Banco Bpm Societa Ord

Good afternoon, this is the Coral School Conference Operator. Welcome and thank you for joining the Banco BPM first half 2022 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 Perronaio, IOR Manager of Banco BPM. Please go ahead, sir.

Thank you very much. Thank you, everybody, for being here with the presentation of the first half results. As usual, you can find the presentation on our website in the Investor Relations page. And let me remind you that the Q&A section is reserved only for the financial analysts. Now I leave the floor to Mr. Castagna.

Good afternoon everybody, thank you for being with us for the Q2 presentation of Banco Bpm. We are very happy to have the opportunity to present this very strong and good set of results for the bank in such difficult operating environment like the one we are experiencing during the last months. Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord All that still continuing to support the real economy with our activity. Core net performing customer loans grew quarter on quarter 1.5%, year to date more than 3%, which was the forecast for the whole year 2022. It is very remarkable to notice that loans to corporates and SMEs are guaranteed for 29% of the entire volume by state guarantees. So we are continuing to have a very safe loan production, mostly supported by state guarantees. Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord is growing to $107.4 billion. Further improvement also in asset quality, we have been reducing year on year $1.6 billion gross MPE and in the last quarter $0.8 billion down to $5.5 billion with an MPE ratio gross at 4.8%, 3.6% with the EBITDA definition. The default rate in the first six months of the year is still very low, 0.9%, below 1%. The cost of risk, also considering the amount that we have front-loaded in order to execute forward disposal during the planned horizon, is 55 basis points. If we consider only the core cost of risk related to the first six months we are down to 35 basis points. Capital, even though impacted by the results of the reserves due to the Govis in Foci is still at a very sound 12.8%. I have to say that thanks to the recovery of the yield of the Govis during the last month of July we are back above 13% also MDA buffer is fully loaded is at a very comfortable 424 basis point with all the LCR and NSFR very well above the minimum we feel that we are well positioned to benefit from the NII boost that is already decided both by ECB but the Euribor movement are now reaching almost 70 basis points of increase I want to remember that we are very sensible in positive terms to the increase of Euribor for 100 basis points the sensitivity for us is 443 million and even if we consider the 50 basing point of increase official increase of ECB rates on one year time horizon is 220 million of increase in revenues as you can see on the right side of the page 7 the rates that we embedded in our strategic plan both for 22 was 0.49 negative and was still negative also for 23 and 24 to at 0.39 and 0.15 so if we have a look to the forward rates you can see that there is a massive potentiality to increase the profitability thanks to the further increase of Euribor coming during the next month, probably due to the inflation. On the left side of the slide, you can see how solid, how consistent has been during the year, starting from the pre-pandemic results in 2019 to have consistent core revenues, almost 2 billion in 2019, and now 2.1 billion in the first six months of the year. Likewise, the adjusted net income starting from 300 million last year was 382 and now we are almost at 500 million of net income. The asset quality went down from 9.7% to 4.8% as well as the risk connected to the domestic sovereign risk is going down from 65% to 41% of shares of Italian Govis on the total portfolio and if we consider only the all-to-collect-and-sale the Italian Govis are down from 58% to 28%. Let's go to page 8 also to see how this consistent set of results can help also by the NII, which are not embedded in our strategic plan assumption, how we can go forward with confidence in order to get the results of our plan. As you can see, in Q222 the core revenues were 1.56 million, already more than what we forecasted for 2023, which was 1 billion 20 million, and in 2024 we reached 1 billion 100 million, thanks also to the contribution of the bank assurance and the partial increase of NAI. The same is also for operating costs. We are down to $632 million. We still have to embed the further reduction of personnel which happened during 2022 and we think we can reach the planned trajectory which forecasts $610 million of operating costs per quarter both in 2023 and in 2024. cost of risk is basically already at the level of our business plan as well as net income is already above the 2023 target and with the further increase of both NII and bank assurance will most probably reach the target for 2024 in terms of asset quality we are on page 9 We are already ahead of the target for 2024 of our strategic plan which was 6 billion of MPE. Now we are already down to 5.5 billion which means again minus 22.3% in the last year and down to 4.8% in terms of MPE ratio. The default rate and the execution of the ARGO transaction allowed us to reach these results and we still expect without massive disposal to overcome 2 billion of reduction, total reduction in MP during 2022. Let's also say, as I mentioned before, that we have already targeted and embedded in our cost of risk more than 500 million of further disposal during the plan horizon. On page 10, some update about our Bank Assurance model evolution. As you may know, we have concluded after the authorization by IVAS the acquisition from Covea of the 81% of BPM Beta we have already applied for the status of financial conglomerate to the supervisor which is a prerequisite to obtain the Danish compromise and so from July this year we are consolidating line by line the result of BPM Vita in our H222. The next step will be in 2023 related to Vera Vita and Vera Assicurazioni. We will have the first window to exercise the call option to company in H123 starting from January and in the second half of the year we have the opportunity to have the closing for Vera Vita and Vera Assicurazioni. So with basically one year in advance vis-à-vis what we expected in our strategic plan. Let's say how we are doing our negotiation in terms of potential partnership. We have received during the last weeks several potential offers from different partners. The board today resolved, decided and authorized the management to continue to explore the potential to establish a new partnership in insurance, in particular to focus the next phase of the process exclusively on non-life activity. A final decision is expected by year-end 2022. Let's pass on page 12 to the financial results. As I mentioned before, there are very good results in all items. On the left side, you see quarter on quarter increase. On the right, year on year, you can see that we have 1.4, as I mentioned before, of core revenues. Let me make you notice that we are one of the few that up to now have an increase also in commission not only in interest rate both quarter-on-quarter and year-on-year. We have also a reduction of 1.5% of cost. Pre-provision income is the same of last year, year-on-year, but thanks to the reduction of cost of risk, notwithstanding the up-fronting of more than 80 billion, we have a pre-tax profit of 680-80 million, which is 30% more than last year. After taxes, this became 457 million, 16% more than last year, and a net income of 384 million, which adjusted became 497 million. The adjustments are related almost entirely to the pre-provision on the de-risking and on some adjustment for the value adjustment on our real estate. Let's pass on page 13 to some detail about our profit and loss. We have net interest income on pager 13 the of yearly trend and the quarterly trend are both positive two percent year-on-year 3.1 percent on the quarter the increase in the quarter is due 50 percent to the commercial activity a 50 percent to the contribution from the govis of course this is go is coming starting to benefit from a better commercial spread, which thanks to the liability spread increase and the arrival increases, giving 10 basis points of advantage vis-à-vis the last quarter. This is what happened until now. On the right side of the slides, we hope to have the opportunity to give you some clear understanding of what can happen in terms of sensitivity both due to the 50 basis points already decided by the ECB rating of the facility rate and also to a possible further increase of a further 50 basis points. Let's say that on the first 50 basis points on an annualized NII will have a an advantage we will have an advantage of 220 million for the second part of the year will be a bit less of this amount because of course the advantage does not start immediately on the first of July should be something more than 100 million if the increase will happen in the second part of the year for another 50 basis points, so the total increase of Euribor will be 100 basis points, the total sensitivity for us, the total increase of NII for us will amount to 443 million, which is 21.6% of our current NII. If we projected this NII in the next the two years 23 and 24 we will have a slightly lower impact of the NII contribution and precisely 360 million equal to 18 percent of our NII in 23 and 260 million in 24 this comes from the positive influence of the TLTRO calculation rates but of course still we have a strong contribution also independent from the TLTRO because you see that also in 2024 when the TLTRO will expire completely we still will have a strong contribution 13% increase on our NAI On page 14, I mentioned before the very good result on fee and commission. We have 1.8% plus year-on-year and 1.4% of improvement on Q&Q. Of course, this comes from a different movement of management, intermediation and advisory fee, which are 2% and 0.3% lower respectively last year and last quarter but completely balanced by the commercial banking fees where we have an increase of 5.7% year on year and 3.1% on a quarterly basis leading to a total increase of the commercial activity of the bank. This came particularly for the good performances coming from the lending activity, we make reference to the 13.7 billion new loans, the payment related services, the positive performance of consumer credit and credit cards products, the investment banking and structure banking advisory fees, which counterbalanced positively the lower contribution coming from asset management fee in particular funds and CGAV placement which in turn were counterbalanced also by higher fees from life insurance and certificates so all in all what we have a reduction of the investment product placement that you can see on the Instagram of the low left side of the slide 14. We reduced it to 3.9 billion in Q2 vis-a-vis 4.5 billion in the first quarter, but this reduction does not affect so much the total commission, which were very well counterbalanced by the other commercial banking fees. Operating cost, as I mentioned before, 1.5% reduction year-on-year, 2.6% always year-on-year, if we consider that 2021 was benefiting of some COVID-related savings for more or less 15 million of contribution. the cost income is still very good at 54.5% slight reduction since 2021 on Q&Q we have a slight increase of 1.2% the increase of 10 million in other administrative costs come I would say half from the energy cost and half from the new contract that we are dealing with in order to substitute at the expiry date the old contract on the other side the staff cost is reducing both year on year from almost 30 million year on year and still is reducing in Q2 even though the major increase in reduction will happen in the second half of the year when we experience another 10 million of cost reduction due to the almost 240 exit that we had in June, always following the early retirement scheme that we started in 2021. The total headcount is still a bit above 20,000 people. On the next page, 16, we see again some figures related to the credit profile and the cost of risk. Year on year, the stated cost of risk is 35% lower than last year. If we see the quarter reduction, you see that the two quarters in 2022 were very much below the two quarters of 2021. even if we consider in both cases some extraordinary provisionings that were done in 2021 for 94 million and in 2022 for 113 million. I would say that the real cost of risk of the core cost of risk for the first half of the year is down to 35 basis point and Q2 is down to 26 basis point. On the left side, on the bottom left side, you see that the migration rates are still good. The default rate we mentioned before, below 1%, 0.9. A danger rate, a bit higher, but it's just a spike that we had because a single position already considering bad loans that we passed during Q2 and also due to the Argo disposal in which we, in order to complete the Argo disposal, we had some movement from UTP to bad loans. all in all we also can say that we are proceeding with some early engagement campaign like likewise we did during the moratoria in order to forecast with some kind of objectivity the possible default of our clients which were due to repay we have done the same exercise this year on almost $6 billion of credit related to clients exposed to energy, raw material intensive sector and out of this $6 billion we have classified as NP only $55 million. At the same time we are prudentially increased of $1.5 billion Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord giving us also we have such a prevention approach on the category I mentioned before we are getting some strong output let me remember again that we are quite satisfied of the increase that we are registering quarter by quarter on the percentage of total gross performing loans to ESMI and corporates which now guaranteed by the state that now amounts to 29% and last year were below 27% again on page 17 on the coverage on the right side of the slide you see that the bad loads are now covered even after the ARGO transaction to 61.5% if we include write-off we are above 70% UTP still very comfortable 40.3% pass due at almost 30% and total MPs 47.8% which is almost 53% if we consider the write-off. The share of secured MP is still almost two-thirds of the total MPs. Let me pass the floor to Mr. Ginevra which will go through

portfolio and liquidity and capital thanks a lot Giuseppe I hope you can hear me so page 18 now presents the recent evolution of our bond portfolio that securities portfolio you see in this page that in the first half of this year we took the opportunity to increase the level of bond holdings which allowed us also to to exploit the increasing yields for increasing the future contribution to NII. The bond portfolio, staying on the left part of this slide, is represented for two thirds by amortized cost component which is important because it limits the level of volatility of the portfolio of capital induced by variations in returns. Turning to the right part of this slide, this shows the progressive important diversification that we are achieving in this portfolio. Italian Govis impact coverage share of only 41.1% this used to be 9.1% at the merger date end of 2016 this 41.1% compares with 50% or below 50% which is the 2024 target bearing in mind that we have concentrated vast majority, predominant majority of Italian Govis in a multi-cost portfolio. They are now 75% of such bonds are in this portfolio which keeps its historical cost without being exposed to the market volatility. The next page, page 19 provides some elements on the contribution of fair value of the comprehensive income portfolio both to capital and to the PNL. In a volatile market context, as it is the case in the first half of this year, reserves went down. They were at 46 million on a net basis at the beginning of the year. They have been booked at 467 million negative on the 30th of June. a volatile environment, so it's not surprising that this trend has been partially reverted in the first part of the year. This reduction, it's important to note, and now I'm on a pie in the bottom part of the left of this slide, is mostly attributable to market risk much more than credit risk. So Italy, as a matter of fact, contributes only for 11% of the reduction in the net level of reserves why the 50 percent you score you look so basically Germany France and Spain 20 percent you he's just go with 19 percent he's other type of securities so moreover the strategies the hedging strategies on the portfolio have also contributed to mitigate the impact of the reduction in reserves now turning to the attention to the national sorry to the net financial result which is in the top right part of this slide we see that the contribution of this item in APNL is 49 million in the second quarter after negative contribution from NEXI of 37 million again another volatile item which in the third quarter so far has showed conversely a positive contribution So, the contribution of fair value of the comprehensive income to this net financial result is positive for 70 million and this positive contribution is largely attributable to option hedging. A final point is that we tend to look at this capital volatility in close conjunction with the overall exposure of our P&L to NII. and the comparison is such that the capital sensitivity is as limited as 2.5 million per basis point if you look at the fair value of the comprehensive income portfolio this only for 300k from Italian Govis so very limited contribution to this yield sensitivity whilst the NII sensitivity which was mentioned by Mr. Castagnan earlier in this presentation is 443 million so is almost a factor of two, the difference between the NI sensitivity and the capital volatility. Next page, a snapshot on funding and liquidity, showing that we are in a very comfortable position in terms of SCR, well above 200%, NSFR, which is above the minimum requirement of 100%, with a total level of liquidity as high as $45 million or above $45 million. We have continued in our issuance program during the second quarter. In April, we issued an 81, an additional tier 1 for $300 million. Recently, in July, we were out in the market with a green senior preferred private placement of $300 million. I was mentioning also the cover bond of $750 million that was issued in March. We are also receiving very comfortable signals from rating agencies. On top of the historical investment grade rating that we have always been granted by DBRS, recently Fitch had assigned to the bank a long-term rating of B-, so in this case investment grade, and Moody's upgraded one notch to BA1 rating, which is just one notch below investment grade. The next slide shows the impact of the various paths that were described in the previous part of this presentation on capital. We started the quarter at 13.1 end of March. We received a positive contribution from P&L of 36 basis points partially absorbed 21 basis points by The expected level of dividend, 50% as per the previous year decision, plus an additional component, which is the effect of additional tier 1 coupons. So the total before impact of reserves is at 13.3%. then of course we had a negative impact of reserves on a net basis this is 54 basis points and so leading to a total of 12.8 but this negative effect has to be interpreted as a temporary phenomenon because on one hand it's Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord On the other hand, it is also influenced by the movements in the market. As I said earlier, in July, after June, the market evolved positively. Now, more than 40 basis points of these 54 have been recovered so that we are well above 13% on a pro forma basis. Bpm Societa Ord Bpm Societa Ord high-level all coming with your one but also from our ability to feel in full all the buffers both in terms of tier one and in terms of both in terms of additional tier one in terms of tier two thank you Eduardo let's terminate with the final two slides one is to concentrate the very good set of result of this first six months

let's say that after the restructuring I would say that we were both geographically and temporary very well positioned to exploit the still very good growth in GDP in the first six months of the year which is above 3% and in our geographical territory maybe more than that and this led us to a very good set of results again both in terms of profitability in terms of cost income, in terms of slowdown of cost of risk, at the same time in terms of further staying concentrated on the further reduction of gross MPE stock, looking at the current level of results but also looking forward with the provision in advance that we did for the next quarter. Bpm Societa Ord I will have to say that we are experiencing a solid set of results also in July. The boom also of the touristic contribution to the summer will for sure boost also in Q3 the economy in Italy. But notwithstanding the good performance, we can see the potential slowdown due to the effect of the geopolitical situation and of the Italian uncertainty in the last quarter of the year. That's why we still are strongly believing that NII sensitivity will be the catalyst to support revenues and profitability even in a slowdown scenario. So what is our outlook with the a certain approach of prudence is that we will go over 4.4 billion of total revenues, 2.5 billion of operating costs, pre-provision profit above 1.9 billion, a cost of risk that we will consider consistent with a slowdown scenario of 55 to 60 basis points which would lead to an APS over 40 cents with a dividend payout of 50% which is embedded in our capital walk that Mr. Ginevra was showing you. Of course, if we consider the adjusted APS will be in the region of 48 basis points with the capital above 13% and MDA buffer of more than 420 basis points. These would be for us the good start for the target that we have in 2023 and 2024, which we confirm with our full commitment of our management and the conviction that the NII can be really a catalyst for improving these results. Now I leave the floor to your Q&A.

Thank you. This is the Coral School Conference Operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 under touch-tone telephone. To remove yourself from the question queue, please press star and 2. We kindly ask to use handsets when asking questions. Anyone who has a question may press star and 1 at this time. The first question is from Giovanni Razzoli with Deutsche Bank. Please go ahead.

Good afternoon and thank you for the details. Three very quick questions. The first one, can you share with us what are the assumptions that you have made in terms of increasing deposit costs, if any, in the sensitivity that you are providing us? I'm asking you this because everyone seems to be focused on this topic and is providing comments. So as a major commercial bank, I would be interested to know your view. And also, is more detail. If you can share with us what was the TFTRO impact benefit that you have in the first half and what is the amount that is expected to disappear in the second half of the year. The second question, I'm going back to the comment that you have just made. So what you are basically saying is that you expect to confirm or improve the 2023 business plan targets also in a slowdown scenario, thanks to the leverage that you have on the NII, which can, I guess, offset the lower fees or I don't know, higher cost of risk, whatever. So is my understanding correct? And the third clarification, you decided to go for a partnership in the bank assurance only in the PNC and protection business. So you will retain the full control of the live business and you do expect to take a decision by year end, right?

And so that's my question. Thank you. Thank you, Giovanni.

Good afternoon. Yes, of course, the NII sensitivity already gets the assumption for a parallel shift, so an increase also on deposit. I don't know if I can give you the right figure, but for sure the first increase of 100 basis points embeds very few basis points in terms of cost of deposit, because this would mean to go to 50 basis points over your IBOR positive. The TLTRO impact...

Sorry, you've been pretty conservative there, because your peers have not incorporated any on that. No, they are incorporated.

they are incorporated on the scenario that we have of the normal cost of deposit so how much this deposit is stable or not in our figure we do not assume that the cost of deposit will increase sensibly in the first 100 basis points but there is an increase in any case TRO I should say that we have a slowdown in the second half of the year of 30 million more or less vis-a-vis the first half which is due of course to the 50 basis points of reduction of the premium but on the same time we recover on the placement because you know that now the placement are much more remunerative than before. On 2023 and 2024 of course we have to wait for understanding better what kind of scenario if I look around of course there are a lot of negative Forecast about 23. Today I read also only one broker talking about below zero, but normally we are not considering this kind of sensitivity. We think that with GDP in the region of 1%, we can have still a very good impact, a positive impact from the NII sensitivity and the increase of Euribor. but it is better of course to wait for the last part of the year to confirm the target or the increasing target for 2023. For Bank Assurance, yes, the decision is that we take the life business which is the vast majority of the business in terms of volumes. I would say that is also the one that is more related to the normal activity of our network which is very good in terms of asset management placement and I would consider the life business very much in line with the other kind of product in asset management. Meanwhile we feel that it's worth to consider to go deep into detail with the bidder in order to understand which kind of better evolution can have the sensitivity that we have on our own business plan related to the improvement that we can get from an industrial partner. And the first understanding on the non-binding offer is that there is room to improve our results.

May I add some more technical comment on the El Quiroz project? Just to take the opportunity of the question, it's something where you have some certainties about what happened in the first half because we used to have a special interest period which ended at the end of the first half. There is uncertainty on the second half because it depends on the actual level of depot facility rates during the second half. In the current scenario, the reduction in contribution from NII due to the expiry of the special interest period is more or less by and large compensated by the increase in the second half due to the fact that the cost of funding using TLTRO is lower than the overall return on the deposit facility.

Thank you very much.

The next question is from Noemi Peruco with Mediobanca. Please go ahead.

Good evening and thank you for taking my question. Thank you for the update also on the insurance business. It's very clear. So here I have just one question. Can you please share with us like the financial and operating trade-off you have in mind for the P&C business? and in case of sale, how would you deploy the likely capital gain? Would you consider paying it to shareholders? And on common equity, can you please break down the moving part leading to one bit of one basis point on page 21? And lastly, may you give us some color on the evolution of aptitudes to our investment of Italian SME in the last month. What are your expectations in terms of corporate loan growth for the rest of the year? And also, would you expect cost of risk to move above 60 bps in 2023, 2024 before falling to a more normalized level? Thank you very much.

Thank you. You know, we have still to consider the different opportunities that we can get. You know that the PNCB business is not really only the upfront payment, but we have to consider the commission level, the strategic business plan that you have to agree with the potential partner, and the growth of value also of the joint venture. so are different issue that you have to examine and I would say that the capital gain will be only a part of these entire amount of consideration let me imagine that cannot be more than 20% of the entire value of the combination so of course we are not very much pressed by the capital gain but more by the evolution of the business and a reinforcement to the commission level for our bank during the year. It wouldn't be in any case such a capital gain to, if we consider only non-life, it wouldn't be so extraordinary to have to consider a different destination of the capital. Moving parts, all in all, is a bettering of RWA and a negative contribution from DTA always coming from the GOVI's impact on reserves. Eduardo was explaining that the 54 basis points were the net. Of course, there is also an impact on DTA and these offset the advantage that we have on RWA. corporate clients up to now I have to say and you can consider the 13.7 billion we have done in terms of new lending and the increase of more than three percent of the total core performing loans which were already the target for 2022 and we have done it without let's say the PNRR deployment which is still to come and maybe we come in the second part of the year so I see a corporate activity which is very which is strong right now as I mentioned before we had some early scheme in order to understand and detect potential difficulties also because there is also now in place some aid program from the state to contribute to our client and as a matter of fact we are not yet in this kind of solution to propose to our client so we see clients with strong backlog of order we are increasing exports which are in any case keeping a good profitability even though eroded by the cost of energy and for some of them by the cost of raw material so not yet as you see from 0.9 of default rate any signal of deterioration but having said that for a prudent approach we consider that in the second part of the year the default rate could increase and for the whole year we consider something that is more than 0.9.

Thank you.

Thank you.

The next question is from Cristian Carrese with Intermonte. Please go ahead.

Thank you for taking my question. Congratulations for the results, very solid. in terms of quality core revenues. I would focus on net interest income and cost of risk taking into account the additional buffer in terms of net interest income looking at 2024. I was wondering what kind of cost of risk do you expect due to higher rates and default rate at around 1% do you think that could be a little bit higher? so the net net net net interesting and cost of risk what could head to net profit in 2024 the second question is on bank assurance if you could split what was embedded in the business plan for 2024 in terms of bank assurance between life and non-life business and on net financial results we saw a positive impact coming from the option hedging on FVOC CI do you expect any additional positive contribution from the hedging in the coming quarter thank you thank you Christian I will start with some

answer and then I will leave the floor to Eduardo in order to give you some color about the hedging strategy and the impact on NFR. Let's say starting from the bank assurance which may be the quickest one the 120 million of value in 2024 were a split of let's say 85 million more or less of life and the difference of long life and and of course the life will still remain and then life will be split in some different possible part with the potential partner. But of course we are working in the sense that the potential partners have to be able to make more money for us in terms of commission. So all in all I wouldn't say that this change our strategy for the for the figure that we embedded in our plan on the contrary maybe if we go to the solution it's why we feel more safe more certain to reach that results with an industrial partner NII understood well that we were talking about 24 is a bit difficult we were thinking that we were so transparent to talk about you about 22 and 23 in 24 as I mentioned before there is a reduction but just for the first 100 basis points which would reduce the contribution on the first 100 basis points of 180 million but of course if the situation will still continue the way we see with the inflation we don't think that the interest rate will terminate their hike with the 100 basis points so it's very much possible that there will be further increase going ahead in the next couple of years I was wondering just looking at the forward rate

There will be some additional more than 100 basis points by 2024 compared to the strategic plan assumption. I'm looking at slide number seven. So take into account the further boost to net interest income. I was wondering what kind of expectation would you have in terms of cost of risk? Take into account also that you... have increased the pace of the risking, looking at what you have done in the first half of 2022?

The forward rates, as you were mentioning, we put them on page 7 in order to make understand that the forecasts are much more generous than our analysis of the first 100 basis points. And, of course, any other 100 basis points will have a considerable effect on our figure for 2024. of course these could bring some effect on cost of risk let's say that we were already prudent in our business plan because we had a default rate for 22 or 1.8 percent meanwhile we are experiencing a 0.9 a 1.2 for 2023 a 1% for 2024 so it's very much possible that there will be some switch from 2022 to the forward years, but it's really now difficult to say. We have to wait at least for the forecast of GDP in 2023, which possibly will come in the next quarter.

On the question about expectations on results of hedging strategies, Of course, hedge is a strategy which produces results against the market movement. in case of the strategy that we put in place in previous quarters have been effective in a scenario of increasing yields mitigating the reduction in reserves in these quarters we are seeing we are going the other way around so of course the hedging strategies are contributing with negative impact on NFR On top of this, of course, we are producing additional contribution to NFR from our ordinary activity.

If I may on this point, so basically on PNL maybe a negative impact from hedging, but a positive impact in terms of capital. On bank assurance, not on the... Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord

On insurance, I understood that it's probably helpful to repeat the numbers which were not very clearly heard. So Giuseppe said the contribution to the total 125 million of the plan is a little bit more than 85 from life and the rest from non-life.

I was wondering on capital.

On capital, I mean, it depends on the evolution of the agreement. At this stage, we've only decided to go ahead in exploring the point of non-life. Then we will decide according to price that will be offered, commissions, and so on and so forth. We don't anticipate major impacts on capital from these decisions.

perfect thank you the next question is from Andrea Vercellone with BMP Exane please go ahead good evening I've got three the first one is if you can explain qualitatively and quantitatively how you move from 440 million theoretical sensitivity to 100 basis points up in net interest income to the actual sensitivity of 360 million that you expect for 2023 and 260 2024. I don't get the moving parts. Second question is on the state guaranteed loans. Average guarantees there is 85%. is it correct to assume that the maximum provision you would book on any such loans potentially needing classification to UTP or MPL or bad loan would be 15% or you would potentially need to book more provisions and then write them back at a later stage and the final question is just a small detail. Have you booked now all of the capital gains on the bonds classified at amortized cost that you sold forward last year or there's still some more to come in H2 2022? Thank you.

Hello, good evening. Let me answer the second two questions and then I will leave it to Eduardo to make some more explanation on the 440 million becoming a bit lower in the next couple of years. This of course is only related to the first 100 basis points of which 50 basis points are already gone. For the state guarantee, we still don't have such experience to say that there are a lot of of these defaulted so basically we are dealing one by one the few that are going into MPE of course we are very attentive not only to the documentation but also to being very quick in doing all the formality to be in the position to exploit the guarantee We are working on the set of loans guaranteed in the last three years, getting of course some remedial action where we see that there are problems, but I can say that the vast majority, if not the complete entire stock, is well positioned. So what we will do is, like in any case there is a guarantee, we will consider only the difference which from time to time will be will be not guaranteed let's say an average of 20 percent could give us an idea because of course as you know there are 100 percent guarantee up down to 70 percent of guarantee but because the 17 percent guarantee are the bigger one I think 20-25 percent could be the maximum amount For amortized costs, we didn't get any profit during this month.

We had already booked the profits for the forward sales that had been anticipated for most of them. There is only a limited amount which has remained for the second half. For the sensitivity, you're right, it's a complex dynamics. Let me try to explain as simply as possible. What happens when rate increase is that the investments in central bank deposit facility react immediately, almost immediately, with the sensitivity of euro per euro, basis point per basis point. So the 100 basis points increase in level of deposit facility rate creates 100 basis points increase in the return on this deposit facility. On the other hand, for TLTRO, the mechanism for calculating the interest rate embeds an average between the historical minus 0.5 and the current level of rate of the deposit facility. implying that in any case, the more the rates are increased, the more you create a difference between cost of TLTRO funding and yield of deposit facility investments. First point. Second point, TLTRO has a maturity, so over time, our $39 billion of TLTRO funding are expected to be reimbursed, part of them in 2023, remaining part, part of them out of it in June 2023, remaining part progressively until end of 2024. This means that this positive effect I was describing earlier is progressively reduced along with the residual maturity of Telt-e-Roc. So if TELTERO lasts forever, then you have forever the impact I was describing. Given that TELTERO is expected to be reduced, then the effect in 2022, for the next 12 months, conventionally calculated as of 30th of June, is higher than the effect as of December 23, because the residual maturity of TELTERO is reduced by 6 months. and this is in turn higher than the level as of end of 24 because, sorry, end of 23, so for the total year of 24 because we remain at this stage with a very limited amount of tetro funding. Yeah, thank you.

The next question is from Tariq Al-Majad with Bank of America. Please go ahead.

Hi, good afternoon, and thank you for taking my questions. Just two quick questions. First of all, on the pass-through rates for deposits, I understand well that there is no impact there. I mean, what's the percentage you take as an assumption into your NIR sensitivity? If I understand right, that there is no sensitivity, can you please explain why? and secondly on the insurance potential partnerships. Can you, maybe I missed that, but can you explain why the life is excluded from the discussions with new partners? Is it because the offer deals from the bidders were not compensating for the higher net profits you presented in the plan or the bidders were not interested? Can you please just give us some elements there?

Thank you.

Good evening.

Let's say that we say that the sensitivity taking account also an increase in the cost of deposit more or less is again an average of 30-35 basis point 400 and of course it will depend the more the interest rate go up of course the more the impact will be higher. insurance partnership why we do exclude life I tried to explain before we think that the life activities much more in the normal activity of our network our people is very much used to sell investment product and they were very good also in the last year to adapt to the different insurance company and so different product the behavior in life insurance investments so we really feel that having also the support of our asset under management factory we can be very good in this activity this of course is also the one who brings much revenues in terms of commission and capital gain so we think that we can exploit this activity 100% we cannot foresee such an advantage from joining with an industrial partner in this kind of business likewise we think we can have in the non-life business so it's both a question of exploiting also the opportunity and the arbitrage of the Danish compromise. Of course we can have a full return on the life without basically spending capital and on the other side to take the advantage of industrial partner to develop product strategy and you know to adapt the different possibilities in the many opportunities of non-life through the advisory of an industrial partner so the two businesses are really very different and again also in terms of capital the life is very profitable for us because we basically have sort of free lunch without spending capital, we can get revenues and profitability.

Thank you.

The next question is from Anna Benassi with Kepler. Please go ahead.

Yeah, good afternoon. I have a couple of questions. One related to the contribution from Associates in Q2 that has been below the Q1 level, 41 million. Can you tell us what is the contribution from Agos and the contribution from the Banca Surans so that we can plan, particularly for Bpm Vita, what you could expect with 100% ownership in H2O? Ben, another question is on your, again, NII sensitivity, just to make sure I understood what you were saying. Could that reflect assuming 100 basis points increasing rate overall, that 2023 NII could top 2.4 billion and then could have a lower level in 24? Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord because honestly your 40 cents stated EPS for this year does not completely work with the revenue cost and cost of risk indication you gave meaning to me the number could be higher than that so maybe you there are a couple we got on the some I don't know for on top or or what we say me for real estate in her band and the meeting permanent whatever you have in mind thank you I hope I understood all your question I'm not that sure but let's start from the one I understood that the first one may be the easiest one is the contribution from Agos

let's say that was 8 million in the first half was 27 million which is 8 million more than last year of course these are commission if you want to have the associates I have to check Agos is 53 million in the first half then the bank assurance you want to know the always the 49 9 million yes it was 9 million always in term of associates in terms okay all the back up to one so both Vera and Bpm I am talking about the one Bpm Vita Vera and Bpm Vita ok the three companies NII sensitivity if the question was 2023 sensitivity will be higher than 2024 yes because of the mechanism that Eduardo was explaining before yeah so my question was more than in total the NII in 2024 would be lower than the NII in 2023 Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord will be, I would say, at the level of last year, a bit higher, 2.1, I think, is the sensitivity that we have. And in 2023, of course, we will benefit totally for all the year of the contribution of Euribor increase, so for sure we'll be higher. I cannot give you already some forecast. but will be I had also the for a gas that read the strategic plan to perform okay okay a one-off from real estate they were almost a from 35 to 40 million if I remember well at these camps because we have a a possible transaction to execute hopefully by the year-end on a quite consistent portion of our portfolio and also we are doing all the different appraisal in order to get the final figure in order to present the infomemo to our potential bidders so that's why we have been working also on that what I am missing

Eventually, the fact rate of some other negative one also that could explain why the stated the EPS so the EPS as reported not the adjusted one is in brackets only 40 cents, because it could be higher.

Yes, the difference was again the adjustment in credit. As I mentioned too, we made room for further risking of more than 500 million and also what we have done on real estate. If I'm not wrong, we were also asking about the cost of risk this year, if it's embedded some negative assumption on the on the slowdown of the economy. Yes, the 55 to 60 basis point is a very prudent approach increasing the default rate for the second part of the year.

Thank you very much.

The next question is from Marco Nicolai with the Jefferies. Please go ahead.

Hi, everyone. Thanks for taking my questions. I've got one on the NPL market. You just completed the Argo transaction. You also have other portfolios to sell over the plan horizon. What are you seeing now on the NPL market in terms of average selling price and volumes? Any hints that the current market environment, current economic environment is impacting this market? Is there anything that could slow down your future progress here? In terms of payout, you mentioned for 2022, 50%. Are you considering to deliver this only via dividends or the buyback option is still there? Then a question on admin costs. These were up this quarter. You mentioned the impact of inflation. Do you see this level, the level that we saw this quarter, as a kind of a floor? and also you were guiding for 2.5 billion costs in 2022. I think, if I'm not wrong, before you mentioned that 2022, in previous results presentation, you mentioned that costs in 2022 should be lower than 2021. If I'm not wrong, are we still keeping this kind of old guidance as valid or you see them more as flattish versus 2021? Yeah, that's it from me. Thanks a lot.

Thank you, Marco. On the NPL scenario, frankly speaking, there is a lot of evolution on that market. We are, of course, not anymore a massive disposal of MPEs because we have been left with 5.5 billion, which less than 2 billion are bad loans. so we are obliged in a way to be very cheeky in trying to find the best solution which are not always do not go always through a straight disposal we are examining you know contribution of asset we are examining funds where we can contribute funds asset and an investor can invest in order to exploit the asset we have a very sound pipeline in this respect we are not obliged because you have seen the default rate going down to the level we expected for 24 if we consider also the further disposal embedded in our cost of risk we are down to something like 4.2% so we are quite opportunistic we have made room because the our balance sheet was very good and our profitability was very sound we took advantage to make some more provisioning in order to increase the potential risking also in view of a potential deterioration of the default rate so no rush into selling anything specific and concentrated piece of asset to sell always find the best possible solution we have done up to now I think since we merged the bank 8 or 9 disposal of assets from 7 billion to 600 million so I think we have quite an experience to run at the most convenient way also these activities in terms of buyback is always an option, of course. We already said last year that could have been a possibility. Let's see how the outlook for this year will be in terms of GDP deterioration. Of course, we are talking about very good results and I understand that we have some good feeling in trying to get the most possible reward to our shareholder but we have also to consider that there are some cloud ahead of us for all the economy and we have to consider at the end of the year what will be the situation. We have done a very prudent outlook of our potential results. 21 21 if you talk only about general expenses I think we are more or less on 21 we have to consider how much could impact in the next two quarter the energy cost but it's not that much higher than what we had in 21 On the opposite, we think that if we consider also cost of staff, we will have some consistent reduction in general cost.

Is it okay? Yes, yes, very clear. Thank you.

Gentlemen, there are no more questions registered at this time.

Okay, so thank you.

Excuse me, there is a follow-up question from Luigi Fedone with Equitosim. Please go ahead.

Hi, good evening. A very quick question regarding the collection. Can you share with us what trend are you observing on asset under management and under custody and the client's behavior in the current environment? Thank you.

We have been down for market effect of almost 4 billion during the first six months. Now we are recovering 1 billion, 1.5 billion. Of course, the recovery always stimulates the investor to make some new transactions, so we are already experiencing during the last couple of weeks some rebound of the lower part of the investment sales we had between mid-June, mid-July, which was really the worst part of the year. Nowadays we think we can have some small rebound. We are confident again to have some rebound also from the market effect. We of course are also giving our client more product which can in one way defend them from the inflation and are more defensive so we think that the attitude of our client should be stimulated by also this new product so of course there will be not the increase that we thought last year but this will be more than offset by the NIA contribution and the lower cost of risk.

Thank you.

The next question is from Adel Palama with UPS. Please go ahead.

Hi, thank you for taking my question. Two questions, actually. One is a clarification on NII and on the guidance for the 2022 revenues. So, I mean, sorry if this was already discussed, but can you tell me again which is the assumption of rate hike included in the 2022 guidance for the revenues? A and then the second question is if you can give us a guidance on the evolution of the equity account investment, a contribution to the revenues and to the trading income. I know it's a little bit complicated, the trading income, but just directions.

Thank you. I would say that if I get rightly your question, I think that almost all the increase comes from the core business, so not from trading contribution. We are very prudent about second half trading contribution. Meanwhile, we feel that the Euribor spike can give us some boost in terms of NII. So basically, the good side is NII and some saving on cost of personnel. to try to keep a solid commercial base of fees through the commercial banking fees, some reduction in cost of risk and a flat, I would say, trading income and up to respect to H1.

Okay, but specifically on ERI for 2022, you have 50 basis point rate hike or you have more?

We have included in the guidance we gave, we provided additional 25 basis points of increase in short-term rates.

Okay, thanks. Gentlemen, there are no more questions registered at this time.

Okay, thank you very much everybody. I know it's a long day in summertime. but I'm not so guilty because tomorrow you have another day so let's say that hope to see you very soon and to have a wonderful summer for everybody bye bye