Milano, 13th July 2005

• The strategic objective is to place Gruppo Intesa among the best European banks as measured by value creation, service quality, profitability and capital adequacy

 

• The main drivers will be: sustainable growth, strict cost discipline, distinct focus on risk management and capital allocation, massive investments in innovation

 

• Gruppo Intesa’s main financial targets for 2007 are:

-      net income at 3 billion euro (up 50% from 2 billion of 2004 on a consistent basis)

-      ROE at 20% (16% in 2004 on a consistent basis)

-      cost/income ratio at 50% (60% in 2004 on a consistent basis)

-      Core Tier 1 ratio at 7.2% (in line with the 2004 ratio on a consistent basis)

-      cash dividends to exceed 5 billion euro in the three-year period, from over 1.5 billion in 2005 to over 2 billion in 2007

-      book value per share to rise from 1.94 euro in 2004 to 2.32 in 2007 (up 19.6%)

-      “return” for shareholders equal to around 60% in the 2005-2007 period

 

• Operating margin to rise an annual average growth rate of 16%

 

• Development strategy based on organic growth with current business mix unchanged: revenues to grow at an annual average rate of 7.4%

 

• A 2 billion euro investment to improve customer service

 

• Costs to increase at a modest annual average rate of 1.1%, as a result of growth-related expenses mostly offset by savings in other items

 

 

 

The Board of Directors of Banca Intesa, which met under the chairmanship of Giovanni Bazoli, approved the Business Plan for the period 2005-2007 drawn up in accordance with the new international accounting standards IAS/IFRS already adopted by Banca Intesa when preparing the quarterly report as at 31^st March 2005.

 

The 2005-2007 Business Plan aims at placing Gruppo Intesa among the best European banks - with an AA tier rating - as measured by value creation and on the key valuation parameters (service quality, asset quality, profitability, capital adequacy), after the restructuring and relaunching of the Group through the achievements in the 2003-2004 period of the targets set out in the 2003-2005 Business Plans.

 

 

1. Main financial targets

 

The Group’s main financial targets set forth in the 2005-2007 Business Plan are as follows:

 

 

 

For the period 2005-2007, Gruppo Intesa’s total revenues are targeted at an annual average increase of 7.4%, reaching around 11.5 billion in 2007 with net interest income to increase at a 7.7% annual average rate (with an annual average growth rate of loans at 8%) and net fee and commission income to rise at a 9.1% annual average rate (driven by asset management, bancassurance, insurance products linked to personal loans and mortgages, current accounts, transaction services, debit and credit cards) while other revenues (profits on trading and other operating income) will be basically unchanged.

 

Costs are set to maintain a much lower growth trend with an annual average increase of 1.1% (to 5.7 billion euro), with the Cost/Income down to target a steady 50% (with a 10 p.p. improvement with respect to the 60% of 2004 on a consistent basis) and operating margin   targeted at an annual average growth rate of 16% to around 5.8 billion euro. Cost of risk will remain around 50 bp. Through the combined action of these items and a tax rate of around 35% Gruppo Intesa’s net income for 2007 is targeted at approximately 3 billion euro, up by about 50% with respect to the 2 billion net income of 2004 on a consistent basis.

 

ROE is thus targeted at 20% in 2007 from 16% in 2004 on a consistent basis and EVA^®(Economic Value Added which - basically - measures the value creation resulting from the difference between the return and the cost of capital employed) at around 1.4 billion eurofrom 0.6 billion in 2004 on a consistent basis.

 By 2007 cash dividends may triple since Banca Intesa intends to determine a pay-out to maintain Core Tier I ratio at around 7%. This level is consistent with the bank’s objective of achieving an AA tier rating, supplies sufficient flexibility to seize external growth opportunities which may arise and maintains an acceptable level of “excess” capital.

 

Overall, in the 2005-2007 period pay-out is expected to exceed 5 billion euro, rising from over 1.5 billion euro in 2005 to over 2 billion in 2007 and - along with the increase in book value per share (including retained earnings for the year) moving up from the 1.94 euro of 2004 to 2.32 in 2007 (+19.6%) - will lead to a “return” for shareholders equal to around 60% in the three-year period.

 

Making Banca Intesa one of the best European banks entails a strong value creation based on the three key management drivers: sustainable growth, strict cost discipline and a distinct focus on risk management and capital allocation.

 

 

2. Deliver sustainable growth

 

Gruppo Intesa’s growth is the key feature of the 2005-2007 Business Plan, despite the forecasted weakness of the general economic situation. The Plan is based on the following conservative macro-economic assumptions:

 

 

Forecasts for the Italian banking system are as follows:

 

 

A revenue growth rate of 7.4% is within the Group’s reach because it is consistent with the momentum that the Bank has already gained and, above all, with the development plans under way. These initiatives are selectively aimed at business areas where the Group still has considerable potential for increasing its market share.

 

Further, it is a sustainable growth in an increasingly competitive and sophisticated market, because it builds on the soundness of a medium/long-term strategy aimed at establishing a responsive and constructive relationship with the “Country System”.

 

Moreover, it is an organic growth. The 2005-2007 Business Plan does not entail particularly significant extraordinary operations. The Plan will be obviously revised should promising opportunities arise which are worth seizing in the framework of the industry’s transformation process in Italy and in Europe: opportunities which are not evident at present and would in any case be analysed with great caution.

 

The Plan does not include significant changes in the business mix consolidated in years 2003 and 2004:

-      the general business mix. In the last two years, the ratio between retail and corporate activities changed from 57/43 to 70/30. The 2005-2007 Business Plan forecasts confirm this level. The Corporate Division has completed the restructuring of its loan portfolio, which led to a reduction exceeding 30 billion euro in loans mainly granted to large and very large non-Italian groups with inadequate risk/return profiles. The Corporate Division has been assigned precise growth objectives especially in the mid-corporate segment (with a turnover of 50-500 million euro), in Public Administration, and in general, in the infrastructure segment;

-      the geographic mix between Italy and abroad. The 2005-2007 Business Plan forecasts confirm an approximately 85-to-15 ratio, even though the goal is to further selectively increase the Group’s retail presence in Central and Eastern Europe (CEE). In the first months of 2005, Banca Intesa signed the purchase agreements for the acquisition of three banks, one in Serbia and Montenegro, one in Bosnia and Herzegovina and one in the Russian Federation. Banca Intesa may enter other target countries - such as Turkey, Romania and the Ukraine - via the purchase of leading domestic banks if conditions justify the investment, or via smaller banks to be developed over time.

 

The Group’s core business will continue to be based on long-term relationships with customers with the objective of giving them the best offering and service. Customers change depending on their life cycle, circumstances, the economic situation, the evolution of their personal and social needs. A considerate bank will be able to support each customer’s circumstances, whether a person or a family or a company: willing to suggest products specifically suited to meet his/her needs and ready to help modify previous decisions as his/her objectives or external conditions change.

 

The choice of the products to be produced in-house and those to be provided via partnerships must be grounded on the utmost customer satisfaction. With this in mind, in the first months of 2005 a strategic transaction has already been announced   for asset management activities, which is part of the new Business Plan: Crédit Agricole will hold a 65% stake and Gruppo Intesa a 35% stake of the share capital of the asset management company resulting from the integration of Nextra Investment Management - which was to date Gruppo Intesa’s totally-captive factory - and Crédit Agricole Asset Management Italia with a long-term distribution agreement.   The asset management offering to the Group’s clients will be enriched and strengthened since Nextra will take part - via the partnership with Crédit Agricole - in one of the largest European asset management conglomerates. At the same time, the opportunity of using the so-called Open Architecture solutions will be increased. In this way, Gruppo Intesa anticipates a trend which will lead to the polarisation of the market in very large global players and specialised asset managers.

 

In short, there are three pillars that will be sustaining this growth. Customer satisfaction (following Banca Intesa’s specialised structures tailor-made to the specific needs of each customer segment), enhancement of the human resources within the Group (with training and motivation of both individuals and teams and maximum enlargement of the shareholder base), a massive investment plan in innovation (around 2 billion euro will be spent over the 2005-2007 period focused on customer service quality, an area where significant progresses have already been made and which still has wide room for improvement).

 

All the Group’s Divisions will contribute to further improving results with revenues to grow at an annual average rate of 7.7% in the Retail Division, of 5.3% in the Italian Subsidiary Banks Division, of 9% in the International Subsidiary Banks Division and of 8.9% in the Corporate Division.

 

The Retail Division  will continue   the efforts begun in the 2003-2004 period to improve service and product quality, both by continuing to develop targeted offers to specific customer segments and by extending credit access and bank services to social categories that find it hard to get bank backing. The new branch lay-out will be rolled out to an increasing number of branches (approximately 500 in the period 2005-2007). The new model is better suited to meet customer needs, easier to use and effectively communicates some of key features which must distinguish Banca Intesa: simplicity of use and customer proximity. As of 1^st September 2005, on an experimental basis, some branches will also be open at lunchtime with differentiated opening hours. The growth in revenues will be the result of both improved business with the existing customer base and the acquisition of new clients. The new company Intesa Private Banking will benefit from cooperating with the branch network to increase the number of customers and assets under management, a model which is unique in Italy.

 

The Italian Subsidiary Banks Division will continue to build on its deep relationships in its respective local markets, extending best practice products and services developed within the Group. The International Subsidiary Banks Division will continue its growth strategy in Central-Eastern Europe both via organic growth (opening of new branches and transferring of the Group’s best practices) and via acquisitions, should attractive opportunities arise.

 

The Corporate Division will grow via better team work between relationship managers and product specialists, which will offer customers, systematically and effectively, the skills operating in day-to-day and extraordinary corporate finance. The new Bank which will increase the activities performed to date by the “Public and Infrastructure Finance” Department will not only enable Gruppo Intesa to strengthened its role in Italy in support of the Public Sector and large infrastructural projects, but also to develop similar activities in other countries in which the Group has a presence.

 

 

3. Strict cost discipline

 

Growth in a difficult market also requires a very competitive cost base. The 2005-2007 Business Plan sets forth a modest annual average increase of 1.1%. The rationalisation of the Group’s structures, the simplification of the organisation, the increase in the efficiency of Information Technology will continue. The review of the main products/processes will be extended to the entire Group. The overall cost savings will amount to approximately 440 million euro and will offset the automatic increases in certain items (e.g. national labour contracts) of approximately 350 million euro and some growth-related expenses (e.g. the opening of around 230 new branches and the increase in the number of commercial staff) of approximately 230 million euro.

 

 

4. Distinct focus on risk management and capital allocation

 

Risk management in all its forms has become one of the key success factors of several leading international banks. In the last few years, Banca Intesa greatly strengthened the management of all risk categories. Ad hoc instruments have been developed. Very rigorous policies have been introduced, creating or consolidating dedicated structures, but also starting to build and disseminate a risk and control culture at all company levels. This effort will continue and in the years of the new Business Plan its results will emerge more clearly:

-      concerning credit risk the internal model to calculate credit VaR - Basel II Advanced – will be finalised and validated and the implementation of Probability of Default (PD), Loss Given Default (LGD) and Exposure At Default (EAD) will be extended to the credit processes of all customer segments, fully-compliant with the principles and greatly ahead of the timing set out by Basel;

-      the strengthening of the platform to measure market risk (VaR) will continue based on the most advanced technology (Algo-SuiteTM) and proprietary solutions (Intesa Suite) - already validated by the Bank of Italy - with the objective of maintaining the current monitoring of risk at single desk level, supporting product innovation and offering innovative risk management services to customers;

-      the operational risk will be measured and managed, with growing attention, thanks to an internal quali-quantitative model (OpVaR) also destined to review the Group’s operating engine and insurance policies.

 

The most significant benefits of this great effort will stem from the integrated management of risk and return. This management will be made possible by the substantial investments made in the last few years, which enabled the Bank to measure for each customer: risk level (expressed in terms of PD and rating), capital absorption (in a Basel I and Basel II logic) and economic value creation (EVA^®).

 

Banca Intesa aims to further improve the composition of its loan portfolio per rating by increasing the investment grade component from 60% in 2004 to 64% in 2007 on the Group’s total loans (including loans to financial institutions and “sovereign risk” counterparts) and from 52% to 56% on loans to enterprises (mid and large corporates, SMEs, micro-enterprises and small businesses).

 

The optimisation of assets includes the recently-announced sale without recourse of 70% of the Group’s doubtful loans. The reason for the sale of assets and the loan servicing business which manages doubtful loans to Merrill Lynch and Fortress is consistent with the strategy to align Gruppo Intesa to the best market benchmarks in terms of the doubtful loan/loan ratio, (which will remain, net of adjustments, below 1% throughout the 2005-2007 period), further and structurally decreasing operating costs and exploiting the particularly high demand for doubtful loans.

 

* * *

 

In short, with the implementation of the 2005-2007 Business Plan, Banca Intesa intends to strengthen its role as a partner in the growth of all its stakeholders through increasing return on capital invested by shareholders, developing long-term relationships with customers based on reciprocal satisfaction, offering professional growth opportunities in a stimulating environment for all personnel and providing support in the development of the countries in which the Group operates, above all Italy.

 

 

Banca Intesa Investor Relations
+39.02.87943180
investorelations@bancaintesa.it

Banca Intesa Media Relations
+39.02.87963531
stampa@bancaintesa.it

 

www.bancaintesa.it