Banco Bpm Societa Ord

Good afternoon. This is the course call conference operator. Welcome and thank you for joining the Banco BPM full year 2020 group results presentation. 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 Pernaglio, Investor Relations Manager of Banco BPM. Please go ahead, sir.

Thank you very much to be present with us tonight for the presentation of the full year result. Before leaving the floor, Mr. Giuseppe Castagna. Let me remind that you can find the presentation on our website in Investor Relations page and the Q&A section is reserved for financial analysts. Thank you very much. I leave the floor to Mr. Castagna.

Thank you Roberto. Good evening everybody. Thank you for being with us for this full year 2020 presentation. Let's start immediately on page 5 where we have summed up some significant performance which our bank was able to reach in this very challenging environment of 2020 the first part is related to the asset quality which we manage through credit management initiative linked to the moratoria to the state guarantee loans and to an effective monitoring of Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord in H2 with a very effective commercial activity from our branch network, but also leveraging on digital banking. This produced a very solid rebound in H2 with pre-provision income up 43% vis-à-vis H1. all these results allowed us in a complicated year in which of course we expected some rules to respect also in terms of dividend distribution encourage us to be very cautious and prudent both on conservative provisioning policy we have in the last quarter we have done 1.3 disposal between portfolio and single name. We have increased of 500 basis points the coverage of MPE. We have upfronting with IFRS 9 further amount in order to foster new disposal starting since 2021. At the same time we were able to front loading restructuring cost able to foster 1,500 early retirement person scheme for 1,500 person and a closure by June this year of another 300 branch which sum up to the 750 we already have closed since the starting of the merger. this allowed us all in all to be back to distribute a dividend of 6 euro per share and overall to be very positive on the outlook of 2021 on page 7 we wanted just to give an outlook on the four year of our merger in which we think we were very much able to to build up a track record in the risking and capital generation. As you know, we have reduced for 30 billion to 8.6 billion the amount of MP, but at the same time, we were able to increase common equity tier one from 11.4 to 13.3%, which is the result of 2020. Needless to say that in between, we have financed something like 1000 basis points coming from revenue generation and asset management transaction which allowed us to reduce of 21 billion the amount of MP during these years. Starting from the credit profile let's have some look about the main action of this year of course the action where very much linked to the pandemic and to the measures taken by the government. We wanted to reach a target in sustaining the economy and we were able to reach a new record lending, new lending in 2020. After 21 billion in 2019, we were able to lend 27.6 billion. including 10.2 billion assisted by state guarantees. We still had at the beginning of the year almost 4 billion of loan loans assisted by state guarantees in pipeline of which in January we were able to deploy 1 billion. The second target was to uphold the portfolio quality through the reduction of MPEs 15% down to 8.6 billion and 7.5 MPI ratio thanks to a very favorable migration rate we had only 1% of default rate to a very low market share in the moratoria 5% versus 7.3% which is our natural market share on loans on checking very carefully the quality of the moratoria both for the one who already aspired in December which were an amount of 3 billion with a very much on the fourth rate of 0.5 percent and the same rate we are experiencing in the early engagement campaigns for the moratorium which are coming at a spiring in the next few months we have as we will check later on reviewed a big amount of this kind of moratoria and we already have some good expectation about the potential repayment. The other step was, as I mentioned before, to reinforce, to massively reinforce the coverage. We have reached for the first time a total of 50% of MPE coverage. Particularly, we have upgraded UTP coverage to 43.7%, 46 base on year. but if we include the Django disposal, the amount of coverage was even more than that. All these considering a tough scenario for 2021, of course related to the COVID and also provisioning further amount to start the risk, further the risking since 2021. The last objective was to contain the capital absorption, and we think that we had reached also these results, having 86% of loans assisted by state guarantee at zero risk weighting. On page 8, a focus on the moratorium. As I mentioned, we started with $16 billion of total requests. In December, we had $3 billion of moratorium expiring. with again a default rate of 0.5 for another billion more or less we had some different measures often linked to state guarantee the remaining portfolio as of end of the year is 12.2 billion of which 10 billion coming from the government and 2.3 from the Abbey moratorium this 12.2 billion are 80% of these are client of low median risk as rating, 12% mid-high risk and only 8% high risk. If we go into the sector with more impact from the COVID, we have a total of 2.7, 2.8 billion of risks under moderatoria, of which 2.4 billion under the best rating category. In order to check into these couple of billion we have run and we're still running early engagement campaigns activated on a total portfolio of selected mid-high and high risk clients amounting for 2.2 billion out of which only 2.8 billion are nowadays in watch list and only 0.6% are with signals of default. The outstanding moratoria related to our performing loans amounts to only 12%. On page 9 we start with some figures starting from asset quality again coming back from 9.1 to 7.5 in gross MP from 5.2 to 3.9 on net MP 39% to 43.7% for UTP coverage and 56% to 59% to bad loan coverage. If we include write-offs, we reach 65%. At the same, I would say, at a very good level, we of course have also our liquidity and funding situation. LCR is an higher of 191% and the SFI ratio is much higher than 100%. We have 20 billion of unencumbered eligible securities and we have reserves both on amortized cost and HTCS respectively for 875 million and 198 million with a very, very strong capital gain. Coming to capital again we reach 13.3% coming from 13% of December 19 with an increased MDA buffer thanks to the many issues we had in 2020 and beginning of 2021 of 81 and tier 2. The total amount passed from 250 basis points to 450 basis points in January this year after the last issue. Again, we propose a dividend distribution of 6 cents per stage, which amounts to 2.8% of dividend yield on the last quotation, which is above 3% if we consider an average of the first month of the year.

On page 10,

we have some figures about the operating performance and the commercial performance both very encouraging second half and first half NII plus 8% net commission plus 3.7% operating cost minus 5.4% pre-permission income plus 43% and this shows also How we really had an impact from the first wave of the COVID, but basically we were able to neutralize the negative effect of the second wave with these results. The commercial performance is also very good. Core net performing loans plus 8% year on year. New lending at a record of 27.6 billion plus 29% year on year. deposit 13 billion plus and asset under management 2.2% year-on-year, 3% on the last quarter 2020. Again, cost saving with a number of maneuvers which almost many of them we can consider extraordinary. We were able to offset the partial lack of revenues especially from asset under management and we reached the further saving of 174 million but the profitability we have generated allowed us also to provision 260 million gross in order to foster the agreement with trade unions already provisioned in 2020 and with an exit for the cost of 1,500 people and the closure of 300 branch. This was also facilitated and also the decision of closing further branch is coming also from a renewal activity on digital banking which strongly supported the commercial activity. We have some figures in the page 11 mobile transaction plus 61% app users plus 26% to 1.3 million investment orders executed plus 21% and so on with a share of digital transactions up to 83% on page 12 there is some specific action we have taken and we're still undertaking in order to increase even more the digital approach the first one is related to the advanced analytics capabilities we have adopted in order to foster more than 20 customer journeys on main commercial areas which were able to allow more than 10 million remote digital contacts with our clients driving over 20% of contribution total retail sales. Another important step was the full digital platform serving SMEs and private clients in order to finance the superbonus and ecobonus initiatives. We have already 3,000 operations in pipeline only after a few weeks. And this is also completely digital. we enable all our personal relational managers and wealth manager advisor to remote advisory nowadays all the transactions can be executed from remote we launched also a new mobile first platform app platform which was ranked at the best level from the main customer ratings and had registered an increase in customer usage of 24%. Finally, we are now onboarding individual customers with the digital identity in order to reach the complete Piperless relationship with clients by this year. On page 13, also in ESG, we wanted to mention some achievements we have reached we have started an ESG committee headed by the CEO to coordinate and control the ESG activities the board oversight is allocated to risk and control committee the executive remuneration is linked to ESG KPI also on environment clients people and community we have started many initiatives some of them already quite successful likewise the 100% of Usage of Renewable Energy with a Strong Reduction on CO2 Emission, the Credit Platform for Clients Investing in Sustainability, again the Super Bonus Digital Platform, the Asset Under Management fully compliant with this ESG policy amounting to more than $17 billion. And then, of course, our internal work with our people on the different pro inclusive program and aimed at valorizing talents also in the community we were able to distribute more than six million of initiatives in order to help our communities during the difficult period of COVID let's go to some figure on page 14 As you will see, we have put vis-à-vis the H1 and H2 in order to make you understand better how the reaction of the bank allowed to reach the results we are mentioning. On NII, we increased 80% almost in the second half, allowing the bank to reach the same result of 2019. of course even though we increased almost 4% fees and commission this was the results who paid more difference in terms of lower revenues vis-a-vis 2019 we had something like 120 million of difference vis-a-vis last year we recovered something in NFR where we had some one-off like the next CNC a transaction but also a very good return for from the govis and trading activity all in all total revenues stand up to 4 billion 152 million almost 200 million less than last year but we were able to recover almost 170 million with lower cost, showing how the flexibility we can use on cost can also offset difficult period, of course, coming from not internal reasons, but coming from the general situation, in this case, from the economic effect of the pandemic. All in all, so we were able to have a pre-provision income basically at the same level of 2019, only 1.4 lower year on year, of course we were very attentive as much as far as the loan loss provision were concerned we prefer to be very consistent and very prudent on this side we not only financed the 1.3 billion of disposal but we decided also to front load some IFRS 9 provision apart from building up more coverage on UTP and bed loans. We will see afterwards how much is the core activity related to loan loss provision, how much is what we consider one-off. Then, of course, we have the restructuring cost which I mentioned, the 260 million gross which are 187 million net. Systemic charge for 143 million, which lead us to a net income stated of 21 million, but an adjusted one of 330 million. Let's go back to the revenues. On page 15, we have again some core revenues split for quarter on the right side and for half year on the left side. We will see some much details in the next page. On page 16, we will have NII, which in the second half was 8% higher than the first half. This was mainly due to the TLTRO. As you can see, the third and the fourth quarter, of course, experienced a massive increase vis-à-vis the first two quarters. The reduction in Q4 of around 10 million comes up from the reduction of the URIBOR so the liability spread coming down from minus 57 to minus 62 and partially also from non-commercial activity especially the cost of the liquidity we place from TLTRO. On page 17 the dynamic of the net fees This is 3.7% second half on first half. If you compare Q3 and Q4 to Q2, which was of course the more affected by the pandemic, we have an increase of 11% and 14% respectively, which is still growing. We are having, as you can see on the right side, month by month revenue generation is increasing. to 150 million on December but I have to say that also January and the first week of February are at a record level of investment product placement we can see better on page 18 investment product placement as you can see after a quite good first quarter of 3.7 million only partially affected in March By the pandemic, we had a very low Q2 on 2.4, then rebounded to 3.2 and 3.7 for a total amount of 13 billion on investment placement. On the right bottom side, you see how the first month, January 2021, was 17% higher than January 20, which was in turn a very good month for us. and the first week of February is already 600 million of production. As far as lending is concerned, on page 19, again, plus 29% year on year, 27 billion of new loans, 24 related to enterprise and corporates, 3.3 to private individuals. If we split... Business and COVID measures driven business. We have 63% in ordinary business, 37% of state guarantee measures. On the right side, some indication about the asset spreads. In the first half of the year, we still were landing at a Bpm Societa Ord Bpm Societa Ord but also we register some positive basis points vis-à-vis the outflows of the second half which more or less is not that different from the outflows that we will have in 2021. So if we will be able to maintain the same pace of new asset spread we should have some better figures as for August 2021. On page 20, the quality of the portfolio. On the left side of the slide, you can see the flow of new lending. As you can see, both the ordinary business and the COVID measures are for the best quality. of our client only 5% and 2% 7% all in all both on ordinary business and coverage measures are in the medium high and high risk only 1% in the high risk meanwhile the stock is on the lower part of the slide still continue to improve showing more lending vis-a-vis low risk client and progressively lower lending vis-a-vis I million high-risk client all in all in the best part of our portfolio we have reached 88.6 percent of our stock as far as the further increase of state guarantee loans on the right side of the slide you see that we had still a pipeline from 2020 of 3.7 billion beginning of the year 1 billion has already been provided to our clients in January, we will consider a potential estimate for up to 5 billion for 2021. On page 21 is again the amount of core loans and deposit and asset under management we already mentioned before. Let's go directly to the operating cost on page 22. Since the beginning of the merger, we had 630 million of reduction in cost. You'll see on the right side of the slide, we started at 3,060 million, 3,000, 0.60 million in full year 16. Of course, this was excluding the restructuring cost of the merger. And we ended up this year to 2,430,000,000. Of course, we can see that at least 120 million comes from saving some personnel which are linked to the pandemia. So and coming from reimbursement had this respect for people not able to work to lower variable remuneration, which of course are not repeated in 2021. but still we are further room to improve the normal activity in cost management thanks to headcount reduction of 1,500 people which will be massively utilized in 2021. We believe that we can have by the year end 1,300 people most of them in the first part of the year which will leave the bank starting to factorize at least 40-45 million already in 2021 coming up going up to 109 million in 2022 and the total consideration 125 million in 2023 the same will have some further savings on the reduction of the retail network we consider that even though for this year they will have only a minimum of 3-4 million of cost savings this will come up to 50 million already from next year 50 million of savings going back to asset quality on page 23 some figure about the stock reduction and coverage we went down 1.5 billion on the right side you can see the reduction starting from 10 billion we had 1 billion of new inflow the default rate we had 1.4 billion of basically workouts and cure rate and then the disposal 1.1 billion related to Django and Titan the total consideration so now amount to 8.6 billion. The migration rates for 2020 were again 1% default rate, 7.5% danger rate, and 3.3% cure rate. Of course, default rate and danger rate were better because of the moratoria. Cure rate was worse than last year because of the difficulties in having judiciary Composition agreement with clients in auctions, of course due to the closure coming from the pandemic. On the right side we will have the full coverage split into different categories. Again, we think we have reached a very cautious amount of coverage. especially considering that we have 60% of our MPE which are secured. On page 24, MPE ratios, again this is an outlook on the upside of the slide about the massive reduction we had both in gross and net MPE and in taxes ratio starting from the merger. and reaching very comfortable 7.5% and 3.9% net and the Texas ratio of 39%. If we follow EBA definition, we are down to 6.7% of MPE ratio. Some detail about LLPs. The global amount of 1.337 million we have split into two different categories one is the core drivers which amount at almost 70 basis points and the other one is both the effort we had from the disposal and the strengthening of the coverage on UTP and BED loans and also the IFRS 9 impact both on performing loans due to the deterioration of the forecast and also front-loading provision for fossil ball fruit derisking starting from 2021. And this is an amount of more or less 50-55 basis points. So all in all, we take advantage from the results in order to be very cautious and pave the way to a much better 2021. On page 25, some numbers about balance sheet. I already mentioned the liquidity and funding. Let me say that we have bonds outstanding for $19 billion. We had quite active issuing during 2020 and January 2021. You will see the different issuing we have done, both in senior, non-preferred, 81 and TR2. on page 26 I would say the Italian govis are still having a lower impact vis-a-vis the total securities portafoglio and in 2021 due to the reduction of the spread we will forecast another consistent reduction in the percentage of Italian govis on total securities. Let me just taking your attention on the very low duration of our portfolio finally capital capital adequacy we are we feel that is a very solid position both in terms of capital in terms of buffers the capital through these capital walk that you see on page 27 we started 13 percent 13 percent we ended up to 14.1 in September where we anticipated the effect of the headwind we expected for the last quarter in almost 50 basis point end of the day there were almost 50 basis point so is 13.6 the post impact numbers building up the performance due to the increasing LLPs and restructuring cost of Q4 and some positive effect from regulatory, this coming especially from the treatment of the software, we reached 13.4% and after the proposed distribution of the dividends, we end up to 13.3%. Much even better, the MDA buffer, where we started 250 basis points, which we consider also our target level in the midterms, but as a matter of fact, after the issue of the 81 January this year, we are up 40-49 basis points now, for common equity fully phased at 614 basis points for phased in. As far as common equity R1 phased in, we are at 14.6%. So, all in all, to have a quick recap, significantly bound in the second half of all the revenues, which is very encouraging for 2021. strong and attention and safeguard for the quality of portfolio both in terms of action in order to detect at first level any possible hint of deterioration and also increasing massively the coverage in order to foster higher reduction in MPE. for the reduction in MP. Again, the cost efficiency not only in 2020 but also with the already booked provision for the retirement scheme in order to offset partially the one-off cost of 2020. Some outlook on 2021 on page 29. we think thanks to the TLTRO which of course will last for the entire year in 2021 and we are also higher capability to draw TLTRO and in our funding plan we think we can expand of another 10 billion drawing TLTRO for this year we think we can reach a very consistent increase in NII as much as we think we can have a very strong recovery in commission both coming from investment products thanks to the results I mentioned and we are already experiencing the beginning of 2021 and also to the commercial activity where we had some manoeuvre which should give us some room for increasing the commercial banking fees activity. Total income is expected to be higher than 2020. On the cost side, of course, I already said that we can only partially offset the massive reduction we registered in 2020, but we are confident that with the pace of reduction we have done during this year, we can be able to have a PPI slightly better than last year, notwithstanding lower RNF results. Cost of risk, also in this case, let me split in two different parts. We think that the normal cost of risk will be more or less at the level of what we provisioned under the normal cost of risk, the 70 basis points for the ordinary activity. but of course we have considered that there will be still a macroeconomic environment which may entail some additional non-core provision which in any case we expect to be at a lower level than the one we registered in 2020. For capital we confirm that our targets remain MDA buffer at 250 basis points Thank you for your attention. I leave the way for your questions.