Banca Monte dei Paschi di Siena S.p.A. (BMPS) Earnings Call Transcript & Summary

Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the MPS Group Full Year 2020 Results Conference Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Guido Bastianini, Chief Executive Officer and General Manager of MPS. Please go ahead, sir.

Thank you. Good morning, everybody. I'm here with our CFO, Giuseppe Sica. Welcome to Monte dei Paschi 2020 End of the Year Earnings Call. I would like to start with a quick overview of the key highlights and achievement of the bank during the year. I'm on Slide 2. Since the break of the COVID-19, we have focused on protecting our colleagues and clients and on doing our part in sustaining the economy. We launched the initiatives of our own and promptly rolled out the government's financial relief measures, granting an overall support to the economy, families and corporates for EUR 23 billion, especially in the form of moratoria and guaranteed loans. More on this later. From a commercial point of view, our network has once again shown great results. Our wealth management flows were stable versus 2019. Commercial direct funding increased by 17% year-on-year. One of the key drivers for sustainable profitability is, of course, cost discipline, a further 3.7% reduction in cost was achieved during the year. About derisking, 2020 was the year of our days in transaction with AMCO, the so-called Hydra deal. The transaction was successfully completed according to plan. We now have one of the lowest NPE ratio in Italy with a gross NPE ratio at 4.2%, or if you use EBA definition, 3.4%. Only last year, our gross NPE ratio was about 12%. The bank's liquidity position has further improved, also thanks to an EUR 11 million increase in commercial debt funding mentioned above, and that testifies to customers' solid confidence in Banca Monte dei Paschi. Our capital ratios, despite the hit from the AMCO derisking transaction, are better than we expected, thanks to some capital management actions put in place. Before we discuss these matters in detail, you can find on Slide 3 a few highlights of our year's results. 2020 closed with a pre-provision profit of EUR 714 million. Net income, while down on the commercial component, was mainly affected by higher record to institutional funding, among the other things, to eliminate reliance on government-guaranteed bonds and to finance the restructuring actions implemented in 2019 and 2020, including the disposal of NPEs. Fees show after the spring lockdown positive results, both on the wealth management component and on traditional banking fees. Fees represent about 50% of total revenues, among the highest levels in Italy, also thanks to our strong product customers. Costs remain under strict control with more benefit of actions realized in 2020 expected in 2021. Cost of the risk is 90 bps, including pandemic-related provisions for about EUR 350 million booked in 2020. Without this additional component, the cost of risk would be around 48 bps. We'd also like to remind that we took a hit to our equity of EUR 0.9 billion from Hydra deals, and this is on top of our ordinary cost of risk. Net operating result is negative by about EUR 40 million, also impacted by the COVID-related provisions and lower level of productivity. Net result is negative for EUR 1.7 billion due to nonoperating costs for an overall amount of EUR 1.3 billion, including around EUR 1 billion of provisions for risk and charges and EUR 154 million restructuring charges related to Hydra and employees exiting November 2020. And I would like also to remind you that we wrote down previously recorded DTAs of EUR 0.3 billion. As mentioned, the gross NPE ratio stands at 4.3% or 3.4% according to the new EBA definition, one of the lowest levels in Italy. And finally, as to capital and liquidity, all indicators remain well above regulatory requirements with transitional CET1 ratio at 12.1% and total capital ratio at 15.7%, above the numbers we would have expected just a few weeks ago. Liquidity coverage ratio is above 150%. Net stable funding ratio is above 100%. Unencumbered counterbalancing capacity exceeds EUR 33 billion versus EUR 25 billion last year, thanks again to very good direct funding flows and to TLTRO III financing. Now please let's turn to Slide 4. We have, ever since the break of the pandemic, continuously worked to help our customers minimize the financial strain of this very difficult months. Thanks to our proactive approach and to dedicated task force and well-run processes, until now, we have suspended the repayment on loans for about EUR 12 billion and have extended the validity of lines of credit and advances for more than EUR 3.3 billion. We accepted applications for EUR 8.1 billion of new guaranteed loans, EUR 2 billion more than in September, thanks to a well-established operational and commercial machine. Applications received by Monte dei Paschi represent about 5%, 6% of the total system requests for moratoria and guaranteed loans. As you know, you would be focused on this, in the last 3 months of the year, close to quarter of our moratoria had expired and have not been renewed. Slide 5. As you can see, wealth management and commercial flows have performed well, maintaining or even increasing last year's performance despite the 2 pandemic waves of 2020. We believe the development of direct and indirect funding are good processes, together with our focus on measures to support the economy of the strength of our commercial network. January 2021 figures show a further increase in wealth management flows. While on deposit, the bank is now rationalizing its exposure to more expensive customers. Moving to Widiba in the Slide 6. As already noted in the previous 2 quarters, Widiba's business model was particularly effective this year with more and more people seeking online services. So in 2020, Widiba achieved 7x the net flows it has seen in 2019 and recorded a double-digit growth on our main business and platform usage indicators, all this without losing sight of the innovation plan. And please now on Slide 7, we show some details on cost. Operating cost has decreased by close to 4% year-on-year. As you can see, the reduction has been mainly driven by other administrative expenses. However, we expect more benefit on the cost of personnel from exits, which, as you know, have happened only in the last part of 2020. We intend to build on our strong cost containment track record to further increase efficiency, thanks to the rationalization of our footprint and the reorganization of our workforce. Slide 8. The recent Hydra transaction was the final steps of a long derisking process. Our gross NPE ratio at the end of December is 4.3%, down from 12% in 2019. Also very important is the quality of the remaining impaired loan portfolio, which is mostly composed of low vintage UTPs. Finally, now the most of our nonperforming stock has successfully been disposed of. We have already redeployed the resources to act an even more proactive management of the COVID-19 loan portfolio in order to keep our credit quality strictly under control. As you have seen, first results have started to come through in terms of reduction of moratoria in Q4. And now funding and liquidity. Our loan deposit ratio is now below 80%. Apart from the strength of our liquidity, this also points to strong potential of future redeployment of customer deposit either switching more and more to wealth management or by tentatively using them for prudent lending. These positive commercial dynamics, together with EUR 0.7 billion Tier 2 bond and EUR 1.5 billion senior preferred bond issued between September and December and the take-up of TLTRO III for EUR 24 billion led to a solid liquidity position with, as already mentioned, counterbalancing capacity exceeding EUR 33 billion and full liquidity indicators steadily well above all requirements. And now on Slide 10 where, before I hand over to our CFO Giuseppe Sica, we can take a closer look at capital ratios. CET1 ratio is, of course, down from Q3 with capital and RWAs impacted by completion of the deal with AMCO. The decrease is lower than we have anticipated, and this is thanks to actions put in place to reduce risk-weighted assets. Importantly, as you will recall, our Pillar 2 requirements for 2021 was reduced by 25 basis points, another positive consequence of the significant derisking process completed in last December. And now Giuseppe, please go on.

Thank you, Guido, and good morning, everybody. Let me now give more details on our numbers, focusing first on yearly evolution on Slide 12. As expected, core revenues were down, mainly due to the cost of institutional bonds used to refinance GGBs and the Tier 2 bonds issued in compliance with the restructuring plan to finance our Hydra transaction. The overall impact of this measure on net interest income is in excess of EUR 120 million. Approximately EUR 50 million can be traced back to lost interest on UTPs, which is a consequence of our derisking. And as most Italian banks, we have significant cost for excess liquidity deposited with ECB. This is due to the substantial deposit inflows, which we witnessed this year and on which we have started to act. Fees and commissions, on the other hand, despite everything held their ground, decreasing only marginally from 2019 year-end, and we see this as a positive result boding well for the future. This year, we had lower commission expenses for GGBs, particularly, we have had much lower fees for distribution of consumer finance products. As you know, we are working to revamp our consumer finance franchise, and GGBs are not coming back. Financial revenues are stable year-on-year once we discount the impact of the Sorgenia and Tirreno Power debt restructuring, which has boosted the 2019 numbers. The management of operating costs was already illustrated by Guido. But as you know, we expect more for the actions already undertaken in 4Q on personnel expenses. And for the bank's net operating result before nonoperating expenses, this only is slightly negative and, in fact, would be aligned to 2019 results if we were to discount macro-related provisions this year and the Sorgenia, Tirreno bill in 2019. As you know, the unwinding of Juliet also had an impact on 2019 results. I will comment on nonoperating items in a moment. Let me now turn to net interest income on Slide 13. In the bottom-right corner of the slide, you can see a detailed breakdown of the quarterly evolution of net interest income. Here, I would like to stress that the commercial component is practically stable. In fact, the EUR 4 million reduction from EUR 339 million to EUR 335 million is fully explained by the Hydra transaction. As I mentioned on the previous slide, most of the quarter-on-quarter decrease is due to the cost of institutional bonds issued in the last part of the year, mainly the Tier 2 issue to support the Hydra transaction. The compression of asset spreads was countered with some success by shifting our commercial funding towards less expensive current accounts. This is a space where we have started to act and continue to act aggressively. Due to the history of the bank that you know well, our market share in time deposits is well in excess of our natural market share, and so we have a lot to do there. Now briefly on commission in Slide 14. 4Q was the strongest quarter over the last 2 years despite below-average consumer finance contribution, as I mentioned before. Fees and commissions record a 7% quarterly increase, a 2.5% increase from 4Q '19 and a 7% increase -- 17% increase from the post-lockdown second quarter low point. The performance is driven by both wealth management and traditional banking fees. Now very quickly to Slide 15. In 4Q, dividends and profits on investment benefited from an increased contribution from our AXA JV, which is, by the way, the highest contribution of the year. The key difference versus previous quarter was the lack of contribution from bond disposals on which, however, we still have more -- a lot to do in the future, thanks to the current rate and spread environment, and I will comment on this in a moment. On Slide 16, Guido has already pointed to an excellent result of the bank's cost containment policies in 2020. On a quarterly basis, operating expenses showed a 5.2% increase, mainly for the typical end-of-year seasonality of other administrative costs and marginally for one-off personnel expenses, mainly severance payments for former employees of our London branch. Upcoming quarters should benefit from the 560 Solidarity Fund exit in 4Q regardless of any upcoming new initiative. We consider the results of other administrative expenses, which are affected here by strong seasonality gain, as satisfactory. As you heard from Guido, other admin expenses were down 6.3% year-on-year. Moving quickly to the cost of risk on Slide 17. In Q4, we booked additional EUR 48 million for the update of the post-pandemic macro scenario. So that adds up to EUR 348 million extra provisions booked in the year for COVID, which brings our end-of-year cost of risk to 90 basis points. Net of this pandemic adjustments, cost of risk would be 48 basis points. We haven't as yet seen signs of loan portfolio deterioration or stress on liquidity, but we feel the additional provisions taken this year, together with the EUR 1 billion Hydra impact on equity, put us in a good position, at least from a relative point of view. Coverage reflects the modified composition of our nonperforming portfolio. With increased bad loans coverage, UTP coverage has gone down mainly as a consequence of the very low vintage plus massive Hydra disposals. On Slide 18, this shows our asset quality migration metrics and the main indicators of credit quality. As I said, we have not seen at the moment any particular sign of deterioration in our loan portfolio. The 3 comments I would make on this slide are: number one, about 70% of past due and are likely to pay loans, which migrated to bad loans in 2020 -- in 4Q 2020, were transferred to AMCO with the Hydra transaction; number two, the slight increase in NPE inflows from -- compared to third quarter also derived from a bottom-up review of the loans under public support, which we have done following or anticipating indications from regulators; number three, post-Hydra, several resources will be freed up, act on cash recoveries, although forward is now a lot stock and management of loans under public support. Now Slide 19 on nonoperating items. This include a EUR 19 million top up to the annual contribution to Deposit Guarantee Scheme, the EUR 18 million quarterly DTA fee, additional EUR 23 million cost connected with the AMCO transaction and profit for around EUR 40 million coming from the disposal of properties to Ardian. They also include EUR 216 million additional provisions prudentially booked against risks and charges. Let me spend some word on these additional provisions. While we do not disclose details, this includes significant provisions for record warranties we have granted in the context of the Hydra transaction and are already a significant proportion of the cap. We have, of course, not received any claim, and this is, in our mind, a very conservative approach. At the same time, we have released some of the provisions we have taken on Valentine and hope there will be more in the future. The provision for risk and charges include some tail requests related to financial disclosure on which we now see signs of stabilization. Provision so far have proven conservative. And in our out-of-core transaction, we have been able to release provisions. The tax line includes a limited reassessment of DTA carried out in the quarter due to time value only. However, we have not taken what would have been a significant DTA recovery, driven by the draft 2021/2025 business plan as this is still being negotiated with DG Comp. I now move to balance sheet figures. Slide 20, this shows the key trends on our loan evolution. First, the decrease in total amount is essentially due to the deconsolidation of the Hydra NPE portfolio. Second, there is a slight increase in medium- and long-term loans, which is essentially due to the disbursements connected to public support measures. As you see, new medium- and long-term loans have increased, for instance, versus 4Q '19 or 1Q '20, which is, however, skewed towards low RWA absorbing assets for the reasons I explained. Slide 21. The key messages regarding our direct funding and liquidity have already been discussed. So here, I will only draw your attention to current accounts and time deposits have grown 17% year-on-year, which is well above system average. We see this a clear upside for the future given: a, the possible reach from direct to indirect with impact on commission; and b, reduction of more expensive current accounts and time deposits, which, at the moment, we are depositing at negative rates with ECB. We have already started to take actions in this direction. On Slide 22. Assets under management are up in Q4. We are now 11% above our Q2 figure and enter 2021 with positive momentum as you can see also from our flows in the top right chart. Our market shares in bancassurance, both savings and protection and mutual funds, are well above our market share on deposits, which is below 4%, as you have seen on Page 21. Finally, apart from the switch from strong deposit flows to indirect funding, we can do more in terms of which from assets under custody to assets under management. On Slide 23, you have more details on capital. We have carefully managed our capital evolution. Excluding Hydra's transaction and what we consider mainly nonrecurring nonoperating items, we would have generated 90 basis points of capital in the quarter, which is still affected by COVID. And finally, before I open to Q&A, on to Slide 24 on our BTP portfolio. This has been an area of focus in the past and part of our commitments with DG Comp. Key messages and positive messages for me are, first of all, the portfolio has significantly shrunk in year-on-year, continuing a long-term trend. Duration is now just above 2 years, I believe, at the very bottom of the industry. As a result, the sensitivity per basis point in the BTP-Bund spread has plummeted from around EUR 9 million in 2016 to around EUR 1 million at the end of 2020 and has gone down by around 50% year-on-year. Finally, at the end of the year, our portfolio recorded unrealized capital gain for around EUR 400 million not recorded in our capital base and which we may take action. Now thank you for your attention, and let me open the floor to questions.

[Operator Instructions] The first question is from Jean Neuez with Goldman Sachs.

I just wanted to ask you 3 quick questions. The first one is on your pre-provision profits. So there has been a lot of moving parts over time, in particular with NII, et cetera, and the consolidation of the loans that will lead to lower yield in absolute terms. I just wanted to understand if you could guide us to a certain amount of pre-provision profit going into 2021, like a quarterly run rate or something that you think you're comfortable with acting as a flow on pre-provision profit from here? The second thing I wanted to ask is one of your slides is that there have been 25 bps reduction in your swap. And I wanted to understand whether this was -- whether you saw that this included the derisking or whether there is more to come because of the derisking that happened in December. And lastly, I wanted to ask about one-off costs or restructuring charges, et cetera, for 2021. I had -- I think that there is an important restructuring charge for -- to be booked, but I just wanted to understand the timing.

Pre-provisions, as you know, we have a business plan on our website on which I would not comment in detail out of respect for DG Competition. But the figures you find there, I think, may, in fact, be behaving some surprise even on the upside given that, for instance, on net interest margin, we have not included the potential effects of TLTRO IV. On the timing of the restructuring charge, in the figures that you see on our website, we had assumed impacts coming in from Q3. So with the negotiation happening in the very short term with the unions, there may be some delay to that given the timing of potential capital strengthening.

Okay. And what about the SREP?

The SREP was published after the closing of the Hydra transaction. So it's a fair assumption to say that this already includes, at least partially, the benefit of the Hydra transaction. This, of course, does not mean that, that cannot be more in the future.

Okay. So you could argue, it's a small reduction compared to the size of the derisking?

Yes, we can argue that. On the other hand, we are in a COVID world still.

The next question is from Hugo Cruz with KBW.

So a few questions. First, can you comment on NII trends for 2021, both assets and liabilities and volumes? Second, if you could remind us of the capital headwinds and tailwinds you expect as well for 2021 before any capital raise? Third, with regards to the capital raise, can you confirm whether you have any intention to issue a Tier 1 or Tier 2 as part of that plan? And fourth, if you have any comments around the ECB stress test, in particular, if you have any estimate already for your CET1 ratio in the adverse scenario.

I think on the NII trends, I think I'll probably repeat a bit the comment, which I made before on our business plan, which is out there. But I think the few points to highlight are: number one, as I said, we see -- well, actually, we have observed already stabilization in commercial NII. So that's the first positive thing. The second is we will have to launch our consumer finance project in the course of the year, which will support NII. And as I said, we have not included benefit from TLTRO IV in the figures of the business plan we are discussing with DG Comp. So these are the positive aspects, together with the action which I mentioned, especially on corporate and time deposits, which I think should have a positive impact of NII if we are successful. We paid this year around EUR 40 million, EUR 50 million for depositing with ECB. On the negative side, we will have to strengthen our MREL ratios, and this will have an impact on noncommercial NII. Of course, these negative impacts are included in the numbers you find on our presentation. On capital headwinds, I'll give you the key highlights here. Number one, of course, you have IFRS 9 phasing in. There may be -- and this was in our estimates, although, as I said, we have not observed it yet, assume the deterioration in the PD, which would have an impact on our risk-weighted assets. And you probably have seen our risk-weighted assets have come down or are below EUR 3 billion below what we had assumed at the end of the year and is also partially because we have not seen a deterioration in PD partially, probably for around the third. And then, of course, there is an ongoing dialogue with the authorities on the revisions of our models. At the moment, we do not have a timing for the outcome of that revision. Certainly, discussions are ongoing. We have guided the market towards a certain increase in our EBA from those models. I think we can confirm that the numbers probably a bit more, but we will have to see in the next few quarters may even not come this year. So the discussions are open. On the EBA stress test, no, we don't have figures that we can share at the moment. Clearly, you have seen the assumptions, which are quite punitive but are punitive for the entire banking system. The one comment that I would make is that if you look at the macro assumptions in our plan, they are very much aligned to the EBA base case. So that's the positive news for us. And finally, on subordinated bonds, we have issued a press release 2 days ago saying we do not have subordinated bonds under consideration at the moment.

The next question is from Corinne Cunningham with Autonomous.

A couple of questions. Just following up on what you were saying there on the sub debt. So the capital raise of EUR 2 billion to EUR 2.5 billion, I think you've now settled at the EUR 2.5 billion. Can you give the split of that between equity and Tier 1? Or is that yet to be decided?