Banco Bpm Societa Ord

Good afternoon, this is the Coral School Conference Operator. Welcome and thank you for joining the Banco BPM first half 2020 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Roberto Peronaio, IR Manager of Banco BPM. Please go ahead, sir.

Thanks a lot. Thanks, everybody, to be present with us at the presentation of Banco BPM First Half Result. As usual, before leaving the floor to Mr. Castagna for the presentation, I would only remind you that you can find the presentation on our website at on the investor relations page and that the section Q&A is reserved only to the financial analyst. I leave the floor to Mr. Scastagna.

Hello, good evening everybody. I know it's 6.30, over 6, so I have to be quick. I'll try to do my best. Thank you for being with us. I know it's been a long day also for you. I start on page 5 basically some news about how is our reaction to the COVID what we can say almost as all the other banks we are back to normal of course with much more digital business grown over these weeks and months basically we have reopened all the branches we will terminate our full reopening by beginning of September and now we have more than 90% of our people in the branch and almost 50% into head office compared with the 35% in the branch and 20% in head office during the peak of the COVID I won't spend time about digital you can see the figure how they've grown they are consistent also now that we are basically with all the branch open basically the digital experience has been appreciated by our client and also I would say by our colleagues back to normal also in terms of business as you can see investment product placement and fees and commission which were the two items eaten by the Bpm Bpm Bpm Bpm Bpm Bpm and 121 in May. The average of the Q1 was 147. On page 6, some comment about the government support measure and how our bank is proactive trying to have a granular approach at client level in order to exploit all the opportunity given by the state measures. and also the possibility to try to cover at our best the needs of our client. Basically, we had a three-step approach analyzing all the corporate and SME clients. The drivers were the pre-COVID rating, the capital solidity, the sector outlook, and the share of wallet. Having done that, we then segmented our client into different groups, homogeneous groups, in order to assess which kind of impact they would have had by the COVID and which kind of measure they would need on our side in order to be the safest possible. As you can see, the output was to give a target list for each relationship manager basically indicating the strategy to be adopted at single client level. On page 7, the new lending activity which grew a lot into Q2. The results of full semester was 12.4 billion of new lending. up 15% vis-à-vis first half 2019 and the impact of the guarantee as of June was 2 billion out of the 12 billion just to mention the pace of the growing guarantee measures in July we are up to 4 billion so 2 billion only in July the amount and the pipeline of the public guarantee amount as of today to 11.5 billion of which already granted in July 4 billion as I mentioned before and out of the 7.5 billion still to be granted we have 5 billion which are already authorized by our credit department and waiting for being drawn by our client. Only 2.6 billion under approval. Going to the moratoria measure on page 8, just a quick number. We had suspended installments for 2.3 billion out of which 0.4 out of Abbey Moratoria and 1.9 billion for the Cure Italia Decree Moratoria. The total underlying exposure related to this installment amounted to 16 billion, out of which 3 billion Abbey Moratoria, 12.9 billion Cure Italy Decree Moratoria. As you know, the Abbey Moratoria has 12 to 24 months of Extension. Meanwhile, the decree is supposed to expire by September this year, but is most probably to be renewed with the August decree, as far as we know, at least to January 2021, giving us, of course, time to intervene in order to have the best possible measure for our clients to comply with the installment basically also to this regard we have a distribution by rating class mostly in the low-medium risk class applying for moratoria differently from the financing guaranteeing by the state the moratoria was basically applied by everybody the majority of which are in the low-medium risk, 76%, only 14% in the mid-high risk and 10% in the high risk categories. The exposure to selected sectors, which we mentioned also in our Q1 results, which are the most exposed to COVID, is only 500 million for mid-high risk and 300 million for high risk. Let's have another look on this issue on page 9. As you can see, out of 102 billion of loans portfolio, we have 86% from 87.8% in the low, medium, low and medium risk categories and 8% in the medium-high, 5% in the high risk category. Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord of this 8 billion, almost 5 are already covered by either real estate guarantee or state guarantee approved under the liquidity decree. The remaining 3 billion are still under examination in order to find the best solution and try to give also to them the support as much as possible of state guarantee. if we go to the level of high risk rating and mid high risk rating the 8 billion became 400 million for the high risk 1 billion for the mid high risk and only 100 million and 400 million are still to be secured on page 10 we have the scenario that we applied on the performing loan exposure in order to consider the ECL impact on H1 result which as you know was 140 million on the performing exposure this was extrapolated with a more conservative scenario vis-a-vis the Q1 as you know in the Q1 we had our own scenario which was more or less 8% of lower GDP meanwhile the new scenario is the one approved by ECB and is a multi-scenario approach which give us more or less 9.6-9.7% of lower GDP, but we were able to disaggregate by sector the impact of the relevant GDP reduction for each specific sector. And again, the COVID impact was 140 million on the performing exposure. On page 12 You can find the results of Q2 compared with Q1. As you see, we reported 105 million of net profit, which was 128 adjusted. On the left of the slide, you find the disposition considering the fair value on liabilities under net financial results. in order to give you a more comprehensive and comparable effective result we have re-exposed the fair value on the liabilities and the net income before tax in order to give you a comparison of the line by line result Q2 on Q1 as you can see on the right side of the slide 12 we were able to have better results basically in every items Q2 on Q1 both in terms of NAI in terms of total income revenues were up 5% not in terms of fee and commission where I told you we have registered more are the fact of the COVID lockdown. We also were able to reduce 3.3% operating cost and have profit from operation at 387 million compared to 320 million of Q1 2020. provision were up almost 50 million 263 compared to 213 for a pre-tax profit 2.6% higher of Q1 106 million versus 103 million after systemic charge we had the net income before the line that I mentioned before and the PPA which was 76 million positive compared to 20 million of Q1 2020. The final net income including the fair value on liabilities is negative 46 million compared to 151 million Q1 which in turn was affected by this item. Let's go to the sort of sum up of the most important item on page 13. We have, frankly speaking, a quite solid H1 performance in in these COVID context. Total revenues again up 5% cost down 3.3 with very good pre provision income. Also in terms of reserves and unrealized gains we got the most but our Govis portfolio as you can see quarter on quarter we had 230 million of reserves on fair value on cost which of course apply to our common equity R1 and impact for 40 basis points Meanwhile, we also registered a very comfortable 245 million of positive performance in terms of unrealized gains on debt at a much higher cost. But as you know, this is not going neither in the profit and loss nor in the common equity tier one. It's still a reserve which is very comfortable for the months ahead. also in terms of volumes we had a quite comfortable growth both in terms of loans which grew 4% year on year and 1% quarter on quarter the real growth is still to come if you consider that only in July we registered another 1 billion of increase in stock which is another 1% compared to the second quarter of this year the same in terms of current account and deposit the increase was 8.7% year on year 3.2% quarter on quarter in July we have another 2.1 billion of deposit growing 2% versus Q2 2020 asset quality we are experiencing a slow decrease of our MPE exposure going down from 9.1 to 8.7 gross and 5% net MPE ratio with the Texas ratio down to 49%. Very comfortable also our liquidity and funding position of course couldn't be different because of the possibility and the opportunity that we exploited drawing 25 billion of TLTRO. We still have 24 billion of unencumbered eligible securities and we still could draw another 10 billion of TLTRO3. The LCR of course was up 193%. Capital ratios also in these also on the capital side we had some strengthening Common Equity Tier 1 grew 40 basis points fully loaded to 13.3% mainly due to the strengthening of the Govis performance meanwhile phase-in Common Equity Tier 1 was up 14.7% also in terms of MDA buffer we were up 335 basis points as you may remember our guidance is 250 basis points meanwhile on common equity tier 1 ratio versus minimum requirement we are up 480 basis points let's go to some specific figure of the balance of the P&L net interest income is up 5 million on the right you can see the different contribution to the growth of the net interest income is interesting to notice that also in the three months of the quarter we had a slight increase month by month from 154 million in April to 164 in June the commercial spread is up some basis point We feel that this could experience some decrease in the next months due to both the lowering of the Euribor and also the increasing volumes of state guarantee which of course have lower spread. I already mentioned the volume both in June and also the increase we registered in July. So I skip page 17, going to page 18 where we have some details about our performance in lending. Strong increase, 13% vis-à-vis same period last year. 22% up in terms of corporates. 30% down in terms of household but if you look on the left low side of the slide you can see that also the household in the Q2 is growing from 0.6 to 0.8 likewise of course enterprise and corporate then there is another figure that scheme that you can see the different figure month by month as you can see we are increasing quite dramatically the lending taking advantage from the state guarantee let's say that in Q2 the amount of state guarantee represented 29% of the total new lending only in July the amount of state guaranteed loans was up to 60% and this of course is going to better our loan portfolio quality on page 19 just one minute about the funding. Of course, we are not issuing anything. First of all, we had some very interesting and very good in terms of rate issue in January and February. Nowadays, we are waiting for normal time to restore, but first of all, we haven't drawn so much in terms of TLT Altro. We are we have almost covered all our needs. I would say that the only thing we will issue by this year is for regulatory requirement if needed and not for liquidity needs. Talking about liquidity on page 20 again 24 billion of unencumbered eligible securities up to 28 billion in July I already mentioned that we can draw another 10 million of TLTRO the total effect of the TLTRO drawing will be in H2 2020 because of course as you know the drawing was done at the end of June let's go on page 21 to net fees and commission as you can see we were down 8% year on year and 14.6% Q2 and Q1 I can say that we are optimistic if we see the right side of the slide you can see both in terms of revenues on the upside of the slide and in terms of monthly product placement trend on the lower part of the slide, the restoring of the normal activity. I would say that after experiencing a very low April with 104 million of revenues coming from commission, we went up to 121 in May and 150 in June, which is in the average of the best two months beginning of the year. the same as you can see on the low side of the slide we went from 1.2 or 1.5 billion of product placement January and February down to 0.9 0.3 0.7 now we are back to almost the normal activity of course coming from the reopening of the network again on the financial next financial result as I mentioned before the results is minus 82 million compared with plus 206 million but these are mostly due to the fair value of the own liabilities on the certificate issuing from our bank if we exclude these lines which you know is not going to affect the common equity tier 1, we register a comfortable 82 million of NFR compared to zero in the Q1. Mostly of these revenues came from disposal of Govis for 34 million, from some revaluation of fair value assets for 29 million and negotiation activity for 18 million. I don't comment the reserves on debt securities and the underlying gains which we already mentioned before and which are still registered and further increase also in July. Debt securities, our portfolio has increased in the last two quarters this year. let's say that the first quarter we just recovered as we do every year some trading activities which normally end of the year we try to keep as low as possible meanwhile in the Q2 we had an increase of almost 3 billion of HTC Govis with a very short maturity Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord page 24 just to mention that the duration is very low is going down for Italian Gov is AC from 3.9 to 3.3 and for Italian Gov is ATCM from 2.3 to 1.6 and the basis point value is down to 1.5 million on page 25 some good news from operating cost we were able to still reduce as we are doing basically since the beginning of the merger as you can see on the right side of the slide basically we are down on the average result of each year 15% from 2017 and we have reduced another 4.5% Comparing H120 to the same period 19. Still we feel that we can be able to have some further reduction in cost also in the second part of the year, namely in staff cost but also in other administrative costs. on page 26 we have some figures about asset quality as I mentioned before we are down to 8.7 and 5% of total MP ratio gross and net and 3.1 and 1.4 on band loan ratios the coverage is still sound 56% on band loan 63% if you include the write-off, 80 basis points higher, a bit lower, 30 basis points lower in UTP coverage, down to 39.3, mainly due to the different composition of the UTP portfolio where we increased the guaranteed UTP versus the uncovered. a good increase also in past due coverage and the total coverage of 48.6 including write-offs of course we have also increased as I mentioned before the performing exposure to 45 by this point flows are going very well the migration rates are still very comfortable down 1.1 percent default rate down 8.1% danger rate or unfortunately also down the cure rate to 3.7% as you can see the inflows both to MPEs and to bad loans are very low of course this is also due to the moratoria effect on page 28 cost of risk The blue figure is the normal cost of risk, mainly in, of course, coverage on non-performing exposure. Meanwhile, the yellow one is COVID-related top-up in generic provision, which amount to $140 million between the two quarters. The cost of risk with this increase is up to 88 basis points on the first half and 97 basis points on the Q2. I would like to draw your attention to page 29. This is a graphic that in our opinion can explain together with the attention we are having for covering as much as possible our client with state-owned guarantee also this slide is very important it shows you how our geography helps in cost of risk containment as you can see we have split Italy in four different areas each one of course representing different regions in which you have the red one which are the one with the MP ratio the higher MP ratio you can see that most of our peers have a good exposure to this region while we have only 1.5% of exposure to our book to this region and the same of course going up where we have the bigger exposure is in the region where the gross MPE ratio is below 9% so I think this can give you some idea of how we could be able to safeguard our asset quality profile. Another very interesting, quite new slide we are going to propose is page 30. This is to show that it's very difficult to imagine a pick-up of the cost of risk to historic situation. As you can see, we exposed the different contribution to the global cost of risk for 17, 18, 19 and 20 split into the stock-driven provision, the disposal provision, the flow-driven provision and only for this year also the COVID impact. As you can see on the correlation on the right side of the slide, the most important correlation is the stock, the amount of stock that you have and so having reduced quite impressively the stock from 30 billion to below 10 billion, is quite difficult to consider a cost of the stock that can go higher than the level that we have right now I would say the same almost for the flows of course there is a lower elasticity in the flows but also this is important to show that if you see the different figure of the flows this can show you that basically our bank was already with a good clean up when we started the merger unfortunately we had a lot of stock but the quality of the performing portfolio is performing almost the same since the merger finally strong capital ratios and buffer we have anticipated the figure of 13.3% on common equity tier 1 14.7 phase in let me say some details the increase was driven by the HTCM reserves on GOVIS and from the SME supporting factor meanwhile we are already embedded in our capital the effect of the FWA deterioration following the DGDP scenario we have applied to our numbers and the shift of the PD from the best categories toward the lower one. This should bring some lower effect in terms of reduction of common equity tier 1 in the second part of the year we are really comfortable with the MDA buffer we are registering and the only possible the only effect that we are forecasting for reducing common equity tier 1 is related to the combined effect of regularly headwind and tailwind which are going to be applied by the year end and amount to some 35 basis points. Just some final remarks. We find the performance quite solid, a good net income. Moreover, a comfortable pre-provision profit up to 390 million in Q2 versus 320 in Q1. and fostered by a very good cost containment which we feel will characterize also the second part of the year. Also the provision policy is prudent. Our scenario does not forecast other potential impact on performing loans. We are deciding and we will make some Bpm Bpm Bpm Bpm of course the workout for the first part of the year was very difficult because of all the constraints of the COVID so we are having some sort of understanding and some reverse offer on the market in order to see if it's possible to have toward the last part of the year some disposal of MPL The capital position is very robust as much as the liquidity and MDA buffers. Some figures about the outlook. I already mentioned a positive outlook for the second part of the year. basically all the more significant items are going to better so both NII fees cost control as much as the cost of risk we should remain at the level we have envisaged we imagine a potential outlook between 90 and 100 business points I would terminate with this and I leave the floor to you for your questions.