Banco Bpm Societa Ord

Good afternoon. This is the Corosco Conference Operator. Welcome and thank you for joining the Banco BPM 9 months 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 Peronaglio, IR Manager of Banco BPM. Please go ahead, sir.

Thank you very much, everybody. Thank you for being with us tonight for the presentation of the third quarter result. As usual, before leaving the floor to Mr. Castagna for the presentation and then up to you for the Q&A, Let me remind that the presentation you can find on our website on Investor Relations page and the Q&A section is reserved for a financial analyst. Thank you very much. I leave the field to Mr. Castagna.

Good evening, everybody. Thank you for being with us this evening. I will try to be as much quick as possible in order to give you time to make your Q&A section. So starting on page five, We want to highlight the very resilient and the path of recovery, which is characterizing our first nine months, particularly significant in a difficult environment like the one we are still involved with the COVID-19 threat. As a matter of fact, Q3 was very good in terms of core revenues, 9.5% Q&Q, for the reduction in cost minus 5.2% Q&Q healthy build up in pre-provisioning income which is not only is 44% better than Q2 but is also better 6% relating to 9 months 2019 which as you know was a very good year for us on top of that I would like to stress that we decided as we anticipated in Q2 a further reduction of MPE through disposal. We have managed to close a deal, two deals actually, for 1.2 billion of total consideration of which 1 million of UTP and 200 million of leasing bed loans. The total risk in consideration since the start of our merger is now at 21.4 billion, and I remind that all this is done without any capital increase, any request of capital from the market. The cost of risk is confirmed at 100 basis points as a guidance for 2020, including the extraordinary transaction we are mentioning. On top of that, we have reserved some slides for give you an hint about how we are dealing in order to strengthen the intentional credit management on the moratoria and also on the total loan portfolio in these difficult times. Last remarks on the capital position as you can see already considering the Q4 Edwin that we expect in the next quarter we have performed a common equity TR1 fully loaded at 13.6% which is 13.6% which is 14.1% without the Edwin. On page 6 a quick reminder about the technically operational solution we adopted in order to minimize the impact of Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord utilizing of course smart working up to 8,000 people with a with a shift of branch presence adopted during the COVID and the reduction of physical presence both in head office and in headquarter on top of that of course we are now fully provided with masks plexiglass gloves and sanitizing gel in order to allow our colleagues to perform at every day on their duties also in terms of cyber we were very active in order to check carefully all the assets also the device we allow to our customer our colleagues to use by during smart working and we have nowadays fully deployed all the tools needed in order to perform correctly also in smart working with our clients. On page seven some numbers about the commercial effort we have done which we feel will help us also to face this second wave of COVID. As you can see on all the digital banking figures we are registering a double-figure increase year-on-year. Mobile transaction, which we mean only mobile and tablets, is up 62%. The user of app, client using app, are up 35%. Online transaction are up 23%. And so almost the same also with digital sales and order executed via web. All in all, considering households, we increased the utilization of direct banking from 77% of last year to 84% of September 2020. This allows us also in terms of commercial volumes to rebound in Q3 vis-à-vis all the main figures of our activity. Investment product placement went up again to 3.2 billion from 2.4 last quarter. The new lending is 7.9 billion vis-à-vis 6.9 in Q2 and especially with the moratoria measure guaranteed by the state which went up 5.2 billion in Q3 vis-à-vis 1.9 billion in Q2. Let me give some further indication about these measures. On page 8, as you can see, we had 9.5 billion of requests for lending assisted by public guarantees in June. This increased to 12 billion in September. Now we are up in October to 13 billion. of the 12 billion in September 7.1 billion were already granted to our clients 4.9 billion are of course in our pipeline 3.5 of these already approved by the credits and 1.4 is under approval because a recent request from our clients the distinction of these 12 billion between 100% guaranteed Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord also in terms of moratoria we are basically at the same level we announced in June is around a bit below 16 million the total amount is still 15.6 billion a small reduction of which 12 billion from state moratoria and 3.4 million of Italian Banking Association kind of moratoria also in October this figure is stable Let me spend some words about how do we see this situation because of the many concerns we hear about the potential disruptive effect of the end of moratoria. Let's say that thanks to our geography there is a first consideration very important in our view which is the difference between the market share of moratoria measures and the market share of public guarantee issued vis-à-vis our natural market share. As you can see, due to our geography, we are very much involved in new lending with public guarantee in which we have a market share of 11% of 105 billion of total loans granted by the Italian banking system we have again 12 billion meanwhile out of the 300 billion of moratoria we have a stake of only 5% which is the 15 billion 15 and a half billion I mentioned before this means in my opinion that the quality of our kind of client due to the very much developed manufacturing in our region is much more addressed to state guarantee loan rather than to moratoria. Having said that, also the moratoria are quite safe in our opinion because the distribution of loans under moratoria by rating class at September still amount at a very comfortable 77% in the low-medium-risk class of rating. Meanwhile, we have 13% of mid-high-risk and only 10% of high-risk clients. If we extrapolate the clients in these two categories, which also are in the more exposed selected sector potentially highly potentially impacted by COVID we have at risk 400 million in the mid high risk client and 300 million in the high risk client I will explain how we are dealing with this client in the next page another very consistent figure which I think can give you an idea of the liquidity that our client are getting from these measures is the increase in deposit from our non-financial corporates. As you can see, this kind of clients in March stand at 25.6 billion of deposit. Meanwhile, in October, they increased of 28% up to almost 33 billion, which is usually 7.5 million more. This means that, of course, the most of the loans we have granted are still there in the current account of our client, and they are taking into full consideration all the installment of the moratoria that are going to expire in the next months in order to comply with this maturity. Let's also say that almost 2 billion of these increase in deposit come from the same client who applied for moratoria. Meanwhile, the other 5 billion comes from the other client, mostly the one who applied for the new loan guarantee. Some few hints about what we are doing in order to monitor and check continuously the clients who applied for moratoria. First of all, out of the 12 billion who applied for the government moratoria, we extrapolated more risky portafoglio, the one we were mentioning before, which amount to 2.7 billion. We are selecting and contacting the almost 9,000 clients pertaining to this category in order to ask each of them the current liquidity situation, the potential need for any further measure in order to comply with the moratorium and so on. Up to now, we have contacted and received answers by almost 20-22% of our clients in these cluster seventy percent of them they don't need anything farther in order to comply with the installment that they are going to mature in the next months so the perception is that only a few part of these will be engaged and this of course is what we are doing in order to find further measures possibly also new government guaranteed loans in order to face potential liquidity needs. The same exercise we are doing also on the total performing portfolio. We have completely renewed our workflow driven monitoring platform with a new early warning system which is allowing us now to have a a consideration of 6 billion in the watch list of credit of course which are running in different clients and 70% of these kind of clients comes out in our watch list without any overdue so this is just to say that we don't wait for a client to to enter into some difficulties to have some quick hint about the potential difficulties up to now 94% of the client entering the watchlist come out without any difficulty again on the new landing so we are now in nine months at around 20.3 billion which is more or less the total of the full last year 65% is ordinary business, 35% is COVID measures. If you only consider the Q3, this amount is switched completely in the opposite situation. If you consider enterprise and corporate, 74% of the new loan granted in Q3 is assisted by state guarantee. you can see also how we are proceeding continuously with the new loans lending and also in November we are still continuing at this pace on page 12 some figures about Q3 and the nine months as you can see are all very positive figures NII is up 8.4% mostly thanks to the TLTRO, but also to the increase in loans. Fee and commission is up 11%. Total revenues is up 14%. Operating cost is down 5%. And pre-provision income, as I said before, is up 45%. But more important, it's up also vis-à-vis nine months 2019. Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord very comfortable results. Just a glance also to the common equity R1 evolution. As you can see on the green side, the phase-in went up from 14.6 to 15.4, the fully loaded from 12.8 to 14.1, and even though we apply 50 basis points of headwind due in Q4, we end up with the 13.6 which we feel very comfortable and the same is in terms of MDA buffer you remember that our guidance was to be up to 150 basis point we are in a comfortable 414 basis point some word about the risking we announced the early We are performing, we have of course, we have a binding offer for 1.2 billion of GBV. One billion is related to the project Django, which is a true UTP sale, portfolio sale of mid-size dimension. These are all positioned between amongst 500,000 and 25 million of GBV each, more or less 50% real estate, 15% other industrial sector with quite an average vintage of almost five years for which we have received the formal binding offer from a couple of bidders. The same, we are of course expecting to close this by year end, but we anticipated this quarter the effect of the after S9 impact on cost of risk. Project Titan instead is a securitization multi-originator GAX for which we will contribute for a figure between 150 and 200 million. also this is due to be concluded during the year and also for this transaction we have anticipated the IFRS 9 impact on page 15 let's see the results of this further reduction we have been down from the numbers that you can see in September 19 we have 10.5 billion down to 10.1 billion in December. We are now at 8.6 if we consider the effect of the Django and the Titan transaction, which means go down year on year 18% and 12% only in Q3. As I remember before, this means 21 billion of the risk since the merger. Also, the ratios were down. before Django and Titan 8.6 gross 4.7 net with the effect of the announced transaction we are down to 7.7% of gross MPL ratio which is further reduced to 6.7 if we include loans to bank as per EBA definition. This has been possible also for the very good migration rates. Of course, they were due to also the current situation with the moratorium measures. As you see, the default rate on page 16 went down to 1%. In Q3, only 150 million of flow. MP danger rate down from 11% to 7.7% and of course all secure rate was down from 5.1 to 3.5% and this was the reason why we decided to increase again our disposal plan. The figure we have after the FRS 9 impact is a coverage of 48%, 51% including write-off, bad loans 57%, 64% including write-off, and an increase from 39% to 42.7% of UTP. Of course, this will go back more or less at the same level of the previous quarter once the two transactions I was mentioning will be executed. the cost of risk including the FRS9 impact of this transaction is up to 324 million which allow us to be still into the range of 100 basis points which we gave you as a guidance for this 2020 on page 17 some figures about our Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord mostly because of the current situation, the uncertainty of the forecast for the next months due to the COVID. Even considering, of course, that we have already a pace in new product sales of asset management product in line with the first months of this year. also in October we are still registering some increase loans went up 0.6% October on September core funding plus 3% only in one month October versus September not to mention the very comfortable liquidity and funding position we have an LCR of almost 200% NSFR most comfortably above 100% eligible securities unencumbered around 26 billion and as you know we have performed during this year all the kind of issue of the bond issue both in 81 senior non-preferred and T2 lately in September 500 million The debt security portfolio performance is very good. We have increased our reserves on health to collection and sale from 32 million of June to 166 million of September with a contribute to our common equity tier 1 of 134 million or 23 basis points. and as much as the unrealized gains on amortized cost went up of 211 million in September and June. Let's also mention that as of today we have a further increase of another let's say 170-180 million in total consideration between these two categories. Net interest income on page 18 as you see the 8.4% increase Q&Q was mostly due not only to a slight increase in commercial transaction operation but mostly with TLTRO of course what we included 47.4 million is not the total contribution of TLTRO on the Q3, which is higher, but we have to consider the downside of the extra liquidity reinvestment for a portion of TLTRO, which we are not investing in loans because of the growth also of the deposit where we were mentioning before. The total results, as I mentioned, is almost 520 million. In terms of commercial spread, notwithstanding the shift from short-term lending to medium-term transaction guaranteed by the state, we are keeping an asset spread in the region of 182 basis points, one basis point better than last quarter, and the reduction in commercial spread of 15 Bpm is all a consequence of the reduction of Euribor in the quarter for 18 Bpm. Of course the quality of the portfolio is bettering because we are substituting basically short-term loans with medium-term guaranteed loans. on page 19 a sound rebound also in terms of fees commercial banking fees at the same level of Q1 management advisory still a bit below Q1 but 11% above Q2 this is also due of course the difference with Q1 also to August in the Q3 but as you can see on the box on the right Box, basically July and September were very consistent at around 143 million. We also wanted to show you the commercial recovery in investment product placement, the monthly trend. As you see on the down right side, apart from the very massive impact in March, April and May, in which we reduced very much the capability of placement since June we have relaunched this activity and apart from the Q3 also October is very sound is 1.2 billion in terms of value date corresponding to the commission in Q3 but in terms of sale we are up to 1.4 billion which means that we have already a reserve of new commission for Q4. On page 20, operating cost also for these very sound results. I have to spend some words in order to make you understand some one-off savings in terms of personnel. We were down total cost from 8.4% with a VQ1 at 5.2% with a VQ2. As you see on the right box, there is a massive reduction vis-à-vis the first year of the merger. We have almost reached 500 million of current reduction in cost, but a part of this comes from some benefit related to the COVID. As you can see, staff cost is down 15% from Q1 and 10% from Q2. Both Q2 and Q3 benefit from the reduction of variable remuneration due to the constraint of the economic situation and also from some one-off COVID-related savings from the government. no much more to mention for administrative cost even though in this case we have some negative one-off due to cost of COVID measures last page some final remarks very sound we feel performance considering also the risking 263 million of net income a strong pre-provision income at 1.3 billion. The risk strategy would allow us to point 7.7 of MPL ratio going down toward our final target. A very solid capital buffer in terms of common equity tier 1 even considering the headwind of Q4. and a quality of loan portfolio supported by the state guarantee and by the many measures we are activating in terms of monitoring and early warning. Some hints about the outlook of the last quarter. We think in core revenues if nothing disruptive happens in terms of COVID. We can be in line both in terms of Q3, both in terms of NII and fees and commission. Let's say that we have already utilized all the one-off for cost. So we think the guidance for Q4 will be more similar to Q1 rather than Q2 and Q3. Asset quality, we are still exploring some opportunity for single names disposal during Q4, but also considering this, we think we can confirm the guidance of cost of credit around 100 basis points. Finally, the target of capital, of course, remains 250 basis points, but we are comfortably above 400, so we think we can reach easily this target.