Banco Bpm Societa Ord

Good afternoon, this is the Coral School conference operator. Welcome and thank you for joining the Banco BPM first half 2023 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 Peronario, IR manager of Banco Bpm. Please go ahead, sir.

Thank you for being here. Before leaving the room to Mr. Castagna for our presentation, let me remind that you can find on our website the presentation, the press release. and the Q&A is reserved to financial analyst and please ask to you to have only two questions for each to give room also the other analyst to do more questions. Thank you very much. I leave the field to Mr. Castagna.

Good evening, everybody. Thank you for being with us for the Q2 presentation. I have to say that we are very proud with my management team to present a very strong set of results. If we start from page six on the left-hand side, there is, let's say, what we have been harvesting during the last year in order to get very strong results in terms of profitability and strengthening balance sheet. On the right side, what we are seeding in order to generate future revenues in the next quarter to come. Starting from the left side, we have had the best performance in terms of P&L in the first part of the year with 624 million on net income, which is 78% more than last year. we have been able to generate 140 basis points in 6 months of common equity tier 1 going up from 12.8 to 14.2 stated and 14.8% in terms if we consider also the Danish compromise on the other side we were able to further reduce the MPI ratio we are now down to 3.8% in terms of gross and 1.9% in terms of net MP ratio, as well as we still have a very sound LCR around 180% and NSRFAR around above 130% after having reimbursed basically more than half of our TLTRO facility. On the right part of the slides, again, what we have been doing during the last months in terms of high value transformation initiatives. As you well know, we have announced a few weeks ago the creation of the second largest player in terms of payments business in Italy with the significant revenue growth potential. And we have been able to join this company with a very strong consideration for our side up to 600 million. On the other side, we are still in the process of reshaping the bank assurance deal. As you will know, in May, we have exercised the column 65% on Vera Vita and Vera Assicurazione, and we are in the process, in the second part of the year, to close also the Gem Venture with the Credit Agricole for the non-life part of this business. On page 7, some flavor about the results that we got Q on Q. You see that total income went up 6% Q2 on Q1 and 21% year on year. Cost income 10 full point lower than last year to 47.8 in Q2 23 versus Q2 22. and also cost of risk was down to 121 million, which is 12% lower than Q1 and 21% lower than Q2 last year. With a pre-tax income and a net income almost 100% better than the previous H1 2022 at $450 441 million as pre-tax and 624 million in H123, which is again our record level in the first semester of the year. These results bring us to increase again the net income guidance for the full year 23 which was 1 billion 140 million in Q1 when we had the Q1 presentation which was 75 cents per shares and we are able now to increase to more than 1.2 billion which means above 80 cents per share. Let's go back to what we have done during this period in terms of product factory we have from one side on the left increased our full ownership of our product factory let's say apart from Banca Leti and Banca Agros which are our private bank and our corporate and investment bank activity we have now 100% of Banco Bpm Evita and Veravita which will be merged together creating a wholly owned life bank insurance company On the right side, what we have done in order to strengthen with the key strategic partners, the other participation in the other JV, starting with Credit Agricole, which we have added to the stake in Agos, which is 39%. And we almost recently increased the long-term commercial agreement with Credit Agricole in consumer credit We have recently added the 35% of the joint venture in non-life bank assurance. And together with this, the new partnership in payment business with FSI and the Crea Bank, in which we will have almost 29% of the stake. During the last year, we have also increased from 14% to 21.7%. Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord to try to exert a significant influence through direct involvement in governance and management in all the product factories, and also to obtain a long-term stream of revenue and dividends out of the stakes that we have in this participation. In the meantime, we were able to extract almost one billion in value from this last two transactions, more than 400 million from bank assurance, and almost 600 billion on consideration for the payment system. Just to recap on the payment system, as you know, is a 2 billion NPV deal based on three strategic pillars. One was the preservation of the current P&L contribution, which in 22 was 140 million. This is a business that in the first half of 23 is growing 10% year on year, so give us a lot of opportunity to increase the stake of revenues from payment system. The second pillar was to have an upfront value generation. As you know, we will get 500 million at closing and 100 million as a deferred payment obtained in a few years. which will mean 32 basis points for the upfront and 50 basis points for the total consideration of increasing common equity tier one, which of course is not yet included in the figure I showed of the current common equity tier one. The third pillar is the upside that will come from the streaming of dividends and from the valorization of this company, which will be the second payment system company in Italy, and possibly we will extract also some value from the increasing value that we will have from this participation. Some figure this new company will represent 10%, will have 10% of market share, almost 9 million on payment cards, 400,000 point of sales, and almost 110 billion on transacted business volumes all in all. On the right side, you see also the different composition as shareholders. The two banks will have 28.6%. FSC will have 42.9% on the shareholding in Paycock. In Bank Assurance, I already said, we have exercised the call on Veravita. Now, in the second part of Q4, we will have Credit Agricole to purchase 65% of the stake in BPM, Maxi, Danni, PNL, and Verassicurazioni for a consideration of 260 million for the 65%, for a total value of 400 million. This will come together with the signing of a 20-year distribution agreement for this joint venture. The rationale is to have an insurance group with a leading player on the P&C market, to have the possibility to have a single commercial offer to our customer, unifying the product catalog, which until now was split into two different companies, and of course to extract the most favorable value and synergies from the product factory together with the favorable treatment that we expect to get from the approval of the Danish compromise. Let's go on page 12. Before going through the figure of Q2, let me say that on the right side, we wanted to show the clear pattern of the new profitability trajectory that you can follow through the last three years. I would say H120 was still a year of restructuring with the NIN at 1.7 billion. going up to 2 billion in 21 and 23, and now reaching 2.5 billion. The same you see in the cost income, 64% H120, then down to 55%, now down to a further 49%. To finish with net income, which was 100 million in H120, 350 million in H121 and H22, and now reaching 624 million in H123. This comes, of course, from the strengthening of net interest income, which grew 50% year on year, but also to the very good tenure of the other income revenues and cost control. I would say that Q&Q, we have... a small reduction in operating costs from 640 to 635 million, a reduction in low-loss provision from 137 to 121, will together with the increase in income lead us to a profit from operation pre-tax of 540 million versus 470 million of Q1. After taxes and systemic charges, this brings to almost 360 million in Q2 versus 265 million in Q1. Going to the year-on-year results, let me just stress that the net profit from continuing operation is up 65% and the net income is up 78%. Let's say that this comes also from a net financial results which is completely different from H122 in which we had an over performance of 177 million this year we have a loss that then we will explain further on of 42 million notwithstanding the net income of H1 was for almost 50% coming from something that is not anymore a profit in H123 we still have realized an increase of 78% in net income in the first part of the year. And I wrote on page 13, we have the 49% already mentioned, which means 9% in Q2 versus Q1 with a commercial spread which increased to 402 basis points versus 357 in Q1 coming from an asset spread which we still are able to maintain at the same level of the last two quarters 152 basis points and an increasing liability spread going from 141 of Q4 22 to 2.04 of Q1 23 to 250 basis points of Q2 of course this is thanks to the Euribor trajectory which is growing in the last two Q from 264 to 339 the depot cost for us grew from 0.45% in Q1 to 0.71% in Q2 which means that our beta is is still at a level of 33%. These numbers allow us to increase our guidance of NII for 2023 from 3 billion to 3.250 million, based on the same level of deeper rate from ECB, no further hikes in the last part of the years, and of course with the same level of beta and which means a sensitivity of 300 million for 100 basis point of increase of rates. Let's talk about the balance sheet. We are keeping our performance not really aggressive on customer loan. We are happy to stay more or less 1 billion lower than the first two quarter. But the quality of our asset is bettering even more. As you see on the right part of the slides, the secured loans to household and non-financial companies grow to 68.8%. of which 23% with state guarantee. If we consider only the SME Portafoglio, this securities part is up to 73.6% and the state guaranteed loan, if we consider only the non-financial companies without the household, is up to 30.6%. vis-à-vis slightly more than 6% in 2019. On the left bottom part of the slide, you see the new lending which shows a performance which is lower than last year. There is, of course, lower demand, but also what we don't see is the refinancing that we saw until H1-22 due to the interest rate that were stable and we had a lot of companies refinancing and getting longer maturity during that period. Of course, this is not happening anymore. The total of general lending is now 10.2 billion vis-à-vis more than 13 billion in the first semester of 2022. Let's say that in July we saw a recover of lending. We have granted 2.2 billion in July, but our policy will still be very prudent, addressing the best rating classes of clients, and of course in our territory, which are mostly in northern Italy. Let's also stress that new land into corporate enterprise is almost 56% green related. In terms of the customer funding, we have increased 2% Q and Q and 3.3% here to date. The customer funding, total customer funding up almost 7 billion since the beginning of the year, more than 4 billion in last Q2, with, let's say, Q&Q, the same level of deposit, but a strong increase in assets under custody, driven, of course, by Govi's placement during the last quarter. All in all, the customer funding is up year-to-date 7 billion in assets under custody, 1 billion in asset under management and since the beginning of the year a couple of billion lower of deposit transformed into asset under custody. Also the deposit base is very resilient. We have a huge retail base. 57 billion are guaranteed deposit. The average retail which means household and SME Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord year on year with a growth of 9 million 1.8% in the commercial banking fee and a reduction of 5.8% into the management and advisory fees. These results is very good in our opinion because it comes after cancellation of the fees of excess liquidity on current accounts which we gave back to our client in Q2 and is a lower contribution of 14 million as well as higher cost for synthetic securitization for 11 million. So all in all we have a very strong performance from many fee-driven activity, one for all the payment services, which is 26 million year-on-year, and also the fees on lending year-on-year are still very consistent, 5 million more than last year. On the management intermediation advisory fee, we have a reduction of 5.8% year-on-year, mainly due to lower fees from FANS and SICAV due to the increased interest rate environment which accounted for 51 million but was partially compensated by higher fees bought from certificates which we issued with fees for 16 million and the GOVIS placement which gave us almost 12 million of fee contribution. Cost control is still very strict. As I mentioned before, we have a small increase of 1% year on year, but Q1-Q, in Q2, we are lower both than Q1-23 and Q2-22, 1.4% on Q1 and 0.5% on last year. this allowed us to have a very good 47.8% of cost income in the quarter and in the first part of the year this goes down to 49.5% as a cost income. For the first time we are below 50%. The headcount evolution since the merger we have reduced more than 5,000 people. We are now below 20,000 people thanks to the last early retirement scheme signed in January. We will have another 250 persons leaving the bank. 100 of them have already left and this allowed us to go below 20,000 people. Also in terms of branches, we have almost reached our target of 1,300 branches, closing almost 17 branches in May Let's talk on page 18 of asset quality. We are very proud of the reduction we had starting from the merger. We were at 24% and now we are to 3.8% in terms of gross MP and again down to 1.9% in terms of net MP ratio. So we are with the same figure of the best in class asset. in net MP ratios in the country. Consequently also our cost of risk is declining even though we continue to have a very prudent approach in provisioning the new income, the new inflow of non-performing and still managing and increasing cost in the stock of MP that we have and in fact we see that now we have a may be the highest coverage vis-à-vis our competitor. We will continue to decrease NPE, to dispose NPE. We have done 200 million of disposal in Q2 2023 as a part of the 700 million we have already provisioned for, and out of this, 300 million will be disposed in the second part of 2023. The overlays go up from 160 million to 200 million. The program provision policy is very well shown on page 19. As you can see, we still have a coverage of below 50 basis points. That's still at a very consistent level. The gross MPE went down from 5.5 billion to 4.2 billion with a reduction in the first part of the year of under 600 million of MPE. The bed loan coverage was down because of the disposal of the, we were mentioning before, but as you can see, the UTP coverage is still increasing to 42.1% versus 40% of the last two quarters. The share of secured MPD is increasing to 66%, as well as the total MP coverage is still at 50.6%. This is thanks to a very good default rate. We are still experiencing also up to July. We have a default rate, let's say a gross default rate of 93%. 0.93%, which if we decount the Q rate, go down to 0.78% at a level even below 22, which was a very record year. The stage two are mostly at the same level, but let's say that this comes from an inflow top-down of 1.8 billion coming from the client that benefited from the measure coming after the flooding in Emilia-Romagna and exclusion of 1.5 billion coming from bettering their rating plus. Let me pass the floor to Edoardo Ginevra for the financial aspect of the presentation.

Thanks Giuseppe. So page 20 gives an idea or gives the data on the evolution of our financial portfolio and shows that there are basically limited evolutions versus the first quarter of the year with total of standing stable at 36.1 billion. 72% of them represented by a multi-cost component and this is for the left part on the right you see that corporate account for 5.5 billion with Govis for 30.7 billion share of Italian Govis is stable at 37.6% confirming our diversification policy adopted since the merger between Banco and Bpm Societa Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord On the left, our reserves on debt securities at fair value are the comprehensive income. Here, since the first months of the year, we have seen a positive evolution with the net amount that used to be 626 at the beginning of the year now down at minus or up, to be honest, up at minus 516. with confirmed very low sensitivity level. The basis point value of our GOVIS portfolio at fair value of the comprehensive income is only 300,000 million and close to zero for Italian GOVIS. Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord and from a balance sheet perspective because they can replace institutional issuances and can be accounted for, can be computed for MRL purposes. Going now to page 22, here we see a positive evolution on our liquidity and funding position under many respects. So, first of all, liquidity, total liquidity measured as the sum of cash and encumber assets now is as high as 44.5 billion. It used to be 40.7 billion three months ago. Exposure with ECB, despite we reimbursed 9 billion of the tectro, now we have a positive net exposure measured by the difference between Bpm Societa at 21 billion and tectro usage at 17.7 billion. This, of course, excludes the reserve requirement calculation. LCR for in the last quarter went from 199 to 179 this is the result of the limited impact from TELTRO reduction the 9 billion we reimbursed in June bearing in mind that for example if we go back to 30th of September of last year we had a similar level 179 with 39 billion of As communicated in previous occasions, the steady state level or the long-term level of the LCR is expected above 140% even after full TELTRO reimbursement. In the bottom part of this slide, we also represented our funding activity, which was quite sustained in June with 750 million of green senior non-preferred and 750 million of covered bond market that reopened very recently. Green bond issuances are now at 1.5 billion since the beginning of the year. We have also published our new Social and Sustainability Bonds Report, we have also been happy to see Moody's providing a positive signal in terms for our credit rating by switching to positive outlook in June 2023. Let's go now to page 23, which gives the breakdown of the capital evolution in the last quarter. So first of all, an important piece of data to look at is that we went from 12.8 to 14.2, so 140 bps increase in the first half of this year. and this I'm mentioning before taking into account the pro forma benefit of the Danish compromise. The conservative estimate of this pro forma benefit leads to a potential total of 14.8. The breakdown of the delta in the last quarter is represented in the capital walk that says that net profit in the second quarter gave a positive contribution of 68 bps which had been dedicated to the dividends and 81 coupons that matured in the same period. Positive contribution also from our capital light model activities represented in the balance sheet actions component contributing for 22 BPs, positive contribution from reserves for BPs and other components including capital among other things DTAs for 10 BPs. Capital ratios are represented in the bottom left. Tier 1 is 16.6. The total is now very close to 20%, 19.5%, with LWA below 59 billion. Capital buffers, both in terms of MDA and in terms of excess of CET1 capital on minimum CET1 requirement, are above 550 BPs. which become 612 BPs if we include the performance estimation of the Danish compromise. Now again, I'll leave the floor to Mr. Castagna.

Thank you, Edoardo. Just to conclude on page 25 and 26, let's say that, let's recap very quickly that these outstanding results in terms of profitability and AI and income operational efficiency with the reduction of cost income, the reduction of cost risk, coupled with the solid balance sheet presentation, which bring us to have less than 2% of a net MPE. And let's say a very unattended capital generation, 140 basis points in just six months, allow us to lead to a further upgrade in PNL guidance. On page 26, you can see how we think our profitability for 2023 will increase from 75 cents of earning per share, 20 cents, to 80 cents. Let's remind that in 2022 it was only 46 cents just one year ago and an increase from 11% to 12% of return on tangible equity. If we reduce to 13%, the return on tangible equity will be 13%. the higher profitability allow us to increase the dividend the payout and with this with the same current payout level of 50% we're able to have an increased guidance of around 9% of as dividend yield in 2023. But what next? Let's say that we also have upside expectation from the new strategic plan to be presented in Q4, both related to new guidance for 2024 IPS guidance. We still confirm 90 cents, which is again 12.5% more Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord which, of course, we will propose to our AGM next year. That's all on our side. Let's give the floor to the question.

Thank you. This is the Coruscant Conference Operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone 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 Antonio Reale with Bank of America. Please go ahead.

It's Antonio from Bank of America. I have two questions, please, one on the use of capital and one on the outlook for an AI in 2024, please, on capital. and you never had this much capital. 14.8% is a record high for the bank. You still have some regulatory headwinds to digest, but you also have at least 30 basis points coming from the payments business and all the organic generation that is implied by your guidance, which means the likely the level of capital is set to stay above 15%. Now, very few banks in Europe have this much capital. So my question for you is how are you thinking about the best use of capital for a bank like yours? Non-interest income growth is a focus for next year and you've been investing in some of the product factories like you showed on slide eight, life insurance, payments. So I wonder how you see the trade-off between using some of this excess capital to grow more in products like private banking or asset management where you could possibly want to do more versus doing share buybacks here. Also, do you have a go-to CT1 level in mind at which you want to run the bank? That's my first question. My second question is on the outlook for 2024. You've increased 2023 guidance for net profit and for NII. You didn't change the 90 cents EPS guidance for 2024. Can you talk a little bit more about the outlook that you expect for NII next year, at least directionally on the evolution of NII in 2024 compared to 2023? Is there any reinvestment contribution from your interest rate hedging strategy that we need to take into account? That's my second question. Thank you.

Thank you, Mr. Reale. Let's see. Of course, there were two questions that we left on the end of the presentation. Bpm Societa Ord to still take all the opportunity from the capital management action to increase our stake in all the product factory. And this brings us now with a very solid and with a good level of confidence to replace a potential and high reduction in the future year with fee commission coming from this product factory. And of course, we are now satisfied of what we have done but still we have opportunity because as you said we are not at the maximum level of each of these investments. Opportunities that could be in the future we will look at them very attentively as we have done up to now. Of course we know that investing capital in industrial activity means to get a reward and a return which would be Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord for reconsidering and increasing our shareholding distribution strategy. As far as 24, it's a bit too early to say. We are already announcing that we will do 12% more than 23, which is already something vis-à-vis most of the competitors. We want to be sure of the situation end of the year in terms of EURIB or in terms of global GDP growth or recession as it appears in the last few days. So let us make all the homework, but for sure we will have some good... We feel that we can have some good opportunity also to increase that guidance, but it's better to wait some months Let's say, for instance, you were asking just directionally, and I, of course, we haven't considered any other increase in 2023. If this will be the case, of course, we think that we will have a very strong part in 2024, better than H1-23, and then possibly the potential decline coming from the possible reduction of interest rate. So we still have to have a clear idea of the Uribor movement coming from ECB, but for sure NII should be at least at the same level, if not better than 23.

Very clear, thank you.

The next question is from Noemi Perucchi, the Mediobanca. Please go ahead.

Good evening and thank you for taking my question. I would like to go back to a capital return if I may. Clearly the quantum will be revealed in the strategic update of your business plan, but I just wanted to have more color of your line of thinking here. clearly we know now the capital gain of the payment unit on day one and also the hundred million deferred payment and so first of all here what's the timeline of this further payment and is it reasonable to expect that all of it will be paid out and further top-up will be announced during the strategic update and Do you expect this top-up to be a one-off or potentially a way for Shared Buyback to structurally integrate your payout policy? And then my second question is more on deposits. So how do you see the deposit market evolving, both in terms of demand and competition? Is BTP still the preferred option or are some deposits getting more traction? And if you could share with us also the deposit beta in Q2. Thank you very much.

Thank you, Naomi. Let's say, difficult to give more color that we tried to give up to now. Let's say that contribution from the payment system should come in the first half of 2024. but we will have, of course, some more precise data by year-end. The further 100 million will come, I would say, by 2027. For the kind of shareholder remuneration, this is the real issue. So we want to consider how much capital... So there is profitability and capital. Profitability would lead us normally to have a higher distribution of dividend, but capital would lead us also to try to exploit at our best our capital in order to get a good return for our shareholders, especially at this level of price of our bank, which is still 0.6%. on the tangible. So there would be a combination of the two. We want to have the opportunity, having the business plan to be done in a few months, to try to give you the best color as possible by December. But again, we feel very much comfortable in increasing our shareholder remuneration in any case. about deposit no I wouldn't say we are very concerned about increasing our total deposit base because you know with interest rate going up deposit direct deposit go to foster asset under management or like in this case asset under custody then when the interest rate will go down maybe will be the opposite so we have to be able to increase in any case as we have done during these last six years the total volume of direct and indirect deposit in order to give our clients the best possible opportunity and never like in these months we say to our colleagues that they can offer to our client the best proposition vis-a-vis risk return opportunities. Of course, starting from the deposit for risk aversion to BTP for prudent investor to, of course, asset under management for people who want to take a proactive approach in their investment. We have opportunity in all three of these things. We are very happy to do that. We had more than one billion of placement of BTP in the last queue. So we are in the position to do whatever is better. The important for us is to grow into the total deposit base and to exploit in the subsequent queue the capability that we have to attract deposit.

The next question is from Christian Carriza with Intermonte. Please go ahead.

Hi. Thank you for the presentation. My first question is, let's say, I would like to make just a quick recap of the journey since the merger back in 2016. Just to say how nice was the turnaround you and your team have done in this period. So you started with 1.6 billion losses and a 24% gross NP ratio. Now we are you are targeting a 1.2 billion more than 1.2 billion net profit in 2023 with a gross MP ratio below 4% and you did this kind of turnaround without a capital increase so well done congratulations now I was wondering what is the next challenge you see Starting from the capital position that is very solid with a common equity tier 1 at around 15% I was wondering what do you think is the best way to use this excess capital? You already said something on the payout, buyback or cash dividend but I would add also maybe what do you think about the investments in technological transformation digitalization so do you think that is also the time to maybe increase to boost investment on technology maybe to save more money for cost rationalization and also to boost maybe some revenues or do you think that after this kind of turnaround there is room for a new kind of a new merger so to grow in Italy through acquisition so this is my first question the second question is on on the financial results I see the certificates the impact of certificates on this line so I was wondering if you can give us Thank you Christian for the kind words.

My team and I, we are very proud of the result we achieved. They were not always good time, but for sure we had some good opinion on us coming also from broker and investors. So thanks for the observation. Maybe the thing that we are more proud is that we were able to go through that difficult time without asking money to our shareholders. We never have capital increase and I think maybe it was a unique case for banks in that period, apart maybe from Intesa. Next challenge is a bit of what we have said. We showed that we want to invest in the industrial project. I think the payment system investment shows that we don't want only to cash in, but we want to invest Bpm Societa Ord Interest rate will go down and we have to be ready to substitute with more commission and fee the lower NII. And this is our strategic idea. Of course, it's very important also what you said on cost reduction. We think that is now the moment. We have invested a lot in terms of digital. So I think we have one of the best in class digital proposition for our client coming from the WeBank experience and still very much appreciated by the market. What we have done maybe less is to reshape the IT infrastructure of the bank. You know that we, since 1st of July, we have a new top line manager Bpm Societa Ord aimed to reduce costs in the future. I don't think M&A is on the table right now, apart again, not amongst banks at least. There could be something on the product factory, but not in the banking sector for the time being. For NFR, I asked Eduardo maybe to give you

So, coming to the component of the cost of certificates, you probably have seen in page 15, we gave the stock level of the outstanding balance, which went from 4.8 to 5 billion euros. This generates the cost component, which we described in the NFR slide, which is given by the market rate, the Euribor, plus the spread, which is consistent with the spread that we normally pay on the wholesale market. So depending on the maturity, but let's say currently between 150 and 200 basis points. And we believe that this is quite similar to what we observed other things equal in the other banks that have similar activities in issuance of certificates in their own balance sheet. But I believe that with these ballpark numbers you have an idea of what could be the guidance.

Thank you. Thank you very much.

The next question is from Giovanni Razzoli with Deutsche Bank. Please go ahead.

Good afternoon to everybody. My question is on the evolution of the cost for 2024 because so far we have seen banks providing a relatively optimistic trend for the cost in 2024 despite the Salary Drift that we are experiencing that we will experience probably as a part of the renewal of the labor contract at the overall environmental. So I was wondering how do you see the cost overall cost base evolution for 2024? And the second question is on the evolution of the funding cost in the second quarter. It seems to me that the deposit data has increased in the Q2 versus the Q1 Uh, to about the 33% that you are mentioning in the, in the core in the target for the career is my understanding. Correct. Can you give us an indication of the evolution of the deposit a beta for the 2nd quarter? Thank you.

Okay, thank you, Giovanni. Let's say my opinion is that if we don't do nothing, the evolution of cost with inflation and new contract for our colleagues and so on, of course, will bring to some increase. What we were very good up to now is to contain this cost through different action and these is quite clearly shown having Q2-23 with lower cost than Q1 and Q2-22. But, of course, this is the time for providing serious and possibly also with cost investment, but we need to try to reshape the IT and operational system of the bank. So this is our target for sure, one of the pillars of the next business plan. Of course, it's not something that can come immediately in one year. So we'll have, let's say, tactical move to contain in the next quarters, but also a strategic view for reducing costs. a solid and stable reduction of the cost base in the future. We know that there is room for that amongst the many things we have been able to do during this year. For sure, the investment in the IT system and the cost efficiency in the operation was not our top level of worries, but now it is. So now we have to work very consistently in order to lower the cost to serve, the cost base, and we will invest in this very attentively. For the funding cost, maybe... Eduardo can...

Yeah, so the question on beta, overall we are on average since the beginning of the year below the number that is implied in our guidance. In general, the behaviour of deposits is very stable as far as those deposits that have contractual rate fixed between the bank and the client are very stable in terms of pricing the only ones that move are the contracts where there is some indexation mechanism with this in mind which account for less than 25% of the total with this in mind we confirm the guidance that we gave the 33% on the overall year and leading to the amount of 3.25 billion NII Thank you.

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

Hi, thanks for taking my questions. I've seen the NP ratio move down quite a bit Q on Q. Can you give us more color on the move? On the other side, the fault ratio ticked slightly, slightly up. and so do you think this level of NPL ratio is kind of the bottom and shall we expect stability from here or you see it in a different ways and also can you give us some more call on fees towards the end of the year obviously you cancel the commissions on excess liquidity so is the impact the negative impact of this all embedded at this point or we shall expect more negatives and similar, do you have any views on the impact of synthetic securitizations going forward? Thank you.

Thank you for the question. No, we don't think we are at the bottom of MP because we still, as I mentioned before, we have been already provisioning for another, let's say, 500 million of disposal already accounted for with the FRS9. Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord That means the inflow of MPE up to now with this default rate, the situation is very comfortable. This should bring us to lower even more by year-end the MPE ratio, but let's wait and see if there is some deterioration that could bring to a new higher inflow. Let me remember that end of 22, everybody thought that in 23 we would have had the double of MPE. default rate of 2022. Fortunately enough, it didn't happen. For fees, no, we, again, in Q, up to now, in the first part of the year, we had only one quarter impacted by the excess liquidity given back to our client. So we'll have another two quarters in which this will work. And I would say that would be for an amount of almost 30 million, 28 to 30 million. As well as we will have some further burden from synthetic securitization. We have just completed another securitization a few weeks ago. So, all in all, we think that if we exclude these items, we will have a sound result in line with H1. Otherwise, we have to run a lot in order to substitute this impact on fees with more activity on commercial banking and asset under management. And of course, it's our target. So we are working for that. As I mentioned before, July was a very good month in terms of investment product placement. But again, let's wait and see what will happen in the next few months. I would say that we would be very happy to match each to the same level of each one. Thank you.

The next question is from Manuela Meroni with Intel San Paolo. Please go ahead.

Yes, good evening and thank you for taking my questions. The first one is on the NII. Could you please share with us what is the deposit beta in the second quarter and possibly divided between retail deposit beta and corporate deposit beta? and the same for your guidance for the full year, so the 33%, how much is retail, how much is corporate. I would like also to understand on the NII, if you have some hedging strategies like replicating portfolio able to protect your NII from a decline in rates. And the second question is on the cost of risk. What is the cost of risk implied in your 2023 guidance? And if you are assuming the use of your 200 million euros overlay provisions. Thank you.

Thank you, Manuela. I will give you the second answer, then I will pass to Edoardo. Basically, we didn't give guidance for cost of risk all 23. We are still a bit prudent in our assumption when we target 1.2 billion, which of course is a risk that could increase a bit in the second half of the year because of what I was mentioning beforehand. Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord covered by state guarantee, the more this will go into the MP inflow, the less will be the cost of risk because we will not anymore obliged or willing to provision 35-40%. And this could bring, of course, in the next few quarters, some further reduction in cost of risk. Of course, with an economic environment which is still at this level. Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord like now, but again, this is our, I know that other banks say that they can use overlays. Of course, if the overlays will still be there, we have a buffer to use. Let Eduardo answer to the guidance for beta and replicating strategy. Yeah, of course.

Starting from replicating strategies, you probably are observing that the current shape of the yield curve which sees still an inverted shape between the short term and the long term, meaning that, yes, replicating strategies are the right recipe to use in a period of declining rates, but this should be implemented gradually depending on the evolution of the curve. Of course, we already have a significant amount of such strategies in place, which we normally use for ALM purposes to steer the overall sensitivity of the PNL. Turning to the breakdown of the beta. Basically, our key determinants of the beta, as I said in reply to the previous question, is the distribution, is the split of our deposits between indexed contracts and the remaining part, which is not indexed. The indexed contracts are 25% of the total base. Of these 25%, one-third is vis-à-vis institutional counterparts for contracts such as treasury contracts, treasury relationships. and the remaining two-thirds are mostly retail and SME that are used to improve the relationship and bring cross-selling. Corporates in that segment we use to a very limited extent if not zero such contracts and so far even in corporates we have observed in a non-indexed contract a very low level of sensitivity. Beta overall in the quarter, the one that you observed, is more or less a safe level of the overall guidance for the year. This has been consistent throughout the segments, of course, with a higher elasticity for larger account, corporate and institutional and much lower for the retail work part.

The next question is from Andrea Vercellone with VMPXA. Please go ahead.

Good evening. Just one question. I'd like some clarifications again on the certificates. So you have 5 billion of certificates which at the moment are costing you, booked in trading, 62 million per quarter. Directionally, if rates go up, it will cost you a little bit more. If rates go down, it will cost you a little bit less. Is that correct or there's something else that we should take into account? Then I'd like to have an idea of the average maturity of these certificates and whether commercially you are thinking of further increasing the notional because clients are probably asking for it. Thank you.

Thanks, Mr. Vercellone. So, of course, you Your point is correct on the directional interpretation of the certificates component. Of course, we didn't include into these cost of certificates the smoothening due to the commissions that we earn on the instrument, which is related not to the stock but to the issuances, bearing in mind that Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord

How much of this 5 billion is with your retail clients and how much of it is with institutions?

It's all for retail clients. Most of the 5 billion have been sold to our clients. A limited part has been placed into other networks of Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord

a.d.d.d.d.d.d.d.d.d.d on the sensitivity of NII, not to rate increase, but to the change in beta. So if the beta changes, let's say, one percentage point differently from your observed beta estimates that is embedded in your guidance, which will be the impact on NII with respect to the 3.25 billion you have as estimate for the full year.

Thank you. Thank you, Mr. Lisi. Castagna speaking. Payment business is very, very early to say what will be the new production with the new factory, because as you can imagine, there will be, first of all, another, let's say, nine months before the closing. Then there will be some further period in order to have the, let's say, the IT migration into the new company. and this will mean that at least for 12-18 months we will still working as we are working right now so without any upside possibly from the new strategic option but with the upside of the growth which up to now is 10% coming from the increase of this kind of business. Of course, then when we will be in the new company, but it's something that we will explain better in our industrial plan, starting from the second part of 2015, we can have some more color about what we expect. Eduardo for the NIA sensitivity.

Yes, I didn't expect to answer to a question on a second derivative, but at the end of the day, what we are talking about is this. Beta is a parameter that measures the sensitivity of interest rate to the evolution of rates. So if rates remain stable, whatever is the beta, your NII remains stable. What we put in our guidance is Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord Bpm Societa Ord 200 basis points in 200 basis points increase in rates an increase in 1% of beta means a decrease in this sensitivity of 10 million order of magnitude of course excellent thank you the next question is from Hugo Cruz with KBW please go ahead thank you very much for the time

just some qualifications on capital and capital return. So on capital, do you think you need to run the bank at the CTO and ratio of 14 to 15%? Or do you think you can go below that? Second, I think you said there'll be some regulatory headwinds. If you could give some guidance there. Third, can you remind us of the capital impact of the very beta deal? and if it's already included in your guidance for the damage compromise. And finally, when you're talking about increasing shareholder remuneration, you know, there's buybacks. But in terms of dividends, are you thinking about, you know, increasing your payout above 50% or just extraordinary dividends? Thank you.

Good evening, Mr. Cruz. So capital, no, I don't think that 14-15 is a normal common equity tier one for regular business. So we think that, as we said before, we will use this capital both for industrial growth and for capital distribution and profitability distribution to our shareholder companies. in which percentage and level we say that it's better to wait for our industrial plan just to have a better knowledge of the situation we will have in front of us for the next years. Edwins, we mentioned many times before in the previous presentation that we are still waiting for some change in the model for corporates we frankly speaking we don't have such a clear idea we will see when this will come I feel either by end of the year or Q1 24 but of course very well manageable by the capital we have at our disposal capital impact on vera vita again maybe Rado can answer to this

Yes, so we have an impact of the Verabita transaction and combined with the transaction on the non-life business without considering the niche compromise, which is between 12 and 15 Bps negative. But this is the outcome of a number of assumptions, including those on PPA. So it can be considered as a prudent quantification. The same on your question on Danish compromise, where we reported an amount which doesn't change after the acquisition of Veravita. It can be possible that the actual amount, the actual mitigation due to Danish compromise can be increased after the Veravita deal.

Last question remuneration I mentioned before this would be a mix of I wouldn't say extraordinary dividend because it would be a new policy on dividend distribution possibly coupled with some extraordinary buyback coming from the capital generated

Great, thank you very much.

The next question is from Delphine Lee with JP Morgan. Please go ahead. Yes, good evening.

Thanks for taking my questions. Just two quick ones, just a follow-up of the previous questions. One on NII is just on the deposit beta. Can I just ask what your assumption is for the exit deposit beta for this year and what you have for 2024? and then on the capital return. Just wondering, so if we understand correctly, the buyback would only be extraordinary. I mean, so you're just thinking about increasing the dividend payout at this stage or am I getting something wrong? Thank you.

Okay, thanks and good afternoon. I think that for beta, the exit is in the region, for 2023 is in the region of around 40% that we assume that is implied in our guidance. I don't know if this answers your question on beta. Yes, it does. Okay. Okay.

About remuneration, again, we say that we will manage to understand what is the best possible return for the shareholders. This will be, of course, coming together from profitability generated and the capital stance at the moment that we will have the business plan done in front of us. For sure, it could be also the two measures together. I would say we will give the new policy on dividend possibly together with a potential buyback coming from the one-off generated with the transaction we have done.

Okay, thank you very much.

Thank you.

The next question is a follow-up from Noemi Peruc with Mediobanca. Please go ahead.

Hi, thank you for taking my follow-up question. So just before, you mentioned an industrial project, potential growth in product factories. So my question is, in which business would you like to grow, and what timeline do you have in mind? Thank you very much.

It's a proper follow-up.

No, we mentioned before, basically, we consider ourselves in a very strong position in terms of where we wanted to be as a product factory. As well, if you would ask to me one year ago, if I thought that the bank assurance was available I would have said no before Cattolica was taken by Generali because I didn't have any chance to do that. Then following the events we were able to do something very interesting for us. Let's say that with the current situation we are very happy as we are. In a different situation we could consider to increase if possible, if the event will be in the position to allow a different share, for instance, in asset management, this would be something that we will consider.

Thank you.

Thank you.

Mr. Peronario, there are no more questions registered at this time.

Okay, thank you very much to everybody. I know that you have another conference to follow, so thanks for being with us and have a very good summer. Thank you.