Banco BPM S.p.A. (BAMI) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM Full Year 2019 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Roberto Peronaglio, IR Manager. Please go ahead, sir.

Thank you very much, everybody, to be here with the conference. Before leaving the field to our CEO, let me remind that you can find the presentation on the website on the IR page, and that the Q&A section is reserved to financial analysts. Thank you very much.

Good evening, everybody. This is Giuseppe Castagna speaking. Thank you for being with us this evening for the presentation of full year results 2019. As you know, this is a special year for us because it's also the final year of the first business plan we had when we started the merger between the 2 banks. So let me allow to introduce this presentation starting from some successful delivery, my team was able to perform during this 3 years plan. Of course, as you know, we will have a much deeper presentation on the business plan over the next 3 years, in which we can also make some further comments on the first 3 years of the merger. So let me start with a very sound capital position. I will give you some number just to recap on what we have achieved. We started this transaction with a Common Equity Tier 1 fully loaded over 12.3%. The target was 12.9%. And I would say that we can announce that we basically achieved the target terminating this year with a 13% fully loaded Common Equity Tier 1, which, after the payment of the proposed dividends will go to 12.8%. Taxes ratio starting from 162% was due to land to 114%. We are now to 52%. Derisking gross NPE down from EUR 31 billion to a target of EUR 23 billion. Now we are at EUR 10.1 billion. Gross NPE ratio from almost 25% with a target to 17%. We are now at 9.1%, as much as the net NPE ratio, we started at 15.7% with a target of 11.1% and a result of 5.2%. Also the rationalization of our cost structure will -- overcame the business plan. The branch were down to 1,700 from -- starting from 2,400. The head count starting from 25,000 were due to planned 22,560 and we are now below 22,000. The cost efficiency, the total operating cost started at EUR 3.086 billion. The target for the plan was EUR 2.858 billion, with a reduction of EUR 228 million. And now we achieved very successful EUR 2.6 billion, with a reduction of EUR 482 million from the starting point. And this was achieved in a very challenging environment in which, of course, we can see all the macro were basically against the possibilities to reach good results starting from the Euribor, which in our plan was due to be 10 basis point positive in 2019, and you know that now we are 38 basis point negative. Also the GDP didn't go as we expected. We did the business plan with a forecast growth of 1% year-by-year, and we are now 0.2%. And also the spread BTP Bund, even though, recall, during the last months for the majority of duration of the plan was well above what we forecast, which was 81 basis point. These results allow us to deliver results, which is above the recent guidance that I gave to you in last quarter, give us the possibility to propose a dividend of EUR 0.08 per share, which means a dividend yield of 4.1%, and, of course, paved the way for presenting the new business plan, 3 of March next month. Let's go to some figure related to the 2019. We achieved a stated profitability of almost EUR 800 million, adjusted was EUR 649 million. The comprehensive profitability, the creation of capital was really strong, EUR 1.3 billion stated, EUR 926 million adjusted. And I remember that this is without considering the strong contribution that we have in the reserve of HTC, which now accounts to around EUR 700 million. Also the capital position and the buffer on P2R are very, very sound. We have reached 14.6% on Common Equity Tier 1 phased in, 12.8%, again, fully loaded after the payment of the dividend with an MDA buffer, which is 440 basis points phased in, 230 basis point fully loaded. If we have done to this figure, the recent contribution of EUR 400 million of AT1 issued in January, we end up having a buffer of MDA higher than 500 basis points phased in and almost 300 basis points in fully loaded. The risk profile is better a lot even in a year in which there wasn't this massive disposal that we have experienced during the first 2 years of the merger. Nevertheless, the gross NPE went down EUR 1.7 billion year-on-year. Net NPE down EUR 1.2 billion with a ratio, which I already mentioned, 9.1% gross and 5.2% net. The unrealized reserve and unrealized gains, I mentioned the HTC, HTM, which were, at the end of the year, EUR 520 million, now they are back to almost EUR 700 million, as well as the reserve on held to collect and sale, which were in December, EUR 71 million, and now at, again, almost EUR 100 million more. This is after, as you know, realizing sound contribution from disposal of govies for a total consideration of EUR 1 billion in last quarter 2019. Also the commercial activities, eventually giving strong results as we, frankly speaking, we're expecting, looking at the volumes that we were generating. We have been growing year-on-year, almost 3% on loans, more than 8% on deposit and 4.5% in assets under management. The liquidity and the funding position is very strong. We have an LCR of 165% and NSFR of more exceeding 100%. And an unencumbered eligible asset for more than EUR 20 billion, nowadays, we are up to EUR 22 billion. Let's go to what I mentioned before, the comprehensive profitability. I think it's quite important to also drive you through this number. We start from the P&L stated, which, of course, include also series of devaluation from the activity that we had on our real estate asset, property and artworks. This ended up producing a negative impact on P&L of EUR 130 million, which we already find in the P&L. Meanwhile, the positive effects that you see in the box down in the Slide 8, generate in terms of capital EUR 367 million of pretax, EUR 250 million post tax. As well as through the disposal that we had and the revaluation that we had in held to collect and sale, both in debt and then in the equity side, we are having an increase in capital of EUR 267 million pretax and EUR 179 million post tax for the debt side and EUR 151 million pretax and EUR 120 million post tax in terms of equity revaluation. Just to mention the 2 main figures, of course, the debt revaluation comes almost all from govies. The equity revaluation comes from 2 asset revaluation, which were Anima, which you know we have a stake of 15%, and Sorgenia, basically and [indiscernible] the contribution that you see on the box. This brought to increase for more than EUR 500 million the capital generation on top of the profit and loss, which bring us to EUR 1.3 billion. And this is, of course, without considering the massive reserves that we still have and of held to maturity govies, which I remember -- as I remember before, amount to almost EUR 700 million, even if we consider net, this amount would be in the region of EUR 500 million, bringing the total creation of capital generation, let's say, a sort of NAV in the region of EUR 1.8 billion. This was generated during 2019. Let's have a look, even though we'll go through the number to the P&L, I have to mention that we have registered some downside in NII. This was expected due to the sale of govies and the bond -- the massive bond issue that we did in the fourth quarter as well as the effect of the Euribor, then we will go further to these details. I would say, almost completely offset by the increase of fees and commission. The net financial results, as I mentioned below was -- before, was impacted by the massive sales of govies, generating there's very sound profitability, bringing total income in the quarter to more than EUR 1.183 million. Operating costs were in line with the previous quarter, amounting to EUR 654 million, generating profit from operation in the quarter for EUR 528 million, basically the same number both stated and adjusted, as well as also the provision are basically the same in the 2 balance sheet into profit and loss. The provision for this year amounted -- for the last quarter amounted to EUR 220 million. After that, you have the more impacting change between the stated and adjusted. Basically, we had the already mentioned devaluation of the properties for EUR 130 million and provisioning for risk charge for EUR 62 million. The pretax profit of the quarter were EUR 150 million in Q4 stated, EUR 300 million adjusted, which after tax and sustaining charge brought the profitability to EUR 95.8 million, and adjusted, of course, EUR 246 million. Let's go to the different items of the profit and loss. Just to go deeper into what I mentioned before, the different contribution between NII and commission, you can see that we started very low in commission to EUR 434 million. We ended up with EUR 462 million. So almost EUR 28 million more. As well as we reduced almost EUR 27 million the NII. This brings to the fact that we have almost the same amount of contribution, considering core revenues, both NII and commission, but in a different composition with commission, which passed from 46% to 49%, and NII going down from 54% to 51%. On Page 11, we can go deeper into these numbers, especially in NII, we have a reduction of almost EUR 20 million. This comes from EUR 8.7 million in the right side of the Slide 11, EUR 8.7 million comes from commercial banking, EUR 5.7 million is the effect of Euribor, the reduction, EUR 3 million is the effect of the growth in deposits. Meanwhile, we have EUR 3 million of difference negative in the reduction of UTP contribution. And as I mentioned before, almost EUR 30 million down from what we call noncommercial banking, which basically are govies disposal, bond issue and other hedging activity. The good news that we have been for the first quarter resilient to the asset spread. You remember that I mentioned that we are starting different action to stop the reduction of the asset spread. And this is the first quarter in which we can say that the asset spread stayed at 185 basis points. The customer spread went down 1 basis point, but this was the effect of the reduction of 2 basis point in the Euribor figure. Let's have a look on Page 12 on the volumes of the balance sheet. As I mentioned before, growth in net performing customer loan of around 3%, mainly driven by a growth of almost 7% year-on-year on the medium-term loans. Meanwhile, we reduced our share of current accounts due to the negative effect -- impact that this source of asset gives to our NII. In terms of direct funding, we have increasing of almost EUR 7 billion current account and deposit, 8% year-on-year. In the last quarter, we were successful in limiting the increase in current account deposit also due to the switch that we have in asset under management. Going to assets under management. You can see that we have experienced the growth year-on-year of 4.7%, mainly driven by market effect. Meanwhile, in the last 2 quarters, there was also a good performance -- commercial performance. Let's have a look to the lending activity more in deep. We were able to replicate, being a bit better than last year. New loans generation, even though, as you know, the year was negative for the market, we grew -- we were able to increase to EUR 21.4 billion the new medium-term loans production, increasing 26% on the mortgages, and with a slight decrease of 3.2% in big -- in corporates where we had last year, in 2018, 2 big ticket, which we don't have any more in 2019. As I mentioned before, on the right side of Page 13, you see the good work we are doing on the repricing. As you remember, we started this policy, firstly, with the corporate, which went up from 120 to 135 basis points. And with the SMEs, we started only in mid -- in the third quarter 2019, but we are already registering a good increase from 214 to 222 basis points all in. This is even better if you consider that the yearly average of the Euribor went down 3 basis point. Let me also underline that there is another good piece of news is the second bullet point. We are still experiencing new lending in residential mortgages, which have a spread, which is lower than the one maturing, but in the corporate business is the opposite. So we are finally having a new lending with increasing spread vis-a-vis the one [ that you aspiring ]. On Page 14, you have an overview of our production -- issuing of wholesale bond. This was in year in which we were very active in all the kind, all the different instrument. As you can see, if you consider also the EUR 400 million, I mentioned before, of AT1, basically, in 13 months, we had EUR 2.8 billion of new issuing splits between EUR 1.75 of senior, EUR 700 million of AT1 and EUR 350 million of Tier 2. This allow us to cope without any problem with the maturities that we have this year. In 2020, we will have EUR 2.4 billion of maturities. As well as we can assume that the reduction in the average rates and leverage spread that we experienced in 2019, as you see, we had maturities at 3.8% renewed at 2.2%. We now have, in 2020, to replace maturities at the NAV senior maturities, of course, at an average rate of 2.8%. Let's pass to the good results of net fee and commission. As you can see, I already mentioned the growth starting from the first quarter. Also the -- if we have a focus on the investment product fees, on the right side of the slide, you see a 9% increase since the first quarter '19, a very good performance of the upfront fees, testifying a good new level of production and a very comfortable production of running fees. If we compare last quarter '19 to last quarter '18, we have EUR 29 million more of revenues coming from the investment product fees. We didn't include in order not to have difficult comparison in the first quarter. This year EUR 5.7 million of performance fees due to the very good performance of our asset under management activity in the last quarter, but this amount to EUR 5.7 million. On Page 16, I think it's very interesting to follow, as I always told you in the last quarter that we were experiencing a very good growth and a very good trend in the investment product. As you can see, starting from EUR 2.9 billion in the first quarter of this year, we went up to EUR 3.4 billion, EUR 3.5 billion. Last quarter, we performed very good result of EUR 3.7 billion. If you compare EUR 3.7 billion with the last quarter of last year, EUR 2.5 billion, we have a growth of 48%. On the right side, there is also the contribution on the total net fees and commission, sound contribution stable of the upfront fees. So also, the new model that we have, as you know, after the merger we started in 2018 of the advisory by portfolio is coming back to generate a good piece of upfront fees. Page 17, I think is -- doesn't need so many comments, is really, I would say, an extraordinary results coming from the consideration that, as you know, in the third quarter '19, we communicate to the market the global reserves for more than EUR 1 billion, we consider only prudent to monetize some of them and realize some profits from them. I already mentioned that the results that are and reserve on debt security, which as you know, are include -- are not included in P&L, but are included in capital position, grew since the end of the year from EUR 71 million to EUR 172 million. And unrealized gains on debt security on HTM grew from EUR 520 million to almost EUR 700 million during the month of January this year. On Page 18, you find the very well diversified. Also this is a part of the derisking, I would say, that we performed during the last 3 years, we went down in Italian govies representing 84% of the total portfolio to 15 -- sorry, to 50%, reducing the govies -- Italian govies from EUR 26.7 billion to EUR 15.5 billion. On the lower part of this slide, you have also the duration of the govies, total govies both in held to collect and sale and held to maturity. Let's pass on Page 19 to the very good performance that we had on cost reduction, very much ahead of the expectation. As I mentioned before, we reduced EUR 480 million since the starting point of the business plan, but only in 2019, we performed the reduction of more than 190 -- almost EUR 190 million, almost 7%. And this comes from the, again, head count reduction we had in last year, the retail network, the organization but the stable and now, I can say, normal level of operating cost that you have performing quarter-on-quarter. As you can see, there is no such difference between the different quarters this year results. Let's say that in the staff cost, we have still some conservatism due to the new contract. So we didn't go directly on profit and loss in terms of having less provision for the new contract, also because of the very good reduction in other administrative cost, which went down 10% since the first quarter. And on a different stage, the performance on depreciation and amortization. Let me give some more hint about the change in accounting model for property and artworks. Of course, we will have all the different accounting principle in the -- attached. But let me say, this is something that we decided to do because, as you know, after the merger we find us in a position unbalanced, I would say, in terms of real estate asset. We had a lot of real estate assets coming from the previous bank, coming from the nonperforming loans and so on. So we decide to -- this is anticipation, of course, of the new business plan. In the new business plan, we will have also a derisking activity, I would say, a massive derisking activity in terms of properties, which will bring to a strong reduction of the balance sheet. In order to do that, we decided to go to change our accounting model to a fair value accounting model, which basically allow us to revaluate that fair value all our portfolio, but with different positing of the results that we have. Just to summarize, you have the P&L, which is affected by a decrease of the asset. We are below fair value, and this is brought directly to profit and loss for EUR 130 million. Meanwhile you have directly to capital without passing from the profit and loss, the positive revaluation mainly due to instrumental asset. This brings to a positive effect in capital with EUR 350 million and the negative effect in profits and loss of EUR 130 million. So all in all, we have EUR 223 million of capital impact, of which EUR 180 million properties and EUR 40 million in artworks. Let's pass on Page 22 to the strong improvement that we are still experiencing in the asset quality. We have reduced from EUR 11.8 billion beginning of the year to EUR 10 billion December '19, of which EUR 6.4 billion UTP and EUR 3.6 billion bad loans. The NPE stock net went down from EUR 6.7 billion to EUR 5.5 billion. So a reduction in line of the gross book value, almost 15% for the gross and 17% year-on-year for demand. This brought the ratio, I already mentioned before, to 9.1% of NPE, 5.2% net, and 3.2% of bad loan ratio, 1.5% net bad loan ratio. We took advantage to this very good balance sheet also to strengthen our UTP coverage, which went up from 37.1% to 39.1%, 200 basis point of increase. We also increased, of course, for much-limited amount, the PD coverage from -- the past due coverage from 18% to 26%. Let me only remember also coming back to the business plan that the starting point for the business plan was 27%. So increased 12 full points in terms of increasing coverage of UTP. And also the target, strangely enough, was 27.5%. Meanwhile, we now reached 39%. On Page 23, you'll find one of the means for which we were successfully delivering these results. We reduced a very good decrease in net flows of NPEs. Year-on-year, a 15% reduction, very good and very sound fourth quarter, even that the net -- the flows from UTP to bad loans, down 32%. I already mentioned that EUR 220 million of provision, which brought the cost of risk to 73 basis points. Let me say that we didn't consider the Sorgenia transaction, which impacted for more than EUR 110 million under this account. So if we perform also Sorgenia's recovery of provision, we would have ended up to 62 basis point. The global NPE workout activity on Page 24 is basically due to the L-ACE transaction, beginning of the year, which was the only disposal that we performed this year. Meanwhile, the rest was -- the main part of the reduction was brought by the cancellation rate of recovery in cure rate, which amounted for something like EUR 2.3 billion vis-a-vis net inflows from EUR 1.2 billion. On Page 25, we wanted -- so 25 excuse me. Sorry, we wanted to give up a recap of -- because we always speak about the very good performance in reducing bad loans, let me say that we did an extraordinary performance also in the reduction of UTP if you consider that this is basically all due to workout. As you can see in the different 3 years of the plan, we had a decrease of EUR 1.8 billion, EUR 1.7 billion and EUR 1.2 billion, basically driven by the green block, which is squared under the red circle, which is the workout. Meanwhile, the inflow basically were compensated by the outflows to bad loans. So if you don't consider these 2 effects, the real reduction comes from a very effective and industrialized machine that we build up during these 3 years, which is delivering year by year and, in terms of percentage, even better, the third year vis-a-vis the first year. As I mentioned before, this allowed us to increase also the coverage in 1 year, 400 basis point, 410 basis point, in the last quarter, 200 basis point of UTP coverage. Let's comment the significant increase in the capital ratios. Let me remember that last year, we had stated, the common equity Tier 1 of 10%, which pro forma was 11.5%. Last quarter was 12.1%. And due to the different step that you can see on Page 26, we reached this very ambitious 13% of capital common equity Tier 1, for which we were enabled to propose a dividend distribution of EUR 0.08, which amounts to 20 basis points of common equity Tier 1. As I mentioned before, the 12.8% match with the 14.6% of common equity Tier 1 phasing, which is some 500 basis point better than the P2R. We also calculated the MDA buffers, as I mentioned before, in order to give you some hint about the capability of the bank to deliver profitability and possibly maintaining dividend distribution in the future, even though we still have, of course, to offset some headwind -- some regulatory headwind. All in all, let me say that thanks to the profitability -- to the good profitability, which we reached through a positive trend, an increase in investment product fees; very strict control of cost; a sound and constant reduction in cost of risk; and a resilient growth in business volumes. We were also able to build up a capital position, strongest ever in our bank, and also considering the previous banks, allowing us again to withstand potential future regulatory headwinds as much as distribution of dividends. Very good, also, again, the reduction -- continuous reduction in the level of NPL in all the metrics, workout, lower inflows and higher coverage. Finally, let me mention again the strong funding and liquidity position of the bank. And all in all, this allowed us to finally arrive in 3 year to the dividend distribution. On Page 28, and I will terminate with this slide, leaving you the floor for some questions. This sort of outlook for 2020, let me say that, of course, most of the things that we have to say about the future will be included in the presentation of our strategic plan in March 3, in less than 1 month's time. But all in all, I would say that the core revenues will be driven by growth in net fees and commission, able to offset the potential pressure on net interest income, which, in our case, not only comes from what I already mentioned, Euribor, govies, UTP, funding for the new bond but also for a reduction of PPA year-on-year, where we continue strict cost control also during 2020, but we will start also to invest and to increase the cost for our IT system in order to allow a growth in the business activity. We will always control and reduce the cost of risk and the NPL ratio, and we are sure that with this track record of internal capital generation that we performed in a very difficult environment of these 3 years, we can support sustainable shareholder's remuneration, managing also every potential future regulatory headwind. Thank you very much. I am free for your questions.

[Operator Instructions] The first question is from Giovanni Razzoli of Equita.

Two questions. I've seen that you have reduced quite significantly your stock of domestic govies. If I'm not mistaken, you mentioned something like EUR 4 billion on a quarter-on-quarter basis. I've noticed in the annexes that part of it related to the fair value through the P&L category, securities, which in the past, also in the Q3, have shown a significant volatility. So this may inflate your actual stock of govies. So increasing this perception of your group without actually contributing significantly to the revenues. Can we assume that in the future, this reduction in the bonds held in the fair value through the P&L is reduced so that the actual holding is more limited than in the past so that the peaks that we have seen, for example, in the Q3 2019 -- in the -- in September 2019 and also last year is reduced? So this is my first question. And whether the reduction in the domestic govies is something that is -- will be part of the strategy going forward? And the second question is a more confrontational, if I may. The beat in terms of CET1 is impressive. You have 12.8%. You also have made a much better job in terms of derisking, vis-a-vis the business plan. What is missing here, in my view, is the payout ratio. The business plan was at 40%. Here, you are in the region of 15% or 20%, depending on what you look at in terms of adjusted EPS. So I was wondering whether shall we take this prudence in terms of dividend payout in a context where banks, we've seen, for example, UniCredit today, raising the payout from 40% to 50%, in cases 70%. I was wondering whether we should take this kind of prudence as something of -- the regulatory of wins in the context that the plan will be significant. So we will have to keep a larger buffer compared with, for example, with your MDA? Or how shall we read this relatively low payout ratio and whether the 40%, 50% is an ambition in terms of payout that you may reach in a couple of years' time?

Okay. Thank you, Mr. Razzoli. I would say that finally, a reduction in trading activities is quite normal for our bank. Normally, we have EUR 1.5 billion to EUR 2 billion less in the end of the year. So this, if you consider also the previous year, is something that you will see year-on-year. So I would consider this as a stable situation because, of course, we have -- also had a very good activity in trading, bringing profitability. And so we will, of course, cautiously and try not to make it so much capital. But of course, this is something that we will exploit over the year. I wouldn't say that this will bring volatility in this respect because, of course, it's much more volatile held to collect and sales. As you know, we have reduced the stake in this asset class. And we have mostly under the held to maturity. Thank you for the second question. Finally, I can be considered a bank like the others. So we are talking about having the same payout of the very good bank. It was not easy to convince everybody that we could become a normal bank during these 3 years. But nevertheless, don't forget that is the first year after many years that we go back to dividends. I think nobody was expecting this kind of results. We have to be -- still to be prudent. Remember that what everybody undermine, which is the fact that we are the only one who went under a merger into the ECB era is something that is for that to assume a lot of prudent approach to the capital. So let's say that even in this very happy situation and good situation, we are assuming some prudence and approach in order, again, to be able to offset anything who should come from the regulatory, and you know that, of course, something will come. But we are still confident that we can be easily above the target of common equity, which I mentioned always as my target, which is to be above -- well above 12%.

And can I make a quick follow-up on capital, if I may?

I didn't get the question, sorry.

No, sorry, follow-up on capital. In the Q3 or Q2 conference call, you had included a margin of conservatism in your CET1 that you were expecting to reverse at year-end. Is this taking place in this quarter?

It's still there. So no reverse. So we are still under the, I would say, the AIRB revaluation model by ECB. I think this will terminate during this year. As you know, I cannot talk on behalf of ECB. So this is something that we'll terminate when we will have the final answer relating to the famous LGD aspect on the derisking that we mentioned many times during these 3 years.

The next question is from Christian Carrese of Intermonte.

The first question is on, let's say, top line. You said that the net interest income should be under pressure. I mean it's still a little bit weaker than in the past, that you also told the fact that you realized some capital gain on government bonds and also the devaluation of Euribor and so on. And so I was wondering, should we look at revenues in a different way going forward in the sense that we have to look at net interest income combined with trading income because if I look at the Slide 17, you still have some EUR 870 million unrealized capital gain on your financial portfolio. So should we expect some higher trading income compared to the past recurring and trading income and maybe a little bit lower net interest income? And on net interest income, do you see the tiering effect already in the fourth quarter. And still, on net interest income, there is any possibility to optimize liquidity and maybe your liquidity coverage ratio seems to be quite high compared to the past. So I don't know if you want to share with us some room to optimize that liquidity. The second question is on capital. Very good, indeed. I think that there is room to further improve the common equity Tier 1 due to the buffer of conservatives but also some other maybe stakes that you can reduce as you did in this quarter like [indiscernible]. I was wondering what is your thought on how to use that capital. It's better to increase payout or maybe still to reduce the gross NPE that is very good compared to the starting point but still at 9%?

Thank you Mr. Carrese, very articulated. I will try to do my best to give the best answer to your question. We wanted to show, of course, NFR has something to do with the reduction of NII. We can consider when you have such reserve, you can opportunistically decide what to do. But I will say that, we are happy to have the reserve, but we'll fight to sustain the NII as much as we can. Of course, in the strategy of managing the balance sheet, there are opportunities when you have such reserves. The opportunities comes easier. As you mentioned, this can be used to -- if we need to further reduce NPE to whatever we decide into the strategic plan to foster some costs. So we are -- we don't think that we will perform every year a sort of capitalization of the reserves. We did the EUR 1 billion sales last quarter also because there was a sort of investment of the trend in the govies. You can remember that after the reduction of the spread in the third quarter, then the sort of fear on the regional election was bringing up again the interest rate. So we decided to take advantage from a very huge amount of reserves. I would just say that we say that more than with NFR, we will try to compensate any reduction of NII with an intensive activity in commission. Also for this, I hope that now we can have some credibility as much as I was telling all of you that I was not worried of the results in the last part of last year and beginning of this year, driven by problems that we are having through the reorganization and for any -- for many other problems. Now we are increasing I have to say that January was even better than the average of the quarter -- last quarter. February is still very, very good. So I would say that in terms of commission and asset under management, bank assurance, we still have to start. We are now finally in a good situation with the new joint venture. We are finally with the network, very well focused on that. And all the bank, as I mentioned also last quarter, will be very much focused on that. Capital. Happy that you can see, there is very good. I do the same. But nevertheless, I had the problem in the last year to be every quarter in the need of produced capital in order to offset headwinds or problems. During the business plan, I will give you the figure of capital that we have produced during these 3 years in order to offset the problem that we had, and it's a figure which almost double the current common equity Tier 1. So we are in no worry about a possibility and capability of capital production. But having said that, we consider safe being still under, I would say, the final part of our merger to conserve a buffer below -- sorry, above the target, which is, again, 12%.

Sorry, just on NPEs, so you are planning some tactical disposal or just mainly internal workout to reduce the stock of NPE.

But I think I showed on the slide where we were showing the constant reduction. I think it was Page 25 of the workout is EUR 1.3 billion, also this year with a very lower amount of volumes. So we think we can reduce year-by-year, at least EUR 1 billion and so to basically touch the end of next plan with the famous 5%. But of course, as I was mentioning before, if we see opportunity, if we decide -- and UTP is a bit more different from straight disposal. You had to find -- you have to find the right combination. For some of these combinations, there is also some change in ECB view, for instance, in the contribution of UTP portfolio into new asset under management company. So we will decide if there are opportunities. We are studying everything, but we don't want, and I repeat, we don't want anymore to pay the price. We paid the first 2 years in order to reduce the stock. We paid more than EUR 5 billion in order to reduce the bad loans. So now we want transactions, which are basically with no capital impact, a very minimal capital impact. If we found this, we will go ahead. Otherwise, we go with our plan, slowly but effectively, towards 5%.

The next question is from Domenico Santoro of HSBC.

Can you please give us a bit of sense quantitative, of course, of all the regulatory headwinds that you expect from now and just to understand a little bit the evolution of the capital from here, please.

Okay. Mr. Santoro, I think we will have more detail on that in the strategic plan. I think I gave you already some, and if I say that it would be safely above 12% as my target. But still apart from what every bank is expecting, we still have to conclude this LGD application of the model. And so let's wait some months in order to have the result of this. As you know, we have already applied a lot of conservatories, but still, we are not in the -- we are not in our end but in ECB end, and so I want to be comfortably in this situation. On top of that, the usual things that you already know, I think there is something in the market risk, something in the AMA. I would say, for a total consideration of 30, 40 basis point, on top, again, the credit.

All right. Sorry, can I just ask a follow-up question because the capital is, of course, is important? I know that you don't want to tell anything now. And of course, we will know more in the March presentation, but just to understand a little bit more, I mean, as the colleague was mentioning before, there is a big chunk of equity, which are, at the moment, deducted from capital. There is, of course, other probability levers. So apart from all the points that you mentioned before about the plan, is there any action specifically here that we should expect in order to change or improve even more the quality of the balance sheet. My understanding is that you don't want to change the size of the sovereign portfolio, which is, of course, something that is under observation from the market because it's NII-productive. Also in the NPE area, you want to be cautious because UTP is different from nonperforming. But I mean, qualitatively, what are the action that we should expect in order to improve even more the quality of the balance sheet at this point?

Again, I'm sure that I will give much more detail on the business plan. We are now commenting only the Q4 results. But basically, I don't know how much more I can say respect to what I already said. So we will -- we have a plan, which is in terms of NPE, is a workout plan. Again, there has been also recently interesting transaction in the field of UTP, which is under our scrutiny. We are considering everything as we did during the first 3 years. We would lose any opportunity to have some more reduction. But I don't think that this has something to do with the capital buffer. Because basically, I don't want to spend capital buffer for that. For me, this is a very important year, maybe there's still a bit difference between our bank and the others. But again, I want to solve all pending situations, which, in my opinion, already sound, are very comfortable. But I didn't see, frankly speaking, the need to increase dividend this year when I know that I have to perform sound profitability also in the next year of the plan. So with the plan, we will understand, I think, better, what will be our part in capital generation, revenue generation and so on. And of course, we won't lose the opportunity to use it to best our capital, either in reducing and bettering our balance sheet or in giving back money to our shareholders.

Can I ask also about the increase in the gross non-performing in the quarter, please, the reason behind that?

Sorry, you mean bad loans?

Yes, correct. This is just my last...

Okay. Sorry. Because I was a bit shocked because we were reducing also the -- when we talk about increasing, I'm worried. No, it's, of course, the switch, as you can see also on Page 25, there is a natural switch from UTP to bad loans, which is 35% -- 32% lower than last year, but nevertheless, some of UTP come to bad loans naturally. So this is the normal outflows from UTP to bad loans.

The next question is from Fabrizio Bernardi of Fidentiis.

I was wondering what's inside the EUR 63 million of provision for risk and charges of the fourth quarter. I think I read that is something one-off related to customer relationship. Is it related anyhow with the diamond's issue, please?

Yes. Mostly, I would say, it is also related to the diamond. It's not that we have a problem in dealing with the provision we already have done last year that you remember were EUR 320 million. Now because also of the possibility that you have with the balance sheet and the situation that we are still a bit far from concluding the transaction with the clients, we have overcome 55% transaction, but we still have 45% of transaction to deliver. So having a so-good situation into the balance sheet, we consider a prudent approach to foster the provision. Again, I don't think that this can be utilized, but that was, in my opinion, a good move in order to offset potential risk and, overall, accelerate the final definition of this problem.

Sorry, one more thing if I can. Have you changed your overall idea about the role that the regulator may play during an M&A deal? I remember you had very tough words about the SSM or the EBA about what they did during the Popolare Milano, Banca Popolare merger deal.

No, I don't -- not tough. I think I am the only one, I would say, entitled to talk about this because everybody speaks, but we are the only one to do it. So it's not tough. It's concrete. It's real. It has been an enormous amount of work to perform a merger so big. And I would say, in such also macro economical environment, and on top of that, we had also to face a lot of request from ECB, but this is only normal. We expect these to come also for whatever happens in the market. Of course, we have very attentively considering all the opportunities but having done a very strong experience in this field.

The next question is from Andrea Vercellone of Exane.