Bper Banca Spa Unsp/Adr

Good morning. This is the Chorus Call Conference Operator. Welcome and thank you for joining the BEPR First Half 2024 Consolidated Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Mr. Nicola Spongi, Head of Investor Relations at BEPR. Mr. Spongi, please go ahead, sir.

Thank you, and good morning, everyone. I'm pleased to welcome you to our second quarter 2024 NLINX conference call. Before I give the floor to our CEO, Gianni Franco Papa, please note that our slide set and press release can be found on our corporate website. I would also advise you to take note of the disclaimer on slide two of the presentation document. That said, after the presentation, our CEO and our CFO, Simone Marcucci, will take care of the Q&A session. I will reiterate that this is reserved for financial analysts, whom I will kindly request to ask a maximum of two questions each, so that everyone will have the opportunity to contribute to today's call. Thank you very much. I will now leave the stage to Mr. Papa, CEO of Bittar.

So good morning to everyone. Thank you, Nicola, for your introduction. Before I start walking through the presentation slides, I would like to inform you of the recent appointment of Simone Marcucci as group CFO. In the same way, I would like to thank Gianluca Santi for his very valuable contribution as CFO. Now, let's move on the presentation on slide four. As you can see on slide 4, the bank continues to pose strong results throughout the first half of 2024. Revenues grew by 4 percentage points, reaching 2.8 billion euros, underlining the strong resilience of our business model. Profit before tax was up by almost 16% at 1.1 billion euros. Allow me to add that this figure has been adjusted excluding approximately €150 million related to the gain on the disposal of the MPE servicing platform in Q1 2024 and excluding approximately €174 million of HR-related actions in Q2 2024. Our cost-income ratio remains stable at 50.6% in the first six months, as a result of our continued focus on cost discipline. As already mentioned, the cost-income ratio excluded €174 million of HR-related actions. We achieved further progress on cost of risk, improving the ratio to 41 basis points, underlining the high quality of our portfolio. Reported adjusted return on tangible equity stands at a robust 16.5%, along with the CET1 ratio reaching 15.3% thanks to our strong organic capital generation. Finally, the bank's liquidity profile remains robust, with LCR and NSFR ratios broadly in excess of the minimum threshold required. Let's move on to slide number five. As you can see, we have been able to demonstrate a positive performance throughout all P&L drivers. We will provide you with an in-depth review of each and every item along this presentation. For now, I would like to underline the important progress of adjusted net profit generation in the last quarter, which almost increased by 26%, as you can see on the slide. That said, I think that for purpose of clarity, it is also noteworthy to comment on progress of stated net profit, which was lower both year-on-year and quarter-on-quarter, mainly due to a very limited tax rate reported in Q2-23 and Q1-24. Moving on to slide six, I'm delighted to state that on the basis of the bank progress, we have revised our guidance of net interest income to stable, and we have revised our cost of risk guidance towards an improved outlook. On the other hand, our guidance on operating cost has been revised very moderately upwards. All in all, we confirm our 2024 guidance on all other items. Now, I would like to move on to the core part of the presentation on slide eight.

Total revenues increased by 4.1% in the first half of 24 versus first half of 23.

This was achieved thanks to resilient core revenues which were up by 7% half on half at 2.7 billion. I would also like to highlight the strong improvement in productivity with the net revenues to risk weighted assets ratio, which increased from 8.6% to 9.6% between Q1 23 and Q2 24. Among the main drivers of total revenues in Q2 24, I would highlight the following. Resilient NII in spite of lower rates with stable contribution of the ecobonus. A strong contribution of net commission income on the back of higher fees from asset under custody, asset under management, and non-life insurance products. And finally, materially higher dividend income, which is a customary item driven by the seasonality of dividend payments in the second quarter. Let's move on to the next slide. focusing on net interest income. Let me say that net interest income growth in the first half of 2024 was very satisfactory. Half on half, NII was up by 8.9% and up 2.4%, comparing Q2 2024 with Q2 2023. In the quarter, NII performance was resilient given the overall macroeconomic scenario. NII was affected by lower spreads, the volume effect was merrily positive given the slight increase in customer loans. That said, treasury related activities related to the bond portfolio, interbank lending, etc. produced high revenues. As you will appreciate, commercial rates stood at a slightly lower level in the second quarter. Finally, I would like to highlight that our sensitivity to 100 basis points movements equal to approximately 130 million euros. Now let's move on to the development of net commission income. Before I comment on the slide, I need to highlight that the bank carried out a recasting exercise in the second quarter of 2024. In practice, Net fees and commissions include charges for payment services provided and other administrative expenses have been netted against recoveries of costs for services ancillary to lending. In the interest of comparability of results, similar reclassifications have been made for all quarters. The overall effect of the mentioned recast has an overall positive effect on cost and by the same token on net commission of approximately $40 million per year. Moving back to net commission income, this showed strong progress, increasing by 4% half on half and by 7.6% year on year. The main contributors to the strong performance were the robust sales of high-quality, non-life insurance products and the good progression of fees deriving from asset under management products. Commission from banking services continue to be the major contributor to overall net commission's income, amounting to approximately 270 million euros, up by 1.2% quarter-on-quarter. Let's move to the next slide, which focuses on the progression of total financial assets. Similar to net commission income, total financial assets grew by 6.3% year-on-year, mainly driven by asset under custody and asset under management. In the quarter, the major drivers were the deposit conversion into asset under custody and asset under management, thanks to customer demand for government bonds and other asset management products. The latter was the main beneficiary of deposit conversions. Two, life insurance almost flat quarter on quarter. I would like to highlight that despite the asset conversion, BIPER is able to fully recapture customer liquidity. Let's move on to our performance on the cost side. Before I describe progress on cost, it is important to highlight two non-recurring items. As you can see, there have been two HR-related actions. one that affected Q4-23 in the amount of approximately €295 million and the other in the amount of €174 million in Q2-2024. The last HR-related action derived from the acceptance of around 600 additional retirement applications. All in all, in the first half of 2024, total costs were up by near 4.2%, reaching a cost-income ratio of 50.6%. As you can see, HR costs increased due to the National Collective Labor Agreement and new hires, while decreasing by €88.4 million, deriving from HR-related synergies. Finally, Non-HR costs grew by 6% in first half of 2024, mainly influenced by the MPE servicing agreement with Gardant.

Let's move to cost of risk where the bank showed a very good progress.

As you can see in the slide, in the first half of 2024, loan loss provision came down by 34.1%, landing at 175 million euros, bringing the cost of risk down to 41 basis points in Q2 and in Q2 at 39 basis points, underlying the high quality of our portfolio. I would like to mention a couple of other points, which have been key in the context of the quality of our loan book. Firstly, our overlays rose to $222 million underlying our conservative risk approach. Secondly, our total coverage ratio at 53.3% remains one of the highest in the Italian banking sector. As a matter of fact, the reason why the total coverage ratio came down to 89 basis points was mainly due to the inflow of UTPs characterized by a better LGD profile and hence will lower coverage requirement.

Let's move on to asset quality on the next slide.

The fact that Reapers benefits from a higher quality loan book is further highlighted by the MPE ratio, which we'll appreciate remains one of the lowest in the Italian banking sector at 1.3% in Q2 2024. As far as the quality dynamics is concerned, gross MPE remains stable year-on-year, while quarter-on-quarter MPEs increase by €300 million. Noteworthy is the strong reduction in Stage 2 loans by approximately €900 million, which partly flowed back to Bonis and partly into UTPs. Let me add that the increase of 200 million euros of UTPs was also driven by the delay in the implementation of the new servicing platform and tactical considerations on reaching critical mass of the loan books for disposal, affecting the speed of NPE disposals. Allow me to reinforce my statement on the very high quality of BIPER's loan book.

Having finished with asset quality, let's move on to the development of the bank risk-weighted assets. As you can see in the slide, in Q2-24, our total risk-weighted assets remained flat quarter on quarter.

This result was achieved primarily on account of our improved risk profile on the back of our prudent credit policy. Credit-risk-weighted assets increased from 44.1 billion euros to 45.3 billion euros, up by 1.2 billion quarter-on-quarter. Let's move to slide number 16. In terms of capital, our significant organic generation further reinforced our capital strength with a CET1 ratio of 15.3%. Our organic capital generation was 199 basis points in first half 2024. Net of the capital gain from the disposal of the MPE servicing platform to Gardant and the HR-related actions, the organic capital generation stands at 194 basis points. The impact of regulatory models amounted to only four basis points in Q2 2024, much lower than in the previous quarter. The NDA buffer gradually improved to 612 basis points in Q2-24 from 315 basis points in Q1-23. All in all, allow me to say that our shareholders value creation was significant with first half 24 earnings per share standing at 51.2 cents.

Moving on to liquidity,

Let me point out that the bank liquidity ratio remained high. LCR reached 161.4% at the end of June 24 versus 160.9% at the end of 23, even after the 1.7 billion repayment of the last TLTRO tranches at the end of March. NSFR increased to 134.6% from 128.4% at the end of December 23. The improvement in both ratios was achieved thanks to positive commercial dynamics in customer deposit, positive net wholesale bond issuance on the market, and in particular for the NSFR, also thanks to disposal of non-high quality liquid assets. In first half 24, the loan-to-deposit ratio stood at 75.7% versus 74.3% at the end of March 24, thanks to the positive commercial efforts

on new loan production.

Turning now to the bond portfolio, on slide 18 we point out that Italian government bonds amount to 8.9 billion euros and account for around 36.1% of total bonds, down 35% year-on-year. After quarters of downtrend in our stock of Italian government bonds, the stock was up by 2% quarter-on-quarter. plus 200 million euros, and as we took advantage of market opportunities. Our securities portfolio duration was confirmed at two years, as was that of Italian government bond portfolio at 2.4 years. The annualized average yields on the security portfolio was 2.7%. Slide 19, focusing on our latest bond issuance, In May, Bipper successfully placed its second senior preferred bond qualifying as green, targeting institutional investors for an amount of €500 million. With regards to the ratings assigned to the bank, in May 2024, Moody's rating upgraded the bank's standalone long-term issuer rating from BA1 to BAA3 investment grade. And in June 2024, Morningstar DBRS revised the bank trend from stable to positive. All key ratings assigned to the bank by the various rating agencies are now investment grade. Ladies and gentlemen, before we start with questions, I would like to reemphasize some of the key points of our presentation. The positive growth in our total revenues was driven by resilient core revenues and operational efficiency. We continue to focus rigorously on cost control. Our outmost risk discipline remains unchanged, and our asset quality stands at the highest level within the Italian banking sector. We continue to generate organic capital, further strengthening our seed-in-wall ratio, which reached 15.3%. And finally, as you have appreciated, we remain on track to achieve our 2024 guidance. Before we move to the Q&A, I trust I will see you all at our Capital Market Day on October 10th, where we will present the new business plan. Thank you.

Excuse me, this is the course call 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 your question, please press star and 2. Please pick up the receiver when asking questions. The first question comes from Giovanni Razzoli of Deutsche Bank.

Good morning to everybody. I have two very quick questions. The first one, if you can please update us on the impact of the Basel IV and what are the different moving parts, especially the operational risk. And the second question is on the detail on the upfront fee contribution in the second quarter vis-à-vis the Q1. My impression is that After a strong Q1, banks, I mean, at least your peers have decelerated a little bit for this contribution. So if you can share with us also your defense for the potential.

Yes, thank you. So in as much as the Basel IV impact, we will have an impact of 70 basis points, of which the operational risk is of 40 basis points. Whereas in 2024, the impact is zero. In as much as the second question is concerned, so details on the upfront fees, we have in the second quarter upfront fees for $29.2 million up from the first quarter of $26.5 million. The increase is due to the fact that in the second quarter we have the subscription of BTPs. So for the BTPs placement of securities being issued in the amount of 2.2 million, mostly BTPs. So on average, we have around 20 to 25 million of a front per quarter.

The next question is from Marco Nicolai of Jefferies.

Good morning. My first question is on the guidance. So you upgraded the NII and also the cost of risk guidance, but you left unchanged the bottom line. So is it costs absorbing all the improvements in the other two lines, or you're just being prudent in terms of net profit? And can you share with us the various moving parts here? And secondly, on the restructuring cost, could you please share what's the expected benefit in terms of personal expenses that you expect from the measures you booked today? In terms of headcount, how many people do you expect leaving the firm this year? And also next year, not only considering this latest measure, but all in all, also considering what you booked in the past. So these are my two questions. Thank you.

Yes, thank you. So yes, we are prudent because we mentioned also last quarter that we have a prudent approach to the numbers. We changed the guidance on cost. The change of guidance on cost is a technical one and is deriving from the reclassification. that I mentioned during my presentation of cost to passive or negative fees. Overall effect of this recast has a positive effect on cost of approximately 40 million, but in 2023 this recast in terms of rounding has brought the figures down from 2.8 to 2.7 billion. just for rounding matter, and therefore we had to review the cost side in as much as the 24 is concerned because of that. In as much as the second question is concerned, you know that after the agreement entered, the two agreements, the one that was signed on December 23 and the one on July 24, we will have roughly 160,000 resources that will be per group, of which 900 will be leaving in 2024 and the remaining 700 will be leaving in 2025. So these two agreements, as you know, entail a one-off cost for a total amount of about $458 million. of which $284 million were accounted for in 2023 and the difference in $174 million in 2024. And we will have a saving for an amount of around $48 million in 2025 with a view to having steady state savings of about $83 million by 2026. Considering exits and new hires at a ratio of one new hire every two exits, this was the agreement that was signed with the unions.

The next question is from Noemi Peruk of Mediobanca.

Good morning. Thank you for taking my questions. I have a question on NII and in particular on the quarterly bridge that you show. I see 6.5 million from non-commercial items, and I would like to ask if you could comment on the nature of this and also if they are recurrent or not. And then I see that market risk arguably declined Q&Q by around 1 billion, what you call at risk, and I was wondering if this is sustainable. Thank you.

Okay, we'll let the first question be answered by our CFO, Mr. Marcucci, and second question by our CRO, Mr. Cristini.

Please. Thank you very much, Mr. Papa. Thank you very much, Mr. Papa. Regarding the first questions, the $6.5 million non-commercial, let me say that this $5.5 million is split like $5 million positive from bonds, $14 million from ECB and $12.5 million from derivative hedging on bonds.

With regard to RWA related to market risk, it's worth highlighting that the other risk RWA as of the end of March include 1.2 billion of prudential add-on, which was introduced in accordance with Article 3 of CRR. This prudential add-on was introduced in order to anticipate the effect of an update of the internal rating system, which was implemented as of the end of June. So after this implementation, this add-on was almost completely removed. In summary, we conclude that the RWA related to market risk are stable about 900 million of euros because as I have just highlighted in the first quarter, 1.2 billion euros included in the other risk were related to credit risk.

Thank you.

The next question is from Ignacio Urlargui of BNP Paribas Exxon.

Thank you very much. Thanks for taking my questions and for the presentation. I have two questions, if I may. The first one is on the capital build-up. I mean, the bank keeps on doing a very strong capital build-up, quarter after quarter. Could you just elaborate a bit on what should we expect for the payout in 2024? I will leave the 25 outlook and onwards for the strategic plan, but how should we think about the payout from here, given the capital path that you are having? And the second one, if you could elaborate a bit more on the MPE increases. I mean, you gave some color on the presentation, but just to understand a bit better, how should we expect MPEs going forward and when the disposals will happen? Thank you.

Thank you, Ignacio. So in as much as the first question is concerned, you know that at the moment we have accrued 30 cents as dividend was $0.16 in the first quarter and $0.14 in the second, equal to around 60% of the net profit. I remind you that the current plan provides for a 50% payout, so we have already above it. So the yield, if you look at the yield today, is at 12.5% on the current share price. As you know, on October the 10th, we will present our new business plan and we will give new guidance update on the dividend payout. For the second question, we have Mr. Cristini.

First of all, on average,

First of all, it's worth highlighting that there are no particular signals of deterioration of the credit risk profile of our portfolio. Namely, the default rate is stable at about 1% in line with our expectations. The probability of default is stable, too. And as highlighted in the presentation, a relevant decrease of Stage 2 exposures was registered in the last quarter. This is a very important aspect because Stage 2 classification is the most predictive indicator for a potential transition to a non-performing status. And finally, a relevant portion of UTP exposure is characterized by higher level of collateralization. The slight increase of the MPA stock registered in the first half of this year is mainly driven by two factors. First of all, in the first part of this year, as highlighted by our CEO in the presentation, in line with market trends, our bank didn't perform massive disposals. that are foreseen in the last part of this year in order to reach a sufficient amount of exposure to cell. Secondly, the activities of the outsourcing platform for MPA management started at the beginning of this year and its implementation is still in progress. So in the first part of this year, the Q rate is lower than the previous period. Anyway, it's worth highlighting that the Q rate of the second quarter registered an increase, and we think that it will further improve in the second half of this year. Finally, as I left in the presentation, with regard to coverage ratio, our bank adopts a very conservative approach, both for performing and non-performing exposures, and its coverage ratios are among the highest in Italy. So in summary, we can affirm that the asset quality remains stable.

Thank you.

The next question is from Domenico Santoro of HSBC.

Hello, hi, good morning. Thanks for the presentation and for taking the questions. Everything is very clear. I just want to understand a bit more, given that you have been here for a while, and I know that you are going to present the plan in October. I just want to have your thoughts about cost and provision going forward for this bank. Considering also the answer that you gave to the colleague on the savings on the personal costs going forward, I just want to understand how could be the direction of cost in 2025 and beyond, and also at which cost of risk you think this bank can run this business going forward, given that there might have been a little bit of conservatism in the past when it comes to cost of risk for these banks. And just an indication of tax rate for this year, I have noticed that there was a step increase in the second quarter and how we can model tax for the rest of the year. Thank you.

Thank you for the question. So I will answer the first one about cost, and then I will let Mr. Cristini answering about the quality of the asset as a second question. So as you know, we are really focused on cost discipline, both in terms of cost reduction and optimization of budget allocation, and this in order to achieve a lower and sustainable cost base. We have planned actions to reduce the cost base as compared to the initial budget level, starting from this financial year. Among these actions, the most significant one includes the reduction of inertial component of personnel costs, to which cost-cutting actions were added with particular attention to consultancy and management costs. Whereas on the other end, in this context, the branch closure does not really add much to the cost-cutting driver. So the focus will be more on the cutting costs linked to processes going forward. Farther and more incisive structural actions will be defined as part of the business plan that is currently prepared. So in October, we will present our plan, which, of course, will touch also the cost, the overall cost-income ratio, bearing in mind, as you know, that the interest rate scenario is for interest rate going down, but we are working on a further reduction on cost, and the plan will be presented, as I mentioned, in October. I'll pass now to Mr. Cristino.

Yes, with regard to the evolution foreseen for the cost of risk, I can confirm what I have previously highlighted. No particular signs of deterioration of the credit worthiness of our portfolio are registered, namely PD and default data stable. In addition, we have already adopted a very conservative approach in provisioning, so we can say that in the upcoming periods, the cost of risk will remain stable taking into consideration the high level of coverage that we have already registered both for performing and non-performing exposures.

And now Mr. Marcucci will answer on tax rate.

So as you know, we are preparing the multi-year plan that will be released on the third quarter. For this reason, in the second quarter, we are not taking into account the TA on fiscal losses. From the third quarter, after the approval of the plan and the related reassessment, we will start again to take an account. Therefore, for the next quarter, we expect around 30% of tax rate again.

Thank you.

The next question is from Fabrizio Bernardi of Intermonte.

Hi, all. I would like to ask if we may expect some other one-off cost in the fourth quarter in order to ease the entry in 2025 and so into the new business plan that will be presented in October.

Thank you for the question.

Do you have some other questions?

No, it's a very general question. I'm not talking about OPEX or SG&A or risk provision, but any one-off items that may impact the, let's say, stated bottom line relative to the guidance that you gave.

No, I can say that so far, for the time being at least, we don't foresee any further actions in terms of extraordinary actions in cutting costs because the major one was the Reduction of the staff. We had, as I mentioned before, an extra request of over 600 colleagues that asked to retire. So we deemed necessary to put in place this action. We discussed with the unions and therefore in the second quarter we had the 174 million euros. I think we are done for the year. We are, as I mentioned, already working on an exercise of reduction of cost day by day, but we don't see any further extraordinary action on it.

And if I can go on with a very aggressive question, I know it may be very early, but But how do you stand in terms of M&A? Because this is a question that investors are always asking. So I know that maybe you cannot give us a forward-looking statement. But maybe you can give us some flavor or color about what you think about enlarging the size of the bank going forward. I mean, we know your main... shareholder. We know the stake it has in other banks. It is always on the press about taking other stakes in other banks. So we would like to understand what do you think about the size of the BPR group and if the size may be in any case increased sooner or later.

In as much as our shareholders are concerned, you should ask our shareholders because obviously I can talk only about what is in the future for BIPA. What I can tell you now, today, is the fact that we are preparing a business plan that is based on organic growth because we see a great opportunity of organic growth thanks to the presence of the bank in the richest areas of Italy, to the strong capital that we have, the strong liquidity that we have. So I wouldn't comment further on the possible M&A. That, in any case, is not for us on the table today.

Thank you.

The next question is from Hugo Cruz of KBW.

Thank you for the time. Also two questions. One on the loan growth dynamics. I think you showed some good loan growth Q&Q. Are there any one-offs in there and what you're seeing for the coming quarters? And then second, you already said quite some interesting things on the new business plan, talking about the focus on costs. I think you mentioned as well, I missed it a little bit, but it sounds like you said 30 cents of dividend accrued, and you could double that for the rest of the year, right? So a focus on capital return, an increase in the dividend payout compared to last year. Anything else we should expect from the new plan? Any details you could give on the focus on organic growth there? Thank you.

Well, I wouldn't take away the thrill of the new plan to be presented on the 10th of October. So, you know, I can't anticipate much. In terms of loan growth Q&Q, we did have a loan growth, and this is thanks to the strong commercial dynamic of the bank. We have put a lot of gasoline into the engine, and now we have a very positive commercial dynamics throughout the different divisions of the bank. So we have growth in retail, in corporate, and in private banking and wealth management. In terms of cost, I already mentioned that we pay particular attention to cost reduction or at least to be able to keep cost a day given the inflationary drift that we have and given the fact that we do expect other rate cuts in terms of cost-income ratio. We might see a worsening of this, but we will work very hard on the further cost reduction. In terms of dividend payout, I already mentioned that we will have a new guidance with the presentation of the new business plan on the 10th of October. It's a matter of fact that if you look at the $0.30 that we have put aside today, we are at around 60% of the payout ratio, which, as I mentioned before, is well above what was foreseen by the current business plan. I wouldn't like to... go farther than that because, you know, we live in a certain time and I want to be able to look at the numbers of the third quarter before, you know, deciding what action to take from this 60%. Thank you.

Thank you. Thank you.

Once again, for any questions, please press star and one on your telephone.

Okay, I guess there are no further questions.

So I thank you very much for being patient with us, presenting on the 7th of August the numbers. I promise next year we'll try to be earlier. And I wish you a good vacation and thank you again. Thank you. Bye.