Unicredito Spa Ord New

Good morning, ladies and gentlemen. Before I hand over to Magda Palczynska, Head of Investor Relations, a reminder that today's call is being recorded. Madam, you may begin.

Good morning and welcome to Unicredit's second quarter and first half 2024 results conference call. Andrea Orchel, our CEO, will take you through the results. This will be followed by a Q&A session with Andrea and Stefano Porro, our CFO. Please limit yourself to two questions. With that, I hand over to Andrea.

Good morning and thank you for joining us today. It is with great pleasure that we announce our second quarter and first half 2024 results. These mark a historic achievement for Unicredit in its journey to set a new benchmark for banking. 14 consecutive quarters of profitable growth, delivering a record quarter and a record first half. These results are testament to the unwavering commitment of our team, the disciplined execution of our long-term vision, and strategy, and our dedication to creating value for all our stakeholders over time. The track record we have built in the last three and a half years is undeniable. We are confident that our action will further propel our positive performance in the future, setting Unicredit apart as an attractive investment opportunity. We have delivered consistently outstanding results across all KPIs, growth, profitability, efficiency, and distributions, outpacing our peers. These achievements are down to clarity of direction, discipline execution, and the proactive steps we take to prepare for the future. Unicredit has transformed into a blue-chip bank with value still to unlock. Lots of it. One defined by both resiliency and profitable growth. Resiliency through the cycle. leveraging our lines of defense and maintaining a quality-driven approach. Profitable growth through quality earnings and excellence in operational and capital efficiency, all propelling our best-in-class distributions. Our past is marked by transformation, our present by superior, sustainable performance, our future by our continuing to unlock significant potential. This performance is down to our mindset. It is the essence of how we engage with our clients and how we do business. This is the 14th consecutive quarter of quality growth driven by our focus on profitable NII, increased fees, and improved operational and capital efficiency, all leading to superior return on tangible equity and organic capital generation to support best-in-class distribution. Given the backdrop of rates and pass-through normalization, the profitable growth in gross NII of 5% in the half and 2% in the quarter is impressive. Overall, cost of risk remain well below our target at five basis points for the half and one basis points for the quarter, thanks to continued significant write-backs, again, underscoring the conservativeness of our provisioning policy. As such, net NII dynamics mirrored those of gross NII. Our fee income grew 6.6% in the half and an impressive 10% in the quarter thanks to our investments in people and with fee-to-revenues reaching 33% and 34% respectively. Our focus on operational efficiency while investing and capital efficiency while targeting profitable growth, continue to set the standard for the industry. Absolute costs declined by 1.2 percent over the six months and 1.7 accelerating in the quarter. With our cost-to-income ratio further improving to 36.3 percent, 2.9 percentage points better than a year ago. Our net revenue to RWAs reached 9.1 percent in the quarter, up one percentage point from a year ago. RWAs were further reduced to 277 billion. It is the combined performance across all these levers that allowed us to reach a record return on tangible equity at 13% CT1 of circa 23.5%, 20% reported, for both the half and the quarter. A record organic capital generation of 6.7 billion, or 234 basis points for the half, supporting accrued distribution of 5.25 billion, or 100% of net profit, while increasing our CT1 ratio to 16.2. A net profit growth of 20% for the half and 16% for the quarter. In the half, our EPS increased by 36%, our accrued DPS by 53%, and our tangible book per share by 20%. These results are built on strong foundation across leading capital levels, sound asset quality, and strong liquidity ratio. Let's now look at the P&L in further detail. Let's start with net revenues. Net revenues increased 7% to $12.6 billion in the half and 6% to $6.3 billion in the quarter. This is a result of a resilient best-in-class NII well above the cost of equity, a top-tier fee-to-revenue ratio with strong upside potential, a structurally lower and less volatile long-loss provision, and continued solid trading. NII net of provision plays the critical role in our P&L, and we have focused on keeping it well above our cost of equity and resilient. we now have a ROAC above 20% in the quarter in NII. While this number will normalize on the back of lower rates and higher cost of risk, we have laid the foundation for value accretive growth thereafter, always exceeding our cost of equity. Growth NII and margins are slightly down quarter on quarter as rates have started reducing. Pass-through has continued to increase, Loan volumes have now recovered, and we focus on profitability. Strong management of the pass-through, with an increase of only 1.4 percentage points to 31.5%, driven mainly by Germany, with a skew to corporates and Central Europe, driven by Austria. Italy pass-through increased by less than one percentage point. Deposit volume stabilized, queue on queue. We have continued to improve our lending mix as we move towards higher profitability and crossover in segments, those that bring us both corporate and retail clients with significantly diversified needs. Asset quality. Our NPE ratio has improved, quote-unquote, and we remain well covered. Our overlays to protect the future remain outsized and higher than the industry. The decline from 1.8 to 1.7 is a rounding equal to 25 million. Our overall cost of risk remains low, reflecting where we are in the cycle and benefiting from substantial write-backs. We witnessed continued significant write-backs across our entire franchise. Germany's cost of risk run rate increased year over year, as it may be earlier in the cost of risk cycle. Italy is broadly stable versus a year ago, while Central Europe, Eastern Europe and Russia saw significant net reversal in the half. Conservative past provisioning, leading to very significant write-backs, enabled Russia to absorb half of the impact of a single-name legal provision in risk and charges. As such, it may be interesting for you to consider our cost of risk together with single-name risk and charges which would raise the one basis point for the quarter to circa 19 basis points. Cost of risk excluding Russia was 12 basis points for the half, broadly in line year over year, and 11 basis points for the quarter, up five basis points year over year. We reaffirm our guidance of a cost of risk below or well below 20 basis points for the year, as we still plan for the start of a normalization of the cost of recycle and potential further precautionary provision in the second half. This is just a precaution at this point. Fees. Fees increased 7% in the half and 10% in the quarter as a result of our investments in product factories and renewed client appetite. These were propelled by clients rebalancing their portfolio ahead of the expected rates normalization and benefited from the renegotiation of some contracts in asset management and in payments. While we remain confident in our fee growth, prospects and this strong hash should not be unrealized. We have taken a measured and disciplined approach to further streamline our organization through the redesign and automation of processes and reducing bureaucracy. Our $1.1 billion of integration costs charged last year is allowing us to maintain our efficiency leadership while investing. Costs declined 1.2% in the half and 1.7%, therefore accelerating in the quarter, with cost to income further improving to 36.3%. Our continued focus on operational efficiency has allowed us to invest in people, hiring, training, attractively rewarding and retaining our talent, and in our business, enhancing our product factories and digital capabilities. We intend to continue this investment whilst keeping the like-for-like cost base broadly flat going forward. Our best-in-class organic capital generation of $6.7 billion in the half and $3.3 billion in the quarter has allowed us to accrue 100% of net profit for distribution while increasing CT1 to 16.2% versus 15.7% like for like one year ago. Our discipline focus on quality net revenue growth, ensuring a net NII ROAC above cost of equity and an increasing ratio of fee to revenues complemented by an obsessive focus on operational and capital efficiency of a key to maximizing profitability and organic capital generation while growing, maintaining best-in-class ordinary distribution without denting capital. This is a competitive advantage that will guide us going forward as we strive to support excellent ordinary distribution without denting City One. Excess capital deploying will be additive to that. As we look at our regions and product factories, I would remind you of the differentiated strengths and value add that each of these bring to the overall group. Unicredit is much more than the sum of its part. Italy. Our Italian business had another excellent quarter, demonstrating its ability to deliver sustained quality profitable growth and outstanding returns well above peers. Net revenue rose 5.5 percent to 5.6 billion in the half and 3.7 percent in the quarter. NII was up 8 percent in the half and 3.3 percent in the quarter thanks to strict management of the pass-through and continued rebalancing in our lending mix. Cost of risk remained mild at 28 basis points for the half and 23 basis points for the quarter. also benefiting from continued write-backs. Fees were up 7% in the half and 10% in the quarter, with all of our factories contributing, but with particular strengths in investments, in protection, in payments, and in corporate finance. Italy is growing its assets under management and gaining market share in bank insurance and, to a lesser extent, in certificates, as our advisory activity supports customers deploy additional investment in the right products. Hence, we have a greater impact from volume than from margin, given certificate, higher margins, and upfronts. But we believe that this is the right strategy at this moment and will pay dividends in the future. Cost rose 0.6% in the half and 0.3% in the quarter. A structural saving from continued simplification and streamlining offset most of the inflation and investment in the business growth, including 550 new hires in the network and 350,000 hours of training to our people. RWAs were reduced by 12 billion or 10% half on half. Italy further strengthened its operating and capital efficiency with its best ever 33.9% cost income ratio and 10.6% net revenue to RWA. Profit before tax rose 16% to 3.4 billion in the half and 14% to 1.8 billion in the quarter. ROAC reached 32% in the half and 33% in the quarter. Italy generated 3 billion of organic capital in the half. Germany. Germany's profitability is the best in a decade, supported by excellent operational efficiency. Net revenue fell 3.6% to 2.7 billion in the half and 2.6% in the quarter. Germany quarterly NII would have been flat, adjusting for the impact of higher funding costs of our group trading portfolio, which was driven by higher volume. Overall, NII was down 10% in the half and 11% in the quarter. Being predominantly a corporate bank with a path-through level on deposit near to 50%, Germany's future sensitivity to rate normalization is fairly low. Cost of risk remained more elevated than the trend line at circa 20 basis points as our franchise is more sensitive to single name files and the country may or may not be earlier in the credit cycle. Fees were down 1% in the half but up 3% in the quarter as performance accelerated across all categories, especially in investment plus 18%, Payment, plus 5, nearly offsetting the lower client hedging fees compared to previous years' extremely high client demand. Germany had the most scope in rationalizing its corporate center and continues to do so. Costs were reduced 7 percentage points in the half and 6 in the quarter, while continuing to fund investments. RWAs were reduced by 7 billion in Germany, or 9% half over half. Germany continued to improve its operating and capital efficiency with a 39.2% cost-income ratio and 8% net revenue to RWA setting records. Pre-tax rose 18% to $1.6 billion in the half and 12% to $7.40 in the quarter. ROC remained at or above 20%. for both the half and the quarter. Germany delivered 1.4 billion of organic capital generation in the half. Central Europe. Central Europe's profitability continues to be driven by strong revenue and disciplined cost control. Net revenue rose 5.5% to 2.2 billion in the half, but we're down 0.8 in the quarter. NII was up 5.9% in the half and 1.4% in the quarter, despite a downward trend that is expected to accelerate due to lower rates and higher pass-through. Cost of risk had net reversal of 5 basis points in the half and loan losses of 9 basis points in the quarter. Fees were up 11.5% in the half and 13% in the quarter, thanks to strong investment in Austria and a large advisory mandate in the Czech Republic. Business initiative across all segments should support this trend. Going forward, revenues will be more visibly impacted by the downward trend of interest rates, partially upset by strong contribution from fees performance. Costs grew by only 1.8% in the half due to wage drift, partially compensated by efficiency activities, enabling us to also continue investment in digitalization. RWAs were reduced by 1.2 billion, or 2% in the half. The discipline focus on operating and capital efficiency continued across all countries, reflected in a 36.5% cost-income ratio and 7.4% net revenue on RWA ratio. Pre-tax rose 17% to 1.3 billion and 1% at 700 million in the quarter. ROC was 24.3% in the half and accelerated to 26.2% in the quarter, and the region delivered 1.3 billion of capital organically in the half. Eastern Europe's outstanding profitability continued at pace this quarter, driven by excellent revenues and strong operational efficiency. Net revenues rose 21% to 1.5 billion in the half, increasing 26% in the quarter. NII was up 17% in the half and 12% in the quarter. Thanks to strong business growth across the region, a favorable rates environment, and good path through control, cost of risk had net reversal of 59 basis points in the half. Due to continued right back and a profitable NP disposal and underscoring once more the conservativeness of our provisioning. Cost of fees were up 13% in the half, 14% in the quarter, driven by all categories. Going forward, revenue is expected to remain broadly stable despite a downward trend in interest rates, thanks to strong commercial activity focused on profitable and capital-efficient business. Costs grew 3.4% in the half, offsetting most of the region high inflation, whilst we continue to invest in our people and in digitalization. Our focus on operating and capital efficiency was reflected in a 30.3% cost-income ratio and 10.2% net revenue on RWA ratio in the half. Pre-tax grew 32% to 1 billion in the half and 35% to more than 550 million in the quarter. ROARC exceeded 40%. in both half and quarter, with the region delivering 600 million of capital organically in the half. Client solution, turning to our product factory. Strong performance across the board. Client solution revenue grew by 7% in the half to 5.8 billion euros, two-thirds of which is fees. Corporate solution revenues rose by 4% to 2.7 billion in the half, driven by advisory and financing up 9%. Payment solution rose by 6% to $1.3 billion, driven by payments up 14%. Individual solution rose by 13% to $1.7 billion, driven by investment up 17%. OneMark has grew to $8 billion in AUM, confirming our business proposition. Our transformation from laggard to leader is due to the consistent delivery across all metrics. regions, and products. We have moved from a bank languishing in the bottom quadrant to one in the top quartile, defined by quality revenues, profitability, organic capital generation, and distribution metrics, consistently outperforming our core peers for nine consecutive quarters. Our disciplined focus on quality profitable growth over volumes naturally constrained our net revenue and net profit growth. versus peer with a greater volume focus. Regardless, we move close to leadership position in both cases. Our strategy aims to excel in net revenue over RWA, organic capital generation, which ultimately supports distribution, cost income ratio, and return on tangible equity. Here, we move to and retain clear leadership outperforming all peers. We have significant further room to add value, and you will see that going forward. Moving to tomorrow. Today, we're a completely different bank, one that has demonstrated its ability to consistently deliver. Our remarkable performance has propelled our total shareholder return and market cap grows to the top of the sector while we continue to invest in the future. And we have just begun. We will build. On this momentum, continue to deliver creative, profitable, high-quality growth over volume, underpinning best-in-class distribution, outperform our benchmarks, and ultimately secure a valuation that truly reflects our worth. We're not just prepared for the future, we're shaping it. We have the resilience, the flexibility, and the ability to adjust to extenuating circumstances without impacting our overall performance. And this quarter is not an exception. Our people and our winning culture will unlock even greater value in the future. Our commitment to our stakeholder remains unchanged. We aim to become the bank for Europe's future, empowering communities to progress and setting a new benchmark for banking. This is the guiding star that unites and inspires us all at Unicredit. We shall continue to strive for the best outcome for our three stakeholders. By putting our clients and community at the very heart of everything we do, we are transforming our organization from the ground up. Our clients' success is our success, and their satisfaction is our ultimate reward. Our people represent the true value of Unicredit. We empower them, invest in them, and foster an environment where they can thrive. Their dedication and passion are the driving forces behind our achievements, and we are committed to supporting them. Our investors provide us with the financial resources to achieve our objectives, and we are committed to protect their interests and deliver the highest sustainable returns and distribution to reward them. Our profitability and distribution yields are the best in the peer group, achieved without compromising our capital, asset quality, and liquidity strengths. The vision and this commitment will not change. Our strategy also remains unchanged, specifically designed to play to our strengths and address our weaknesses. It is composed of a set of levers which we can flex depending on the needs of the business, the growth opportunities, and the external environment. It is the combination of those levers that allows us to evolve over time while being consistent to our vision and objective. We have put our clients back at the center. That has shaped a new business model. We have progressively redesigned our organization, turning it on its head. We have redesigned our processes, way of working, aiming to achieve excellence in efficiency, leveraging our skill in technology, in data, in operation, in procurement, in training, and in product offering to deliver with speed and quality. We are uniting and empowering our people around one vision, one winning culture, one set of principle and value, and we are supporting them with the right organization and tools. We're developing best-in-class product factories alone or with strategic partners to deliver the best financial services product to 15 million clients across Europe via increasingly integrated distribution channel freely selected by our clients. We're investing in best-in-class technology and data, evolving our operation to continue to secure efficiency while enhancing our clients' and own people's experiences. Our strategy is underpinned by clear financial targets delivered through an optimal balance of our three financial levers. Given the changed environment and our ongoing transformation, we have shifted or are shifting our focus to quality top line growth while maintaining leadership in asset quality, in capital, and in operational excellence. To grow our top line in a quality way, once rate and cost of risk normalize, we will continue to tilt the mix of our lending towards high net NII ROAC products and segments while fulfilling our clients' broader needs. This will also drive fee growth supported by investment in our people, in our factories, in our distribution channels, and in our technology. Doing so, we will maximize our capital efficiency, enhance capital generation, and profitability powered by our improvement in operational excellence. Our dedicated approach to quality over volume and our proactive, buildup of lines of defense result in a uniquely resilient bottom line and confidence in our long-term outlook. Given headwinds, these results could have been expected to go in the opposite direction. They didn't. Our cost of risk is defined by quality focus and a conservative approach, and we have still 1.7 billion overlays, to further support our cost of risk. In cost, we continue our obsession with efficiency, holding 1.5 billion of buffers already sustained through non-operating items last year. In capital, we focus on optimal capital allocation and a superior profitability portfolio mix, with 6.5 billion of excess capital protecting total distribution and or allowing for strategic flexibility to further propel net profit through inorganic, and now with Odeno-Ion, organic external growth. Our task now is to maintain our leadership across all these levers. But our new focus is to be in a unique position on NII, as our approach gives us a very high quality and profitable top line whose growth is now the central focus of our strategy. Without changing strategy, we now shift our focus from the operating machine to the commercial machine. Our commitment to quality over volume and our diversified footprint have resulted in NII growth that aligns with our European peers, but with net NII ROAC having grown by three times and its resilience enhanced by the shift in our lending mix. Our future in fees looks bright given the momentum and the further impact of our past and planned investment and internalization. The combination of the higher resilience of NII and above-market growth of fees gives us confidence on the future top-line trajectory. The strong foundation, proven track record, and diversified levers to generate fee-based growth above market rates uniquely position us for the future. Vodeno Ion. Through our investment in Vodeno Ion, Unicredit acquires, firstly, Vodeno's next-generation cloud-based core banking technology, fully competitive with best-in-class providers such as Thought Machine, Mambo, Tenex. Scalable and flexible offering, a comprehensive suite of digital banking products across multiple channels. We are welcoming 200 technology engineers developers, and data scientists, as well as a management team with a strong track record in banking and technology implementation. Through ION, we acquire a small bank incorporated in Belgium whose legacy technology and clients have already been successfully migrated to Vodeno and that already operate through a branch structure in Poland, Germany, and Sweden. It is the combination of Bodeno and Ion that provides them with a competitive advantage vis-à-vis pure technology providers and fintechs. This investment propels Unicredit into a new realm of technology development and digital banking, ensuring a strong differentiation from pure technology providers, neobanks, and incumbents undergoing digital transformation. Going forward, Unicredit will be able to leverage Vodeno's technology and talent to further develop this now proprietary technology and use it as a sandbox for a number of technology innovations. We can use ION to profitably and quickly enter targeted client segments or entire markets across Europe, providing additional opportunities to deploy our excess capital. This is our third route. Boden and ION will continue to target embedded finance services to marketplaces, e-commerce, retailers, travel, healthcare, and education platform, and banking as a service for selected fintechs. We aim to start with a project on Poland, considering the significant level of synergies with our other European markets and the credibility and experience of of the Vodeno iron management team in the area. We will come back to you with further detail once the project is fully fledged. We're investing 370 million in cash for 100% of Vodeno iron, with an expected impact on our city one of circa 15 basis points. The P&L impact of the consolidation will be dependent on the level and speed of additional investment that we make to develop this technology and these franchises, and we will communicate it to you in due course. We expect to close by year end, subject to regulatory approval. I may add, we have no intention of integrating Vodeno Iron. They will be like our 14th bank, providing us with selective technology and organic growth opportunity through startups in various market and marketplaces. I will now provide you with an update on Russia. Our strategy has been clear since day one, working towards an orderly, solvent, wind-down as quickly as possible, always without both the letter and the spirit of a complex legal, regulatory, and sanction limitation. At each and every step, we have held true to our values, determined to do right by our principles and reputation, even if capitulating to pressure would have been the easier path at the time. We remain determined not to take action but that breaching local laws and regulation provide Russia with a justified motive to intervene and take control of our local asset and the value that comes with it. Facts speak to themselves. We have significantly reduced our activities since the first quarter of 22, particularly those not related to Western companies. Cross-border exposure is down 93% from $4.5 billion to $300 million, while minimizing our loss to 11% of principal. Local loans are down 68% from $7.3 billion to $2.3 billion. Local deposits are down 69% from $8.3 billion to $2.6 billion. And cross-border payments are down 56% from $25 billion to to 11.2 billion. I remind that as all of our economies continue to purchase selective materials from Russia, those materials go through the payment system of three banks. In doing so, we have also absorbed the drag on our growth and profitability. And more importantly, we reduce the capital impact of a full write-down of Russia from circa 130 basis points on a 14% CT1 to circa 50 basis points on a 16.2% CT1, transforming it from very significant to non-substantial. Looking ahead, our ultimate goal is clear and unwavering, and we believe fully consistent with the expectation of our regulator. We will continue to drive down our exposure to Russia, and are continuing as we speak. Our existing plan foresees the following targets for 2025. Cross-border exposure, practically nil, with 100% reduction. Local loans, below $1 billion, with an 85% reduction. Local deposit, below $2 billion, with an excess of 75% reduction. Cross-border payment to $8.5 billion, with more than a 66% reduction. Recently, we were advised that a straightforward implementation of recent instruction by the ECB may be inconsistent with our legal framework in certain areas or conflicting with our duties. Given the seriousness of the potential consequences involved, we have sought legal clarity from the European Court of Justice to protect Unicredit from unnecessary risks. including potentially providing Russia with a justified motive to intervene and take control of our local asset and the value that comes with them. We welcome the ECB's recent openness to further clarify their request ahead of any ruling and remain open to withdraw our request to the ECJ should their clarification provide us with the necessary legal comfort. Should it be necessary for the proceeding to continue, we consider an institutional win any ECG ruling, regardless of the outcome, as we would have confirmed the legality of the paths we have been ordered and the rule of law in all of our actions. Let's move to guidance. This strong start to the year allows us to increase our net revenue guidance to over $23 billion from circa $22.5 billion. This is thanks to strong performance across all revenue lines and higher expectation for the full year skewed more towards net interest income. Our operational and capital efficiency results are also ahead of plan as we have front-loaded a number of initiatives. We have chosen not to upgrade our net profit and return on tangible guidance at this time as we retain flexibility to further support our future performance as we have done every year. However, I want to be clear. Putting aside that flexibility, our underlying performance is sent to substantially exceed, or in other words, blow out our net profit and return on tangible guidance. This is the same conservative approach we have taken so far. Our 2025 and 2026 ambition remains steady and confirmed. We're well positioned to continue our trajectory of sustainable, profitable growth and outsized distribution. And it is this sustainability of high growth and high profitability and high distribution that provides the value of Unicredit. In conclusion, we have again demonstrated the effectiveness of our Unicredit Unlock strategy. Our metrics of growth, efficiency, capital generation, profitability, and distribution set a benchmark for our industry. We have moved from a restructuring story to a blue-chip bank with superior growth and distribution prospects. We face the future with the same strategy, shifting our emphasis from our efficiency KPIs which we shall defend to our top line quality growth KPIs. We have leading profitability and distribution, strong line of defense, and more than 6.5 billion of excess capital that protect or further propels our profitability and distribution depending on the opportunity. We have plenty of runway and are excited to show what we can do when rates and cost of risk normalize. The team has demonstrated again and again their ability to come through, and they continue to surprise even me. I would not want to bet against them. Both our price-to-earnings and price-to-distribution multiples remain at a substantial discount to not only top peers, but also to the broader sector, particularly when considering our fundamentals and the comfort provided by our line of defense and excess capital. We offer a unique investment opportunity at an attractive entry point. Thank you all, and we shall open for questions.