Intesa Sanpaolo Spa Ord

Good afternoon, ladies and gentlemen, and welcome to the conference call of Intesa San Paolo for the presentation of the third quarter, 2023 results, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Rosianna. 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 1 and 1 again. If you could all kindly limit yourself to two questions so that everyone is given the opportunity to ask their questions. Thank you. I remind you all that today's conference is being recorded. At this time, I would like to hand the conference over to Mr. Carlo Messina, CEO, so you may begin.

Thank you. So welcome to our nine-month 2023 results conference call. This is Carlo Messina, Chief Executive Officer, and I'm here with Stefano Del Punta, CFO, Marco Del Frate and Andrea Tamagnini, Investor Relations Officers, and Luca Bocca, Head of Planning and Control and Deputy CFO. Also with us are Massimo Proverbio, the Group Chief of our Technology and Data, and Stefano Barrese, Chief of our Bank of the Territory Division. Today I will walk you through a very high-quality set of results. but also I will update you on our tech transformation that is moving quickly with more than 2 billion euro already invested. Massimo and Stefano will help answer any question you might have regarding our journey. In addition, I will give you an update on the results of our main ESG initiatives, confirming our world-class position in social impact and strong focus on climate. It is all about building a sustainable and profitable bank that can continue to be a leader in the future while delivering strong results in the short term. Now, our nine-month results. We delivered a net income of 6.1 billion, of which 1.9 in Q3. They were the best nine months of the past 16 years and the best Q3 ever for the net income. They were also the best nine months and the best quarter ever for operating income and operating margin. Strong results mean that we can improve our net income guidance for this year to above 7.5 billion. Looking ahead, 2024 and 2025 net income will be higher than in 2023. Our dividend yield is the highest in Europe at 11.5%. 11.5%. In the first nine months, we accrued cash dividends of 4.3 billion euros and completed the 1.7 billion buyback. In a few weeks, we will pay an interim dividend of 2.6 billion. That means A dividend per share of 14.4 cents, almost doubling the interim dividend of last year. Additional capital distribution for 2023 on top of our 70% cash payout on stated net income will be quantified at full year results approval, but this means that we have already decided to do this. We clearly have excess capital, and additional distribution for 2024 and 2025 will be evaluated year by year. We are highly profitable, liquid and capital solid. We further strengthened our zero MPL status, and Russia's exposure is down even further, very close to zero. The common equity ratio is at 13.6%. Considering DTAs, it stands at 15%. All our stakeholders, not only shareholders, but also ISP people, the public sector, households, and businesses benefit from our excellent performance. Of course, we are all very sensitive to the fact that many families and businesses are struggling, and we remain committed to supporting them. Our very profitable and efficient business model also allows us to further strengthen our world-class position in social impact. Just last week, we hosted an Impact Day event where we discussed priorities to address social inequalities and the concrete way in which we are stepping up our many social initiatives by deploying a contribution of 1.5 billion euros by 2027 leveraging a social delivery machine of 1,000 dedicated people. I'm proud of our results and thank our people for their hard work. Now let's turn to slide one for the highlights of our nine-month results. Slide number one. In a nutshell, we delivered the best nine months for profitability. NPL inflows, stock and ratio remained at historical lows, driving the cost of risk to just 28 basis points. Q3 net income doubled last year Q3 results. Capital remained rock solid despite the impact from the vast majority of expected regulatory headwinds. The liquidity position is strong and we increased direct customer deposits by 3.5 billion in Q3. Slide number two. In this slide, you can see the impressive growth of net income up 85% on a yearly basis and up almost 10 times in 10 years. Slide number three. These all-time high results achieved in the first nine months mean that we can further improve our net income guidance for this year to above 7.5 billion euros. Slide number four. And looking ahead, we can confirm that as already said in July, we expect net income for next two years to be higher than 2023 net income. We have always over-delivered on our promises. Slide number five. I'm very proud that our excellent performance allows us to support all our stakeholders in a significant way. Talks with banking sector trade unions regarding a new national contract are ongoing, but I fully support paying our people more to compensate for the impact from inflation and to do it quickly. Technology and efficiency will offset these costs. But as I've said many times, ISP people are truly our most valuable asset. An increase in net income and so in cash distribution is also favoring an increase in tax revenue for the state. And 40% of cash dividends go directly to households and to foundations to support their charitable programs for local communities. Slide number six. Inter San Paolo feels the moral obligation to leave a positive mark on broader society, and we remain committed to being the engine of sustainable and inclusive growth. To further strengthen our world-class position in social impact, we launched just last week a massive program to address social needs, to fight inequalities, and to promote financial, social, education, and cultural inclusion. based on three pillars, a contribution of 1.5 billion euros, a social delivery machine with around 1000 dedicated people and the setup of a new organizational unit called ISP for Social. Now let's move to slide eight and take a closer look at the nine month results. Very briefly, in the first nine months, net interest income was up 65% yearly. The total contribution from net interest income commission insurance was up over 27%. Revenues increased almost 20%, and costs were essentially stable, driving operating margin to an all-time high. Provisions declined significantly and net income reached $6.3 billion when excluding the final contribution to the resolution fund. Slide number nine. In Q3, net interest income was up further at over 6% quarterly. We achieved record quarterly revenues up 27% on a yearly basis and operating margin up 56% yearly. Costs were down on a yearly basis when excluding depreciation for tech investments. Net income reached 2.2 billion when excluding the yearly contribution to the deposit guarantee scheme. Slide number 10. In this slide, you can see the strong acceleration of net interest income. Net interest income is expected to be well above $14 billion this year, and further growth is expected in the next two years, also thanks to a higher contribution from core deposit hedging. Slide number 11. Net interest income growth was clearly driven by the spread component, which is benefiting from the increase in market rates. Slide number 12. Customer financial assets are above 1.2 trillion, up almost 40 billion in the nine months. The decline in Q3 is entirely due to the negative market performance effect. Direct deposits are up 12 billion in the nine months, reaching the highest level ever. Direct deposits and assets under administration will fuel our wealth management and protection business in the future with a positive impact on commissions. Property and casualties contribution is increasing and in the nine months was more than 480 million. 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 about a 70 million euro yearly increase in energy costs and would be down net of these components. Slide 14, our nine month cost income ratio is the lowest ever and stands among the best in Europe. Please turn to slide 15 to see how in San Paolo asset quality continues to be strong. The net MPL ratio is at 1%, and then MPL inflows in the first nine months were the lowest ever, with Q3 net inflows down almost 30% versus Q2. Furthermore, Stage 2 loans are decreasing further, 6% quarterly and 21% in the past nine months, thanks to the high quality of our loan portfolio and our strong capabilities in prevention activities. Slide number 16. NPL stock and ratios are among the best in Europe today. after an impressive de-risking. So we still have only 5.2 billion euros of net non-performing loans at risk in our figures. Slide number 17. Just have a look at Stage 2 loans. We are also very well positioned in terms of Stage 2 that represents only 8% of loans. A further evidence of the high quality of our loan portfolio. These figures are net of overlays for all the European competitors. And you can see that there are a number of banks with significant stage 2 loans after overlays and generic provisions. We are in a very good position considering our 35 billion net stage 2. Slide number 18. Our nine-month annualized cost of risk stood at just 28 basis points thanks to best-in-class de-risking solutions, high-quality loan portfolio, and proactive credit management. NPL coverage increased to 50.4%. We are not seeing any signs of asset quality deterioration. Let's move to slide 19 for an update on Russia. Quarter after quarter, we are reducing our Russia exposure, which is approaching zero. Slide 20. The common equity ratio is at 13.6%. We have absorbed almost all the expected regulatory headwinds And as you can see, we clearly have significant excess capital in each year of the business plan. Please turn to slide 21 for a quick look at the results of the last EBA stress test. As you can see in this slide, our well-balanced model reduced the impact of the EBA adverse scenario. And on slide 22, It is clear that we are one of the clear winners of the EVA stress test with a 140 basis point common equity TR1 ratio buffer versus requirements in the worst year of the adverse scenario. Please turn to slide 23 to see our betting class liquidity positions. The liquidity coverage ratio and the net stable funding ratio are well above regulatory requirements and our business plan targets and we have a very diversified and sticky deposit base. Let's move to slide 24 for more details on the liquidity position. Liquidity reserves remain at a high level and cash with the ECB is significantly higher than the remaining TLTRO. In the next chapter, I'm going to give you an update on the progress of our business plan with a focus on the initiatives related to two pillars, our strong investments in technology and our commitment to ESG. Slide 26. Our excellent nine-month performance confirms the success of our business plan formula, based on a full range of concrete industrial initiatives, which are proceeding at full speed. This was possible thanks to our people, and I'm personally very proud that job satisfaction continues to grow, reaching its highest level of the past 10 years. In the next slides, I'm going to quickly focus on the strong progress we are making in relation to two pillars of our business plan, technology and ISG. While in the appendix, you can find more details on the complete list of initiatives. Slide 21, regarding our investments in technology during the last results call, we presented a focus on our digital strategy that relies on three pillars. EasyTech, which is becoming the tech backbone of the entire group, our new digital channels like EasyBank and Federal Direct, attracting new clients and better serving our customers, and artificial intelligence to further unlock new business opportunities, increase efficiency, and manage risk. These actions will generate the benefit of 500 million additional gross income on top of what is already included in our business plan. Now I want to update you on how EasyBank and the artificial intelligence program are proceeding at full speed. Please turn directly to slide 30. EasyBank, our digital bank, we successfully launched in June is now fully operational and well received by the market, as shown by the main satisfaction indexes. The appreciation is further confirmed by the fact that many new customers have joined us, coming to our group through EasyBank and opening more than 50,000 new accounts. Slide 31. The migration of the first group of 300,000 clients from ISP to EasyBank was successfully completed with half of the migrated customers already accessing the app in the very first hours. Even with heavy customer activity, the EasyBank app maintained excellent performance with a response time even faster than the ISP app. which is recognized by Forrester as the global mobile banking apps leader, ranking first worldwide among all banking apps. Slide 32. On this page, you can see how the adoption of artificial intelligence is well underway while maintaining a responsible approach to the use of data. In just one quarter, we doubled the number of artificial intelligence use case deployed. For example, on regulatory analysis, we are the first European bank to apply artificial intelligence. Now please turn to slide 33 to see how we are progressing on our ESG commitment. We remain committed to being the world's number one impact bank. In this slide, you can see our strong progress towards the business plan ISG targets. And also here, we are ahead of schedule on almost all of the projects. We carried out 32 million interventions to support people in need, and we granted $13.5 billion in new social lending to support non-profit activities vulnerable and young people, and urban regeneration. And we continue to support innovation through investments in startup and innovation projects. Let's move to slide 34. In this slide, you can see other important ESG initiatives with impressive results achieved, such as $41 billion in new lending to support the green economy, circular economy, and ecological transition. More than 70% of assets under management invested in ISG products and €8 billion in green social bonds. And I want to stress that in 2022, we reduced by 62% the absolute emissions for the four high-emitting sectors, with reduction targets already set for 2030. Slide 35. In this slide, you can see our leading ESG position in the main sustainability indexes and rankings. Now, slide 37. Let me say just a few words about the Italian economy, which is strong thanks to solid fundamentals, world-leading household wealth, and very resilient SMEs. Growth for this year will be close to 1%, and as inflation slows, the economy is set to continue growing. Slide number 38. As you can see in this slide, Intel Sao Paulo is far better equipped than its European peers, thanks to our rock-solid capital base and well-diversified and efficient business model. Slide 39. This slide recaps how ISP is well equipped to further succeed in the future. I will not go through all the points, but let me highlight that we remain a wealth management protection and advisory leader with fully owned product factories and more than 1.2 trillion in customer financial assets and zero MPL. We are ready to succeed. in any interest rate environment as shown by this set of all-time high results. Slide number 40. To finish, let me turn to the outlook. We can upgrade our 2023 net income guidance to above $7.5 billion, and this is a floor for the coming years. Our stronger sustainable performance enables us to generously reward our shareholders with a 70% cash payout. We will pay $2.6 billion as cash interim dividend in a few weeks. That means a dividend per share of $0.144, almost doubling last year's interim dividend per share. We will deliver a dividend yield of more than 11.5%. We clearly have excess capital to give back to shareholders. And additional capital distribution for 2023 will be quantified at year end. And any additional distribution for the next two years, so 2024 and 2025, will be evaluated year by year. In closing, I want to repeat we are going all on our tech transformation while delivering excellent performance and strengthening our world-class position in social impact. This is what it takes to build a bank that continues to succeed over the next decade. InterSanPaolo is a clear dividend tech delivery machine with a strong focus on ESG, especially to reduce inequalities and poverty. So thank you for your attention, and we are now happy to answer your questions.

Thank you, sir. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Once again, please press star 1 and 1 for any question and wait for your name to be announced. if you could all kindly limit yourself to two questions so that everyone is given the opportunity to ask their questions. Thank you. We are now going to proceed with our first question. And the questions come from the line of Antonio Reales from Bank of America. Please ask your question.