Bper Banca Spa Unsp/Adr

Good evening. This is the Chorus Call Conference Operator. Welcome and thank you for joining the conference call on the first half 2021 consolidated results of the Bipper Banker Group. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity for you 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. Pierluigi Montani, CEO of PeopleBank. Please, Mr. Montani, go ahead. Thank you very much, and good evening, and welcome to all participants for joining us tonight. I'm here tonight. We're together with the CFO, Roberto Ferrari, the head of planning and control, Alessandro Simonazzi, the manager responsible for preparing the company's financial reports, Marco Bonfatti, and the head of investor relations, Fabio Bellati. As you know, this first half of the year was extremely important for the BIPO group because with the integration of the 33 branches on 21st June, we completed the integration of the going concern consisting of 620 branches, which has enabled our group to make a significant leap in size. The six-month results are already partially reflective of the contribution from the newly acquired business unit, and they are extremely positive and reveal results. a significant growth in volumes, increasing profitability, continuing improvement in credit quality, and confirmed financial strength. So moving on to highlights for the period, it is worth noting that the successful completion of the integration process is testified by the excellent retention of banking relations with customers from the newly acquired branches, which bears witness to the attention we paid to our new customers and the specificities of our 20 areas. And as you can see also, the return rate is confirming this trend. And we're confident that this will continue during the future or will not be very far from the results we have. As you can see, I mean, the volumes that we got from the newly acquired business unit are almost consolidated and so the overall gross banking product from Intesa Sao Paolo and Ubi is at 96 billion of volumes with 3 billion in funding and entire funding and deposits 41.3 billion as I was saying before we have 620 branches that have onboarded the group and there were 5107 employees that entered the group but 22 have left and so now the headcount that has been included in the group from the acquired business unit, which is 5,085, and personnel accounts for 33% of the group. of personnel altogether, and branches account for 40.6%. As you can see, volumes are on a strong upturn. Total funding grew to $263.6 billion, up 42.3% year-to-date, of which indirect deposits amounted to $165.1 billion. Net loans to customers increased to $76.3 billion, plus 43.9% year-to-date. The net profit for the period amounted to $501.8 million and was contributed to both by the newly acquired business unit and multiple one-offs that we have already mentioned on other occasions, excluding one-offs. Profit before tax amounts to approximately $260 million, net $189 million, with operating income up to $1,590 million, driven by growing revenues primarily from a pickup in net commission income, boosted by a gradual recovery and placement of asset management and back assurance products. The annualized cost of credit net of 310 million worth of additional loan loss provisions, of which 50 in the second quarter aimed at increasing our coverage levels, settled at 70. basis points. Our credit quality continues to increase with a gross MPE ratio of 5.7% and a net MPE ratio of 2.8%. The MPE coverage rose to 51.8% from 49.5% in the previous quarter, and the annualized default rate is 0.8%. on the total stock of loans on a steady downturn since the end of 2020 when it was 1%. Capital strength is confirmed with a set one ratio of 13.5% and runs in parallel with a robust liquidity position. And then moratoria amounted to 8.1 billion as of 31st March 2021 and got down to 3.2 billion in total. as at the end of June. So let's now focus on total funding, which amounts to $263.6 billion, up 42.3% year-to-date, with the newly acquired business units contributing $72.9 billion. More specifically, direct funding was up 56% and indirect funding was up 35%. Total funding was up 3.3% quarter-on-quarter, as you can see in the slide, primarily in due to the 33 branches acquired from Intesa Sao Paulo, which contributed $5.8 billion. Net of this contribution, total funding would be $2.5 billion, up 1%, thanks to the positive commercial input. Moving on to the next slide, direct funding rose to $98.5 billion with a newly acquired going concern contributing $31.6 billion. I would like to remind you that 95% of direct funding from customers consists in current accounts and site deposits at a very low cost. Direct funding grew 4.3% quarter-on-quarter, driven once again by the internal Sao Paulo branches, which contributed $2.2 billion approximately, and net of this contribution The growth rate would have been $1.8 billion equal to 1.9%. Indirect funding is similarly going up. It registered a significant growth to $165.1 billion, posting a 35.2% growth with net with a new business unit contributing $41.3 billion. Indira Departments rose by 2.7% quarter-on-quarter as a result of the $3.6 billion contribution from the 33 branches of Intended and San Paolo, with a large share of Assets Under Management, $1.3 billion, and Life Bank Assurance, $1.4 billion. On a like-for-like basis, the growth would have been $1 billion, so it would have been 1.5%. It is worth noting that the growth in deposits was also underpinned by the strong performance shown in the placement of assets under management and life bank assurance, which totaled $1.2 billion in the six-month period, largely in excess of the entire amount for the last year. In the last quarter that we're focusing on, I would like to underline that since it was a little bit higher than the previous quarter, because even though it was a good quarter anyway, but the increase was due to the fact that in the first quarter, the branches had to focus very much on sales and distribution, And then after the UBI branches were acquired, of course, they did not only focus on sales and distribution, but also on maintaining relations and retaining relations with the existing customers. So the branch network was a little bit distracted by this, and so there was a little bit of a reduction, but it's still a very good quarter. And this trend of growth also continued in July from what we could see Net loans to customers total $76.3 billion and we're up 43.9% as compared to the end of 2020 and a quarter increase.

Is there any problem now?

Mr. Montani is asking, but is that okay? Okay. excuses, but we got news that probably the financial community was not listening to the translation, but apparently everything is working. So the quarter-on-quarter increase was 1.2% thanks to the Intesa San Paolo branch's contribution, but net of this input, net loans, were down 0.4%. But once again, in this case, I would like to underline that after the acquisition of of the UBI branches, there was a lot of a focus by the branch network on funding because that was the most important part in order to retain customers. And so there was a slight decrease in loans that we are recovering. And in the second part of the year, we are expecting that growth will be ranging between 1% to 2%. As far as loan payment moratoria are concerned, as I was saying before, they went down by 60% from $8.1 billion in the first quarter to $3.2 billion at the end of June. But what I feel urgent to underline is that this $3.2 billion, I mean the breakdown of this $3.2 billion is as follows. 63% of these outstanding moratoria are rated from 1 to 5. That is the best ratings we have internally. And the default rate on expired moratoria is in line with the default rate of performing loans. But a very marginal amount of them is stage 2 or stage 3, which means that these moratoria were more of you know a circumstance and we have no worries no concern about the development for the future and as far as state guaranteed loans are concerned they are stable actually so they amount to 6.5 billion and we're up seven percent quarter on quarter we have already talked about credit quality This slide, number 12, is extremely important as it emphasizes the continuous improvement in this area that the bank is making quarter after quarter, particularly with regard to the growth and net MPE ratios, which were respectively 5.7% and 2.8% at the end of June, which is important because not earlier than December last year, the MPE ratio was 7.8%. and also the NPE coverage ratio was up to 51.8% from 49.5% in the previous quarter. In particular, BAT loans coverage is 60.9% now and UTP's coverage is 43.1%. It is important to underline that performing loan coverage is likewise up to 0.6%. It was 0.5% in the previous quarter and it was 0.3% at the end of 2020. Performing loan coverage was also driven by the increase on coverage in the Stage 2 loans, which amounted to $9.4 billion in the first quarter, $9.5 billion in the second quarter at the end of June, and accounts for 12.9% of total performing loans and coverage. Stage 2 coverage was up to 3%. And I would like to remind you that we have... adopted an extremely conservative approach to classification of loans in stage 2 as we have included in this class medium high rated exposures to sectors which were most affected by the health emergency such as restaurants, hotels, travel agencies, transport and leisure even in the absence of signs of impairment so that we could monitor the situation more accurately. As far as the default rate is concerned, on slide 14, we can see the development of the default rate over time, which was 0.8% in the first half of the year, lower than 1% for 2020, which bears, and also the average recovery rate is up to 7.1%, and confirms the positive trend observed in the previous years. The securities portfolio amounts to 27.1 billion up by 2.4 billion year-to-date following the reinvestment of part of our excess liquidity which we would otherwise departed entirely with ECB at negative interest rates. Italian government bonds are steadily growing as well and now amount to 8.3 billion. It should be noted that the Italian bond portfolio accounts for 40.7% of the total bond portfolio which confirms the group's diversification strategy. Finally, the bond portfolio duration is 2.3 years down from three years in 2020. We'll now focus on the income statement. As we have already said, the six-month period closed with a net profit of almost $502 million and was inclusive of the newly acquired business unit and a number of one-off items. Net of these one-offs, profit before taxes, I had mentioned, already anticipated amounts to approximately $260 million. And one-offs include integration-related costs totaling almost $88.9 million, almost $89 million, of which $18.4 million in personnel expenses and $70.5 million in other administrative expenses. Then there were additional loan loss provisions that we made and they amounted to 310 million of which 160 or 260 were expended in the first quarter and 50 in this latest quarter goodwill impairment amounted to 230 million and badwill generated by the going concern acquisition for an amount of 1 150 million so one point 15 billion was inclusive of a recovery of bad wealth taxation from Interest in Sao Paulo for an amount of 316 million. A few words on our net interest income which amounted to 730 million almost for the six month period of which 632 million from commercial activity with customers, 55.6 million were contributed to by the securities portfolio and 56.7 million were contributed to by the TL3 funds net of the interest paid on excess liquidity deposited with the CBE. The spread reduction in the six-month period was primarily due to excess liquidity held with the CBE and the lower securities portfolio contribution. As you know, excess liquidity is about $23 billion now, turning Now, to excess liquidity held with ECB, we're confident that we will gradually run it down, including we're working on this by thinking of some actions. But this will be run down as a result of funding being shifted from direct to indirect deposits, which is connected with the expected increasing loans by 1% to 2%. we expect that in the second half there will be a positive impact on net interest income from both the ISP branches contribution and growing lending volumes so there are other initiatives that we are taking but without overdoing in order to compensate the low interest rates with the ECB. As far as net interest income is concerned, net commission income is concerned, I'm sorry, It reached $734 million with a growing share of indirect deposits and bank assurance-related fees, which accounts for 42%. In particular, net commission income for the second quarter amounted to $405 million on a strong upturn from the previous quarter, 27% up, supported by both the contribution from the newly acquired going concern and placement of funds in direct deposits and in direct funding products. Traditional banking fees also registered a significant increase to $223.1 million. Trading income and dividends, slide 20, illustrates the fact that the six-month period was very positive. Trading income totaling Approximately 120 million have benefited from positive market performance and capital gains on securities disposals. But this area was always yielding positively and we're continuing the trend. As far as operating costs are concerned, they totaled 1.2 billion and were impacted by approximately $98 million in one-off charges, mainly in relation with the going concern integration process, staff training, rebranding, advertising, and advisory, and more specifically, $70.5 million in higher administrative expenses and $18.4 million in higher personnel expenses. On this point, I would like to underline that between the end, between the First and second quarter, if we remove these extraordinary costs, the cost in the first quarter would have been $467.2 million. In the second quarter, they would have been $546.5 million. But we should remove from this latter part $5.8 million that were not related to the integration, but they were one-off costs due to the pandemic. and other minor expenses, but they had an impact anyway. So the cost for the quarter would have been 540 million. As far as the cost of credit is concerned, provisions amounted to 576 million, including 310 million additional provisions, which also take account of the very conservative approach that we have adopted when it comes to provisioning even though there has been no evidence so far of a significant deterioration in credit quality as testified by the indicators that we have mentioned excluding the additional loan loss provisions the annualized cost of credit is 70 basis points but we are confident that the cost of credit in the future will decrease as it will benefit from the prudential approach we've always adopted and particularly from the improvement we have observed in credit quality. As far as liquidity is concerned, the situation is very strong. The total eligible assets have grown to $29.9 billion and LCR exceeds 200%, I think it's 215.5%. We have no problems on that or on the contrary. And also the CET1 settled at 13.52% comfortably above the SREP requirement and up 10 BPS from the previous quarter. So on account of the profit for the period and other minor drivers, for a total of 22 basis points and partially offset by the effect of the RWAs whose impact was 12 BPS from the acquisition of the Integra San Paolo Business Unit 2. Let me close by highlighting that the key messages of the first half of the year are that there's a growing underlying profitability, continuously improving credit quality and also the capital position is extremely sound and we have completed the integration of the uh going concern that we have acquired and so we can look at or to the future with more optimism because we think the import for the future will be significant and we can now focus and or place a stronger focus as we have done in the past but we will place a stronger focus on commercial growth and cost reduction um and on the integration, I'm sorry, of the going concern and we'll also focus on cost reduction through a leaner operating structure and a more rational cost base. I would say that this is everything we did and tried to illustrate all of the work we did in the six-month period and thank you for your attention. We'll now take your questions. This is the conference call operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchstone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is by Domenico Santoro from HSBC. Thank you very much for your presentation. I have some questions on the numbers. I would like to understand with respect to the guidance that you provided some time ago on net interest income, and if I remember correctly, it was $400 million altogether. I think there's an impact also from the PPA so on top of the higher liquidity that you have illustrated and that in fact reflects the trend in the ECB part of this drain can part of this drain be absorbed and how do you expect it will evolve in the following years as an effect of the PPA then on costs I think that your guidance was 525 I understand that there are some one-offs but the number that we should consider is it still going to be the same for the next part of the year or in light of the second quarter trend is it too ambitious or should we in fact rebound it over to 2022 then I have a question on provisioning now that you have done a lot of cleanup in terms of coverage I mean what is going to be the recurring provisioning rate for the future, and what about the capital regulatory aspects that you want to add, for instance, on the ARB models? And then I've got more of a qualitative question. You are a bank for which the access to deposits with the ECB... on a percentage basis is one of the highest at all. It's one of the highest compared to all of the other Italian banks. I understand that you were involved in an integration process, but are there any commercial sales and distribution strategies that you want to focus on in order to reduce this impact of deposits held with ECB on your net interest income? Well, I will try to follow the order of your question. So as far as the guidance on net interest income, I mean, we had given a guidance of 400 million, as you said, and the impact of PPA was non-material, basically, almost non-significant, and we can confirm that. In terms of costs, you were asking whether we can confirm the guidance we gave, and we do confirm it, also because in this course we are benefiting from the lower costs for personnel. And so when we gave this guidance, we took account of this, and we can confirm that. And then as far as liquidity is concerned, it's true that we've got a lot of liquidity, especially if we make a comparison with other banks. But we should remember that liquidity exploded, so to say, or boomed after the acquisition of Ubi. Before that, it was not at these levels. And so we're trying to address this sort of a huge problem. And we have been focusing on that just for a few months. I understand that liquidity is a big problem. Liquidity is a problem when banks run out of liquidity. On the other hand, instead, we are safe on that, but actions are there. When you have excess liquidity available, then you can think of conversion strategies which is something we are thinking of so not only do we want to speed up on loans that would slow down because of other things but we want also to enact some sort of an interesting conversion conversion or shift you know strategy because as you could see the placements that we made in the first and second quarter were significant and so output in the six-month period exceeded the levels of last year, and July was a very good month. It was a good month, and so we do not have the projections yet, nor do we have guidance or actually results for the month of July, but we're confident that the month will be following the same trend. And so on the one hand, it is a problem. On the other, it is an opportunity. As far as your question on capital is concerned, the CFO will answer to your question. Hi, Domenico. Your question on capital, as we said last time, we do not have any headwinds for 2021 or 2022, so we do not expect any positive or negative impacts. The first negative impact will be in 2023 from Basel III, but it will be partly mitigated by other positive impacts connected with the rollout of the models and so the Basel III impact may in fact be lower than 50 basis points. I'm sorry, I was referring to Basel IV, the CFO said. As far as provisions are concerned, the guidance that we're giving is lower than 70 basis points. And on the ARB of Unipol Bank, which is lower, this is the question. Yes, the CFO is answering. The process is integrated with the request, the application that they made for transitioning to our models, also for the UB assets. And so we expect that by the end of 2022 or by 2023, this will happen. And this is one of the positive effects that will reduce and mitigate the impact of Basel IV. Thank you. The next question is from Noemi Perucco from Mediobanca. I have three questions. The first question is a follow-up on your guidance on the cost of risk, as you said, minus 70 basis points, but I would like to get clarification on whether this is the guidance for this year in terms of underlining cost of risk or does it apply also to next year, 2022? Then my second question is a brief question on costs. Do you expect any further additional one-offs for the second half of the year? And my third question is about the M&As. You have just completed the integration of the two acquisitions and I would like to understand how you're approaching your business plan if there's going to be an alternative for value creation that contemplates an M&A or if it's not contemplated. Mr. Montani is answering. Well, the costs were projected for the future and our approach was very prudential, meaning that if we had had to base ourselves on what comes from our models, we should have indicated a much lower cost. And the topic was very much debated internally, and we thought it was appropriate to consider the risks that may come from the pandemic. And as I said in my presentation, all of the evidence in this regard, and you can see that also from the trend of the Stage 2 exposures, are positive. uh for us as it applies to everybody models do not take these circumstances into account and we wanted to be much more conservative and prudential and wanted to keep our cost at a higher level than the models predicted we would we would be pleased to uh to know to be denied or to be proved that our prudence and caution was was was too much, so to say. But as far as one-offs are concerned, no, we do not expect any, or there may be some adjustments, but it will be marginal. And as far as M&As are considered, we're now working on our business plan that we are going to complete by the end of this year or beginning of next year, and all options will be evaluated. But I would like to be precise. I mean, the acquisition of this business unit for this bank was extremely important I was describing the impacts before, but 30% of our personnel and 40% of the branches reflect a very big leap in size. It's true that the bank is used to having high volumes, but the specific weight is very high also because the bank is working 60% in the northern part of Italy, Lombardy and Emilia-Romagna. In terms of future projections or outlooks, this meets an important focus. The integration proved successful and was very good because customers were transferred there. accurately and well, but of course there are some cues and tales that we want to work on so that we can fine tune the process. We want to work particularly on the revenue synergies. Your question that you made before is important because we have to focus a lot on this. Integration for us is our top priority. We have not yet thought of any other acquisitions or operations or deals, but it's true that the market is developing. We may be involved. because the market I mean that there are not many banks that have that are major players and the bank will evaluate and consider its convenience and for its customers and shareholders and if that applies then I mean these options will be considered but our top priority is the integration of the going concern we have acquired which is the most important asset to us for the time being Thank you very much. Next question is from Adele Palama from UBS. Please, you have the floor. Yes. Good evening. I have a question on the outlook for 2022. If you could give a scholar on the development of the net interest income fees and costs and the cost of risk.

Thank you.

Well, actually, we have covered most of these factors because the cost of credit has just been hinted at now for the costs. Over time, we have confirmed our guidance. I do not think there are any open issues unless I'm wrong. the guidance of 400 million was for 2021. So should we consider 400 million as net interest income for 2022 as well, or the fee and commission income? What is the run rate that you consider for 2022 on these fronts? Well, for 2022, we expect an increase following this trend, and we're working on the business plan, you know, So all of these answers will be more precisely answered to once the business plan is completed. But I can say right now that the trend for us is a growing trend because the synergies that we're putting in place are revenue synergies, and that's why we're putting together a series of synergies to develop revenues. And then as far as costs are concerned, I mean, the cost we're taking this year and will be taking this year, there may be some investments in IT for the future that we will include in our business plan. Thank you very much. Our next question is from the English conference, from Jean-Francois Neuilly from Goldman Sachs.

I just wanted to ask one quick question on the scenario of consolidation which is unfolding in Italy. So you've obviously acquired a going concern and you've completed this successfully, obviously, as the results now demonstrate. Then the question is, it looks like there is more M&A on its way. There were some headlines on Cariger, for example, recently, and obviously there has been the announcement by Unicredit. BAMI also often says that they would like to gain more critical size. How do you think of yourself in that complexion, please?

Well, to be honest, there are not many banks left. There are many small banks left, but there are two large banks that are much bigger than we are, and they are OnlyCredit and Intesa. But speaking about our peers, apart from Carigio that you mentioned, there's Popolare di Sondrio, there's us, and then there's Banco Popolare and Monte dei Paschi. As far as Monte dei Paschi is concerned, there were some announcements by Unicredit, and so I do not know. I mean, they're reasoning about that. As far as other banks are concerned, I would... exclude Korea for the time being I mean as being part of acquisitions because of the problems they have I went through it I do not think it's going to be one of the forthcoming aggregations coming up but there are three that are yeah that are considering combinations so it's true that in the future there may be combinations but and there are not many players that are involved as far as we are concerned we are focusing on the integration of the business units we have acquired that we want to complete in the shortest time possible by uh you know by by increasing uh revenues on that and then it's true i mean we may be involved in m a m a scenario and we would not uh uh disregard anything if it is advantageous for the bank and their customers and shareholders.

Thank you very much.

The next question from the Italian conference is by Andrea Barcellone from Equita. I've got two questions, one on cost of risk and one on the M&As. As far as the cost of risk is concerned, could you give us guidance on what the cost of risk would be coming out of your models without the operational adjustments that leads you to a 70 basis points guidance? I'm asking you this because... You know, we're coming from a conference call with Intesa San Paolo where they mentioned 20 to 30 basis points as cost of risk, running cost of risk, which is very much different from 70 basis points. It's true that the two banks are completely different, but 40, 50 basis points difference is a lot. My second question is about the M&A. The message is clear. The message was clear, so you're very much concentrated and focused internally. on the recent acquisition, but you are aware of the fact that the banking industry is getting consolidated. It may also be true that some of these banks may not be there after a certain number of quarters. And if this happens, would it be a problem for Beeper or would it happen that after the UB acquisition, Beeper can be standalone and can compete with larger banks on its own? Well, I will answer your first question by saying that those who have low cost of risk are probably very, very good, or they are very optimistic, or maybe they are larger. I cannot argue on that. Based on our models, the cost would be 40 basis points, so we're not that distant from what the others are communicating, but we wanted to be conservative, and we We keep saying that the cost that we are estimating is 70 basis points. Then if it's better, we would be happy. Then as far as your question is concerned about the M&As, we are aware that there will be mergers and it's also true that we may be interested in the M&A scenarios and And you said if some of the players will not be in the game, what will happen to Beeper? Well, I can say that as of today, the bank has got 1,683 branches. There may be there are even too many because with the digitalization increase, we may work with a lower number of of branches but still we would need more than 1,000 and so we've got a lot of employees I think you mentioned and then excluding Val d'Aosta we're present everywhere in Italy and we have a strong presence in Lombardy and Emilia Romagna the most important regions in Italy let's say and even though I mean in a very remote scenario we had to be on a standalone basis. We would be able to stay on the market and produce and generate a profit that would make our shareholders happy. But I do not think that the banks will not be in the game. And the scenario will be interesting also because we – It would be difficult for us not to be part of a scenario like this, but what we are interested in at the moment is being focused on what is under our feet and not over our head where we cannot understand what is happening. Mr. Montani, there are no more questions registered at this time. Unless there are any questions, then we will be willing to For any clarification you may require, I am willing to give you assistance as my colleagues will, and I would like to thank you for your attention and see you next time. Hopefully, we will be able to provide you with even better data. Thank you very much. Good evening.