does not represent to be, nor can it be construed as being, an offer or solicitation to buy, subscribe or sell financial products or instruments, or to execute any operation whatsoever concerning such products or instruments. EQUITA SIM does not guarantee any specific result as regards the information contained in the present publication, and accepts no responsibility or liability for the outcome of the transactions recommended therein or for the results produced by such transactions. Each and every investment/divestiture decision is the sole responsibility of the party receiving the advice and recommendations, who is free to decide whether or not to implement them. Therefore, EQUITA SIM and/or the author of the present publication cannot in any way be held liable for any losses, damage or lower earnings that the party using the publication might suffer following execution of transactions on the basis of the information and/or recommendations contained therein. The estimates and opinions expressed in the publication may be subject to change without notice. EQUITY RATING DISPERSION AS OF DECEMBER 31, 2015 (art. 69-quinquies c. 2 lett. B e c. 3 reg. Consob 11971/99) COMPANIES COVERED COMPANIES COVERED WITH BANKING RELATIONSHIP BUY 33.5% 56.6% HOLD 63.8% 41.5% REDUCE 2.7% 1.9% NOT RATED 0.0% 0.0% The list of all conflicts of interest, rating dispersion and other important legal disclaimers are available on in the avvertenze legali section. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 7