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

Good afternoon and welcome to the last fireside chat of the European Financials Conference. I am joined here on stage today by Mr. Luigi Lovaglio, CEO of Banca Monte Paschi. Thank you very much for joining us.

Thank you for having me.

As you already know, we're going to begin asking you a question. So if you look at the screen, you will see we want to know what you think is the most important benefit that Mediobanca could bring to Banca Monte Paschi. The first option is revenue diversification; the second option is acquisition of complementary product factories; the third, cost and funding synergies; and the fourth, acceleration of DTAs. [Voting]

Okay. Fourth, acceleration of DTAs with 47%, that is the majority.

With that in mind, we will get into this. But I want to start with the beginning before we get into M&A, the story of Monte Paschi. You've had quite an evolution, and you've come a long way in terms of profitability improvement. So I want to understand. What are your views from now on? What is -- what do you think is exciting about Monte Paschi's story at this moment?

So thank you. Thank you, first of all, for inviting me here and for the question as well. I think it was really an exciting period of time because I remember I was here -- not here but in London 3 years ago, right, asking support for an increase of capital. It was a difficult period of time. And now I'm here just to ask support for a transformational deal like the one on Monte Paschi -- Mediobanca and Monte Paschi. Honestly, I believe the strength of Monte Paschi that always was there is the network. And so when you speak about a business that has to go more and more towards fee-based business line, right, it's clear that the network is the one that is giving you the comfort about your future, right? And the network of Monte Paschi is really a great network with -- and has been proven by what happened in the last 10 years, right? So the future is brilliant because I believe that the network will have the capability to generate additional value for all our stakeholders. And clearly, consistently with what has been set in our business plan in August '24, also the transaction, the deal that we launched in January with Mediobanca is going in the same direction.

Okay. You were talking about your push for fees now. It's a capital-light type of strategy. But let's first begin with the NII trajectory because Banca Monte Paschi is a rate-sensitive bank like many Italian peers, and you've benefited a lot from the rate increases in the past years, really pushing earnings and profitability as well. Now we're going into monetary easing. Can you walk us through how you're thinking about NII progression against that backdrop?

So at the beginning of the year, we gave a guideline to have a decrease of net interest income, as was the one that in a conservative way, we said one high digit, right? We feel comfortable to confirm this direction even if, as usual, we like to be quite prudent in our guidelines. But clearly, the other important message and guidelines we gave is that we believe that at the end, the pretax profit will be very similar, at least at the level of last year. It means that we will have a nice remuneration for our shareholders. As you know, in May, we are going to make a distribution of more than EUR 1 billion dividend. So having the level of pretax profit at least the level of last year, it is clear that this is also a good indication for our shareholders. Clearly, the trend on net interest income will depend on the capability to negotiate with our customer and a trade-off between volumes growth and price. Always, I think it's important to wait what is going to happen in the first quarter because clearly, once that we are going to check the capability of negotiating the proper way, this trade-off will be much more precise about the guidelines in terms of net interest income. What makes us very comfortable is that the strength of our network will enable us, for sure, to reach and to offset part of the gap that we are going to have in net interest income with fees and commission. It is something on which really we feel comfortable.

Can you remind us how you manage interest rate sensitivity on NII? What's your hedging strategy?

Normally, we are -- as the structure of our asset liability, we are almost naturally hedged. Clearly, if we see what is going practically to happen in terms of sales of mortgages, most of the mortgages are fixed rate. So we try to manage liabilities with a sort of floating rate more or less.

On the liability side, the deposit and the deposit franchise, how are you seeing trends now that we're going into monetary easing?

No, we see practically clearly a bit of tension because there is a huge competition in terms of keeping deposits. For us, deposits are strategic because clearly, we plan to have an important growth in terms of flow of asset management. And normally, we want to keep always a good base of deposit from the conversion activity that is quite intensive. In the last quarter, I think we reached an important level of collection in terms of gross flow for asset management. Clearly, deposit for us is crucial. The price as well. And I have to say that up to now, we feel comfortable with the plan we put in place, the guidelines that we gave.

You mentioned fees offsetting the pressures on NII. In the business plan, particularly the asset management, the wealth management and the protection businesses are expected to drive much of that growth. Can you tell us what are the drivers or what are the catalysts that you're expecting to boost that growth from now on?

No, fees and commission are crucial. It's clear that the overall business model. The banking business model should more and more be focused on fee-based business, right? And normally, if you want to increase the fee, you need to put in place action not only on one side, right? I mean you need to have more people dealing with customer to know much better the customer. You need to have also distribution enlargement. And that was -- all this kind of action were the action we put in place with our business plan. I mean focusing on customers that are normally are generating more revenues was this idea, behind the idea to create a new cluster of customer, a sort of upper affluent because according to our estimation, they are the customers that are generating higher revenues compared to the other. We want to improve our capability in dealing with customers without some remote activity and so investing in much more technology on that. And last but not least, we plan also to increase significantly the personal financial advisers that are in our challenger bank that's Widiba. So all action to focus particularly on asset management and wealth management products. And I have to say that we are quite confident that we will be successful.

With all of that happening, you are expecting to end the year with a CET1 ratio above 18.5%. Now let's talk about the optionality that, that gives you. And therefore, let's tackle that question. Part of that excess capital could be used for the offer on Mediobanca. Now can you tell us in detail what you're expecting Mediobanca could bring for Monte Paschi?

No, the initiative on Mediobanca is consistent with our business plan. So we were saying we have free capital. And I was always mentioning to investors that our idea about free capital was to look for product factories because we think that it is important to enlarge the potential of the group in terms of revenue generation. So November, I think considering what UniCredito did, what was expected to be done by BPER, this opportunity of Mediobanca was for us a clear evolution of the strategy because at the same time, practically, we can have a consumer lending product factory. We will enlarge significantly the distribution because we combined Mediobanca Premier, a fantastic brand, with our Widiba that is a challenger bank with an excellent platform because it's a front end that is state of the art. So you are going to have a combination with more than 1,200 personal financial adviser, more than 500 bankers, if I remember well, almost EUR 45 billion of assets. And from this kind of scale, you can compete easily on the market. So consistent with the plan, we are extending, enlarging the distribution power of the group. Then there is this other important part that is Compass, right, excellent consumer lending factories. We were already investing in our platform. Clearly, if we combine, we can attach to Compass 1,300 branches, 3 million customers and developing, I think, quite important program for consumer lending being the #3 player in Italy. And I believe that Compass serve also to explore external other market. And I'm thinking also that maybe abroad, we can export this capability. And then there is what we believe is really important for overall the development and the growth and the value creation, is the part of investment banking, wealth management, Mediobanca. And I think it's important really to underline that we want to add value to this part that for us is -- has enormous value in terms of brand, in terms of people that are there, in terms of history. This is the real, according to me, Mediobanca. And so I enjoy that also listening what the management of Mediobanca was mentioning a few days ago, they were saying that customer and employees, they would like to be focused on what they call PIB. So private investment bank, I think, is -- and this is exactly what we believe Mediobanca should be focused. And thanks to this focus, clearly, we will enrich the overall structure of revenues. I think we will be one of the key player on domestic market, combining the capability, the excellent capability of the people, of the management and the team that is there in the so-called PIB with the balance sheet of Monte Paschi. So full-fledged service for our customer and will be crucial for us that this part of the business will keep growing, creating value because it's complementary to our part of business that is much more retail oriented.

So your argument is this is complementary, and you do present revenue synergies. You did present with the offer. Have you considered the risk of revenue attrition, particularly when we think about the wealth management and the investment banking franchise at Mediobanca?

Clearly, all combination, I think you have -- normally when you have 2 commercial banks, you have significant risk of dissynergies, let's call it this way, because you have loans given to the same customers. So normally, you don't like concentration on risk. We have bank branches that are -- will be closed. The IT system, you have to decide which 1 of the 2 IT system will be used. So normally, you have a period where dissynergy are really there. I believe that the dissynergies on the -- in our case will be minimal. Anyway, we will try to manage in the best way. Clearly, we will put a lot of attention to the customer and to the people and to the management and to the team of this part that I think we can classify in this PIB, just to make everything clear, through communication, through retention, to incentive because really what we want to do is to develop this kind of business. And we want to keep attract talents because we strongly believe that the potential of Mediobanca part that of the business I was mentioning is significant and can be really an important player on domestic market. Then attrition should be managed. I have to say that if we look, what happened in the last recent years, I don't remember significant attrition from bankers that left in the last years in Mediobanca. So I mean the brand is so strong. The tradition is so strong. The history is so strong. Everybody will be very proud to keep working in this institution, especially if you will find in this combination the will to keep, to be focused and to grow in what really I believe is the real strength of Mediobanca: brand, people, history and capabilities.

So part of the appeal for you is also the wealth management proposition after that potential acquisition. Now my question is, how are you thinking about the client fit? And what is your vision for that combined business moving forward?

No, I think we have to clarify about this. Combined doesn't mean to mix. Combined means to take the best in terms of know-how, competencies, customers, people and try to increase the value that this combination can generate, right? Mediobanca has excellent private banking activity. And the idea is to transfer this kind of know-how also on the part of the private banking customer of Monte Paschi. If I remember well, they have 140, 150 private bankers. And it's clear that we want to invest in this part of the business that is the core business of Mediobanca, making a sort of distinctive approach towards this cluster of customers with the contribution of part of the customers that are also Monte Paschi. So the idea should be something that should be clear. We want -- we have really a simple, single, unique ambition to build up a competitive force that will be the #3 -- top 3 in Italy, in the Italian market with strong know-how, competencies and specialization, but just for the benefit of all our stakeholders.

And what about the Generali stake that Mediobanca has? Because for Mediobanca, it is part of as well the revenue story and the revenue resilience argument. What do -- how are you thinking about that stake if you end up buying Mediobanca?

If you think -- I answered probably with my sentence. Really, the ambition is to build up the third competitive force in the Italian banking sector. So Generali is providing a nice flow on uncorrelated profitability. Nice to have, but it's not crucial for the potential that we want to explore in making this deal. So nice to have the relative contribution on the total will be much lower than what is today. Moreover, Generali offer also some optionality for the future in terms of cooperation. And I believe it's nice to have, but for us, what matters really is the remaining part of the business on which we plan to invest in order to build up what I mentioned, the competitive force in the Italian landscape.

And what's your view for the protection business that's embedded in your business plan if maybe you are not thinking about Generali being part of the group?

No, I'm not saying that it's not. I'm just saying that my dependency -- the dependency on the group of Generali will be much lower, extremely much lower because it will be -- while today Generali contribution to the profit of Mediobanca, if I remember, is 40%; on the other scenario, it will be much lower, will be 16%, 15%, I don't know, something like that. So I think in the context, right, of what we are building up to spend much more time in speaking about Generali and then to speak about more than 80% of the remaining part of the business gives a different representation of what is this deal. This deal is to set up a competitive fourth that will be the third one in terms of asset deposit in Italy with a strong capital base, a strong sustainability, significant remuneration of our shareholders because we will have a capital generation that is going above the net profit, and this is something that is very important. We will have the capability to distribute 100% of the profit while keeping a capital that is around 16%. That means that we are not losing what we have today, as a stand-alone, the opportunity to further remunerate our investor from industrial point of view and from financial point of view. So what will be tomorrow is something that is what we have today plus. And I think there is value creation for all the shareholders, the one on Monte Paschi and the one on Mediobanca. And we can be, for the future, also a good example of transformation on the way how we are banking because through Widiba and Mediobanca Premier, we will really have a significant portion of business going through distribution. We will have a strong, powerful retail part of the business, excellent consumer loan players, as I said, also for going abroad and Mediobanca PIB, let's put it this way, that will really generate additional value not only for the group but I believe also for the Italian economy.

You've talked about your capability to distribute capital to shareholders and go above the current payout up to 100%. Precisely, what you're saying is you're going to generate more capital than net income because of the DTAs. And that's when we start talking about the polling question. The audience believes that, that is an appeal that the deal brings to the table. That's also one of the things that you presented when you first presented the offer for Mediobanca. My question is, are there any risks to the usage in full extent of the DTAs? And in particular, if I may, last year, we heard the government talking about the possibility of introducing temporary delays to the usage of the DTAs. How could that change the picture in your plan?

No, I see very low risk, absolutely very low risk. If we do the transaction from the first consolidated balance sheet, we can immediately write up EUR 1.5 billion. We will have EUR 2.9 billion gross. It means EUR 2 billion net present value of DTAs. And when we speak, let's put in this way, synergies, you can have that disruption of revenues or thinking that it takes a bit of time in getting synergies in terms of cost, in terms of funding. But the DTAs is cash from the first day. It's cash that is going above net profit. So through DTAs, we will ensure 100% payout, keeping 16% capital. That means listening what I heard already from this conference that somebody is setting 13% ideally level of CET1. So we will have a huge amount of free capital, and we will be very capable to remunerate all our shareholders by far from what I think other institution can do, right, with this situation. That's why DTAs for Mediobanca -- for Monte Paschi shareholders is something important, but they will have the opportunity to cash in and to accelerate it compared to the previous situation, stand-alone. And for Mediobanca, this is an additional contribution to the premium that we already provide through shares.

You say that the pro forma CET1 that you would expect is around 16%. With the DTAs, you will be able to distribute 100% of the net profit and still accumulate more and more capital. So how are you thinking about the ideal target capital level that you want to operate?

I think we stick at least as management to the level of 14% because I believe it's better to be conservative than -- at this stage. But clearly, it's something that we can also reconsider. But even with 14%, we will have free capital, and free capital that can be utilized for industrial project and also for financial and from -- point of view, right? So a fantastic optionality. When you have capital, you have a nice profit, you can pay 100% dividend and you have in front of you the possibility to make a program that is a combination, joining forces with a dedicated business line, fantastic brand, Mediobanca, Monte Paschi. This project is a balanced project because we are preserving the dimension, the size. So nobody will prevail on the other. And this is, I believe, a key factor to motivate people, right? On the top of that, practically, we are -- we have the possibility to reward our people. It's a project that is also focused. Not as normal are the combination of 2 commercial banks in reducing significantly the staff. In this case, it's nice to say and I'm really happy that we can do and we can be focused on, we will look at the top line because I believe that the future of the banking sector should not be anymore in discussing incremental minus 3%, minus 4%, plus 2%, plus 1% but should be to generate the top line through additional way of making business, reinforcing distribution and looking for different revenue stream. That I believe is the future, and this project is looking in this dimension. It's one of the few projects where -- is that you merge 2 institutions and you keep 1 CEOs instead of one. So I think it's a very nice project.

We've discussed the option for Mediobanca, your offer on Mediobanca. But maybe we can talk a little bit more in general about what's happening in the broader Italian banking space. There are a lot of deals currently on the table. How are you seeing the industry in general? Are there further opportunities for consolidation? How do you see Banca Monte Paschi further maybe playing in that scenario or in that standard? Do you think you will have more or another role in this?

No, I think I was mentioning, I think, since 1 year at least that size matters. But size should be in the -- a concept of size should be utilized in a clever way. The size matter, but customers are important. So you should have a strong grip on customer, both sides, collecting deposits but also granting money, especially on the small and medium company. So that's why we have to come back to this concept of banking that is close to customer and with the customer and revolving around the customer, as we were mentioning in our business plan. It's different how banks should look like in terms of operational platform, control function, IT system. So we should never lose the grip and the proximity to our customers. So that's why in order to increase the revenues, you should improve your distribution capability. Investing in value-added products in contact with customer, applying different model. It can be fully online, hybrid model and face-to-face, distribution to branch and distribution to personal financial adviser, a fantastic operational machine that will reduce the cost to serve almost to 0 like a fintech, but at the same time, developing relation with customers in order to make them more and more confident about the support that the bank can give. And this, I believe, will be the next 5 years. That's why I don't exclude 2 years from now a further wave of consolidation. And clearly, Monte Paschi positioned together with Mediobanca with such complementary business, strong scale, competencies, 2 fantastic brand on which leverage, I believe, can play an important role also 2 years from now.

So there could be more options out there.

I believe so.

Very clear. Thank you very much. Let's open to questions from the audience. If anyone has anything that they want to ask, please. I can keep on going. Okay. So let's talk about -- again, let's talk about Mediobanca. The synergies that you're envisioning that you presented with the offer, you're talking about something close to 20% of Mediobanca's stand-alone cost base last year. Now how do you see that compared to past transactions? And where specifically do you think you'll be able to extract those synergies from?

No, I think we have to split. There are 2 kinds of synergies. The one that are connected with the non-HR cost, administrative expenses, where I believe just putting together some large contracts that we have, like an example, IBM, Microsoft, whatever, [ Experion ] or [indiscernible] facility management, cleaning companies, whatever activities, right? If you put together, it's clear that the size of the 2 banks will enable significant synergies in terms of coming from the negotiation of contracts, right? Moreover, I think we were just thinking about different investment because if I remember well, in our plan -- the plan of Mediobanca is EUR 75 million per year. In our plan, EUR 100 million per year. So it means altogether, EUR 175 million. Probably we will not invest any more in our consumer lending platform. We want to make some digital projects in order to improve our capability to deal with upper affluent customers. So all these kind of projects, looking at the business plan of Mediobanca, the old one, are very similar to the one on Mediobanca. So probably instead to spend EUR 175 million, we can spend a little bit less. So there will be saving also in terms or to invest this money in something that is even looking further, right, in the future. And moreover, I believe we are going to have some function, central function that will overlap. Compliance officer, maybe it can be 1 instead of 2. Chief Risk Officer as well. Then we can have something in an IT platform, right? So basically something that, according to me, are very conservative. We set around EUR 300 million from outside in. So we don't know exactly the details, but it's something that we feel comfortable. On funding, no doubts because we bring deposits, cheap deposit. And then we reduce also, if I remember well, the need in terms of [ RHEL ]. So I think no discussion. And maybe we were very conservative in fixing EUR 100 million. On revenues, this -- I would like to really not use the word synergies because synergies means that you are extending best practice on the same cluster of customers, while what we are doing, we are enriching the offer with an integrated -- we are integrating the offer for the different cluster of customers. So there is no disruption. I made an example. Corporate customer, we provide advisory service, the people, right, in this area. It's clear that we can provide balance sheet. If today a customer, for example, is asking lending and is not provided by -- several reasons by Mediobanca because it's not something that they believe is in the core or for any reason, we can attach the balance sheet as well to our corporate customers that require advisory services. Mediobanca excellent team can go and provide advisory service to the customer of Compass, Mediobanca Premier by attaching 1,300 branches. Maybe we will enrich the attractiveness of the service provided by personal financial adviser. We can provide daily banking products. So there are a lot of opportunities that will come and will enlarge the business scope. These are not synergy. It's enriching the opportunity on generating revenues. If Compass is going abroad, it is a new market and enriching the space on which we are operating, so are not really synergy. It's opportunities that are coming by joining the efforts.

And what about timing? Can you tell us what should we expect? What are the key next dates that we should be looking for?

So we have on 17th of April, General Meeting of Shareholders of Monte Paschi. Then we expect to have the necessary authorization for end of June. And then we will start the acceptance of the shares. So I believe July -- mid of July, July, we will complete.

I'm going to open up again in case anyone has thought of any questions that they want to ask. Okay. What about going back to Monte Paschi's stand-alone story? Can you tell us a little bit about the trends that you've seen so far in the quarter? How are you seeing the start of the year? And how do you see it progressing 2025?

No, we are quite positive on the performance we are observing. I would like really to stress one point that I think was not too much underlying last year. Last year in Feb, in February 2024, we presented a fantastic balance sheet, historically higher level for Monte Paschi. Thanks also to DTAs, the profit was EUR 2 billion. And at that time, we decided to appoint a Deputy CEO. The Board decided to appoint a Deputy CEO in charge to the commercial activity. And we changed the Head of Retail, Head of Corporate, the Head of Organization, the Head of HR. So normally, if everything goes very well, you don't change management. We changed it just because we wanted to be prepared for a potential new transaction. Having people today, as it is today, fully committed and deliver commercial results because normally, when you have an organization, the CEO is focused on making extraordinary transaction. There is the risk. The tension from a commercial point of view is decreasing. And we keep equipped ourselves. We are well prepared. That's why I'm very confident that the result of the bank will be even much better because I'm outside. So somebody is working for me, and it's performing quite well because we have an excellent network. And this is the power of this bank. And the project is based on a network, a powerful network, historically proven because the people of Monte Paschi gave evidence that they are very close to customer and the customer are very loyal. This is the brand of Monte Paschi. In a very difficult period of time, they kept the customers. They kept deposit and they were increasing the business. And remember that Monte Paschi is an excellent player in terms of bancassurance because it's something the group was already selling 25 years ago. If we combine the power of this network and the performance that every day they are focused on with the exceptional brand of Mediobanca, excellent people of Mediobanca in this area of personal investment banking, and I'm sure the pride to be part of Mediobanca will enable us to keep all the people that are there also because we want to spread even to a lower level the retention program and the incentive program. So everybody will make more profit and will get more bonus, just to make it very simple. And by this combination, really, I strongly believe that the performance overall on Monte Paschi together with the quality of -- and the capability of Mediobanca will really support and create this competitive force in the market. So I believe that also the results we are going to present in May will just confirm what I'm saying.

So precisely the way that you say it, not losing track of the importance of the commercial efforts as well. I want to go back to the business plan that you presented. And you talk a lot about your push for mortgage growth, your focus on growing the mortgage segment. How have you seen competition margins evolving and volumes now?

Mortgage is a crucial product. You cannot be a retail bank without being a key player on mortgages. So that's why it's a hook product that is true mortgage. You keep deposit. You keep marginal deposit on the account. It's the way how to get deposit with the cheap price. This is the -- and the bank was quite active last year. But this year, in the business plan, we wanted to be one of the key player. And I believe we are really progressing because last year, last quarter, if I remember well, we were going with a pace of more than EUR 3 billion per year. Our plan this year, to go with the level -- total level of mortgage granted even higher. There is a competition, clearly. We have to compete. But normally, the competition is not only in terms of price. Now if you succeed in granting mortgage in 3 weeks and then from 3 weeks in 2 weeks, this is something that sometimes is also a factor that can influence the price. So we want to be excellent in servicing, in exploring the opportunity, utilizing all the distribution channel we can, including everything that we -- can be done online, having in mind that 70% of customers that are looking for mortgage, the first inquiry they do through Internet. Then 80%, they need to speak and to have face-to-face contact with the bank. So once that you cover all the potential point of contact, you will be successful. Mortgage for us is a crucial product.

Very clear. We're coming towards the end of our fireside chat, but I will give you one last opportunity. Any questions? I feel like I'm at the wedding. What do they say? Forever hold your peace.

No, I think that practically these days, I believe we were quite clear about the projects.

Clear. Thank you very much for joining us.

Thank you.

Have a good rest of the afternoon.