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 First Half 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Roberto Peronaglio, IR Manager of Banco BPM. Please go ahead, sir.

Thanks a lot. Thanks, everybody, to be present with us at the presentation of Banco BPM first half result. As usual, before leaving the floor to Mr. Castagna for the presentation, I would only remind you that you can find the presentation on our website on the Investor Relation page. And that the section Q&A is reserved only for the financial analysts. I leave the floor to Mr. Castagna.

Hello. Good evening, everybody. I know it's 6:30, over 6, so I have to be quick. I'll try to do my best. Thank you for being with us. I know it's been a long day also for you. I'll start on Page 5, basically, some news about how is our reaction to the COVID. What we can say, almost, as all the other bank, we are back to normal, of course, with a much more digital business grown over these weeks and months. Basically, we have reopened all the branch. We will terminate our full reopening by beginning of September. And now we have more than 90% of our people in the branch, and almost 50% into head office compared with 35% in the branch and 20% in head office during the peak of the COVID. I won't spend time about digital. You can see the figure, how they have grown. They are consistent. Also now that we are basically with all the branch open, basically, the digital experience has been appreciated by our clients, and also, I would say, by our colleagues. Back to normal also in terms of business. As you can see, investment product placement and fees and commission, which were the 2 items hitten by the crisis during the 2 months -- 2.5 months of the COVID peak, are now in June, almost back to normal. Product placements in June was EUR 1.3 billion compared to EUR 0.7 billion in May and EUR 0.3 billion in April. As much as the fees and commission revenues, up to EUR 151 million in June compared to EUR 104 million in April and EUR 121 million in May. The average of the Q1 was EUR 147 million. On Page 6, some comment about the government support measure and how our bank is proactive, trying to have a granular approach at client level in order to exploit all the opportunity given by the state measures and also the possibility to try to cover, at our best, the needs of our client. Basically, we had a 3-step approach, analyzing all the corporate and SME clients. The drivers were the pre-COVID rating, the capital solidity, the sector outlook and the share of wallet. Having done that, we then segmented our clients into different groups -- homogeneous groups in order to assess which kind of impact they would have had by the COVID and which kind of measure they would need, on our side, in order to be the safe as possible. As you can see, the output was to give target list for each relationship manager basically indicating the strategy to be adopted at a single client level. On Page 7, the new lending activity, which grew a lot into Q2, the results of full semester was EUR 12.4 billion of new lending, up 16% vis-à-vis first half 2019. And the impact of the guarantee as of June was EUR 2 billion out of the EUR 12 billion. Just to mention the pace of the growing guarantee measures, in July, we are up to EUR 4 billion. So EUR 2 billion only in July. The amount in the pipeline of the public guarantee amount as of today to EUR 11.5 billion, of which already granted in July, EUR 4 billion, as I mentioned before. And out of the EUR 7.5 billion still to be granted, we have EUR 5 billion, which are already authorized by our credit department and waiting for to be drawn by our client, only EUR 2.6 billion under approval. Going to the moratoria measure on Page 8, just a quick number. We had suspended installments for EUR 2.3 billion, out of which EUR 0.4 billion out of ABI Moratoria and EUR 1.9 billion for the decree -- Cure Italy Decree Moratoria. The total underlying exposure related to this installment amount to EUR 16 billion, out of which EUR 3 billion ABI moratoria and EUR 12.9 billion Cure Italy Decree Moratoria. As you know, the ABI Moratoria is 12 to 24 months of extension. Meanwhile, the decree is supposed to expire by September this year, but it's most probably to be renewed with the August decree, as far as we know, at least at -- to January 1, 2021, giving us, of course, time to intervene in order to have the best possible measure for our clients to comply with the installment. Basically, also to this regard, we have a distribution by rating class, mostly in the low-medium risk class applying for moratoria. Differently from the financing guaranteeing by the state, the moratoria was basically applied by everybody, the majority of which are in the low-medium risk, 76%, only 14% in the mid-high risk and 10% in the high-risk categories. And the exposure to selected sectors, which we mentioned also in our Q1 results, which are the most exposed to COVID is only EUR 500 million for mid-high risk and EUR 300 million for high risk. Let's have another look on this issue on Page 9. As you can see, out of EUR 102 billion of loans portfolio, we have 86% from 87.8% in the low medium -- low and medium risk categories, and 8% in the medium-high, 5% in the high risk category. Inside this, we have that the sector most impacted and other sector that are -- you can see in the Note 3, transportation, accommodation, restaurants, and travel agency, textile and leather, automotive and transportation are -- account for EUR 8 billion out of the EUR 102 billion of our portfolio. Of this EUR 8 billion, almost EUR 5 billion are already covered by either real estate guarantee or state guarantee approved under the liquidity decree. The remaining EUR 3 billion are still under examination in order to find the best solution and try to give also to them the support as much as possible of state guarantee. If we go to the level of high-risk rating and mid-high risk rating, the EUR 8 billion became EUR 400 million for high risk, EUR 1 billion for the mid-high risk, and only EUR 100 million and EUR 400 million are still to be secured. On Page 10, we have the scenario that we applied on the performing loan exposure in order to consider the ECL impact on H1 result, which, as you know, was EUR 140 million on the performing exposure. This was extrapolated with a more conservative scenario vis-à-vis the Q1. As you know, in the Q1, we had our own scenario, which was more or less 8% of lower GDP. Meanwhile, the new scenario is the one approved by ECB. And it's a multiscenario approach which gives us more or less 9.6%, 9.7% of lower GDP. But we were able to disaggregate by sector the impact of the relevant GDP reduction for each specific sector. And again, the COVID impact was EUR 140 million on the performing exposure. On Page 12, you can find the results of Q2 compared with Q1. As you see, we reported EUR 105 million of net profit, which was EUR 128 million adjusted. On the left of the slide, you find the re-exposition position considering the FV of own liabilities and net financial results. In order to give you a more comprehensive and comparable effective result, we have reexposed the fair value on the liabilities under the net income before tax, in order to give you a comparison of the line-by-line result Q2 on Q1. As you can see on the right side of the Slide 12, we were able to have better results basically in every items, Q2 on Q1, both in terms of NII. In terms of total income, revenues were up 5%, not in terms of fee and commission, where I told you we have registered more hard effect of the COVID lockdown. We also were able to reduce 3.3% operating cost and have a profit from operation at EUR 387 million compared to EUR 320 million of Q1 2020. Provision were up almost EUR 50 million, EUR 263 million compared to EUR 213 million. For a pretax profit, 2.6%, higher of Q1, EUR 106 million versus EUR 103 million. After systemic charges, we had the net income before the line, as I mentioned before, and the PPA, which was EUR 76 million positive compared to EUR 20 million of Q1 '20. The final, net income, including the fair value on liabilities, is negative EUR 46 million compared to EUR 151 million in Q1, which, in turns, was affected by this item. Let's go to the sort of sum up of the most important item. On Page 13, we have, frankly speaking, a quite solid H1 performance in this COVID context. Total revenues, again, up 5%. Costs, down 3.3%, with very good pre-provision income. Also in terms of reserves and unrealized gains, we got the most that our govies portfolio. As you can see, quarter-on-quarter, we had EUR 230 million of reserves on fair value on cost, which, of course, apply to our common equity Tier 1 an impact for 40 basis point. Meanwhile, we also registers a very comfortable EUR 245 million of positive performance in terms of unrealized gains on debt at amortized cost, that, as you know, this is not going neither in the profit and loss nor in the common equity Tier 1. It's still a reserve which is very comfortable for the months ahead. Also, in terms of volumes, we had a quite comfortable growth, both in terms of loans, which grew 4% year-on-year and 1% quarter-on-quarter. The real growth is still to come. If you consider that only in July, we registered another EUR 1 billion of increase in stock, which is another 1% compared to the second quarter of this year. The same in terms of current accounts and deposit, the increase was 8.7% year-on-year, 3.2% quarter-on-quarter. In July, we have another 2.2 -- EUR 2.1 billion of deposit, growing 2% versus to the Q2 '20. Asset quality, we are experiencing a slow decrease of our NPE exposure, going down from 9.1% to 8.7% gross and 5% net NPE ratio, with the taxes ratio down to 49%. Very comfortable also our liquidity and funding position. Of course, couldn't be different because of the possibility and the opportunity that we exploited, drawing a EUR 25 billion of TLTRO. We still have EUR 24 billion of unencumbered eligible securities, and we still could draw another EUR 10 billion of TLTRO III. The LCR, of course, was up 193%. Capital ratios also in this -- also on the capital side, we had some strengthening. Common Equity Tier 1 grew 40 basis point to -- fully loaded to 13.3%, mainly due to the strengthening of the govies performance. Meanwhile, phased in Common Equity Tier 1 was up 14.7%. Also, in terms of MDA buffer, we were up 335 basis point. As you may remember, our guidance is 250 basis point. Meanwhile, on Common Equity Tier 1 ratio versus minimum requirement were up 480 basis point. Let's go to some specific figure of the balance sheet -- of the P&L. Net interest income is up EUR 5 million. On the right, you can see the different contribution to the growth of the net interest income. It's interesting to notice that also in the 3 months of the quarter, we had a slight increase month-by-month from EUR 154 million in April to EUR 164 million in June. The commercial spread is up some basis point. We feel that this could experience some decrease in the next months due to both the lowering of the Euribor and also the increasing volumes of state guarantee, which, of course, have lower spread. I already mentioned the volume, both in June, and also the increase we registered in July. So I skip Page 17. Going to Page 18 where we have some details about our performance. In lending, strong increase, 13% vis-à-vis same period last year, 22% up in terms of corporates, 30% down in terms of household. But if you look on the low side -- on the left low side of this slide, you can see that also the household in the Q2 is growing from 0.6 to 0.8, likewise, of course, enterprise and corporate. Then there is another figure, that -- scheme that you can see the different figure month by month. As you can see, we are increasing quite dramatically the lending, taking advantage from the state guarantee. Let's say that in Q2, the amount of state guarantee represented 29% of the total new lending in the -- only in July, the amount of state-guaranteed loans was up to 60%. And this, of course, is going to better our loan portfolio quality. On Page 19, just 1 minute about the funding. Of course, we are not issuing anything. First of all, we had some very interesting and very good in terms of rate issue in January and February. And nowadays, we are waiting for normal time to restore. But first of all, we haven't drawn so much in terms of TLTRO. We are -- we have almost covered all our needs. I would say that the only thing we will issue by this year is for regulatory requirement, if needed, and not for liquidity needs. Talking about liquidity on Page 20. Again, EUR 24 billion of unencumbered eligible securities, up to EUR 28 billion in July. I already mentioned that we can draw another EUR 10 million of TLTRO. The total effect of the TLTRO drawing will be in H2 2020, because, of course, as you know, the drawing was done at the end of June. Let's go on Page 21 to net fees and commission. As you can see, we were down 8% year-on-year and 14.6% Q2 on Q1. I can say that we are optimistic. If we see the right side of the slide, you can see both in terms of revenues, on the up side of the slide, and in terms of monthly product placement trend, on the lower part of the slide, the restoring of the normal activity. I would say that after experiencing a very low April, with EUR 104 million of revenues coming from commission, we went up to EUR 121 million in May and to EUR 150 million in June, which is in the average of the best months -- of the best 2 months beginning of the year. The same, as you can see, on the low side of the slide. We went from EUR 1.2 billion and EUR 1.5 billion of product placement, January and February, down to EUR 0.9 billion and EUR 0.3 billion -- EUR 0.7 billion. Now we are back to almost the normal activity, of course, coming from the reopening of the network. Again, on the financial -- net financial results. As I mentioned before, the results is minus EUR 82 million compared with plus EUR 206 million. But these are mostly due to the fair value of own liabilities on the certificate issuing from our bank. If we exclude these lines, which you know is not going to affect the Common Equity Tier 1, we are -- we registered a comfortable EUR 82 million of NFR compared to 0 in the Q1. Mostly of these revenues came from disposal of govies for EUR 34 million, from some revaluation of fair value asset for EUR 29 million and negotiation activity for EUR 18 million. I don't comment the reserves on debt securities and the unrealized gains, which we already mentioned before, and which are still registering further increase also in July. Debt securities, our portfolio is -- increased in the last 2 quarters this year. Let's say that the first quarter, we just recovered, as we do every year, some trading activities, which normally, end of the year, we try to keep as low as possible. Meanwhile, in the Q2, we had an increase of almost EUR 3 billion of HTC govies, with a very short maturity linked to the expiring of TLTRO funding. So we have matched the 2 activity. Still, we have 57% of Italian govies, mainly concentrated, as you can see down in the slide, in the HTC portfolio. Page 24. Just to mention that the duration is very low. It's going down, for Italian govies AC, from 3.9 to 3.3, and for Italian govies HTCM, from 2.3 to 1.6. And the basis point value is down to EUR 1.5 million. On Page 25, some good news from operating cost. We were able to still reduce, as we are doing basically since the beginning of the merger, as you can see on the right side of the slide, basically, we are down on the average result of each year 15% from 2017. And we have reduced another 4.5% comparing H1 '20 to the same period '19. Still, we feel that we can be able to have some further reduction in cost also in the second part of the year, namely in staff cost, but also in other administrative costs. On Page 26, we have some figure about asset quality. As I mentioned before, we are down to 8.7% and 5% of total NPE ratio gross and net and 3.1% and 1.4% on bank loan ratios. The coverage is still sound. 56% of bad loan, 63%, if we include the write-offs, 80 basis point higher. A bit lower, 30 basis point lower in UTP coverage, were down to 39.3%, mainly due to the different composition of the UTP portfolio, where we increased the guarantee to UTP versus the uncovered. A good increase also in past due coverage, and the total coverage of 48.6%, including write-offs. Of course, we have also increased, as I mentioned before, the performing exposure to 45 basis point. Flows are going very well. The migration rates are still very comfortable, down 1.1% default rate, down 8.1% danger rate and, fortunately, also down the cure rate to 3.7%. As you can see, the inflows, both to NPEs and to bad loans, are very low. Of course, this is also due to the moratoria effect. On Page 28, cost of risk. The blue figure is the normal cost of risk, mainly in, of course, coverage on nonperforming exposure. Meanwhile, the yellow one is COVID-related top-up in generic provision, which amount to EUR 140 million between the 2 quarter. The cost of risk with this increase is up to 88 basis point on the first half and 97 basis point on the Q2. I would like to draw your attention on Page 29. This is a graphic that, in our opinion, can explain, together with the attention we are having for covering as much as possible, our client with state-owned guarantee. Also, this slide is very important. It shows you how our geography helps in cost of risk containment. As you can see, we have split Italy in 4 different area. Each one, of course, representing different regions, in which we have the red one, which had -- the one with the NPE ratio -- the higher NPE ratio. You can see that most of our peer have a good exposure to this region, while we have only 1.5% of exposure to our book to this region. And the same, of course, going up, where we have the bigger exposure is in the region where the gross NPE ratio is below 9%. So I think this can give you some idea of how we are -- could be able to safeguard our asset quality profile. Another very interesting quite new slide we are going to propose is Page 30. This is to show that it's quite -- it's very difficult to imagine a pickup of the cost of risk to historic situation. As you can see, we exposed the different contribution to the global cost of risk for '17, '18, '19 and '20, split into the stock-driven provision, the disposal provision, the flow-driven provision and, only for this year, also the COVID impact. As you can see on the correlation on the right side of the slide, the most important correlation is the stock, the amount of stock that you have. And so having reduced quite impressively the stock from EUR 30 billion to below EUR 10 billion is quite difficult to consider a cost of the stock that can go higher than the level that we have right now. I would say the same almost for the flows. Of course, there is a lower elasticity in the flows. But also, this is important to show that if you see the different figure of the flows, this can show you that, basically, our bank was already with a good clean up when we started the merger. And fortunately, we had a lot of stock, but the quality of the performing portfolio is performing almost the same since the merger. Finally, strong capital ratios and buffer. We have anticipated the figure of 13.3% on Common Equity Tier 1, 14.7% on phased in. Let me say some details. The increase was driven by the HTCM reserves on govies and from the SME supporting factor. Meanwhile, we have already embedded in our capital the effect of the RWA deterioration following the GDP scenario we have applied to our numbers and the shift of the PD from the best categories toward the lower one. This should bring some lower effect in terms of reduction of Common Equity Tier 1 in the second part of the year. We are really comfortable with the MDA buffer we are registering. And the only possible -- the only effect that we are forecasting for reducing Common Equity Tier 1 is related to the combined effect of regular headwind and tailwinds, which are going to be applied by the year-end, and amount to some 35 basis point. Just some final remarks. We find the performance quite solid, good net income. Moreover, a comfortable pre-provision profit up to EUR 390 million in Q2 versus EUR 320 million in Q1 and fostered by a very good cost containment, which we feel will characterize also the second part of the year. Also, the provision policies are prudent. Our scenario does not forecast other potential impact on performing loans. We are -- and deciding, and we will make some further resonant during the second part of the year in order to still reduce the NPL ratio. Of course, the workout for the first part of the year was very difficult because of all the constraint of the COVID. So we are having some sort of understanding and some reversal from the market in order to see if it's possible to have, toward the last part of the year, some disposal of NPL. The capital position, again, very robust, as much as the liquidity and the MDA buffers. Some figure about the outlook. I already mentioned a positive outlook for the second half of the year. Basically, all the more significant items are going to better. So both NII, fees, cost control, as much as the cost of risk, we should remain at the level we have envisaged. We imagine a potential outlook between 90 and 100 basis point. I would terminate with this, and I leave the floor to you for your questions.

[Operator Instructions] The first question is from Christian Carrese with Intermonte.

Yes. I would say a positive set of results, in particular, on core revenues. My first question is on net interest income. If you can share with us the moving parts expected in the second half 2020, in particular, in terms of customer spread evolution. I would suppose a further reduction versus spread due to new loans guaranteed, TLTRO, the current additional contribution expected in the second half, and the possibility you to increase for additional EUR 10 billion the TLTRO III cap. The COVID exposure increased in the quarter, do you expect to further increase the debt exposure? And there is any room to optimize liquidity, taking into account that today, you have a liquidity coverage ratio of 193%? The second question is on fees. We saw a quite important increase in deposits year-to-date, I think EUR 5 billion. We saw a positive trend in June. Do you expect this year, the third quarter, to be different from the other years in terms of seasonality? So you do expect some commercial action to try to regain what lost in the first and second quarter? Third question, on cost base. You said, costs should go down further in the second half. So if you can update on redundancy plan, I would say, and the reduction of branches that you announced after the COVID outbreak. And finally, a question on M&A and dividend. We saw ECB asking banks not to pay dividends to keep some capital for COVID-19, and at the same time, issued a consultation paper in which clarified the rules for M&A, so bad will recognition and so on. I was wondering if you can share with us your thoughts on M&A. We saw the successful bid by Intesa for UBI. Do you see further consolidation -- need for consolidation in the current environment? So it could be helpful to hear from you your thoughts.

Thank you, Mr. Carrese. Very comprehensive set of question. I would say, of course, I cannot give you the right number, but we expect a quite consistent increase of NII in Q2. This is both for TLTRO, but also for the increase of volumes of our lending activity, even though we'll be tempered by the slight reduction in the spread because of the bettering of the quality of the asset -- of the loans we are going to grant. We don't think, as I mentioned before, to exploit very much the TLTRO, either then -- for repositioning the maturity during the time life. So it's possible that you are going to add some drawing in order to have different maturity and not only one maturity. But the average will be more or less the one that we have right now. Cost is very -- as I mentioned, and fortunately, we think that we are quite good at cost reduction. We have done a massive cost reduction in the first 3 years of the plan. We try to have an unfortunate industrial plan in which we were not cutting costs so much because we thought it was the time to invest more, to invest for more revenues. But of course, as we mentioned at that time, as the case may be, and unfortunately, the COVID was the case, we were able to still reduce our cost base. And we feel that this year can be quite consistent, the reduction that we are going to have, consistent with the reduction we had in last year, year-by-year. The majority will come not from redundancy and branch closure, because, as you know, we still have to present the renewal of the industrial plan. And until then, it's very difficult to have some action to be taken. But also, on ordinary basis, and thanks to some major COVID-related, we will be able to consistently reduce cost base for personnel and also for other general costs. Commission, as I mentioned before, we are quite comfortable because of the June performance. The July was in line with June. The normal -- this is for investment products, the normal activity is recovering. The amount of loans we are doing, of course, bring with them also a lot of commercial activity. And so we can have some sort of optimistic approach in terms of also banking commission, as we registered already in June. Dividend. Capital, as you see, is very strong. Of course, we are still showing an optimistic approach, but we want to see if the situation is really the one we see right now. So we'll take some other -- we will take advantage from the ECB rules to wait until the end of the year. And then I hope we'll have a clear view of the situation to understand what is better to do. But the most important thing is that we have enough capital. The MDA buffer is well -- comfortable. And the production also of the profit that we mentioned for the first half, we feel it's possible to have also a good production in the second half. M&A. Congratulation to Intesa for the deal. Of course, this is a new situation. We couldn't do anything, and so we had to wait, for seeing what was going to happen. For sure, this is a catalyst for new aggregation. We are -- our job is to be ready to take any potential opportunity at our best. And in order to do that, we will try to work as much as possible to have a sound balance sheet, sound revenues and be ready for whatever opportunity is going to come.

Just a follow-up. Would you take in consideration also a buyback, having in mind the current low valuation?

Everything is possible. Well, every year, we do these conversation. It depends from the amount of revenues and profit we are going to generate. And I would really take the opportunity to wait up to the end of the year. But again, I think you can be comfortable from the size of capital we have reached.

The next question is from Giovanni Razzoli with Equita.

Some clarifications on my side. The first one is on your cost guidance, because if I'm not mistaken, in the business plan, you were assuming staff reduction, voluntary exits with the cost in the region of EUR 200 million, EUR 220 million, if I'm not mistaken. Shall we assume that you will enter into negotiation with the trade unions for this plan? Or shall we wait for the new business plan? And if so, can you give us an indication of what's your thoughts about the timing of this business plan? And the second question, related to the situation of Agos, which has been very good performance in this second quarter. Please correct me if I'm wrong, but if I remember correctly, you have a put option with Crédit Agricole 10% stake for a valuation of EUR 150 million, which expires in June 2021, while you retain the option of listing the company, if I'm not mistaken, by November this year. I was wondering, as the timing is running late, what are your thoughts on this stake? And what could be the impacts on your capital if the put option were to expire or you were not succeeding to listing the company?

Thank you, Giovanni. No, you're right. We mentioned, of course, in the business plan, some early retirement scheme. Of course, nowadays, hiring is freezing because -- it's freezing because we have to wait for the update of the plan in order to start a negotiation with the union, which are a prerequisite in order to make some provision on the expire -- on the exit. So of course, what I was mentioning before in terms of cost reduction was not taking in account the potential add-on need for redundancy. Of course, if this will be the case, we will have enough room also for that. But of course, I was talking like-for-like. Agos, we have -- also because of the COVID, we decided together with the Crédit Agricole to give some time for deciding what to do. And we are basically under negotiation to postpone the maturity of the put option. So I cannot give you some -- any other detail because it's not yet closed, but the intention of both parties is to postpone to better times, I would say, the possibility to list the company.

The next question is from Fabrizio Bernardi with Fidentiis.

I have another question on M&A, the usual one, on Anima. And if you can you give us an update about the possibility of any other asset management company may join Anima or later, maybe there is an evolution of the situation, considering the UBI has gone. And deeper, may be looking for a partner. Second, if you think that there will be an extension of the moratoria as some of the CEOs that had the conference call in the last few days have told us. And third, if you can give us an idea of the capital gains on govies, let's say -- or to collect the amortized cost that you may realize quarterly. Just to have an idea of the magnitude of the trading line that we can assume.

Thank you. Mr. Bernardi. Anima, as I mentioned many times, Anima is a strategic partnership for us. Of course, we took the opportunity to increase our stake both for showing that it's not a stake we want to dispose. And secondly, because it was a very low price when we increased our stake. We feel that whatever transaction with product factory, it's very convenient for the bank. So we are very interest to try to understand what are the opportunities on the market. We don't forecast right now to increase our stake in Anima. But again, all the product factory for us is a core business, and we want to try to be stronger in each of this product factory. The extension of moratoria, of course, I don't know. Nothing for sure. As far as we know, we have been told that there should be some postponement in the new decree from the government, the one which will be issued in August. If this is the case, it's very good for the banking system, because, as much as we have arranged the good transaction for many of the client who needed the moratoria and the liquidity to comply with the installment, we will have another 3, 4 months of time. As I mentioned before, we have worked for the vast majority of client, but still, we have some thousand of client which we have to deal with. So some postponement would be very beneficial. Again, for the reserves and unrealized gains, basically, we are not going to be opportunistic on that. We have had a very good second half in terms of NFR. We have almost reached the 70% of the budget for the year. So we are not going to have speculative approach in order to capitalize these revenues. Of course, we follow the market. So if there are opportunities, we can decide to take some advantage. But normally, all this is done to support NII, especially with the TLTRO convenient funding.

Sorry. If I can, a follow-up on M&A. When I look at your stock, it's trading at 0 2 to tangible. So it's a very low valuation. And you usually tell me that this multiple is not good for M&A, especially if you go on with a paper deal. So this multiple is more a risk or a concern or a positive factor from the M&A standpoint? Because at the end, UBI was taken over at 0 5, if I'm right, the tangible equity. So more than twice your multiple. So which is your consideration about the current valuation of the stock?

Now of course, I'm very disappointed about the current valuation. We would like to be, of course, in a different position. But we have to take -- to have respect for this valuation, the market. Of course, in the last months, I think there is some realignment vis-à-vis also other banks which are using the market cap. We will try to fill the gap in order to be ready again, if the case may be, either to have a potential aggregation or to valorize the maximum possible level our stock in case somebody would like to look at our bank.

Next question is from Tiberio Guidolin with JPMorgan.

I just have 2 quick ones. The first one is on capital. And what impact on RWAs are you expecting from rate migration in the second half of the year and in 2021? And then secondly, if you could you just please give us a better understanding on what drove the increase in associated income over the quarter?

Thank you for your question. Again, it's not that easy to consider the capital impact. We feel that we have already done what was needed in terms of outlook and the forecast in order to adjust our -- deteriorating of our performing portfolio with the scenario that we mentioned before. But on top of that, we feel that even though there should be some further deterioration for sure, we still don't have factorized at the right level the positive effect of the guarantee. So we are right now experiencing, as of June, we had only EUR 2 billion out of EUR 11 billion of potential pipeline of guaranteed loan already in our book. In July, there was another EUR 2 billion, and we are growing up possibly to fill all these pipeline by the year-end. If this is the case, of course, the positive impact of the guarantee were gone to completely offset in our forecast, the potential deterioration. The potential, further deterioration, if any, of the WA. In terms of the stake holdings in our participation, I would say, normally, especially in the last year, the best contributor was Agos. And this is also the reason why, this year, we are having a lower contribution. And of course, the second is Anima.

The next question is from Jean Neuez with Goldman Sachs.

I just wanted to ask on the -- on your comment about filling the guaranteed loan bucket. So the question that I have is, how do you expect this to play out, the filling up of the guaranteed bucket? Because do you expect these to be loans to new clients? Or do you expect that even though it's not the aim that essentially, over time, this guaranteed bucket will add another refinance or serve to amortize progressively existing loans of existing clients? And obviously, this has an impact on the cost of risk, I guess, whether that's just additional loans or whether they serve to remix, if you want, the existing loan book. And also, on the cost of risk, I just noticed that there wasn't much increase. There was a slight decrease in total NPE this quarter. But the provisions, which did not relate to COVID, the one that you call physiological cost of risk, they still rose almost 20 basis points in the quarter without necessarily having seen many new NPL. So I just wanted to understand whether you'd stick to the cost of risk guidance that you gave earlier in the year, and whether you think that this year is the peak or whether you think that the lag effect has -- is going to hit 2021 as well, as per the slide where you show that the stock is much more powerful in terms of provisions than the typical flow. And my second question is on costs. I just wanted to ask, the cost reduction, like 5% year-over-year, that's a really big reduction. And that's great to see. I just wanted to understand whether, in there, there were any costs that you've postponed or any operations that you would normally do, any investments or any items which is essentially going to have to be expensed at some point down the line and where this is a temporary decrease which will have to be refilled either in Q4 or later in 2021. Trying to find what's the right base essentially.

Thank you. I'll try to give some order to your question. The guarantee, if I understood well, you want to know how much is replacement of loans, how much is new loans. Of course, especially for small-medium enterprise, the vast majority is replacement. So I would say, 60% is going to replace loans which are expiring, as normally do during the year, normally. Also, normally, we do EUR 20 billion of new loans each year. Of course, it's not that this is all add-on to the stock. The add-on is only EUR 2 billion, EUR 3 billion per year. So normally, there is a maturity and a replacement, which is more or less EUR 20 billion. This year, we feel could be much higher. We feel it'd be in the region of EUR 26 billion, EUR 27 billion. The vast majority, of course, is replacement, but there is also 30%, 40%, which is going to be new loans, not compulsory to new client, but the new loans to existing client or to new client. In terms of -- if I understood the question about the cost of risk. Excluding the performing side, the increase of EUR 40 million, if you see also in Q1 and Q2 '19, there is the same increase in Q2. It's quite physiological because Q1 normally comes after the end of the year and you have done a lot of provision already for year-end. So I don't think it's something which is worrying us. Again, we showed the correlation between the increase of stock, increase of flows to the cost of risk. And for the time being, we are not experiencing neither increase of stock of NPL or increase of flows. So we feel that this could be the normal situation up to the end of the year. The only new things could come from further -- eventual performing provision -- provision on performing. Lastly, cost. No, we are not going -- we have not done any postponement. We had, of course -- we were very attentive to invest. First of all, we didn't -- we had all the investment that we forecasted in the plan for IT. So we are increasing our investment in IT. The other cost or expenses were related to revenue-driven project, which, of course, for the current situation have been postponed, but there are not costs that will come without revenues.

The next question is from Noemi Peruch with Mediobanca.

I have 2. The first one is on capital. You mentioned 35 basis point is planned. And can you update us on the disposal and static securitization envisaged in the plan? And did you make some of the securitization in 2020 already? And the second one is on fees. If I'm not mistaken, you were planning to reprice current account fees in H2, worth EUR 20 million, EUR 25 million. Do you confirm this is still happening?

Yes. I start from this. We have confirmed that we have postponed, due to the COVID, whatever increase in cost of current account. This will start from January 2021. And so we are, of course, postponing this fee-driven increase that will come from next year. In terms of capital, if I understood well your question, the 35 basis point comes from headwinds and tailwinds. I think that most of them will come in the last quarter, but I cannot really be so precise with you. Basically, they come from negative ARB market, the operational risk going to standard and the update of the historical series. Meanwhile, the positive one comes from the software deduction and the infrastructure supportive factor. Most of them, I think, will come in the last part of the year.

And I was referring to the distribution over time between 2020, 2022. From your business plan, I see 100 bps of headwinds between 2020, 2021. So is it reasonable to think that in 2021, we will see a 65 bps of headwinds?

Yes. Of course, we mentioned that we are going to have some shift towards 2021. Basically, everything is postponing by 1 year. So we will have a less impact on 2020, a bit higher impact in 2021, again, a lower impact in 2022 and 2023. The global, of course, is going to be 200 basis point, as we mentioned, in the presentation of the business plan.

Okay. And can you update us on the disposal and static securitization as well?

Yes. Of course, the forecast was done taking in account a lower amount of provision that we had in forecast for the business plan. Of course, doing more provision, the shortfall is going to be reduced. So possibly, we will have lower impact also for that. Then you asked about disposal. Basically, we are still working for some securitization possibly by the year-end. I already mentioned some sounding about NPL disposal, but still nothing sure to tell you for this quarter.

The next question is from Antonio Reale with Morgan Stanley.

Two for me, please. The first one is on your cost of risk guidance. I'm looking at your Slide, 10 which shows your assumptions so far, which I think imply -- for the model, which I think imply EUR 140 million over loan losses from IFRS 9. And that's exactly what you booked in Q1 and Q2. My question is how much of your full year guidance of 90 to 100 bps is purely model-driven, i.e., from macro? And how much is underlying? And if anything else, how much is sector-specific or any other? That's the first one.

Thank you, Mr. Reale. So I'm sure I got the first one, I have some problem with the second one. But I'll try to go for the first. Cost of risk, basically, as I mentioned before, the -- we should be done with provision we have done on the performing loans this year, of course, if our forecasts are correct. So basically, whatever will come, will come in order either to increase the NPE ratio, the NPE coverage, or because of some higher flows, should come to nonperforming loans. So I think we shouldn't be so different from the figure we mentioned in terms of performing loans. As far as -- I understood that you made some positive comment on our disposal. So thank you very much. What do we feel? Nowadays, we don't know. That's why we are trying to have some understanding of the current market situation. That's why we are trying to have hint about the possible price. Please remember that the thought -- all the disposal we have done were bad loans. Meanwhile, this time could be also UTP, in which we have now a direct experience. So this is why we are having some -- trying to have some understanding, taking also in consideration that for disposal concluded by 2020, there is also some benefit coming from the government measures in terms of fiscal advantage. So we will try to understand what is possible to do. We think that we have a very comprehensive portfolio in terms of secured, unsecured -- more secure, more provisioned and so on in order to find the best possible solution.

The next question is from Alberto Cordara with Bank of America Merrill Lynch.

I just wanted to connect to a question that you were asked before by a colleague of mine. Looking at the regulatory headwinds, you mentioned that there is a net impact of 35 bps in the second part of the year. So my question is, can you give us an idea what is the gross positive tailwind from software intangible and infrastructure supporting factor? And another question related to this, of the 200 bps that you mentioned of regulatory headwinds, how much will be taken this year in the second half and how much is left for the next few years, and in particular, for 2021? And the other question is, I think before you mentioned that this state-backed guarantee loans comes obviously at a lower spread and the Euribor is taking -- is on a negative path. So can you give us a bit more of an idea on what we should expect in terms of NII evolution over the next few quarters?

For the first question, I think you make reference to the 35 basis point I mentioned before. Again, the different items. I didn't mention the right numbers, but it's -- the different items are the market, the update of the historical series, the going standard for operational risk. So this amount to some, let's say, almost 50 basis point. And on the other side, we have a positive impact between software intangible deduction and infrastructure supportive factor of more or less 15 basis point. So all in all, it could be 35 basis point. With this, we have done -- with the forecast we gave you, with the presentation of the business plan, but the -- our view on credit, you know that we have a long-standing request of application for the disposal we have done. We are still waiting for that. And most probably, this will come in 2021. The second was NII. Again, also for that, there is increase of volumes, possibly quite consistent, decrease on spread because of the quality of these volumes coming from state-guaranteed loans, or low -- very low-risk borrowing, which, of course, are taking some liquidity, and the contribution of 1% for the TLTRO drawn this year, so is a consistent increase in NII.

Okay. But what should we expect in the next quarter? Is it still an increase in NII or some pressure comes?

Cost is almost even in Q3 and Q4 because, of course, there is this big impact also from TLTRO for the full deployment of TLTRO and also a consistent increase in month-by-month of the new loans. As I mentioned before, in July, we had EUR 2 billion of new loan all with the state guarantee.

Next question is from Andrea Vercellone with Exane.

I've got 2. One is a clarification on the moratoria or on the extension of the moratoria and the second one is a follow-up on a previous question on cost of risk. On the moratoria, you mentioned before, and we also read it in the newspaper, that maybe it's postponed to the end of January. And you said that would be very important because that gives you more time to wrap guarantees on client positionings. I don't understand why that is the case since you are free to move anything, at least that's my understanding, from the expiring moratoria, the state-sponsored one, to the ABI one, which is not lapsing yet. That is not correct. And I'd like to know why. And what are the differences? To me, it's more or less a carbon copy, one or the other. And the second one is on cost of risk. If I'm not mistaken, you said before that the provisions you will book in H2 will -- whatever they will be, they will only be related to stage 3 loans, so existing NPLs or new NPL formation. Other banks are also doing some Stage 2 overlay, i.e., moving some positions to Stage 2 and posting some provisions, I call them a bit invested provisions. Is this something that you're planning to do as well? Or you'll just take it as it goes? And then if you have NPL formations next year, you will provide them?

Thank you, Mr. Vercellone. First question. Of course, I can switch, but we lose the 33% of the guarantee of -- from the state, which, of course, apply only to the moratoria decree and not to the ABI Moratoria, of course. So it's very good for us, also for our portfolio to still keep this guarantee even though it's not a full guarantee. But of course, if this is not coming, we can also work with the ABI moratoria. Secondly, I want to be clear about that. We, of course, have a forecast, which are quite consistent in terms of provisioning also in H2. We expect that this will come from potential -- even though I mentioned, as of today, we don't have either increase of flows to the deterioration, neither to -- from UTP to bad loans. And so it's very difficult to make a forecast. But with the scenario we have, there is a potential deterioration of the default rate, of the danger rate and so on. So if we follow these numbers, we have some consistent provision to do, which will apply mostly to NPL and not to other performing. If this is not the case, and we will be consistent with the default rate and danger rate, which we are experiencing right now, which are basically the same as usual, I think it would be possible to make some more provision also on Stage 2 because there is not a deterioration from Stage 2 to Stage 3.

And your 90 to 100 basis points guidance assumes this top-up or it's all underlying? My understanding is that it's all underlying, plus what you have already made in H1. Correct me if I'm wrong.

See, that is very difficult that it could happen both. So for me, it's very difficult that can happen both, as a shift between Stage 2 and 3, and at the same time, a further increase of Stage 2. So we think we are safe enough with our forecast, which are, again, the famous, let's say, 100 basis point. We still don't know if it will be because of the increase of Stage 2 or because there will be a shift from Stage 2 to shift -- to Stage 3. As of today, it's more because of the increasing of Stage 2 but could be different in the next months.

The next question is from Domenico Santoro with HSBC.

Very 2 quick questions on my side. First of all, on the DTAs. As other European banks have done in Europe, you're going to potentially temper your targets when -- the profit targets, of course, when you present the new business plan. So I'm just wondering whether, at the point, it will be a profitability test on DTA, whether we should expect any write-down of non-guarantee DTA that, at the end, there might be also beneficial, of course, for your core Tier 1 given the way Basel III and the deduction, they work. And secondly, on the NII -- I'm sorry to ask the same question, can you give us a bit of visibility on the incremental contribution from TLTRO in the third quarter given that some of the banks are also giving back to the ECB part of the liquidity?

Okay. Thank you for your question, Mr. Santoro. We have a very clear the effect of DTA. We know that, from one side, they can be very useful if the profitability is going to increase. On the other side, of course, they are a burden to the profitability on equity. So in any case, we will have to do the right choice. Up to now, we thought -- we still think with the last business plans we presented, that was not the case to write-down. Let's take advantage of these months. But we -- as of today, we don't think this is the situation we are going to face. But of course, we are under a very extraordinary period. So just for example, if the situation should be worse that we imagine because of a second lockdown or whatever, of course, we will be reconsidering also the potential -- the possibility to write-down something. But as of today, we are not taking this move. NII, I gave you the gross profitability of TLTRO because it's very easy. It's 1% split, basically, even into the 2 quarter. But of course, this is the gross because then you have also to utilize and make the best possible use of this funding. Sometime, if you are not able to use everything, you have to make some transaction, which make -- which give you some negative basis point -- negative yield. So it's almost EUR 60 million per quarter if you could be able not to have negative yield on utilizing this liquidity.

Gentlemen, there are no more questions registered at this time. Gentlemen, would you like to add any final comments to conclude the conference?

Okay. So thank you very much to everybody. Plenty of question, I'm very happy considering the timing. Have a nice holiday, and see you on September. Thank you.

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