Popolari consolidation warrants differentiation; Buy BPM/BPER · March 9, 2015 Italy: Banks Equity Research Popolari consolidation warrants differentiation; Buy BPM/BPER Government

March 9, 2015

Italy: Banks

Equity Research

Popolari consolidation warrants differentiation; Buy BPM/BPER

Government reform sets the stage for restructuring

Public capital injections in Italy have been relatively limited owing to the

slow recognition of losses. However, public intervention (or fear of

outsized involvement) has been a decisive trigger in a number of countries

for market consolidation or restructuring, which has been lacking in Italy.

Having “missed” this opportunity, Italy’s state involvement is following a

legislative path: the bank reform bill announced in January 2015 requires

the Popolari banks to become joint stock companies. We believe this will

trigger a wave of mergers, initially among the Popolari, and possibly later

involving foreign banks, as Popolari, even merged, remain fairly small.

In aggregate, without M&A, the upside for Popolari seems limited

Since the announcement of the bill the Popolari shares have risen 39%,

leaving them on 0.8x 2014 P/TBV. We believe this adequately reflects our

“reasonably normalized” ROTE estimate of 7% (current pre-impairment

profit and normal loan losses). Past transactions suggest cost synergies

have the potential to increase ROTE to 9.2% and capital optimisation can

release significant value at certain banks. However, the group is on 8.4x

cum synergy profits which is no longer excessively cheap.

Bank-by-bank, uniform multiples leave room for differentiation

The four Popolari banks under our coverage trade within +/-2% of the

average P/TBV of 0.8x. However their stand-alone returns differ: we see a

range of 6%-9% on our reasonably normalized profit estimates; cost

synergies could add more at BPM and BPER compared to UBI and BMPS;

and capitalization discrepancies are high: on CET1, the banks are in a

narrow range, but on leverage the best capitalized banks (BPM and BPER)

hold almost twice as much equity as BMPS and BAPO.

Switching from BAPO (B to N) into BPER (CL-Buy), BPM (B)

We downgrade BAPO to Neutral after outperformance and initiate on BPER

with a CL-Buy as we see significantly more value into the consolidation

phase. The shares have risen by a similar amount ytd, but we see BPER as

offering: 1) the cheapest P/E on stand-alone earnings (8.6x), 2) the lowest

efficiency base, and 3) potential capital release of c.20% of its market cap.

All in, we estimate a trade buyer could achieve a c.22% ROI by acquiring

BPER at the current share price. BPM moves to Buy on a similar premise.

SUMMARY OF RATINGS AND PRICE TARGETS

* denotes Conviction List membership

Source: Datastream, Goldman Sachs Global Investment Research.

RELATED RESEARCH

Popolari reform: Will this time be different? Buy Intesa (on

CL) and BAPO, January 20, 2015

Popolari reform (continued): This time appears to be

different – Buy ISP (CL), BAPO, January 20, 2015

COVERAGE VIEW: NEUTRAL

Jean-Francois Neuez +44(20)7552-9362 [email protected] Goldman Sachs International Goldman Sachs does and seeks to do business with

companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Willis Palermo +44(20)7552-8394 [email protected] Goldman Sachs InternationalJacqueline Cheung +44(20)7552-5949 [email protected] Goldman Sachs International

The Goldman Sachs Group, Inc. Global Investment Research

Rating Price 12m PT Potential

New Old New Old upside

UCG N N 6.07 7.00 6.90 15%

ISP B* B* 2.95 3.60 3.60 22%

BMPS N N 0.57 0.62 0.52 10%

BPM B N 0.85 1.01 0.73 20%

BAPO N B 13.65 15.10 16.30 11%

UBI N N 7.12 7.80 6.70 10%

BPER B* -- 7.27 10.30 42%

This is a redacted version of our report published on March 9, 2015

March 9, 2015 Italy: Banks

Goldman Sachs Global Investment Research 2

Table of contents

Overview: Popolari consolidation the logical result of AQR & recaps 3

Ratings and valuation summary 5

Mapping the landscape 7

Step no.1: Assessing stand-alone “reasonably normalized” earnings power

– fairly valued in aggregate but differences exist 9

Step no.2: Synergies – cost saving can boost profits materially, range of funding costs already narrow 11

Step no.3: Capital optionality – synergies for some, dissynergies for others 15

Valuation: Incorporating our M&A screen into price targets 18

Banca Popolare Emilia Romagna (EMII.MI): Initiating with CL-Buy 19

Banca Popolare di Milano (PMII.MI): Up to Buy from Neutral 22

Intesa (ISP.MI): Reiterate Conviction List-Buy 25

UniCredit (CRDI.MI): Neutral 28

Banca Monte Paschi di Siena (BMPS.MI): Neutral 31

UBI Banca (UBI.MI): Neutral 34

Banco Popolare (BAPO.MI): Down to Neutral from Buy 37

Appendix: Balance sheet unknowns – relative size of NPL books can make a difference for consolidation 40

Appendix: Recent trends in P&L developments 43

Appendix: Detailed earnings changes 45

Disclosure Appendix 46

The prices in the body of this report are based on the market close of March 5, 2015.

The authors would like to thank Mridul Gupta for its contribution to the report.



Overview: Popolari consolidation the logical result of AQR & recaps

The Italian banks we cover have made an aggregate loss since 2008, but public intervention

has been limited as losses have been slow to filter through, giving banks time to

recapitalise on their own. However, public intervention (or fear of outsized involvement)

has been a decisive trigger in a number of countries for market consolidation or

restructuring (Spain, the UK, Ireland, Greece). Thus, unsurprisingly, little restructuring has

taken place: Italy is still the second most fragmented market in Europe

Having “missed” this opportunity, Italy’s state involvement is following a legislative path:

the bank reform bill announced in January 2015 requires the Popolare banks to become

joint stock companies. We believe this – and the market ingredients – will trigger a wave of

mergers:

Low profitability: we expect Italian banks to be some of the least profitable in the

sector, on our estimates, and among them, Popolari to be less profitable than large

banks.

Fragmentation: even if the 10 Popolari concerned were to consolidate into just two

banks, neither would feature among the Euro area’s top 20 by assets.

Exhibit 1: Concentration of Italian banks is low … Herfindahl index for credit institutions, 2013

Exhibit 2: …ROTE also among the lowest ROTE 2015-17E

Source: ECB.

Source: Goldman Sachs Global Investment Research.

Exhibit 3: Popolari are small in an Italian and a European context: even the two biggest together would not feature in

the Euro area’s top 20 Assets, 2013, € mn

Source: EBA, Company data.

94

83.8

70.664

56.2

45.9 43.739.6

30.6

GRE NET POR BEL SPA FRA UK ITA GER

14.3% 14.0% 13.8%13.0%

11.6%11.0% 10.7%

10.3% 10.2% 10.0%9.1%

7.7%

SWI CEE NOR SPA UK AUS IRE POR BEN FRA ITA GER

16

40

15

81 14

56

11

42

11

17

10

65

85

0 78

7 67

4 58

75

61

53

95

37

37

03

35

31

63

05

29

52

74

26

62

65

25

62

41

23

92

23

19

91

99

19

81

98

18

91

77

16

21

61

14

71

47

14

51

31

12

61

25

12

41

22

12

01

18

11

61

09

10

91

02

10

19

89

29

18

98

48

28

27

77

77

67

57

47

37

1 63

62

60

59

54

54

53

53

53

49

48

46

46

45

45

44

43

42

41

40

37

37

37

37

37

36

35

35

35

33

32

30

29

28

27

27

25

25

23

23

16

16

13

13

10

BN

PP

DB

K

CA

SA

SO

CG

SA

N

BP

CE

UC

I

ING

RA

BO

BB

VA

CB

K

CM

ISP

AB

N

CA

IXA

DZ

B

ND

AFI

ML

IE

LB

BW

BA

NK

IA

1/2

Po

po

lari #

21

BM

PS

#2

7

BA

PO

#3

8

UB

I #4

0

ME

DIO

#5

8

BP

ER

#6

4

PM

I #7

2

ICC

R #

74

VIC

EN

#76

VE

NE

T #

84

CA

RI #

85

SO

ND

#9

2

PIC

C #

97

ET

RU

#1

03

BA

RI #

10

7



Valuations have risen and converged…

With the exception of BMPS on 0.7x, the domestic Italian banks we cover are trading in a

narrow P/TBV range of 0.80-0.82x on 2014. Arguably, this is logical, given their business

plans which all target similar long-term returns (9% ROTE); however, on our assessment of

“reasonably normalized” profits (that is, current pre-impairment profits and average loan

losses), we believe that:

At this level of valuation (a P/E of 10.8x), the standalone upside potential is limited for

this group of banks

However, stock picking opportunities do exist, as their earnings power varies: on 8.4x

‘’reasonably normalized’’ P/E (step 1), we believe BEPR is still relatively attractive

… But in an M&A scenario, cost and capital synergies warrant

differentiation

We attempt to estimate the value that can be released for each of the domestic banks in a

consolidation scenario. Overall, we find that materially more value can be released at BPM

and BPER. We screen them on two metrics: cost and capital synergies:

On costs, we estimate that the average increase in cum synergy profits could be 31%

higher than on a standalone basis and ROTE would gain 2.5 points. BPER and BPM are

the least efficient vs. peers.

On capital, BPER’s and BPM’s capital requirements are still significantly higher than

peers, owing to delayed adoption of the latest regulatory calculation standards. Using

the most recent benchmarks set by UBI, we estimate they could release c.20% of their

market cap. Conversely, BMPS’s and BAPO’s extra capital requirements would

increase by c.30% of their market cap, on the same measure.

Exhibit 4: On 10.8x stand-alone P/E, upside appears limited, but taking into consideration potential value release

through consolidation, selected opportunities appear Scenario P/Es


Step 1 Step 2 Step 3

P/E on “reasonably normalized” profits expectations Nomalized P/E including cost synergies Nomalized P/E including cost and capital synergies

13.2x12.5x

10.8x 10.5x

8.6x

11.0x

BPM UBI BMPS BAPO BPER Total

10.2x9.4x

8.1x 8.0x

6.8x

8.5x

UBI BPM BMPS BAPO BPER Total

11.5x

8.9x 8.8x

6.4x

4.6x

8.4x

BMPS BAPO UBI BPM BPER Total



Ratings and valuation summary

Initiating coverage of Banca Popolare Emilia Romagna (BPER) with a Buy rating

and adding to the Conviction List as we see significantly more value potential going

into the consolidation phase than for peers. The Popolari shares have risen by a similar

amount this year, but we believe BPER offers (1) the cheapest P/E on stand-alone

earnings (8.6x), (2) the lowest efficiency starting point and (3) capital release potential

of c.30% of its market cap. All in, we estimate a trade buyer could achieve a c.22% ROI

by acquiring BPER at the current share price.

Upgrading Banca Popolare di Milano to Buy: similarly to BPER, BPM is a relatively

small bank, where potential cost and capital synergies are significant; we estimate it

would trade at 6.0x P/E on normalized provisions, cum cost synergies and after

harmonizing its capitalization to our benchmark.

Banco Popolare down to Neutral from Buy: in our view the value release potential in

a consolidation scenario at BAPO is more limited owing to the risk that its

capitalization could suffer from higher risk weight assignment in the future, as is taking

place at peer UBI, also noting that BAPO’s starting risk weight position was lower.

After a period of out-performance we therefore take the shares to Neutral from Buy.

Intesa remains Conviction List-Buy: our investment thesis is based on the attractive

dividend prospects: we forecast an average yield of 8% over the next five years, rising

to 13% including excess capital. This yield is credible in our view given (1) on the

earnings side: current pre-provision profit growth and falling impairments and (2) on

the capital side: sector-leading ratios and relative lack of complexity on three important

counts – a less international footprint, less wholesale business and smaller in the

context of its central bank, making the capital more accessible to shareholders in our

opinion.

Unicredit, BMPS and UBI remain Neutral.



Exhibit 5: Summary of ratings, price targets and estimates € per share

* denotes Conviction List membership

Source: Datastream, Company data, Goldman Sachs Global Investment Research.

Rating Price 12m price target Potential GS EPS GS P/E

new old new old upside 2014 2015E 2016E 2017E 2018E 2019E 2014 2015E 2016E 2017E 2018E 2019E

UniCredit N N 6.07 7.00 6.9 15% 0.34 0.44 0.64 0.77 0.85 0.92 18.0x 13.7x 9.5x 7.8x 7.1x 6.6x

Intesa San Paolo B* B* 2.95 3.60 3.6 22% 0.09 0.23 0.29 0.31 0.33 0.35 33.2x 12.6x 10.1x 9.4x 8.9x 8.4x

Banca Monte dei Paschi di Siena N N 0.57 0.62 0.5 10% -0.83 0.02 0.06 0.07 0.08 0.08 nm 37.2x 9.7x 8.4x 7.5x 7.5x

Banca Popolare di Milano B N 0.85 1.01 0.7 20% 0.05 0.04 0.06 0.07 0.08 0.08 16.0x 20.5x 14.8x 12.2x 11.3x 10.6x

Banco Popolare N B 13.65 15.10 16.3 11% -4.16 0.81 1.22 1.50 1.73 1.83 nm 16.9x 11.2x 9.1x 7.9x 7.5x

UBI Banca N N 7.12 7.80 6.7 10% 0.19 0.32 0.51 0.63 0.74 0.79 36.8x 22.1x 13.9x 11.3x 9.6x 9.1x

Banca Popolare dell'Emilia Romagna B* 7.27 10.30 42% 0.03 0.41 0.68 0.83 0.91 1.00 225.3x 17.5x 10.6x 8.7x 8.0x 7.3x

Italian banks - - - - - - - - - - - 31.5x 14.9x 10.4x 9.0x 8.3x 7.8x

GS EPS v. consensus GS EPS (old) % change

2015E 2016E 2017E 2018E 2019E 2014 2015E 2016E 2017E 2018E 2019E 2014 2015E 2016E 2017E 2018E 2019E

UniCredit -4% 12% 10% 0% na 0.38 0.55 0.68 0.80 0.90 -10% -19% -6% -4% -5% na

Intesa San Paolo 29% 26% 19% 18% na 0.09 0.23 0.29 0.31 0.33 0.35 0% 0% 0% 0% 0% 0%

Banca Monte dei Paschi di Siena -55% -5% -25% -58% na -0.83 0.01 0.05 0.06 0.07 0.06 0% 16% 16% 16% 16% 16%

Banca Popolare di Milano -12% -1% 5% 12% na 0.06 0.05 0.06 0.07 0.08 -4% -22% -8% -2% -4% na

Banco Popolare 8% 5% 7% 18% na -0.53 1.07 1.64 1.97 2.38 nm -25% -25% -24% -27% na

UBI Banca -20% -4% 0% 7% na 0.12 0.45 0.56 0.72 0.84 59% -28% -9% -12% -12% na

Banca Popolare dell'Emilia Romagna 5% 24% 14% 27% na na na na na na na

Italian banks -- -- -- -- -- - - - - - - -- -- -- -- -- --

TVBPS P/TBV GS ROTE

2014 2015E 2016E 2017E 2018E 2019E 2014 2015E 2016E 2017E 2018E 2019E 2014 2015E 2016E 2017E 2018E 2019E

UniCredit 7.16 7.44 7.82 8.33 8.79 9.27 0.85x 0.82x 0.78x 0.73x 0.69x 0.65x 5% 6% 8% 10% 10% 10%

Intesa San Paolo 2.23 2.42 2.61 2.73 2.82 2.90 1.32x 1.22x 1.13x 1.08x 1.05x 1.02x 4% 10% 12% 12% 12% 12%

Banca Monte dei Paschi di Siena 1.07 0.81 0.87 0.92 0.98 1.04 0.53x 0.69x 0.65x 0.61x 0.57x 0.54x nm 2% 7% 7% 8% 7%

Banca Popolare di Milano 1.01 1.06 1.10 1.14 1.18 1.22 0.84x 0.80x 0.77x 0.74x 0.72x 0.69x 5% 4% 5% 6% 6% 7%

Banco Popolare 16.61 17.39 17.13 17.73 18.46 19.31 0.82x 0.79x 0.80x 0.77x 0.74x 0.71x nm 5% 7% 9% 10% 10%

UBI Banca 8.91 9.47 9.33 9.62 9.99 10.42 0.80x 0.75x 0.76x 0.74x 0.71x 0.68x 2% 3% 5% 7% 8% 8%

Banca Popolare dell'Emilia Romagna 10.38 10.44 10.81 11.15 11.57 12.03 0.70x 0.70x 0.67x 0.65x 0.63x 0.60x 0% 4% 6% 8% 8% 8%

Italian banks - - - - - - 1.04x 0.98x 0.93x 0.88x 0.85x 0.82x 4% 7% 9% 10% 10% 11%

Price target Target multiple

Method Horizon Risks

UniCredit ROE/COE 12m Unforeseen change in sovereign, macro, asset quality and regulatory situation, either way P/TBV = 0.9x 2015E TBVPS

Intesa San Paolo ROE/COE 12m Renewed sovereign concerns, deteriorating macro outlook and asset quality, adverse regulatory changes P/TBV = 1.5x 2015E TBVPS

Banca Monte dei Paschi di Siena ROE/COE 12m Unforeseen change in sovereign, macro, asset quality and regulatory situation, either way P/TBV = 0.8x 2015E TBVPS

Banca Popolare di Milano ROE/COE 12m Renewed sovereign concerns, deteriorating macro outlook and asset quality, adverse regulatory changes P/TBV = 1x 2015E TBVPS

Banco Popolare ROE/COE 12m Unforeseen change in sovereign, macro, asset quality and regulatory situation, either way P/TBV = 0.9x 2015E TBVPS

UBI Banca ROE/COE 12m Unforeseen change in sovereign, macro, asset quality and regulatory situation, either way P/TBV = 0.8x 2015E TBVPS

Banca Popolare dell'Emilia Romagna ROE/COE 12m Renewed sovereign concerns, deteriorating macro outlook and asset quality, adverse regulatory changes P/TBV = 1x 2015E TBVPS



Mapping the landscape

The Popolari banks operate under a relatively unusual governance system in which

shareholders have the same voting rights, independent of their percentage of ownership in the

banks. This prevents large shareholders influencing the management of these institutions and

therefore, in our opinion, diminishes their appeal as investments, all else equal. In any event, a

number of the Popolare banks have limits on maximum ownership. This has, in our opinion,

contributed to limiting M&A among the banks and therefore the Popolare banks, which are

typically smaller participants in a fragmented market:

According to the data available for the banks subjected to the AQR, seven Popolari

banks were tested, representing 54% of the total number included in the sample, but

controlling only 29% of domestic exposure

The data from the Popolari banks association shows a c.25% market share of loans and

deposits for this group (vs. a 29% natural market share) in Italy

Among the main Euro area countries, the Herfindahl index of the Italian system is the

lowest, second only to Germany, and we forecast Italian banks’ returns to be the

second lowest within our coverage universe

In Exhibit 6, we present key data for the 10 banks subject to the reform.

Exhibit 6: Mapping the Italian banking landscape: Popolare banks are small and numerous Exposures at default, € mn, as of end 2013 – (MV as of March 4, 2015)

Source: Company data, EBA, Datastream.

Bank Market Cap Assets Loans P / TBV P / Deposits

€mn 2013 2013 2015E 2016E 2015E Latest available

UBI Banca 6,200 124,242 88,421 17.1x 12.9x 0.7x 8.4%

Banco Popolare 4,853 126,043 86,149 18.0x 11.5x 0.7x 6.8%

Banca Popolare Dell'Emilia Romagna 3,441 61,758 50,508 17.7x 12.7x 0.7x 7.6%

Banca Popolare Di Milano 3,652 49,382 33,345 17.7x 14.3x 0.8x 11.3%

Banca Popolare di Vicenza 45,234 32,233

Veneto Banca 37,306 27,995

Banca Popolare di Sondrio 1,814 32,770 25,235 na na na 6.2%

Creval 1,412 27,198 21,517 21.9x 16.3x 0.7x 7.0%

Popolare dell' Etruria 16,445 8,487

Popolare di Bari 10,319 6,886

P / E



Exhibit 7: ISP is as large as all the Popolare banks on total

Italian exposure combined… Total exposure

Exhibit 8: …and on customer loan exposure Retail and corporate exposures

Source: EBA.

Source: EBA.

Exhibit 9: Concentration of Italian banks among the lowest as

per Herfindahl index… Herfindahl index for credit institutions

Exhibit 10: …and as measured by share of the top 5

banks Share of total assets of five largest credit institutions

Source: ECB.

Source: ECB.

Exhibit 11: The presence of Popolari banks is not

homogeneous across Italy... Branch market share

Exhibit 12: ...accounting for almost one quarter of the

banking business, but less than their natural market

share suggests Loans/Deposits/Branch market share

Source: Assopopolari.

Source: Assopopolari.

ISP

UCG

MPS

Medio

Carige

Iccrea

UBI

BAPO

BPER

BPM

BPViVeneto BPSo

ISP

UCG

MPS

Medio

Carige

Iccrea

UBI

BAPO

BPER

BPMBPVi

Veneto BPSo

0

500

1,000

1,500

2,000

2,500


2009 2013

0

10

20

30

40

50

60

70

80

90

100


2009 2013

25.30%

24.60%

29.30%

Deposits Loans Branches



Step no.1: Assessing stand-alone “reasonably normalized”

earnings power – fairly valued in aggregate but differences exist

Italian banks are still reporting relatively high loan losses both compared to their European

peers and to their history, implying a high degree of profit normalization going forward.

However we also think that the shares of Italian banks already price this in full: based on

the current earnings power, adjusted for the depressed provisions component (that is,

applying a normal level of provisions to 2014’s clean pre-provision profits), we find the

smaller banks trade on 10.8x P/Es, a touch higher than the larger banks. In the absence of

M&A, there seems to be little upside potential in aggregate for the group, in our opinion.

We believe that an M&A screen is particularly relevant now that the risks related to asset

quality have reduced owing to the banks’ large AQR-related provisioning in 2014, which

followed years of already fairly heavy reserving. Banks, indeed, are all guiding to lower

loan losses going forward. We run a scenario analysis as follows:

We first clean the 2014 earnings for exceptional items (of which there were many).

We then apply the cost of risk seen in the 2006-08 period. We peg it at 0.66% for all

banks by taking all banks back to the peer group average, as opposed to reverting

provisions to each one’s own trough level, to reduce differences that could be a result

of one bank’s exceptional write backs or write offs. We note that this cost of risk

includes provisions for bad loans, as well as the so-called provisions for risk & charge,

but not impairments on financial assets.

Finally, we work out the ROTE on normalized provisions and compare the banks’ P/Es

on this earnings scenario.

Exhibit 13: In our view the eventual reduction of provisions is the most powerful earnings

driver for Italian banks € bn; P = Provisions

Source: Company data, Goldman Sachs Global Investment Research.

Our conclusions are as follows:

The normalized provisions level implies a €16 bn pretax uplift on 2014 in aggregate for

the seven banks we cover. This is a reduction in provisions of two thirds.

The ROTE springs from a cumulative breakeven result for the group (adjusting for the

one-off losses) in 2014, to 8.7% with larger banks earning more (9.4%, driven by Intesa)

than smaller banks (7.1%).

€ bn Loans, ave. LLP+R&C Cost of risk (% of loans) P Gain [Δ] New P P decrease

4Q13-4Q14, avg 2014 2014 Avg ( 06-08) 2014 - avg 100% @ 0.66% %

[A] [B] [C] [D] [E]=[C] - [D] [F]= [E]x[A] [G]=[F]-[B] [G]/[B]-1

Unicredit 476.6 4.7 0.98% 0.61% 0.32% 1.5 3.1 -33%

Intesa 338.3 5.1 1.50% 0.63% 0.84% 2.9 2.2 -56%

BMPS 128.4 8.0 6.23% 0.78% 5.57% 7.1 0.8 -89%

UBI 86.6 0.9 1.08% 0.45% 0.42% 0.4 0.6 -39%

BAPO 84.0 3.6 4.23% 0.94% 3.57% 3.0 0.6 -84%

BPM 32.6 0.4 1.31% 0.66% 0.65% 0.2 0.2 -50%

BPER 45.3 0.9 1.88% 0.55% 1.22% 0.6 0.3 -65%

Larger banks 814.9 9.7 1.19% 0.62% 0.54% 4.4 5.4 -45%

Domestic banks 376.9 13.8 3.65% 0.67% 2.99% 11.3 2.5 -82%

Aggregate Provisions 1191.8 23.5 1.97% 0.66% 1.31% 15.6 7.8 -67%



Among the smaller banks, the spread is large: on normalized provisions, in 2014 UBI,

BMPS and BPM would have returned a still low 6%-6.5% ROTE, while ISP would have

shown a ROTE above 10%. Among the smaller banks, BEPR screens best.

From a valuation stand point:

o Among the smaller banks, share prices already reflect the blue sky scenario for

provisions, as their capital adjusted P/Es are on average at 10.8x. In our view this

multiple does not offer much upside for the group in the absence of M&A.

o As for P/E, the bank-by-bank scenario valuation spread is also very wide, ranging

from 8.6x at BPER to 13.2x at BPM, pro-forma on 2014. We therefore believe that

on this basis, owning BPER is still more attractive on a relative basis, because a

reduction in provisions can still drive BPER’s shares. Peers, however, must achieve

stronger delivery on pre-provision profit for the shares to perform from here, and

we consider this more challenging to achieve than falling LLPs.

Exhibit 14: Taking provisions back to their benign pre-crisis levels would drive ROTE closer to COE, but P/Es would still

look fairly full


Exhibit 15: A wide range of returns post provisions

normalization Net income, based on 2014 clean profits + provision

normalization

Exhibit 16: P/E post provision normalization are also

wide-ranging Net income, based on 2014 clean profits + provision

normalization



€ bnPretax income,

underlying(+) Upside sources

(=) Pretax

profit, Blue sky(-) Taxes

(-)

minorities

(=) NI, Blue sky

potential

P/E, Blue sky

earningsP/TBV

ROTE

potential

Banks 2014(+) Costs

synergies(+) Provisions pro-forma

NOT capital

adjusted

NOT capital

adjusted

NOT capital

adjusted

Unicredit 4.1 -- 1.5 5.6 -1.7 -0.4 3.5 10.1x 0.81x 8.0%

Intesa 3.4 -- 2.9 6.3 -2.2 0.0 4.1 11.5x 1.25x 10.9%

BMPS -6.3 -- 7.1 0.9 -0.3 0.0 0.5 10.8x 0.70x 6.4%

UBI 0.6 -- 0.4 1.0 -0.4 -0.1 0.5 12.5x 0.80x 6.4%

BAPO -2.2 -- 3.0 0.8 -0.3 0.0 0.5 10.5x 0.82x 7.9%

BPM 0.2 -- 0.2 0.4 -0.2 0.0 0.3 13.2x 0.84x 6.3%

BPER 0.1 -- 0.6 0.6 -0.2 0.0 0.4 8.6x 0.80x 9.3%

Larger banks 7.5 -- 4.4 11.9 -3.9 -0.4 7.6 10.8x 1.01x 9.4%

Smaller banks -7.6 -- 11.3 3.7 -1.4 -0.1 2.2 11.0x 0.78x 7.1%

Total -0.1 -- 15.6 15.6 -5.2 -0.5 9.8 10.9x 0.95x 8.7%

10.9%

9.3%

8.0% 7.9%

6.4% 6.4% 6.3%

9.4%

7.1%

8.7%

Inte

sa

BP

ER

Un

icre

dit

BA

PO

BM

PS

UB

I

BP

M

La

rger

ba

nks

Sm

all

er

ban

ks

To

tal

13.2x12.5x

11.5x10.8x 10.5x 10.1x

8.6x

10.8x 11.0x 10.9x

BP

M

UB

I

Inte

sa

BM

PS

BA

PO

Un

icre

dit

BP

ER

La

rger

ba

nks

Sm

all

er

ban

ks

To

tal



Step no.2: Synergies – cost saving can boost profits materially,

range of funding costs already narrow

With the potential for consolidation clearly established, we assess the benefits that could

arise from a potential wave of mergers, with emphasis on cost synergies that could be

extracted in market consolidation. For the domestic banks under our coverage, we estimate

a potential uplift to ROTE of 2.5 pp to a level of c.9.2%, considering only cost synergies.

Italian in-market mergers have typically targeted 22% cost synergies...

Exhibit 17 shows the targeted synergies of the main mergers of Italian banks during the

pre-crisis period. On average cost synergy targets were 22% of the cost base of the junior

partner in the merger. Meanwhile, revenue synergies were targeted at 10%, but were

usually less predictable as they were typically less within management’s control. Therefore

our analysis does not take this into account when estimating return accretion through

consolidation. We also show later in this note that funding does not seem to be a source of

synergies as its cost has in aggregate fallen significantly already, and also, the differences

between the banks which existed in the peak crisis years have now most disappeared.

Exhibit 17: On average the most recent Italian domestic transactions were based on cost

synergy targets of 22% Synergies / SmallCo’s Operating Costs

Source: Company data, M&A Monitor, Datastream, Goldman Sachs Global Investment Research.

…but efficiency gains already significant since 2008, possibly

limiting synergies compared to the past

In this section, we highlight that costs have already been a key source of structural

improvement in returns for Italian banks since the crisis. This caveats our previous analysis

somewhat by potentially reducing synergy potential going forward as we recognize that

part of the work has already been completed.

Since 2008, cost cuts saw Italian banks improve potential ROTE by 2.5 pp. We consider the

ratio of total expenses to customer volumes (customer loans + customer deposits + AUM)

rather than cost / income ratio: in aggregate, Italian banks have structurally increased their

efficiency per unit of business volume by 12% since 2008, which in our view was mainly a

result of branch cuts.

Italian banks are targeting further cost savings going forward: Exhibit 20 shows business

plans for network rationalization and cost growth for the banks under our coverage.

6%7%

19%

14%

9%7%

8%

18%20% 20%

23%24%

25%27%

BP

Vero

na

&

BP

No

vara

MD

PS

&

An

ton

ve

ne

ta

BP

VN

& B

PI

BP

BG

& B

PC

I

BP

U &

B.L

om

ba

rda

Un

iCre

dit

& C

ap

itali

a

Inte

sa

& S

PIM

I

Revenue Synergy (%) Cost Synergy (%)

Mean:

22%

Mean:

10%



Exhibit 18: BMPS appears to be the most efficient Italian

bank on business volume… Total expenses as a % of business volumes, last four

quarters

Exhibit 19: …owing to stronger cost cutting undertaken

through the crisis years

Change in expenses as % of business volumes in bp, 4Q

rolling, since 2008



Exhibit 20: Branch closures and cost CAGR are similar among banks Summary of Italian banks’ business plans

Note: for UCG and ISP this table shows retail branches in Italy; network definition and scope may vary from bank to bank. Costs are at group level, except non-core for UCG; BPER as of 2014

Source: Company data.

Exhibit 21: Smaller Popolare banks are less productive

overall… Cost per unit of customer volume (loans + deposits + AUM)

Exhibit 22: …mainly because they manage less volume in

each branch… Volumes per branch, € mn



1.23%1.36%

1.48% 1.49% 1.51% 1.55%

1.72%

1.44%

BM

PS

Inte

sa

BA

PO

UB

I

Un

icre

dit

BP

M

BP

ER

To

tal -45.9

-36.7

-19.6-17.2

-14.9-13.1

-8.2

-16.9

BM

PS

BP

M

Inte

sa

BA

PO

BP

ER

UB

I

Un

icre

dit

To

tal

Branches Costs (€ bn)

2013 Plan target % change 2013 Plan target CAGR

ISP 4,100 3,300 -20% 8.4 8.8 1.4%

UCG 3,505 3,100 -12% 13.7 14.1 0.6%

BPM 716 670 -6% 1.0 1.0 0.5%

BMPS 2,334 2,200 -6% 2.8 2.6 -1.7%

BAPO 1,990 1,920 -4% 2.3 2.2 -0.2%

UBI 1,725 1,597 -7% 2.1 2.1 -0.2%

BPER 1,273 1,143 -10% 1.4 1.2 -3.9%

1.9% 1.9%

1.6% 1.7%

1.5%

1.7%1.6%

1.7%

1.6%1.5% 1.5%

1.3%1.2%

1.4%

BPER BPM UBI BAPO Intesa (It) BMPS Total

4Q08 4Q14

91.4

76.1 73.381.0

61.255.1

78.9

126.5

98.2

89.785.9

75.4

63.2

99.4

Intesa (It) BMPS BPM UBI BAPO BPER Total

4Q08 4Q14



Exhibit 23: … their per capita staff costs can vary too… €,000, personnel expense / staff

Exhibit 24: …despite each branch costing less to run € mn, total cost per branch



Blending it in: 2.5 pp increase in ROTE on lower costs

We assess the potential improvement in earnings and returns for each of the domestic

banks we cover: we estimate that earnings would increase by c.31% and ROTE would

increase by 2.5 pp to 9.2% on average. In order to establish this potential, we proceeded as

follows:

Normalization of LLPs, as per the previous section.

We then apply the synergy potential, with two scenarios and average them:

(1) First, 20% cost synergies as per recent Italian deals as per the past in market

transactions.

(2) Second, the productivity of each of these banks converges to that of BMPS, the

most efficient domestic bank under our coverage and the most recent example of

in-market M&A in Italy. The highest increase is seen at BPM and BPER as they are

the least efficient.

The average of these two scenarios would result in a c.31% increase to earnings

and a 2.5 pp increase in ROTE to c.9.2% on average.

Exhibit 25: Cum synergies and normal LLPs, the returns

of BAPO and BPER would be highest ROTE cum cost synergies and normal LLPs

Exhibit 26: Cum synergies and normal LLPs, small banks

would trade on 8.5x P/E, BPER most attractive Scenario P/E cum cost synergies and normal LLPs



79.0

70.075.0

68.9

61.2

73.170.6

78.774.2

71.2 69.7 67.763.5

69.6

BPM BAPO UBI Intesa (It) BPER BMPS Total

4Q08 4Q14

1.32

1.45

1.311.27 1.27

1.03

1.25

1.61

1.36

1.23 1.19 1.19

1.07

1.33

Intesa (It) BPM UBI BMPS BMPS BAPO Total

4Q08 4Q14

11.8%

10.3%

8.9% 8.6%7.8%

9.2%

BP

ER

BA

PO

BP

M

BM

PS

UB

I

To

tal

10.2x

9.4x

8.1x 8.0x

6.8x

8.5x

UB

I

BP

M

BM

PS

BA

PO

BP

ER

To

tal



Exhibit 27: We estimate that cost synergies would result in a 2.5 pp increase in ROTE and a c.31% increase in earnings,

albeit from a still depressed base € mn, summary 2014 P&L, adjusted for one-offs


Funding synergies: We see limited potential

In this section, we attempt to quantify the funding synergies that mergers between

Popolare banks could release. We observe the following:

First, the “mark downs” (i.e., the liability margins charged to customers) have

converged already, compared to what was the case at the height of the crisis, to the

extent that we do not believe that much can be extracted, on a pro forma basis

Second, none of the banks has excess deposits, therefore there is no obvious way for a

bank in deficit of deposits to extract synergies from merging with a bank which would

have an excess

Exhibit 28: Funding cost already comparable Mark down

Exhibit 29: None of the Popolari have excess deposits Loan to deposit ratio, 4Q14



€ mnPretax income,

underlying

(+) Upside sources (=) Pretax

profit, scenario(-) Taxes

(-)

minorities(=) NI, scenario P/E, scenario P/TBV

ROTE

potential

Banks 2014(+) Costs

synergies(+) Provisions

Cost +

Provisions

NOT capital

adjusted

NOT capital

adjusted

NOT capital

adjusted

BMPS -6.3 0.3 7.1 1.2 -0.4 0.0 0.7 8.1x 0.70x 8.6%

UBI 0.6 0.2 0.4 1.2 -0.4 -0.1 0.6 10.2x 0.80x 7.8%

BAPO -2.2 0.2 3.0 1.0 -0.4 0.0 0.6 8.0x 0.82x 10.3%

BPM 0.2 0.2 0.2 0.6 -0.2 0.0 0.4 9.4x 0.84x 8.9%

BPER 0.1 0.2 0.6 0.8 -0.3 0.0 0.5 6.8x 0.80x 11.8%

Smaller banks -7.6 1.1 11.3 4.8 -1.8 -0.1 2.9 8.5x 0.78x 9.2%

0

20

40

60

80

100

120

140

160

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

UBI BAPO BPM BPER

145%

121% 119%112%

104%

BMPS BAPO UBI BPER BPM



Step no.3: Capital optionality – synergies for some, dissynergies for

others

Popolare banks have reasonably similar Basel 3 fully loaded CET1 ratios (Exhibit 30). But

they have very different leverage ratios, meaning that their risk weights are extremely

varied: BPM is less than twice as levered as BMPS, despite having only a c.30% higher

CET1 ratio. This is explained by very different risk weighting applied to the assets of these

banks. The differences stem primarily from one factor: the capital requirement calculation.

There are two groups of banks among the smaller domestic Italian banks:

Those applying an advanced, internal approach, for the calculation requirements

(BMPS, BAPO, UBI): their RWAs / asset range from 39% to 52%.

And those using standardized approaches (BPM, BPER). These banks typically have

higher capital requirements, with risk weights ranging from 67% to 70%.

Exhibit 30: CET1 ratios are within a narrow range… CET1 ratios, fully loaded, end 2014 (pro-forma for BMPS)

Exhibit 31: … but leverage varies widely across banks TE/TA, end 2014 (pro forma for BMPS)



An obvious way to release synergies therefor would be for a bank in the “advanced” group

to acquire a bank in the “standard” group, and apply their model to obtain lower RWAs.

However, we also believe that the opposite may also be true and is a risk for two banks in

the advanced group BAPO and BMPS: these banks have much lower capital requirements

than UBI, which in turn, just increased its own risk weights as it now uses more

conservative assumptions for future losses. We therefore run an analysis in which we

harmonize the capital requirements by products/loan categories to those of UBI (the most

conservative bank among those using the advanced approach to capital requirement

calculations), under the assumption that (1) banks in the standard group eventually adopt

the advanced approach and (2) banks that are currently less conservative than UBI also

adopt more conservative capital requirements. We find that:

If BAPO and BMPS had to converge to UBI, the additional capital required to maintain

their core tier 1 at the same level as currently would equate to 18% and 23% of their

market cap respectively

Applying the same method to BPM and BPER, we estimate they could release 38% and

26% of their market cap respectively

13.3%12.4%

11.5% 11.5%10.9%

10.0% 9.7%

Intesa BPM BAPO UBI BPER UniCredit BMPS

HIghest CET1 28% above

lowest

8.7%

7.3%

6.0%5.7%

4.9%4.5%

4.0%

BPM BPER UBI Intesa UniCredit BAPO BMPS

HIghest leverage 115% above

lowest



Exhibit 32: Converging risk weights to UBI is positive for

BPER and BPM but negative for BMPS and BAPO Increase/decrease in RWAs, based on 2013 data, € bn

Exhibit 33: BPM and BPER to yield capital synergies;

BMPS, BAPO at risk Change in capital requirements as % of market cap



Exhibit 34: Cum synergies and normal LLPs, the returns

of BPM and BPER are the highest ROTE cum cost synergies and normal LLPs

Exhibit 35: Cum synergies and normal LLPs, small banks

are on 8.4x P/E, BPER cheapest Scenario P/E cum cost synergies and normal LLPs



Exhibit 36: At current market price, post synergies and capital relief, a trade buyer would acquire BPER on 4.6x P/E,

BMPS on 11.5x € bn

Source: Company data, Datastream, Goldman Sachs Global Investment Research.

-10.8-8.9

0.0

12.7

22.7

BPER BPM UBI BAPO BMPS

-38%

-26%

0%

18%

23%

BMPS BAPO UBI BPM BPER

16.0%

12.1%

9.5%8.8%

6.6%

9.3%

BP

ER

BP

M

BA

PO

UB

I

BM

PS

To

tal

11.5x

8.9x 8.8x

6.4x

4.6x

8.4x

BM

PS

BA

PO

UB

I

BP

M

BP

ER

To

tal

€ mnPretax income,

underlying

(+) Upside sources (-) Taxes

(-)

minorities(=) NI, scenario P/E, sceanrio P/TBV

ROTE

potential

Banks 2014(+) Costs

synergies(+) Provisions Capital adjusted

NOT capital

adjustedCapital adjusted

BMPS -6.3 0.3 7.1 -0.4 0.0 0.7 11.5x 0.70x 6.6%

UBI 0.6 0.2 0.4 -0.4 -0.1 0.6 8.8x 0.80x 8.8%

BAPO -2.2 0.2 3.0 -0.4 0.0 0.6 8.9x 0.82x 9.5%

BPM 0.2 0.2 0.2 -0.2 0.0 0.4 6.4x 0.84x 12.1%

BPER 0.1 0.2 0.6 -0.3 0.0 0.5 4.6x 0.80x 16.0%

Smaller banks -7.6 1.1 11.3 -1.8 -0.1 2.9 8.4x 0.78x 9.3%



Exhibit 37: Corp. loans’ risk weights vary across banks…Risk weighted assets / exposure at default, 2013

Exhibit 38: …as do those for retail exposures Risk weighted assets / exposure at default, 2013

Source: EBA, Goldman Sachs Global Investment Research. Source: EBA, Goldman Sachs Global Investment Research.

Exhibit 39: Corporates - of which: SME Risk weighted assets / exposure at default, 2013

Exhibit 40: Retail – Secured on real estate property Risk weighted assets / exposure at default, 2013


Exhibit 41: Corporates (Other, mainly large corporates) Risk weighted assets / exposure at default, 2013

Exhibit 42: Retail – Other Retail (mainly consumer loans)Risk weighted assets / exposure at default, 2013


46% 49%

66%

93%

107%

BAPO BMPS UBI BPER BPM

19% 20%

33%

57%

72%


33%39%

56%

96%

118%


14%17%

24%

42%

72%


53%

65%72%

89% 91%


24%

28%

57%

71% 73%




Valuation: Incorporating our M&A screen into price targets

We incorporate the findings of our consolidation screens into our price targets as follows:

Step no.1: Stand-alone valuation:

o Valuation of earnings stream: We arrive at a multiple of tangible book value by

comparing our expected ROTE with COE over our five-year forecast horizon. We

now incorporate 2019E for all seven banks under coverage.

o Capital adjustments: We adjust the value of the earnings stream according to

the banks’ respective capital positions. Capital above or below our threshold is

added or deducted from the value of the earnings streams.

Step no.2: Consolidation adjustment:

o We start from the post-tax cost synergies estimated earlier in the report

o We apply a P/E of 10x to them (the long-term P/E of the banks)

o We finally ascribe a percentage attribution of these synergies to the banks which

varies according to their size: smaller banks, which we see as more likely junior

partners in mergers, are ascribed a greater share of these synergies

We detail these assumptions in Exhibit 43:

Exhibit 43: Price target methodology and assumptions


Banks Earnings stream valuation + Capital adjustment + Consolidation factor

ROTE / COE = P/TBV Threshold Ave. level

Post tax

synergies, €

per share

x P/E x

Share

attributable

to bank

Assets

(€bn)

BMPS 7.4% 10.0% 0.7x 10.5% 11.6% 0.02 10.0x 20% 183.4

BAPO 8.1% 10.0% 0.8x 10.0% 10.2% 0.40 10.0x 25% 123.1

UBI 6.5% 10.0% 0.6x 10.0% 12.4% 0.15 10.0x 25% 121.8

BPER 8.0% 10.0% 0.8x 10.0% 13.2% 0.22 10.0x 40% 60.7

BPM 6.1% 10.0% 0.6x 10.0% 16.1% 0.03 10.0x 40% 48.3



Banca Popolare Emilia Romagna (EMII.MI): Initiating with CL-Buy

Source of opportunity

We initiate coverage of BPER with a Conviction List-Buy. BPER screens

well in our M&A analysis: it screens as having ample cost and capital

synergies that can be released in an in-market merger. We find that at

the current share price, BPER trades on 4.6x “reasonably normalized”

earnings and cum cost and capital synergies, or a c.22% ROI for a trade

buyer acquiring it at its current valuation. Its relatively small size vs

peers makes it an attractive franchise for a trade buyer in our view. The

additional attraction in BPER, compared to BPM and to the other peers,

is that its stand-alone profitability looks more attractively priced: it is on

8.6x P/E, on current pre-impairment profits and normal loan losses,

compared to peers on 10.8x.

Catalyst

The banks reform law announced in January is likely to become

definitive in mid-March. Assuming that the law does not change in

substance, the Popolari banks will then have 16 months to transform

into joint stock companies (SpAs). We expect the consolidation process

to start soon afterwards, and share prices to react positively as the first

transactions approach and get underway.

The next set of results is on May 12. As for peers, we expect BPER to

report an improvement in impairment charges, driving bottom-line

growth.

Valuation

We set our 12 month ROE-COE price target at €10.3, implying 42%

potential upside. As for peers, our valuation is based on the expected

profitability over our forecast horizon (to 2019E) and is adjusted for

excess capital over 10% fully loaded CET1 ratio. It further reflects the

findings of our M&A screen (Exhibit 43). Our price target implies a

P/TBV multiple of 1.0x 2015E.

Key risks

Key risks to our view include renewed macro, sovereign and asset

quality concerns. Further risks include uncertainty linked to the

Popolare reform and the outcome of the consolidation phase.

Source: Company data, Goldman Sachs Global Investment Research, FactSet.

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile

Low High

Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the investment

profile measures please refer to the

disclosure section of this document.

Banca Popolare Emilia Romagna (EMII.MI)

Europe Banks Peer Group Average

Key data Current

Price (€) 7.27

12 month price target (€) 10.30

Upside/(downside) (%) 42

Market cap (€ mn) 3,496.7

Tier 1 ratio (%) 11.3

12/14 12/15E 12/16E 12/17E

GS Net income (€ mn) 40.6 223.7 403.3 477.6

GS EPS (€) 0.03 0.41 0.68 0.83

DPS (€) 0.00 0.04 0.34 0.42

BVPS (€) 10.09 10.14 10.52 10.86

GS P/E (X) 204.6 17.5 10.6 8.7

Dividend yield (%) 0.0 0.6 4.7 5.7

GS ROE (%) 0.3 4.1 6.6 7.8

P/BV (X) 0.5 0.7 0.7 0.7

380

400

420

440

460

480

500

520

540

560

580

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Mar-14 Jun-14 Sep-14 Dec-14

Price performance chart

Banca Popolare Emilia Romagna (L) FTSE World Europe (EUR) (R)

Share price performance (%) 3 month 6 month 12 month

Absolute 23.8 6.1 (8.1)

Rel. to FTSE World Europe (EUR) 10.8 (5.7) (21.3)

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 3/05/2015 close.



Exhibit 44: Loan book breakdown 2Q14; € bn

Exhibit 45: Liabilities, funding breakdown 4Q14; € bn



Exhibit 46: Impaired loans ratio breakdown

Exhibit 47: Coverage breakdown



Exhibit 48: Branch distribution 2014 year end

Exhibit 49: P&L breakdown Revenue, expenses and PBT compared with averages RWAs

Source: Company data. Source: Company data.

38.9

16%

0%

56%

27%

1%

Current accounts Repos Mortgages

Other Debt securities Impaired

60.7

11%

56%

17%

8%8%

Deposits from banks Deposits from customers

Debt securities in issue Shareholders' equityOther

3.9

%

5.7

%

6.5

% 8.1

%

10

.9%

13

.4%

7.2%

11.2%12.9%

16.0%

20.2%22.6%

6.3%

10.0%11.7%

14.2%

18.5%

20.7%

4Q

08

4Q

10

4Q

11

4Q

12

4Q

13

4Q

14

NPL Doubtful Restructured

Past-due Total NPL + Doubtful

64.6

%

57

.6%

52

.8%

54.9

%

55.0

%

56.6

%43

.1%

36.8

%

33

.8%

36.8

%

37.3

%

40.7

%

4Q

08

4Q

10

4Q

11

4Q

12

4Q

13

4Q

14

NPL Doubtful Restructured Past-due Total deteriorated

5.0%

3.4%

-0.7%

-4%

-2%

0%

2%

4%

6%

8%

10%

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

Revenue/avg RWA Expenses/avg RWA PBT/avg RWA



Banca Popolare Emilia Romagna (EMII.MI): Model summary

Exhibit 50: Banca Popolare Emilia Romagna model summary € mn


P&L (In € mn) 2013 2014 2015E 2016E 2017E 2018E 2019E Assets 2013 2014 2015E 2016E 2017E 2018E 2019E

Net interest income 1,290 1,292 1,241 1,294 1,354 1,423 1,499 Cash 489 451 451 451 451 451 451

Net fees & commissions 698 691 715 736 758 781 805 Loans to banks 1,588 1,709 1,709 1,709 1,709 1,709 1,709

Trading and Equity inc. 72 37 4 0 0 0 0 Loans to customers 46,515 43,920 44,805 46,149 47,533 49,435 51,412

Other income 187 198 169 120 120 120 120 Securities 9,106 10,302 10,302 10,302 10,302 10,302 10,302

Non interest income 957 926 888 856 878 901 925 Other earning assets 4 37 37 37 37 37 37

Total recurring revenues 2,247 2,217 2,129 2,151 2,233 2,324 2,424 Interest earning assets 57,212 55,968 56,853 58,197 59,581 61,483 63,460

Rev / avg. earning assets 3.9% 3.9% 3.8% 3.7% 3.8% 3.8% 3.9% Tangible assets 1,273 1,287 1,287 1,287 1,287 1,287 1,287

Staff -787 -787 -764 -761 -765 -782 -801 Intangible 491 498 498 498 498 498 498

General administration -405 -404 -398 -398 -402 -406 -410 Other assets 2,293 2,450 1,999 1,548 1,548 1,548 1,548

Depreciation & other costs -66 -70 -73 -74 -76 -77 -79 Total assets 61,758 60,653 61,087 61,981 63,365 65,266 67,244

Total operating expenses -1,259 -1,261 -1,235 -1,233 -1,242 -1,265 -1,290

cost income ratio (%) 56% 57% 58% 57% 56% 54% 53% Liabilities 2013 2014 2015E 2016E 2017E 2018E 2019E

Operating income 988 956 894 918 991 1,059 1,134 Due to banks 7,821 6,480 6,480 6,480 6,480 6,480 6,480

Provision -877 -858 -532 -364 -328 -339 -353 Customer deposits 33,681 33,964 35,343 36,404 37,496 38,621 39,779

provisioning charge (%) 1.85% 1.90% 1.20% 0.80% 0.70% 0.70% 0.70% Securities in issue 10,187 10,518 9,300 8,824 8,879 9,417 9,976

Other provisions -30 -39 -12 -10 -10 -10 -10 Financial liabilities 3,150 1,944 1,944 1,944 1,944 1,944 1,944

Net exceptionals -15 -1 0 0 0 0 0 Other interest bearing liabilit 38 13 75 75 75 75 75

Profit before tax 67 58 349 544 653 709 771 Interest bearing liabilities 54,877 52,919 53,142 53,726 54,873 56,536 58,254

Taxes -52 -28 -146 -210 -246 -265 -286 Other liabilities 2,848 2,864 2,864 2,864 2,864 2,864 2,864

tax rate (%) 78% 49% 42% 39% 38% 37% 37% Shareholders' equity 4,033 4,870 5,082 5,391 5,628 5,866 6,126

Minorities & others -9 -15 -4 -5 -5 -5 -5 Capital 4,026 4,855 4,882 5,062 5,226 5,427 5,647

Net income 6 15 200 329 402 439 480 Net profit of the period 7 15 200 329 402 439 480

GS Net income 19 16 200 329 402 439 480 Total equity and liabilities 61,758 60,653 61,087 61,981 63,365 65,266 67,244

Per share data (EUR) 2013 2014 2015E 2016E 2017E 2018E 2019E Asset quality 2013 2014 2015E 2016E 2017E 2018E 2019E

EPS 0.02 0.03 0.41 0.68 0.83 0.91 1.00 Gross NPLs 10,214 11,006 11,340 11,114 10,891 10,673 10,460

GS EPS 0.05 0.03 0.41 0.68 0.83 0.91 1.00 NPL Coverage ratio 37% 41% 42% 42% 42% 42% 42%

DPS 0.00 0.00 0.04 0.34 0.42 0.46 0.50 Net NPL ratio 13.8% 14.9% 14.7% 14.0% 13.3% 12.6% 11.8%

Book Value per share 10.98 10.12 10.56 11.20 11.69 12.19 12.73

Tangible Book value 9.64 9.08 9.52 10.17 10.66 11.15 11.69 Capital and key ratios 2013 2014 2015E 2016E 2017E 2018E 2019E

Tier 1 capital 3,991 4,592 4,790 4,955 5,156 5,375 5,615

Valuation 2013 2014 2015E 2016E 2017E 2018E 2019E Preference shares 23 11 11 11 11 11 11

P/E 361.3 x 229.4 x 17.1 x 10.4 x 8.5 x 7.8 x 7.1 x RWA 43,351 40,692 32,819 34,127 35,013 36,230 37,812

GS P/E 137.7 x 220.5 x 17.1 x 10.4 x 8.5 x 7.8 x 7.1 x Equity Tier 1 ratio 9.2% 11.3% 14.6% 14.5% 14.7% 14.8% 14.8%

P/B 0.6 x 0.7 x 0.7 x 0.6 x 0.6 x 0.6 x 0.6 x

Tang. P/B 0.7 x 0.78 x 0.7 x 0.7 x 0.7 x 0.6 x 0.6 x Products penetration 2013 2014 2015E 2016E 2017E 2018E 2019E

Dividend Yield 0.0% 0.0% 0.6% 4.8% 5.9% 6.4% 7.0% Customer loans / deposits 1.38 x 1.29 x 1.27 x 1.27 x 1.27 x 1.28 x 1.29 x

Market cap / deposits 10% 10% 10% 9% 9% 9% 9% Customer loans / Tot. assets 0.75 x 0.72 x 0.73 x 0.74 x 0.75 x 0.76 x 0.76 x

Cust. Dep. / Tot. Earning asse 0.59 x 0.61 x 0.62 x 0.63 x 0.63 x 0.63 x 0.63 x

Profitability ratios 2013 2014 2015E 2016E 2017E 2018E 2019E

NIM (NII / avg. RWA) 2.98% 3.07% 3.38% 3.87% 3.92% 3.99% 4.05% Loans per branch (EUR mn) 35.6 34.5 35.2 36.8 37.9 39.5 41.0

Net fees / avg. RWA 1.61% 1.64% 1.95% 2.20% 2.19% 2.19% 2.17% Loans per employee (EUR m 4.0 3.8 4.0 4.3 4.4 4.5 4.7

Revenue / avg. RWA 5.18% 5.28% 5.79% 6.43% 6.46% 6.52% 6.55% Deposits per branch (EUR m 25.8 26.7 27.8 29.1 29.9 30.8 31.7

Cost / avg. RWA 2.90% 3.00% 3.36% 3.68% 3.59% 3.55% 3.48% Deposits per employee (EUR 2.9 2.9 3.2 3.4 3.5 3.6 3.6

NII / tot. revenues 57% 58% 58% 60% 61% 61% 62%

Net fees / tot. revenues 31% 31% 34% 34% 34% 34% 33%

Securities inc. / tot. revenue 3% 2% 0% 0% 0% 0% 0% Distribution network 2013 2014 2015E 2016E 2017E 2018E 2019E

Cash RORWA 0.01% 0.04% 0.54% 0.98% 1.16% 1.23% 1.30% Number of employees 11,718 11,593 11,143 10,823 10,823 10,873 10,923

ROA 0.01% 0.02% 0.33% 0.53% 0.64% 0.68% 0.72% Number of branches 1,308 1,273 1,273 1,253 1,253 1,253 1,253

ROAE 0.1% 0.3% 4.0% 6.3% 7.3% 7.6% 8.0% Employee / branch 9.0 9.1 8.8 8.6 8.6 8.7 8.7

Tang. ROAE 0.5% 0.3% 4.5% 6.9% 8.0% 8.4% 8.7% Avg. staff costs (EUR) 66,872 67,495 67,240 69,257 70,642 72,055 73,496



Banca Popolare di Milano (PMII.MI): Up to Buy from Neutral

Source of opportunity

BPM screens well in our M&A analysis: it has ample cost and capital

synergies that can be released in an in-market merger. We find at the

current share price, BPM trades on 6.4x “reasonably normalized”

earnings and cum cost and capital synergies. It is also relatively small

by assets and focused on the most active regions of Italy, making it an

attractive franchise for a trade buyer.

Catalyst

The banks reform law announced in January is likely to become

definitive in mid-March. Assuming that the law does not change in

substance, the Popolare banks will then have 16 months to transform

into joint stock companies (SpAs). We expect the consolidation process

to start soon afterwards, and share prices to react positively as the first

transactions approach and get underway.

The next set of results is on May 12, 2015. We expect BPM to report

lower impairment charges supported by an improving macro backdrop,

paving the way for profitability improvement. This being said, we also

believe that on a standalone basis, we do not see very significant

upside for BPM as these profitability trends are already well priced, in

our opinion. In this regard, we believe BPER offers a more attractive

risk/reward.

Valuation

Our 12 month ROE/COE price target increase from €0.73 to €1.01. We

downgrade our estimates to reflect slightly lower revenues, but this is

offset as we incorporate the findings of our M&A analysis in our

valuation, driving the increase. We value BPM on a P/TBV multiple of

0.9x 2015E and add an M&A factor as per Exhibit 43.

Key risks

Key risks to our view include renewed macro, sovereign and asset

quality concerns. Further risks include uncertainty linked to the

Popolare reform and the outcome of the consolidation phase.

Source: Company data, Goldman Sachs Global Investment Research, FactSet.

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile

Low High

Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the investment

profile measures please refer to the

disclosure section of this document.

Banca Popolare di Milano (PMII.MI)

Europe Banks Peer Group Average

Key data Current

Price (€) 0.85

12 month price target (€) 1.01

Upside/(downside) (%) 20

Market cap (€ mn) 3,720.9

Tier 1 ratio (%) 11.6

12/14 12/15E 12/16E 12/17E

GS EPS (€) New 0.05 0.04 0.06 0.07

EPS (€) Old 0.06 0.05 0.06 0.07

DPS (€) New 0.03 0.02 0.03 0.03

DPS (€) Old 0.01 0.01 0.03 0.04

GS P/E (X) 11.0 20.5 14.8 12.2

Dividend yield (%) 5.2 2.2 3.4 4.1

GS ROE (%) 5.7 3.9 5.3 6.4

P/BV (X) 0.5 0.8 0.8 0.8

380

400

420

440

460

480

500

520

540

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

Mar-14 Jun-14 Sep-14 Dec-14

Price performance chart

Banca Popolare di Milano (L) FTSE World Europe (EUR) (R)

Share price performance (%) 3 month 6 month 12 month

Absolute 41.7 30.4 50.3

Rel. to FTSE World Europe (EUR) 26.9 15.8 28.9

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 3/05/2015 close.



Exhibit 51: Loan book breakdown 2Q14; € bn

Exhibit 52: Liabilities, funding breakdown 4Q14; € bn



Exhibit 53: Impaired loans ratio breakdown

Exhibit 54: Coverage breakdown



Exhibit 55: Branch distribution

as of 3Q 2013

Exhibit 56: P&L breakdown

Revenue, expenses and PBT compared with averages RWAs



28.9

13%

1%

54%

31%

1%

Current accounts Repos Mortgages

Other Debt securities Impaired

48.3

7%

57%

19%

9%8%

Deposits from banks Deposits from customers

Debt securities in issue Shareholders' equity

Other

1.7

%

2.6

%

3.5

% 5.3

% 7.2

% 8.8

%

3.9%

7.6%8.5%

11.5%

14.9%

16.9%

3.4%5.4%

6.2%

9.5%

12.1%13.6%

4Q

08

4Q

10

4Q

11

4Q

12

4Q

13

4Q

14

NPL Doubtful Restructured

Past-due Total NPL + Doubtful

65.5

%

51

.0%

47

.1% 55.8

%

55.5

%

55.9

%

40

.8%

24

.2%

28.1

%

34

.3%

36

.1%

38.5

%

4Q

08

4Q

10

4Q

11

4Q

12

4Q

13

4Q

14

NPL Doubtful Restructured Past-due Total deteriorated

4.8%

3.0%

0.1%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

Revenue/avg RWA Expenses/avg RWA PBT/avg RWA



Banca Popolare di Milano (PMII.MI): Model summary

Exhibit 57: Banca Popolare di Milano model summary € mn


P&L (In € mn) 2013 2014 2015E 2016E 2017E 2018E 2019E Assets 2013 2014 2015E 2016E 2017E 2018E 2019E

Net interest income 838 800 805 862 920 972 1,016 Cash 363 323 323 323 323 323 323

Net fees & commissions 544 557 579 596 614 632 651 Loans to banks 1,813 985 985 985 985 985 985

Trading and Equity inc. 248 211 175 175 175 175 175 Loans to customers 33,345 32,079 33,052 34,374 35,749 37,179 38,666

Other income 53 53 52 53 54 55 56 Securities 10,857 11,689 11,689 11,689 11,689 11,689 11,689

Non interest income 845 821 806 824 843 863 883 Other earning assets 188 199 199 199 199 199 199

Total recurring revenues 1,683 1,622 1,611 1,686 1,763 1,834 1,898 Interest earning assets 46,204 44,951 45,924 47,246 48,621 50,051 51,538

Rev / avg. earning assets 3.52% 3.56% 3.55% 3.62% 3.68% 3.72% 3.74% Tangible assets 1,134 1,022 1,022 1,022 1,022 1,022 1,022

Staff -609 -612 -615 -636 -653 -671 -688 Intangible 96 96 96 96 96 96 96

General administration -305 -286 -284 -284 -287 -290 -293 Other assets 1,584 1,880 1,557 1,557 1,557 1,557 1,557

Depreciation & other costs -73 -75 -74 -76 -77 -79 -81 Total assets 49,382 48,272 48,922 50,244 51,619 53,049 54,536

Total operating expenses -987 -974 -974 -996 -1,018 -1,040 -1,062

cost income ratio (%) 59% 60% 60% 59% 58% 57% 56% Liabilities 2013 2014 2015E 2016E 2017E 2018E 2019E

Operating income 696 648 637 690 746 795 837 Due to banks 5,914 3,319 3,319 3,319 3,319 3,319 3,319

Provision -590 -319 -292 -270 -245 -255 -265 Customer deposits 26,423 27,703 28,828 29,693 30,583 31,501 32,446

provisioning charge (%) 1.73% 0.98% 0.90% 0.80% 0.70% 0.70% 0.70% Securities in issue 10,114 8,982 8,286 8,574 8,879 9,214 9,571

Other provisions -10 -4 -12 -10 -10 -10 -10 Financial liabilities 1,440 1,843 1,843 1,843 1,843 1,843 1,843

Net exceptionals 0 0 0 0 0 0 0 Other interest bearing liabilit 75 75 75 75 75 75 75

Profit before tax 97 325 333 410 490 530 561 Interest bearing liabilities 43,967 41,921 42,350 43,503 44,699 45,951 47,253

Taxes -67 -92 -147 -154 -181 -195 -206 Other liabilities 1,789 1,814 1,814 1,814 1,814 1,814 1,814

tax rate (%) 70% 28% 44% 38% 37% 37% 37% Shareholders' equity 3,626 4,537 4,757 4,927 5,105 5,283 5,469

Minorities & others 0 -1 -4 -5 -5 -5 -5 Capital 3,596 4,304 4,576 4,676 4,801 4,953 5,118

Net income 30 232 182 251 304 330 350 Net profit of the period 30 232 182 251 304 330 350

GS Net income 30 232 182 251 304 330 350 Total equity and liabilities 49,382 48,272 48,922 50,244 51,619 53,049 54,536

Per share data (EUR) 2013 2014 2015E 2016E 2017E 2018E 2019E Asset quality 2013 2014 2015E 2016E 2017E 2018E 2019E

EPS 0.01 0.05 0.04 0.06 0.07 0.08 0.08 Gross NPLs 5,279 5,853 6,029 5,908 5,790 5,674 5,561

GS EPS 0.01 0.05 0.04 0.06 0.07 0.08 0.08 NPL Coverage ratio 36% 39% 42% 42% 42% 42% 42%

DPS 0.00 0.02 0.02 0.03 0.03 0.04 0.04 Net NPL ratio 10.1% 11.2% 10.5% 9.9% 9.4% 8.8% 8.3%

Book Value per share 1.00 1.03 1.08 1.12 1.16 1.20 1.25

Tangible Book value 0.97 1.01 1.06 1.10 1.14 1.18 1.22 Capital and key ratios 2013 2014 2015E 2016E 2017E 2018E 2019E

Tier 1 capital 3,333 3,921 4,021 4,146 4,299 4,464 4,639

Valuation 2013 2014 2015E 2016E 2017E 2018E 2019E Preference shares 262 214 214 214 214 214 214

P/E 102.2 x 15.7 x 20.1 x 14.5 x 12.0 x 11.1 x 10.4 x RWA 42,611 33,700 24,123 24,955 25,822 26,723 27,659

GS P/E 102.2 x 15.7 x 20.1 x 14.5 x 12.0 x 11.1 x 10.4 x Equity Tier 1 ratio 7.2% 11.0% 15.8% 15.8% 15.8% 15.9% 16.0%

P/B 0.8 x 0.8 x 0.8 x 0.7 x 0.7 x 0.7 x 0.7 x

Tang. P/B 0.9 x 0.82 x 0.8 x 0.8 x 0.7 x 0.7 x 0.7 x Products penetration 2013 2014 2015E 2016E 2017E 2018E 2019E

Dividend Yield 0.0% 2.6% 2.2% 3.4% 4.2% 4.5% 4.8% Customer loans / deposits 1.26 x 1.16 x 1.15 x 1.16 x 1.17 x 1.18 x 1.19 x

Market cap / deposits 14% 13% 13% 12% 12% 12% 11% Customer loans / Tot. assets 0.68 x 0.66 x 0.68 x 0.68 x 0.69 x 0.70 x 0.71 x

Cust. Dep. / Tot. Earning asse 0.57 x 0.62 x 0.63 x 0.63 x 0.63 x 0.63 x 0.63 x

Profitability ratios 2013 2014 2015E 2016E 2017E 2018E 2019E

NIM (NII / avg. RWA) 1.95% 2.10% 2.78% 3.51% 3.62% 3.70% 3.74% Loans per branch (EUR mn) 46.6 45.4 46.8 48.7 50.6 52.7 54.8

Net fees / avg. RWA 1.27% 1.46% 2.00% 2.43% 2.42% 2.41% 2.40% Loans per employee (EUR m 4.2 4.1 4.3 4.4 4.6 4.7 4.9

Revenue / avg. RWA 3.92% 4.25% 5.57% 6.87% 6.95% 6.98% 6.98% Deposits per branch (EUR m 36.9 39.2 40.8 42.1 43.3 44.6 46.0

Cost / avg. RWA 2.30% 2.55% 3.37% 4.06% 4.01% 3.96% 3.90% Deposits per employee (EUR 3.4 3.6 3.7 3.8 3.9 4.0 4.1

NII / tot. revenues 50% 49% 50% 51% 52% 53% 54%

Net fees / tot. revenues 32% 34% 36% 35% 35% 34% 34%

Securities inc. / tot. revenue 15% 13% 11% 10% 10% 10% 9% Distribution network 2013 2014 2015E 2016E 2017E 2018E 2019E

Cash RORWA 0.07% 0.61% 0.63% 1.02% 1.20% 1.26% 1.29% Number of employees 7,846 7,740 7,740 7,800 7,850 7,900 7,950

ROA 0.06% 0.48% 0.37% 0.51% 0.60% 0.63% 0.65% Number of branches 716 706 706 706 706 706 706

ROAE 0.8% 5.7% 3.9% 5.2% 6.1% 6.4% 6.5% Employee / branch 11.0 11.0 11.0 11.0 11.1 11.2 11.3

Tang. ROAE 0.8% 5.3% 4.0% 5.3% 6.2% 6.5% 6.6% Avg. staff costs (EUR) 75,346 78,586 79,472 81,857 83,494 85,164 86,867



Disclosure Appendix

Reg AC

We, Jean-Francois Neuez and Willis Palermo, hereby certify that all of the views expressed in this report accurately reflect our personal views about

the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly,

related to the specific recommendations or views expressed in this report.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.

Investment Profile

The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and

market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites

of several methodologies to determine the stocks percentile ranking within the region's coverage universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate

of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend

yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

Quantum

Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for

in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

GS SUSTAIN

GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list

includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and

superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate

performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the

environmental, social and governance issues facing their industry).

Disclosures

Coverage group(s) of stocks by primary analyst(s)

Jean-Francois Neuez: Europe-Pan-Euro Banks. Willis Palermo: Europe-Pan-Euro Banks.

Europe-Pan-Euro Banks: Alpha Bank, Arrow Global Group, Banca Monte dei Paschi di Siena, Banca Popolare di Milano, Banca Popolare Emilia

Romagna, Banco BPI, Banco Comercial Portugues, Banco Popolare, Banco Popular Espanol, Banco Sabadell, Banco Santander, Bank Handlowy, Bank

of Ireland, Bank of Piraeus, Bank Pekao, Bank Zachodni WBK, Bankia, Bankinter, Barclays plc, BBVA, BNP Paribas, CaixaBank SA, Commerzbank AG,

Credit Agricole SA, Credit Suisse, Danske Bank, Deutsche Bank, DNB, EFG International, Erste Bank, Eurobank Ergasias SA, HSBC, ING Groep N.V.,

Intesa Sanpaolo, Investor AB (B), Julius Baer Group, KBC Group NV, Komercni Banka, Lloyds Banking Group Plc, Mbank, National Bank of Greece,

Natixis, Nordea, OTP Bank Plc, PKO BP, Provident Financial, Raiffeisen Bank International, Royal Bank of Scotland, SEB, Societe Generale, Standard

Chartered, Svenska Handelsbanken, Swedbank, UBI Banca, UBS Group AG, UniCredit, Virgin Money Holdings, Vontobel.

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Goldman Sachs Investment Research global coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 33% 54% 13% 44% 38% 32%

As of January 1, 2015, Goldman Sachs Global Investment Research had investment ratings on 3,483 equity securities. Goldman Sachs assigns stocks

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