Intesa Sanpaolo Spa Ord

Good afternoon, ladies and gentlemen, and welcome to the conference call of Intesa San Paolo for the presentation of the Half Year Results 2023, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Razia, and I will be your coordinator for today's conference. At the end of the presentation, there will be a question and answer session. To enter the queue for questions, please press star 1 and 1 at any time. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. You are kindly invited to ask no more than two questions so as to leave room for other participants. I remind you that today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Carlo Messina, CEO, so you may begin.

Thank you very much. Welcome to our first half 2023 results conference call. This is Carlo Messina, Chief Executive Officer, and Amir with Stefano Del Punta, CFO, Marco Del Frate and Andrea Tamagnini, Investor Relations Officers, and Luca Bocca, Head of Planning and Control. Also with us today are Massimo Proverbio, the Group Chief of our Technology and Data, together with Paola Papanicolaou, Head of Transformation, Stefano Barrese, Head of Bank of the Territory, together with Virginia Borla, Head of the Division Business Governance, and Tommaso Corcos, head of our private banking division. They are here with us today because I will not only walk you through a very high quality set of results, but we will also give you a preview of our tech transformation that is moving quickly thanks to significant investments. Massimo, Paola, Stefano, Virginia and Tommaso will help me to answer all your questions on technology and the two important digital business initiatives we launched recently, Easy Bank and Fideurum Direct. We have just closed the best six months ever, with net income reaching 4.2 billion, of which 2.3 billion in Q2. They were the best six months and the best quarter since 2007 for net income, And they were also the best six months and the best quarter ever for operating income, operating margin and gross income. Strong results means that we can raise our full year net income guidance to well above 7 billion euros. And looking ahead, 2024 and 2025 net income will be higher than in 2023. Rewarding shareholders while maintaining a solid capital position is embedded in our DNA. Our dividend yield is the highest in Europe at 11%. In the first half, we accrued cash dividends of 3 billion euros and completed the 1.7 billion buyback. In November, we will pay an interim dividend of at least $2.45 billion to shareholders. We remain committed to a 70% cash payout ratio, and any additional capital distribution will be evaluated year by year. We are highly profitable, liquid and capital solid. Russia's exposure was down even more, close to zero, and we further strengthened our zero MPL status. The common equity ratio is at 14% before the Q2 impact from the voluntary deduction regarding calendar provisioning that will give us benefits in the future in terms of Pillar 2 requirements and cost of risk. Considering DTA, Common equity stands above 15%. Taking into account our very low risk profile, it is clear that we have a significant excess capital that can be returned to our shareholders. In Q2, customer financial assets increased by $37 billion to $1.3 trillion. with an increase of 20 billion in direct customer deposits. After this set of excellent results, let's turn to our digital journey. We are going all in our tech transformation and evolving fast. We see a need for speed that is all about building the bank to succeed in the next decade. We have already invested $1.8 billion in technology while building EasyTech, the tech backbone of our group. Leveraging EasyTech, in June, we launched in less than one year our state-of-the-art digital bank, EasyBank, based on cloud technology. Also in this case, we demonstrated to be a delivery machine. Delivery machine like in wealth management protection, like in MPL, and now in technology. By Q1 next year, we will already have more than 2.5 million EasyBank customers. In addition, two weeks ago, we launched Direct Advisory as part of our Fideurum Direct digital offering. creating Italy's first network of wealth advisors working exclusively through online channels. We are also investing heavily in artificial intelligence. All these initiatives will generate an additional 500 million gross income in 2025. On top of what is already included in our business plan. So these are in advance. in addition of what is already included in our business plan. We are here not only to deliver strong results in the short term, but also to build a bank that can continue to be a leader in the future, the leader in the future. Now, let me say a few words on the macro situation. The economy is already showing better than expected growth this year. and I remain positive as inflation is going down and this will help the Italian economy to continue growing. Of course, we are very sensitive to the fact that many families and businesses are struggling due to inequalities and we remain committed to supporting them. We are also stepping up our many social and climate initiatives. All our stakeholders, not only shareholders, but also ISP people, the public sectors, households, and businesses benefit from our excellent performance. I'm proud of our results and thank our people for their hard work. Now let me turn to slide one to see the highlights of our first half results. Slide one. In a nutshell, we delivered the best six months for profitability and MPL inflows. Stock and ratio remained at historical lows, driving the cost of risk to just 25 basis points. Capital remained rock solid despite the impact of the vast majority of the expected regulatory headwinds. Slide number two. In this slide, you can see the positive evolution of net income up 80% on a yearly basis and 10-year increase in terms of delivery of profitability and net income. Slide number three, the all-time high results achieved in these six months means that we can comfortably improve our guidance for this year to well above $7 billion. And when I say well above, I really mean well above. Slide number four. Our excellent six-month performance confirms the success of our business plan formula based on a full range of concrete industrial initiatives. More than 80% of these are ahead of schedule. Slide number five, very important. Looking ahead, we expect net income of the next two years to be higher than 2023. So 2023 can be considered as a floor. Given further growth in net interest and insurance income, coupled with recovery in commissions and profits from trading, cost reduction enabled by technology, already agreed voluntary exits of people and easing inflation low cost of risk thanks to low mpl stock exist existing high quality overlays and no one of these are related to russia because we are zero exposures just 100 million in the local bank exposure to russia and voluntary deduction from common equity of the impact of calendar provisioning. And then you can add also lower levies and other charges concerning the banking industry. We have always over delivered on our promises. Now let's move to slide seven for the details of the first half results. Slide seven. Very briefly, in the first six months, net interest income was up almost 70% yearly. The total contribution from net interest income commissions and insurance was up 28%. Provisions declined significantly, and net income reached $4.4 billion when excluding the final contribution to the resolution fund. Slide number eight. In Q2, net interest income increased 10% quarterly. Commission started to recover and insurance income was up 16%. Net income was up 16% quarterly and 74% yearly. Slide number nine. In this slide, you can see the strong acceleration of net interest income. Net interest income is expected to exceed $13.5 billion this year, and further growth is expected in the next two years. Slide number 10. Net interest income growth was driven by the spread component, which is benefiting from the increase in market rates. Slide number 11. In Q2, commissions were up 4% and insurance income registered the best quarter ever with a growing property and casualties contribution expected to reach $800 million in 2025. Slide number 13. Costs are down when excluding depreciation for tech investments and the increase in energy prices. In particular, administrative expenses were affected by a 44 million yearly increase in energy costs and would be down net of these components. With energy prices now well below pre-war level, administrative expenses can revert to the usual downward trend. Obviously, expenses are also impacted by the strong investments that we are delivering on technology. Slide number 14. Our cost income ratio stands among the best in Europe. And please turn to slide 15 to see how in San Paolo asset quality continues to be strong. The net NPL ratio is at 1%. Net NPL inflows remain at historical low and Stage 2 loans are down 11% quarterly and more than 30% yearly, reaching only $37 billion. And compare our Stage 2 with the Stage 2 of other peers in the market. Slide number 16. NPL stock and ratios are among the best in Europe. So really impressive the figures of the net NPL stock that we have. Only Nordic Bank are better than Intel Sao Paulo. Slide number 17. Our annualized cost of risk stood at just 25 basis points and NPL coverage increased to 49%. We are not seeing signs of asset quality deterioration. Now let's move to slide 18 for an update on Russia. In Q2, we further reduced our Russia exposure, which is rapidly approaching zero. Slide number 19. The common equity ratio is 13.7% despite absorbing the vast majority of expected regulatory headwinds And after a 30 basis points impact in Q2 from the voluntary deduction related to calendar provisioning, thus reducing pillar two requirements and lowering future cost of risk. Considering BTA, the common equity ratio stands above 15%. As you can see, we clearly have significant excess capital in each year of the business plan. And this excess capital will be evaluated year by year to be redeployed to our shareholders. Slide number 20. We maintained a best-in-class liquidity position. The liquidity cover ratio and net stable fund ratio are well above regulatory requirements and our business plan targets. We have a very diversified and sticky deposit base. And let's move to slide 21 for more detail on the liquidity position. Liquid assets and unencumbered eligible assets increased in Q2, and cash with the ECB is significantly higher than the remaining TLTRO. Slide number 22. I'm very proud that our excellent results allow us to support all of our stakeholders in a significant way. Currently, talks with banking sector trade unions are taking place regarding a new national contract. I fully support paying our people more to compensate the impact of inflation. And technology and efficiency will offset this cost. But ISP people truly are our most valuable asset. Let me remind you that we have the highest dividend yield in the industry. An increase in net income and sustainable net income, not short-term net income, and so in cash dividends, sustainable cash dividends, is also favoring an increase in tax revenue for the state. And 40% of cash dividends go directly to Italian households and to foundations to support their charitable programs for local communities. Slide number 23. Intel San Paolo has a duty to leave a positive mark on society and to support the transition towards social, cultural, and environmental improvement. In this slide, you can see our leading ESG position in the main sustainability indexes and rankings. And we remain committed to being the world's number one impact bank. Some companies are backing down on ESG. We are moving ahead. At the end of this presentation, you can see the slides on our many social and climate initiatives. Let's move to slide 25. I strongly believe that to remain a leader in the next decade, you need two things. The first is a well-diversified and resilient business model mainly based on wealth management and protection. And the second is to best serve customers. Today, this means meeting their demand for digital services, and so we must position the bank to be a tech leader. ISP is already moving ahead, and we reinvented our IT core to lead the market today and tomorrow. That is why I want to spend a few minutes on our digital journey. This really sets InterSanPaolo apart from our peers. So we are on a different planet. Our digital strategy relies on three pillars. First of all, easy tech, which will become the technological backbone of the entire group. Then our new digital channels, like Easy Bank and Fidelram Direct, attracting new clients and better serving our customers. Third, artificial intelligence, to further unlock new business opportunity, increase efficiency, and manage risks. This action will generate already in 2025 a benefit of $500 million additional gross income, mainly coming from costs. On top of what is already included in our business plan. Now I want to leave the floor to Massimo Proverbio, Paola Papanicolaou, Stefano Barrese and Virginia Borla and Tommaso Corcos to walk you through the pillars of our digital strategy starting from slide 26.

So Massimo. Thank you Carlo and good afternoon to everybody. Starting from the fifth pillar, EasyTech is our cloud technology backbone that we developed together with ThoughtMachine, the innovation leader in this space. Leveraging the cloud partnership with Google and the team that we set a few years ago, EasyTech is up and running and is already being successfully deployed for our mass market retail client through the digital bank, EasyBank, which Stefano will discuss in a moment. EasyTech will be progressively extended to the entire group across clients, segments, and countries. We have already significantly invested in technology with 1.8 billion euros already deployed and more than 1,200 IT specialists hired since the beginning of the business plan. We will keep investing Please turn to the next page, page 27. On this slide, you can see why EasyTech is a new, unique, and distinctive platform. It is cloud-native with flexible cost, modular with fast time to market, secure and resilient by design, scalable across segment, product, and geography, and real-time with instant response. It is important to notice that we are the first leading bank to migrate the entire core banking system to the cloud. As said, EasyCREC was the foundation for the launch of EasyBank. And now I leave the floor to Stefano Barrese for a brief overview of our new digital bank, starting from slide 28.