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 First Quarter 2025 Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Luigi Lovaglio, Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good morning, everybody. Many thanks for joining us for the Monte Paschi First Quarter 2025 Results Presentation. We started the year at full speed. Our network successfully drove growth of commercial activity across the board. These were visible, particularly in our fees and commission dynamic, the inflows into wealth management and the trends in our lending and savings volumes. Overall, this is a confirmation of Monte Paschi's competitive market strength, the value of our people and our high-performing business model, which is able to adapt to changing macroeconomic conditions and evolve with the transformational trends reshaping the banking industry. Our ability to continuously reinforce our home foundation enable us to reach a record fully loaded CET1 ratio of 19.6%, one of the highest in Europe, with a solid capital buffer. We are making excellent progress, confirming that our organization is agile and capable of adapting to our clients' needs effectively. Our people are lightened and focused and committed, proving once again that they are without any question our most valuable asset. To draw a metaphor for this first quarter results, I will call this the overture to the symphony, which I believe we are capable of performing with our planned business combination with Mediobanca. Since we made our offer in January, Mediobanca has woken up. We appreciate that it has recognized the need to focus on its core banking activities after more than a decade of relying on the dividends of its minority stake in Generali. As a part of this, it has announced an exchange offer on Banca Generali. We don't see this as an obstacle in our objective to create Italy's third major financial institution. We are fully determined to follow through on our transaction with a powerful endorsement that our shareholders gave us last month at our AGM. Let me be crystal clear. Mediobanca's offer for Banca Generali is not an alternative to our more transformative projects. While it took our offer to energize Mediobanca into taking control of its balance sheet, the move to expand in wealth management is coherent with our industrial rationale and ambition to create a new competitive force in Italian banking. Having said that, we would clearly need to fully analyze the transaction strength and weaknesses. There are important questions that need to be answered before we can assess the financial impact for Banca Generali transaction. Let's go now to some key highlights of first quarter results. Net profit for the quarter hit EUR 413 million, up by 24% year-on-year, driven by a strong operating performance. Net operating profit came to EUR 448 million with positive yearly and quarterly trends, thanks to increased fees contribution, effective cost management and reduction in customer risk. Gross operating profit at EUR 535 million was up quarter-on-quarter, thanks to the both higher revenues driven by the increase of fees and lower operating cost. Fees and commission also supported the early trend, enabling us to cross EUR 1 billion revenues as last year, while HR costs were higher, mainly due to labor contract renewal. Strong commercial performance in key strategic areas, in particular with wealth management gross inflows of EUR 4.5 billion and EUR 1.7 billion of mortgages, both with significant growth compared to last year. Operating costs fell to EUR 472 million, thanks to the strict discipline in the non-HR cost, enabling to partially offset the year-on-year increase of labor cost. Cost of risk at 46 bps, decreasing versus 53 bps in 2024, with a declining trend in line with the guidance for the year. The liquidity position of the bank continues to be sound. And finally, as I mentioned, Core Tier 1 ratio fully loaded at a record level of 18.6%, supported by the positive impact from the first-time adoption of Basel IV. Buffer on Tier 1 ratio is close to a remarkable level of 890 bps. Let's move on now to more details of our results. As I've just mentioned, net profit of the first quarter reached EUR 413 million, up by 24.2% year-on-year driven by strong operating performance, which confirmed the solidity of our business model. We noted a 14% growth versus the fourth quarter 2024, excluding positive net tax in both quarters. Now moving to the next slide, we are presenting the net operating profit, which in the first quarter amounted to EUR 448 million, showing a positive trend, growing plus 0.8% year-on-year and growing plus 9.4% quarter-on-quarter. The dynamic was supported by increased contribution of fee income as well as effective operating cost management while keeping cost of risk under control, in line with the guidance. Now let's see the gross operating profit, which reached EUR 535 million in this quarter, increasing by 3% quarter-on-quarter. It was driven by both revenues growth, up by 1% quarter-on-quarter, and lowering lower operating cost, minus 1%. Revenue in the quarter crossed EUR 1 billion again, almost practically confirming last year level. Yearly trend on gross operating profit was supported by resilient revenues, also thanks to the strong net fee income contribution, partly offsetting increased costs impacted by labor contract renewal and higher variable remuneration pool. Cost-to-income ratio has improved to 47% compared to 48% in the fourth quarter 2024. Moving to the next slide, where we are presenting some selected information on commercial performance. The activity of our network is focused on key strategic areas and is delivering results in a very sustainable manner. With this slide, I would like to show just a couple of KPIs that are reflecting the outstanding performance of the business. Total commercial savings were EUR 167 billion, an increase by more than EUR 5 billion year-on-year. Wealth management gross inflows crossed EUR 4.5 billion in the quarter up by 22% year-on-year. New retail mortgages granted in the first quarter reached EUR 1.7 billion, more than 3x compared to 1 year ago, which is a confirmation of successful the relaunch of the lending activity. New consumer finance flows amounted to almost EUR 340 million with a 23% year-on-year dynamics. I would like to take this opportunity to thank our colleagues for these excellent results they have achieved. This is successful commercial banking. Now let's have a look to net interest income evolution. In the first quarter of 2025, net interest income reached EUR 543 million with both yearly and quarterly trends in line with the guidance given to the market. The level of net interest income was affected by the decline in interest rate only partially offset by effective management of cost of funding. Now looking at the volumes. Let's start with loans. We are reporting very strong net loans dynamic in the first quarter with a growing retail [indiscernible] component. Practically, we are growing by EUR 1.6 billion, which translates to 2.5% quarter-on-quarter, with a positive trend also year-on-year. It has enabled us to increase market share since the beginning of the year. Such a growth was possible, thanks to the acceleration of our commercial activity, and this is a part of our strategy to mitigate the impact of decreasing rates on net interest trend. Now total commercial savings at the level of EUR 167 billion, they are up by EUR 5.2 billion compared with the first quarter 2024. That means 3.2% higher year-on-year with growth recorded across all components. The quarterly trend was almost stable, confirming the solid funding base and reflecting also a selected pricing approach towards the deposit. Also on the side of deposit, we are gaining market share from the beginning of the year. Now with regard to our banking book securities portfolio, which includes asset classified at amortized cost and fair value to OCI, it stood at EUR 9 billion, almost -- EUR 11 billion, sorry, almost in line with the previous quarter. The fair value to OCI portfolio decreased quarter-on-quarter at EUR 1 billion with duration further decreased to around 1.6 years and credit spread sensitivity down quarter-on-quarter to a marginal level of EUR 200 million. The dynamic of the fair value through P&L portfolio increase quarter-on-quarter is related to our market making activity. Now let's move on to fees and commission income. Total fees in the first quarter are in EUR 400 million area, up by 8.9% year-on-year and 6.5% quarter-on-quarter. This growth was mainly driven by the strong performance of wealth management and advisory fees, which increased by 15% year-on-year and 21% quarter-on-quarter, again thanks to the excellent commercial activity and reflecting strong focus on key strategic areas of our business plan. Commercial banking fees, growing by 2.7% year-on-year with a quarterly dynamic reflecting typical year-end seasonality effect. Regarding costs. In the first quarter, operating costs amounted to EUR 472 million, decreasing by 1% quarter-on-quarter, supported by continuous focus on non-HR cost optimization and disciplined spending management process. The year-on-year increase, plus 2.2%, was mainly due to the impact of the renewal of the labor contract, partially offset by the effect of strict cost and discipline in non-HR costs and managerial expertise in this respect. Let's move now to the asset quality slide. As you can see, the gross NPE stock decreased in the quarter to EUR 3.6 billion with secure component representing more than 17% of the total nonperforming exposure. Gross NPE ratio is down at 4.5% and net NPE ratio at 2.2%. We are not seeing particular signs of deterioration so far, and as you can see, the quality of R&D remain under control. So that we expect to further improve our KPIs in the next quarter, also leveraging on the effects of our project gaining a further improvement of our internal workout activity and put in place also some action in order to decrease the stock. We believe that at the end of the second quarter, we will show an additional reduction of this portfolio. Now a few words on cost of risk and coverage. The cost of risk was at 46 basis points in the first quarter 2025 versus 53 basis points in full year 2024. There is a decline, and this is in line with the guidance for 2025. NPE coverage improved 49.5, and I believe that all these trends are in line with our strategy and reflect our conservative approach in managing risk. Liquidity, I think the sound LCR liquidity position was confirmed again in the quarter, unencumbered contract balancing capacity stood at EUR 32 billion, ECB funding further decrease now accounting for 6% of total liabilities, down from 9% a year ago. Liquidity coverage at 156 level and net stable funding ratio at 130%. And this is a testament of the solidity of our funding structure. Now let's move on to the capital. The common equity Tier 1 ratio we reported at a solid level of 19.6%, one of the highest in the European banking system, factoring in starting this quarter the positive effect of Basel IV, mainly on nonoperating risk-weighted asset. This impact was somehow anticipated, but the positive effect was even higher than expected. I would like to remind that all ratios include net profit of the first quarter 2025. And our calculated net of dividend, we assume 75% payout ratio on per tax profit. The Tier 1 buffer remained at very high level of around 890 bps. We have a super strong capital position, and we continue to generate capital. So let me go back to our transaction, which will give birth to a new major player in the Italian banking system, one that is highly dynamic, a leader in key specialized business and with a robust capital position. This is a new competitive force that aims to play an increasingly virtuous role in supporting families, businesses and local communities. I'd like to thank the CEO of Mediobanca. This morning, we spent time to suggest what is the best for Monte Paschi. And I would like to say that we are already awake, and we like to challenge ourselves with innovative transformational deals, which for sure require vision, skills and execution capability. The offer is progressing at pace. And in line with the announced time line, supervisory authorities, authorization and antitrust authorization are expected by June at the beginning of July, followed by approval of the exchange offer document and the start of exchange offer period. On April 17, the capital increase was approved by Monte Paschi shareholders with more than 86% of the represented capital voting in favor, demonstrating significant support by a full spectrum of our shareholders. And our offer represents an unparalleled financial proposition for all shareholders. The transaction is expected to generate annual pretax synergies of approximately EUR 700 million along with deferred tax asset benefits of around EUR 400 million per year over the next 6 years. It is projected to deliver double-digit accretion on adjusted earnings per share and the strong organic capital generation, supporting a potential dividend payout ratio of up to 100% without impacting capital levels. The combined entity is projected to have a pro forma CET1 ratio of over 16% with a significant excess of capital at our disposal. We believe our offer represents fair value based on Mediobanca's fundamental and historical performance. And what is important to underline that is our offer provides immediate and certain value for Mediobanca shareholders, I'm just repeating in order to be very clear, immediate and certain value for Mediobanca shareholders. We did not suddenly wake up one day to discover that 40% of our balance sheet was in the hands of another management team in a completely different sector than our own area of expertise. The proposed combination is focused on creating stronger, more capital-generative business in the markets where we compete. It is not about power games or control of another firm. It is about the bottom line, plain and simple. Meantime, the financial benefits of exchange offer on Banca Generali for Mediobanca shareholders are less evident. What is certain that the operation consumes capital, 80 bps says Mediobanca. According to some analysts, the capital erosion is estimated even above 100 bps. That means more limited room for capital distribution. At the first glance of the transaction appears to be neutral, if not negative for earnings per share even when considering Mediobanca estimated synergies with Banca Generali. Dividend per share, making it complicated to understand where the transaction is accretive to shareholders in terms of dividend distribution. There is also no mention of the potential negative impact of canceling the Banca Generali brand. So financial benefit of the Mediobanca, Banca Generali deal are not evident in any case. And our offer on the contrary delivers a significantly better financial proposition for Mediobanca shareholders. Among unclear issues, there is also a mention of the economics of the announced long-term strategic partnership agreement in the bancassurance and asset management business, especially in comparison with the recent agreement signed on April 17 between Banca Generali and Assicurazioni Generali. The envisaged transaction includes also several areas of attention which make the deal uncertain at this stage. Finally, objectively, Mediobanca doesn't have a track record in successfully integrating a business of this scale. Banca Generali is not an investment banking boutique. So let me now conclude by recapping the key messages. We are moving ahead of our targets, thanks to our strong and resilient business model and the extraordinary diligence of our colleagues across the bank. We delivered strong economic and commercial performance: net profit plus 24% year-on-year; resilient revenue supported by significant fee growth, plus 8.9% year-on-year; and the acceleration of the lending business, new retail mortgage in first quarter, 3x versus first quarter last year; new consumer loan flows, up by 23% year-on-year; cost of risk reduction in line with guidance; capital ratio at the top of the banking sector with 18.6% Core Tier 1 fully loaded ratio. On the back of the positive first quarter dynamic 2025 profit before tax expected to be higher year-on-year with further room to grow in 2026 beyond our business plan. Our vision on banking industry envisage the creation of the new powerful competitive force to better serve families, large company, small and medium business and the local communities. Monte Paschi intends to play a leading role in this intense and necessary phase of consolidation in the Italian market. The time has come to change the approach to banking for the good of all stakeholders, starting with clients. We will expand distribution channels, enrich the offering of products and services to our customers open new market segments and accelerate investments in technology. All of this requires scale. The shareholders who supported Monte Paschi turnaround, know -- and all shareholder, I believe, know that we didn't just wake up to the idea that our capital must be actively allocated. It is the life blood of our business. We are grateful for their support, and we will not let them down in the future. The business combination of Monte Paschi and Mediobanca puts us in a leading position to accelerate towards what we expect will be the most important phase of consolidation of our industry. Thank you very much, and we are ready to answer to your question.

[Operator Instructions] The first question is from Ignacio Ulargui, BNP Paribas.

I have two questions, if I may. The first one is on the strong commercial performance in 1Q, which was quite solid. How should we think about growth going forward? How -- I mean, do you think that there is still more potential of growth coming both on lending and on the -- especially on the deposits and asset management side? And also was curious about how the margins on this new production has been compared to the back book, whether you are finding it profitably, the growth. The second question is on capital. I mean, what is the rationale to have such a strong capital buffer? And could you consider to distribute more to shareholders. Just one clarification, if I may on, the CET1 ratio,pro forma. Shouldn't we expect the translation of the increase in capital in the quarter to translate to the combined Mediobanca and Monte Paschi of 16 being above 17?

So thank you. I will address the first question, right. So last year, we plan to reinforce our commercial structure, appointing a new Deputy General Manager in charge to the business, new Head of Retail and new Head of Corporate. So the idea was really to give a boost to our capability to grow on the commercial activity. And I believe that already starting from the second part of last year, we saw significant improvement in all dimension of what is the commercial activity. So first quarter is a confirmation. We are quite confident we can keep this pace because it's just not a matter of higher performance, right? But it's just the combination of all the actions we put in place. Organization, people products and, at the same time, also new tools that will help to be more effective in commercial activity using also some technology that is supporting us in better defined customer profile. Clearly, we have to match and to combine in the best way the trading between the price that we are offering for attracting new business and our profitability, right? But we strongly believe that we have such a penetration on our territories that the customer will follow us in dealing with our bank. And this sort of loyalties that has been proved through the years will help us in growing in terms of volumes with a good trade-off between price and volumes. So I believe we can keep the margin and we can keep growing. And this is a confirmation -- I was mentioning this, what I was saying is confirmed, but also the trend in market share. At least this is what we plan up to the end of this year, clearly, with some seasonal situation that will come on the third quarter. But also the second quarter, we believe, will be quite successful. So the rationale on capital buffer, right? The rationale is that this position, we can really afford to follow our project combining and joining efforts with Mediobanca and, as I was mentioning, to be in the position to have an active role in the second phase of consolidation. The excess of capital will help us to be stronger from a national point of view, and I believe can give an additional option to be even more generous with our shareholders in terms of remuneration. As we were mentioning, the combined entity will have the benefit of capital, which is about 16. And despite the 100% payout ratio, we will keep growing in capital. So this is an important difference that I believe investors are appreciating because we can ensure sustainability of the remuneration of our shareholders for the next 5 years while keeping higher capital for additional benefit that can come, as I said, industrially and financial for our shareholders. It's just not a matter of projection of 1 year or 2 years and it's not just a matter to decrease the capital to the level from 14 to 15 or 12. We are confirming a strong level of capital for the benefit of all our shareholders, and we will try to imagine the best way we can once the transaction will be completed. Now, Andrea, if you want to add anything.

Yes. Ignacio, on your last question, as we said this CET1 ratio following the transaction pro forma 31 December '24 would be 16.2%. And as the CEO has just said, we can keep let's say, the capital stable over time while distributing 100% dividend. So on the Basel IV impact, it is partially factored in, in our projections because as you might remember, we gave a guidance of EUR 2 billion of RWA reduction. And now the impact is more positive. It's more about EUR 3 billion in terms of RWA reduction. The delta, yes, can be translated in terms of higher capital for the combined entity.

The next question is from Giovanni Razzoli, Deutsche Bank.

Two questions. One, again on the very, very strong CET1 ratio on a stand-alone basis, which you expect to grow further in the next couple of quarters. So you would be in the condition to approach 20% soon. Is my understanding correct? Or do you see growing the volumes or some headwinds, which may prevent this trajectory? And the second question on the Mediobanca-Banca Generali transaction. Are there any read across between the outcome of the Mediobanca General Meeting, which has been called to approve the offer on Banca Generali and your offer?

So on, let's say, your first question about capital projections. now I just remember -- just remind, sorry, what we gave as guidance, i.e., that as mentioned many times, we will have the impact of the update of the internal models by year-end '25, the impact of which is around EUR 800 million, EUR 900 million RWAs and the FRTB impact potentially next year or maybe the year after or maybe never, that depends on what the regulation will be, which is currently estimated at EUR 400 million. While we have, for sure, factor in our projections the sustained bond dynamics that we are successfully experiencing.

So Giovanni, thank you for your question. So the answer is quite simple. My -- I'm fully convinced that the investors that will vote for the Mediobanca transaction to the next general meeting shareholder will deliver the shares to us because, as I said, the two transactions are not alternatives. And I believe this is what, looking at the financial and the economics and the benefit, that the investor already started understanding by approving our increase of capital. The General Meeting of Shareholders that would be a sort of consistent behavior, right? At any case, we will start again our contacts with our investors to be sure that our transaction would be successful. But in any case, I don't see any negative or completing situation by voting for General Meeting Shareholder in Mediobanca and delivering the share. This is what I believe will be the common behavior of the of investors.

The next question is from Luis Pratas, Autonomous.

My first one is as well on the Mediobanca-Banca Generali offer. I wanted to understand better your strategic flexibility. In the scenario that Mediobanca shareholders approved the Banca Generali offer and you gain control of Mediobanca afterwards, can you actually stop the Banca Generali offer if you want to? And related to this, as you calculate the incremental capital impact of doing the Banca Generali transaction, under the same terms offered by Mediobanca in case, once again, you can control of Mediobanca afterwards. And then more about your business plan, fees accelerated this quarter. Year-on-year growth was around 7% ahead of the business plan run rate. How do you expect this line to evolve in the rest of 2025?

Okay. Thank you for the question. So about the first question, as I mentioned, the financial terms, timetable and the offer condition to which Banca Generali offer is subject are absolutely still unclear. Therefore, it's very difficult to make an assessment on this transaction overall at this point of time.

Luis, can you repeat the second question, please?

The second question is on fees. It's basically -- it's regarding the guidance of 2025, if you could give your expectations for the rest of the year since it started very well in Q1.

So as I mentioned, this quarter was an excellent performance. And in our understanding, I think it's something that in some way can be more or less repeated, as I said, with some seasonality in the third quarter. So overall, we still believe that for the full year, we can almost keep the pace more or less of the first quarter, so even slightly above the guidance we gave at the beginning of the year.

Okay. And maybe can I just do a quick follow-up? On the full year guidance, I wanted to confirm if the full year guidance of 2025 is still to achieve a pretax profit of at least in line with 2024, so the EUR 1.4 billion? Or are you in a -- can you actually even be above this level?

No, no. I think I was mentioning during the presentation, we gave a guideline as time line not to be lower. This time, we're saying will be higher. And this will create a base to have also an higher 2026, definitely better than what has been -- what was planned.

The next question is from Andrea Lisi, Equita.

The first one is on the evolution of the commercial dynamics in terms of inflows in the collection that you have observed in April and which trend do you expect going on? And if you can provide us a detail regarding the investment fees on the contribution of any upfront or performance fees that contributed to total investment fees in the first quarter. The second question is on the NII, in particular, if you confirm the sensitivity you have provided previously. And which trend of volumes in terms of loan evolution are -- do you expect also regarding the current scenario and the feeling you have regarding how your clients are approaching for new lending? And if 2026 NII given the current curve is seen above or below the 2025 levels. Then just a clarification regarding your offer of Mediobanca, in particular regarding the success threshold of 67%. That is a threshold that can be waived. Do you have any detail regarding a potential minimum threshold condition? Or you're just still committed to stay above 67% and so on?

Okay. So as I was mentioning, right, saying that we expect to keep the pace of the first quarter. It's clear that I based my assumption on the fact that already April is getting good signals in terms of inflow into our wealth management products. So positive on that. I think we were mentioning also this time, we have a standard of -- or most percentage of upfront fee on total asset management fees, more or less, it's between 35%, 40%. We are not having our portfolio significant portion of our product where performance fee is forcing. So practically, there is no particular one-off in the total fees that we have because practically the product -- majority of our products without performance fee. I believe that net interest income, I will give the floor to Andrea.

Yes. The sensitivity is generally stable. The currency sensitivity for minus 100 bps per shift of the curve is slight -- is in the neighborhood of minus EUR 150 million, slightly less actually. Then for '26, given, let's say, the resilience of our NII, the positive loan dynamics and also the long end of the curve being a bit higher than expected, actually, we expect an NII which is stable or increasing compared to '25. And this is supported also again by loan dynamics that we expect to be above market.

As you were mentioning, our offer is for 67% of the shares, and we are confident about our targets. So we are not making any thoughts on a different level up to now.

The next question is from Hugo Cruz, KBW.

Can you hear me?

Yes.

I wanted to ask about your M&A strategy. It sounds to me from what you said that if you succeed with Mediobanca, you won't stop there and you want to pursue the next stage of consolidation. So I wanted to understand what that means exactly. Do you think there could be further -- do you see yourself as a buyer or as a target in that second round? How concentrated do you think the Italian market could end up being in, say, 5 years' time?

So I think I was mentioning also in the previous presentation, I believe that still, we needed to further have a process of consolidation in Italy and probably should be a consolidation that should be EBITDA-innovative. That's why I think the second wave will start in the coming 2 years from now, probably. And I believe, given our capital position, know-how in integration; the strength of our network, because whatever is the consolidation, you need to have a strong franchise; the strength of our brands; the quality of the people, we believe that we can be an important player in this environment of further consolidation. And the capital position that we have will give also, according to me, a competitive advantage in order to look for the best solution for all our stakeholders and to ensure a sustainable remuneration to our shareholders.

[Operator Instructions] Gentlemen, there are no more questions registered at this time. I'd like to turn the conference back to Mr. Lovaglio for any closing remarks.

Thank you very much for this opportunity, and we're going to see for the next presentation that is expected to be August, hopefully earlier. Thank you very much.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.