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 2022 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.

Thank you very much. Thank you, everybody, for being here with the presentation of the first half results. As usual, you can find the presentation on our website in the Investor Relations page. And let me remind that the Q&A session is here only for the financial analysts. Now I leave the floor to Mr. Castagna.

Good afternoon, everybody. Thank you for being with us for the Q2 presentation of Banco BPM. We are very happy to have the opportunity to present this very strong and good set of results for the bank in such a difficult operating environment like the one we are experiencing during the last months. Nonetheless, both in terms of net income, volume growth, asset quarterly and capital buffer, we feel that we have done a strong set of results, probably the best results ever for our bank. Let's go through the different line. Profitability grew, both in terms of core profitability Q-on-Q and H-on-H, 1.4%. Operating cost, down 1.5%. We will see that like-for-like, the reduction is even bigger. Net income at EUR 206 million, plus 16% quarter-on-quarter and adjusted net income at almost EUR 500 million. We have reached EUR 497 million of adjusted net income. All that still continuing to support the real economy with our activity. Core net performing customer loans grew quarter-on-quarter, 1.5%; year-to-date, more than 3%, which was the forecast for the whole year 2022. It is very remarkable to notice that loans to corporates and SMEs have a guarantee of 29% -- are guaranteed for 29% of the entire volume by state guarantees. So we are continuing to have a very safe loan production, mostly supported by state guarantee. In particular, the new lending to SMEs, 58% is with state guarantee. New lending at all is, again, at a very good level of EUR 13.7 billion in the first 6 months of the year, plus 13% year-on-year. Green new lending, EUR 4.6 billion and also the direct customer funding is growing to EUR 107.4 billion. Further improvement also in asset quality. We have been reducing year-on-year, EUR 1.6 billion, the gross NPE and in the last quarter, EUR 0.8 billion, down to EUR 5.5 billion with an NPE ratio gross at 4.8%, 3.6% with the EBA definition. The default rate in the first 6 months of the year is still very low, 0.9%, below 1%. The cost of risk also considering the amount that we have front loaded in order to execute forward disposal during the plan horizon is 55 basis points. If we consider only the core cost of risk related to the first 6 months, we are down to 35 basis points. Capital, even though impacted by the results of the reserves due to the govies [ unfortunately ], is still a very sound 12.8%. I have to say that thanks to the recovery of the yield of the govies during the last month of July, we are back above 13%. Also MDA buffer is fully loaded is at a very comfortable 424 basis points with all the LCR and NSFR very well above the minimum. We feel that we are well positioned to benefit from the NII boost that is already decided both by ECB, but the Euribor movement are now reaching almost 70 basis points of increase. I want to remember that we are very sensible in positive trends to the increase of Euribor for 100 basis points, the sensitivity for us is EUR 443 million. And even if we consider the 50 basis points of official increase of ECB rates on 1 year time horizon is EUR 220 million of increase in revenues. As you can see on the right side of Page 7, the rates that we embedded in our strategic plan both for '22 was 0.49% negative and was still negative also for '23 and '24 at 0.39% and 0.15%. So if we have a look to the forward rates, you can see that there is a massive potentiality to increase the profitability, thanks to the further increase of Euribor coming during the next month probably due to the inflation. On the left side of the slide, you can see how solid, how consistent it has been during the year, starting from the pre-pandemic results in '19 to have consistent core revenues almost EUR 2 billion in '19 and now EUR 2.1 billion in the first 6 months of the year. Likewise, the adjusted net income starting from EUR 300 million, last year was EUR 382 million, and now we are almost at EUR 500 million of net income. The asset quality went down from 9.7% to 4.8% as well as the risk connected to the domestic sovereign risk as we're going down from 65% to 41% of share of Italian govies on the total portfolio. And if we consider only the [indiscernible], the Italian govies are down from 58% to 28%. Let's go to Page 8, also to see how this consistent set of results can help by -- also by the NII, which are not embedded in our strategic plan assumption, we can go forward with confidence in order to get the results of our plan. As you can see, in Q2 '22, the core revenues were EUR 1.56 million (sic) [ EUR 1.56 billion ], already more than what we forecasted for 2023, which was EUR 1.02 billion. And in 2024, we reached EUR 1.1 billion, thanks also to the contribution of the bancassurance and the partial increase of NII. The same is also for operating costs. We are down to EUR 632 million. We still have to embed the further reduction of personnel, which happened during 2022. And we think we can reach the planned trajectory, which for EUR 610 million of operating cost per quarter, both in 2023 and in 2024. Cost of risk is basically already at the level of our business plan as well as net income is already above the 2023 target. And with the further increase of both NII and bancassurance will most probably reach the target for 2024. In terms of asset quality, we are on Page 9. We are already ahead of the target for 2024 of our strategic plan, which was EUR 6 billion of NPE. Now we are already down to EUR 5.5 billion, which means, again, minus 22.3% in the last year and down to 4.8% in terms of NPE ratio. The default rate and the execution of the Argo transaction allowed us to reach these results. And we still expect without massive disposal to overcome EUR 2 billion of reduction, total reduction in NPE during 2022. Let's also say, as I mentioned before, that we have already targeted and embedded in our cost of risk more than EUR 500 million of further disposal during the plan horizon. On Page 10, some update about our bancassurance model evolution. As you may know, we have concluded after the authorization by IVASS, the acquisition from Covea of the 81% of BPM Vita. We have already applied for the status of a financial conglomerate to the supervisor, which is a prerequisite to obtain the Danish Compromise. And so from July this year, we are consolidating line by line the result of BPM Vita in our H2 2022. The next step will be in 2023 related to Vera Vita and Vera Assicurazioni. We will have the first window to exercise the call option do company in H1 2023, starting from January and in the second half of the year, we have the opportunity to have the closing for Vera Vita and Vera Assicurazioni. So with basically 1 year in advance vis-a-vis what we expected in our strategic plan. Let's say, how we are doing our negotiation in terms of potential partnership. We have received during the last weeks several potential offer from different partners. The Board today resolved, decided and authorized the management to continue to explore the potential to establish a new partnership in insurance, in particular to focus the next phase of the process exclusively on non-Life activity. A final decision is expected by year-end 2022. Let's pass on Page 12 to the financial results. As I mentioned before, there are very good results in all items. On the left side, you see quarter-on-quarter increase. On the right, year-on-year, you can see that we have 1.4%, as I mentioned before, our core revenues. Let me make you notice that we are one of the few that up to now have an increase also in commission, not only in interest rate, both quarter-on-quarter and year-on-year. We have also a reduction of 1.5% of costs. Pre-provision income is the same of last year year-on-year. But thanks to the reduction of the cost of risk, we, notwithstanding the upfronting of more than EUR 80 million, we have a pre-tax profit of EUR 688 million, which is 30% more than last year. After taxes, this became EUR 457 million, 16% more than last year and a net income of EUR 384 million, which adjusted became EUR 497 million. The adjustments are related almost entirely to the pre-provision on the derisking and on some adjustment fair value adjustment on our real estate. Let's pass on Page 13 to some detail about our profit and loss. We have the net interest income on Page 13, the half yearly trend and the quarterly trends are both positive, 2% year-on-year, 3.1% on the quarter. The increase in the quarter is due 50% to the commercial activity at 50% contribution from the govis. Of course, this is starting to benefit from a better commercial spread, which thanks to the liability spread increase and the Euribor increases, giving 10 basis points of advantage vis-a-vis the last quarter. And this is what happened until now. On the right side of the slides, we hope to have the opportunity to give you some clear understanding of what can happen in terms of sensitivity, both due to the 50 basis points already decided by the ECB raising of the facility rate and also to a possible further increase of further 50 basis points. Let's say that on the first 50 basis points on an annualized NII will have an advantage, we will have an advantage of EUR 220 million for the second part of the year will be a bit less of this amount because, of course, the advantage do not start immediately on the 1st of July, should be something more than EUR 100 million, if the increase will happen in the second part of the year for another 50 basis points. So the total increase of Euribor will be 100 basis points, the total sensitivity for us, the total increase of NII for us will amount to EUR 443 million, which is 21.6% of our current NII. If we projected this NII in the next 2 years, 2023 and 2024, we will have a slightly lower impact of the NII contribution. And precisely, EUR 360 million, equal to 18% of our NII in 2023 and EUR 260 million in 2024. This comes from the positive influence of the TLTRO calculation rates. But of course, still, we have a strong contribution also independent from the TLTRO because you see that also in 2024, when the TLTRO will expire completely, we'll still have a strong contribution, a 13% increase on our NII. On Page 14, I mentioned before, the very good result on fee and commission, we have 1.8% plus year-on-year and 1.4% of improvement on Q-on-Q. Of course, this comes from a different movement of management intermediation advisory fee, which are 2% and 0.3% lower, respectively, last year and last quarter, but completely balanced by the commercial banking fees, where we have an increase of 5.7% year-on-year and 3.1% on a quarterly basis, leading to a total increase of the commercial activity of the bank. This came particularly for the good performances coming from the lending activity. We make reference to the EUR 13.7 billion of new loans. The payment-related servicing, the positive performance of consumer credit and credit cards product, the investment banking, structured banking fees, advisory fees, which counterbalanced positively, the lower contribution coming from asset management fee, in particular, Fund and Sicav placement, which in turn were counterbalanced also by higher fees from life insurance and certificates. So all in all, what we have, a reduction of the investment product placement that you can see on the histogram of the low left side of the Slide 14, we reduce it to EUR 3.9 billion in Q2 vis-a-vis EUR 4.5 billion in the first quarter. But this reduction does not affect so much the total commission, which were very well counterbalanced by the other commercial banking fees. Operating cost, as I mentioned before, 1.5% reduction. Year-on-year, 2.6% -- sorry, yes, year-on-year, 2.6% always year-on-year, if we consider that 2021 was benefiting of some COVID-related savings for more or less EUR [ 15 ] million of contribution. The cost income is still very good at 54.5%, slight reduction since 2021. On Q-o-Q, we have a slight increase of 1.2% ,the increase of EUR 10 million in other administrative costs come, I would say, half from the energy cost and half from the new contract that we are dealing with in order to substitute at the expiry date the old contract. On the other side, the staff cost is reducing both year-on-year from over almost EUR 30 million year-on-year and still is reducing in Q2, even though the major increase in reduction will happen in the second half of the year, while we experienced another EUR 10 million of cost reduction due to the exit almost 240 exits that we had in June, always following the early retirement scheme that we started in 2021. The total head count is still a bit above 20,000 people. On the next Page 16, we see again some figure related to the credit profile and the cost of risk. Year-on-year, the stated cost of risk is 35% lower than last year. If we see the quarter reduction, you see that the 2 quarters in 2022 were very much below the 2 quarter of 2021, even if we consider in both case some extraordinary provisioning that were done in 2021 for EUR 94 million and in 2022 for EUR 113 million. Let me say that the real cost of risk, or the core cost of risk for the first half of the year is down to 35 basis points and Q2 is down to 26 basis points. On the left side, on the bottom left side, you see that the migration rates are still good. The default rate we mentioned before, below 1%, 0.9%, a danger rate a bit higher, but it's just a spike that we had because a single position already consider bad loans that we passed during Q2 and also due to the Argo disposal which we -- in order to complete the Argo disposal, we had some movement from UTP to bad loans. All in all, we also can say that we are proceeding with some early engagement campaign. Likewise, we did during the moratoria in order to forecast with some kind objectivity, the possible default of our clients which were due to repay, we have done the same exercise this year on almost EUR 6 billion of credit related to clients exposed to energy, raw material-intensive sector. And out of this EUR 6 billion, we have classified as NPE only EUR 55 million. At the same time, we are prudentially increased EUR 1.5 billion the stage 2 due to this kind of client. But with the final results, which was below Q1, exactly in Q2, we have EUR 11.2 billion in Stage 2, which is 10.4% of total performance loans versus 10.7% over last quarter. So all in all, also Stage 2 is giving us -- also we have such a preventive approach on the category. I mentioned before, we are getting some strong output. Let me remember again that we are quite satisfied of the increase that we are registering quarter-by-quarter on the percentage of total gross performing loans to SMEs and corporates, which now guaranteed by the state that now amount to 29%. And last year were below 27%. Again, on Page 17, on the coverage on the right side of the slide. You see that the bad loans are now covered even after the Argo transaction to 61.5%. If we include the write-off, we are above 70%. UTP is still a very comfortable 40.3%, past due at almost 30% and total NPEs, 47.8%, which is almost 53% if we consider the write-off. The share of secured NPE is still almost 2/3 of the total NPEs. Let me pass the floor to Mr. Ginevra, which will go through portfolio and liquidity and capital.

Thanks a lot, Giuseppe. I hope you can hear me. So Page 18 presents the recent evolution of our bond portfolio, the securities portfolio. You see in this page that in the first half of this year, we took the opportunity to increase the level of bond holdings, which allowed us also to exploit the increase in yields for increasing future contribution to NII. The bond portfolio staying on the left part of this slide is represented for 2/3 of -- by amortized cost component, which is important because limits the level of volatility of the portfolio of capital induced by variations in returns. Turning to the right part of this slide. This shows the progressive important diversification that we are achieving in this portfolio. Now Italian govis impact [ cover ] share of only 41.1%. This used to be 99.1% at the merger date end of '16. This 41.1% compares with 50% -- or below 50%, which is the 2024 target. Bearing in mind that we have concentrated a vast majority, predominant majority of Italian govis is in amortized cost portfolio. They are now 75% of such bonds in this portfolio, which keeps its historical cost without being exposed to the market volatility. Next page, Page 19 provides some elements on the contribution of fair value of the comprehensive income portfolio, both capital and to the P&L. In a volatile market context, as it is the case in the first half of this year, reserves went down. They were at EUR 46 million on a net basis at the beginning of the year. They have been booked at EUR 467 million negative on the 30th of June. Volatile environment, so it's not surprising that this trend has been partially reverted in the first part of the year. This reduction is important to note now I'm on a pie in the bottom part of the left of this slide is mostly attributable to market risk, much more than credit risk. So Italy, as a matter of fact, contributes only for 11% of the reduction in the net level of reserves, whilst 50% is core Europe. So basically Germany, France and Spain, 20% U.S. is govis, 19% is other type of securities. Moreover, the strategies, the hedging strategies on the portfolio have also contributed to mitigate the impact of the reduction in reserves. Now turning to the attention to the net financial result, which is in the top right part of this slide, we see that the contribution of this item in the P&L is EUR 49 million in the second quarter after negative contribution from Nexi of EUR 37 million, again, another volatile item, which in the third quarter so far has showed conversely a positive contribution. So the contribution of fair value of the comprehensive income to this net financial result is positive for EUR 70 million, and this positive contribution is largely attributable to option hedging. A final point is that we tend to look at this capital volatility in close conjunction with the exposure -- overall exposure of our P&L to NII. And the comparison is such that the capital sensitivity is as limited as EUR 2.5 million per basis point. If you look at the survey of the comprehensive income portfolio, these only for EUR 300,000 from Italian govies, so very limited contribution to this sensitivity. Whilst the NII sensitivity, which was mentioned by Mr. Castagna early on -- earlier in this presentation, is EUR 443 million. So it's almost a factor of 2, the difference between the NIII sensitivity and the capital volatility. Next page, snapshot on funding and liquidity, showing that we are in a very comfortable position in terms of SCR by well above 200%; NSFR, which is above the minimum requirement of 100% with a total level of liquidity as high as EUR 45 million or above EUR 45 million. We have continued in our issuance during the second quarter. In April, we issued an AT1, additional Tier 1 for EUR 300 million. Recently in July, we were out in the market with a green senior preferred private placement of EUR 300 million. Worth mentioning also the covered bond of EUR 750 million that was issued in March. We are also receiving very comparable signals from rating agencies. On top of the historical investment-grade rating that we have always been granted by DBRS, recently Fitch had assigned to the bank a long-term rating of Triple B-, also in this case, investment grade and Moody's upgraded 1 notch to Ba1, which is just 1 notch below investment grade. The next slide shows the impact of the various parts that were described in the previous part of this presentation on capital. We started the quarter at 13.1%, end of March. We received a positive contribution from P&L of 36 basis points, partially absorbed 21 basis points by the expected level of dividend, basically 50% as per the historical -- the previous year decision, plus an additional component, which is the effect of additional tier 1 coupons. So the total before impact of reserves is at 13.3%. Then, of course, we had a negative impact of reserves on a net basis, this is 54 basis points and so leading to a total of 12.8%. But this negative effect has to be interpreted as a temporary phenomenon because on one hand, it's progressively absorbed through the pull-to-par effect by December '24, basically, this amount will be reduced by the simple natural tendency to part of the price of our bonds. On the other hand, it is also influenced by the movements in the market. As I said earlier, in July, after June, the market evolved positively. Now more than 40 basis points of this 54 have been recovered so that we are well above 13% on a pro forma basis. A quick mention on the phase-in ratio, which is at 14% and on the buffers, our fully loaded buffer, in terms of MDA, distributable amount is 424. So we're reassuring, benefiting not only from the high level of Common Equity Tier 1, but also from our ability to fill in full all the buffers both in terms of Tier 1 and in terms of -- both in terms of additional Tier 1 and in terms of Tier 2.

Thank you, Edoardo. Let's terminate with the final 2 slides. One is to concentrate a very good set of results of this first 6 months. Let's say that after the restructuring, I would say that we were, both geographically and temporary, very well positioned to exploit the still very good growth in GDP in the first 6 months of the year, which is above 3%. And our geographical territory may be more than that. And this led us to a very good set of results, again, both in terms of profitability, in terms of cost/income, in terms of slowdown of cost of risk at the same time in terms of further staying concentrated on the further reduction of gross NPE stock looking at the current level of results, but also looking forward with the provision in advance that we did for the next quarter. Edoardo talk about the solid capital position even better if we consider recent movement of the govies. Notwithstanding this good performance and a good feeling that we have also in Q3, I would have to say that we are experiencing a solid set of results also in July, the boom also of the touristic contribution to the some would, for sure, boost also in Q3, the economy in Italy. But notwithstanding the good performance, we can see the potential slowdown due to the effect of the geopolitical situation and of the Italian uncertainty in the last quarter of the year. That's why we still strongly believe that NII sensitivity will be the catalyst to support revenues and profitability even in a slowdown scenario. So what is our outlook with a certain approach of prudence is that we will go over EUR 4.4 billion of total revenues, EUR 2.5 billion of operating costs, pre-provision profit above EUR 1.9 billion, a cost of risk that we consider consistent with a slowdown scenario of 55 to 60 basis points, which would lead to an EPS over EUR 0.40 with a dividend payout of 50%, which is embedded in our capital work that Mr. Ginevra was showing you. Of course, if we consider the adjusted EPS, we'll be in the region of 48 basis points (sic) [ EUR 0.48 ], with the capital above 13% and MDA buffer of more than 420 basis points. This will be, for us, a good start for the target that we have in 2023 and 2024, which we confirm with our full commitment of our management and the convention that the NII can be really a catalyst for improving these results. Now I leave the floor for the Q&A.

[Operator Instructions] The first question is from Giovanni Razzoli with Deutsche Bank.

Three very quick questions. The first one, can you share with us what are the assumptions that you have made in terms of increasing deposit costs, if any? The sensitivity that you are providing us. I'm asking this because everyone seems to be focused on this topic and is providing comments. So as a major commercial bank, it could be interesting to know your view. And also, there's more detail, if you can share with us what was the TLTRO impact benefit that we have in the first half and what is the amount that is expected to disappear in the second half of the year. The second question, I'm going back to the comment that you have just made. So what you are basically saying is that you expect to confirm or improve the 2023 business plan targets also in a slowdown scenario, thanks to the letters that you have on the NII, which can, I guess, offset lower fees or, I don't know, higher cost of risk quarter. So is my understanding correct? And the third clarification, you decided to go for a partnership in the bancassurance only in the P&C and protection business. So you will retain the full control of the Life business, and you do expect to take a decision by year-end, right? So those are my questions.

Thank you, Giovanni, Good afternoon. Yes, of course, the NII sensitivity already get the assumption for a parallel shift, so an increase also on deposit I don't know if I can give you the right figure. But for sure, the first increase of 100 basis point embeds very a few basis points in terms of cost of deposits because this would mean to go to 50 basis points of Euribor positive. The TLTRO impact...

You're pretty conservative there because you feel have not incorporated any on that.

They are incorporated on the scenario that we have -- of the normal cost of deposit. So how much this deposit are stable or not in our figure, we do not assume that the cost of deposit will increase sensitively in the first 100 basis points -- but there is an increase in any case. TLTRO, I should say that we have a slowdown in the second half of the year of the EUR 30 [ million ], more or less, vis-a-vis the first half, which is due, of course, to 50 basis points of reduction of the premium. But on the same time, we recovered around replacement because you know that now the placements are much more remunerative than before. On 2023 and 2024. Of course, we have to wait for understanding better what kind of scenario, if I look around, of course, there are a lot of negative forecast about '23. Today, I read also only one broker talking about below 0, but normally, we are not considering this kind of sensitivity. We think that with the GDP in the region of 1%, we can still have a very good impact -- positive impact from the NII sensitivity and the increase of Euribor. But it's better, of course, to wait for the last part of the year to confirm the target or the increasing target for 2023. For bancassurance, yes, the decision is that we take the Life business which is the vast majority of the business in terms of volumes. I would say that is also the one that is more related to the normal activity of our network, which is very good in terms of asset management placement. And I would consider the life business very much in line with the other kind of product in asset management. Meanwhile, we feel that it's worth to consider to go deep into detail with the bidder in order to understand which kind of better evolution can have the sensitivity that we have on our own business plan related to the improvement that we can get from an industrial partner. And the first understanding on the nonbinding offer is that there is room to improve our results.

May I add some more technical comment on TLTRO. Just to take the opportunity of the question. It's something where you have some certainties about -- on what happened in the first half because we used to have a special interest period, which ended at the end of the first half. There is uncertainty on the second half because it depends on the actual level of depot facility rates during the second half in the current scenario, the reduction in contribution from NII due to the expiry of the special interest period is more or less by and large, compensated by the increase in the second half due to the fact that the cost of funding in using TLTRO is lower than the overall return on the deposit facility.

The next question is from Noemi Peruch with Mediobanca.

Thank you for the update also on the insurance business, it's very clear. So here, I have just one question. Can you please share with us like the financial and operating trade-off you have in mind for the P&C business? And in case of sale, how would you deploy the likely capital gain? Would you consider paying it to shareholders? And on common equity, can you please break down the moving parts leading to 1 bps -- of 1 basis point on Page 21. And lastly, can you give us some color on the evolution of attitudes to our investment of Italian SME in the last month. What are your expectations in terms of corporate loan growth for the rest of the year? And also would you expect cost of risk to move above 60 bps in 2023, 2024 before falling to a more normalized level.

Thank you. we have still to consider the different opportunity that we can get. You know that the P&C business is not really only the upfront payment, but we have to consider the commission level, the strategic business plan that we have to agree with the potential partner and the growth of value also of the joint venture. So a different issue that we have to examine. And I would say that the capital gain will be only a part of this entire amount of consideration, let me imagine that cannot be more than 20% of the entire value of the combination. So of course, we are not very much pressed by the capital gain, but more by the evolution of the business and the reinforcement to the commission level for our bank during the year. It wouldn't be in any case such a capital gain to if we consider only non-Life, it wouldn't be such -- so extraordinary to have to consider a different destination of the capital. Moving parts. All in all, is a bettering of RWA and a negative contribution from DTA always coming from the govis impact on reserves Edoardo has explained and 54 basis points were the net. Of course, there is also an impact on DTA and this offset the advantage that we have on RWA. Corporate clients. Up to now, I have to say, and you can consider the EUR 13.7 billion we have done in terms of new lending and the increase of more than 3% of the total core performing loans, which were already the target for 2022, and we have done it without, let's say, the PNRR deployment, which is still to come and maybe will come in the second part of the year. So I see corporate activity, which is very -- which is strong right now. As I mentioned before, we had some early scheme in order to understand and to detect potential difficulties also because there is also now in place some aid program from the state to contribute to our client. And as a matter of fact, we are not yet in this kind of solution to propose to our client. So we see clients with strong backlog of order. We are increasing export, which are, in any case, keeping a good profitability even though eroded by the cost of energy and for some of them by the cost of raw material. So not yet, as you see from 0.9% of default rate and sign of deterioration. But having said that, for a prudent approach, we consider that in the second part of the year, the default rate could increase. And for the whole year, we consider something that is more than 0.9%.

The next question is from Christian Carrese with Intermonte.

Congratulations for the results, very solid in terms of quality core revenues. I would focus on net interest income and the cost of risk, taking into account the additional buffer in terms of net interest income, looking at 2024. I was wondering what kind of cost of risk do you expect due to higher rates and default rate at around 1%. Do you think that it could be a little bit higher? So the net interest income and cost of risk, what could add to net profit in 2024. The second question is on bancassurance. If you could split what was embedded in the business plan for 2024 in terms of bancassurance between Life and non-Life business. And on net financial results, we saw a positive impact coming from the option hedging on FVOCI. Do you expect any additional positive contribution from the hedging in the coming quarter?

Thank you, Chris. I will start with some answers and I will leave the floor to Edoardo in order to give you some color about the hedge strategy and the impact on NFR. Let's say, starting from the bancassurance, which maybe the quickest one. The EUR 120 million of value in 2024 were a split of, let's say, EUR 85 million more or less of Life and the difference of non-Life. And of course, the life will still remain and down life will be split in some different possible part with a potential partner. But of course, we are working in the sense that the protection patterns has to make -- have to be able to make more money for us in terms of commission. So all in all, I wouldn't say that this changed our strategy for the figure that we embedded in our plan. On the contrary, maybe if we go to these solutions, it's why we feel more safe, more certain to reach that result with an international partner. NII, I understood well that we were talking about '24 -- it's a bit -- we were thinking that we were so transparent to talk about you about 2022 and 2023 and 2024. As I mentioned before, there is a reduction, but just for the first 100 basis points, which would reduce the contribution of the first 100 basis points of EUR 180 million. But of course, if the situation will still continue the way we see with the inflation, we don't think that the interest rate will terminate their hike with 100 basis points. So it's very much possible that there will be further increase going ahead in the next couple of years.

I was wondering just look at the forward rates, there would be some additional -- more than 100 basis points by 2024 compared to the strategic plan assumption. I'm looking at Slide #7. So taking into account the further boost to net interest income. I was wondering what kind of expectation would you have in terms of cost of risk, taking into account also that you have increased the pace of de-risking looking at what you have done in the first half 2022.

The follow-on rate, as you were mentioning, we put them on Page 7 in order to make understand that the forecast are much more generous that our analysis of the first 100 basis points. And of course, any other 100 basis points will have a considerable effect on our figure for 2024. Of course, this could bring some effect on cost of risk. Let's say that we were already prudent in our business plan because we had a default rate for 2022 of 1.8%. Meanwhile, we are experiencing at 0.9%, 1.2% for 2023, 1% for 2024. So it's very much possible that there will be some switch from 2023, 2022 to the forward years, but it's really now difficult to say. We have to wait at least for the forecast of GDP in 2023, which possibly will come in the next quarter. Yes. On the question about expectations on results of hedge strategies. Of course, hedge is a strategy which produces results in against the market movement. So in case of the strategy that we put in place in previous quarters have been effective in a scenario of increasing yields, mitigating the reduction in reserves. In this quarter, we are seeing -- we are going the other way around. So of course, the hedging strategies are contributing with a negative impact on NFR. On top of this, of course, we are producing additional contribution to NFR from our ordinary activity.

If I may on this point. So basically, on P&L, maybe a negative impact from hedging, but a positive impact in terms of capital. On bancassurance, not on the -- keeping the Life business, what do you expect would be the impact on capital?

On P&L, the point on P&L it depends on the evolution of rates. I mean it's what will happen in the second half elections and volatility in general makes the markets difficult to predict with a 6 months or 5 months horizon. On insurance, I understood that it's probably helpful to repeat the numbers, which were not very clearly heard. So [ does that ] say the contribution to the total EUR 125 million of the plan is a little bit more than 85% from Life and the rest from non-Life.

I was wondering on capital..

On capital, I mean, it's depends on the evolution of the agreement. At this stage, we've only decided to go ahead in exploring the point of non-Life, then we will decide according to price that will be offered the commissions and so on and so forth. We don't anticipate a major impact on capital from this decision.

The next question is from Andrea Vercellone with BMPS.

I've got 3. The first one is if you can explain qualitatively and quantitatively, how you move from EUR 440 million theoretical sensitivity to 100 basis points up in net interest income to the actual sensitivity of EUR 360 million that you expect for 2023 and EUR 260 million 2024. I don't get the moving parts. Second question is on the state guaranteed loans. Average guarantees there is 85%, is it correct to assume that the maximum provision you would book on any such loans potentially needing classification to UTP or NPL or bad loan would be 15% or you would potentially need to book more provisions and then write them back at a later stage? And the final question is just a small detail. Have you booked now all of the capital gains on the bonds classified at amortized cost that you sold forward last year? Or there's still some more to come in H2 2022?

Let me answer on the second 2 questions, and then I will leave Edoardo to make some more explanation on the EUR 440 million becoming a bit lower in the next couple of years. This, of course, is only related to the first 100 basis points, of which 50 basis points have already gone. For the state guarantee, we still don't have such experience to say that there are a lot of these defaulted. So basically, we are dealing one by one. The few that are going into NPE. Of course, we are very attentive not only to the commentation but also to being very quick in doing all the formality to be in the position to exploit the guarantee. We are working on the set of loans guaranteed in the last 3 years, getting, of course, some remedial action where we see that there are problems. But I can say that the vast majority, if not the complete entire stock is well positioned. So what we will do is, like in any case, there is a guarantee, we will consider only the difference, which from time to time will be not guaranteed. Let's say, an average of 20% could give us an idea because, of course, as you know, there are 100% guarantee up -- down to 70% of guarantee. But because the [ 70% ] guarantee are the bigger one, I think 20%, 25% would be the maximum amount. For amortized cost, we didn't get any profit during this month. We had already booked the profits for the forward sales that has been anticipated for most of them. There is only a limited amount, which has remained for the second half. For the sensitivity, you're right, it's a complex dynamics. Let me try to explain as simply as possible. What happens when a rate increase is that the investments in Central Bank deposit facility reacts immediately, almost immediately with the sensitivity of euro per year or basis point per basis point. So the 100 basis points increase in level of deposit facility rate creates 100 basis points increase in the return on this deposit facility. On the other hand, for TLTRO, the mechanism for calculating the interest rate embeds an average between the historical minus 0.5% and the current level of rate of the deposit facility. Implying that in any case, the more the rates are increased, the more you create a difference between cost of TLTRO funding and yield of deposit facility investments. First point. Second point, TLTRO has a maturity. So over time, our EUR 39 billion of TLTRO funding are expected to be reimbursed part of them in 2023, remaining part progressing. Part of them, half of it in June 2023, remain part progressively until end of 2024. This means that this positive effect I was describing earlier is progressively reduced along with the residual maturity of TLTRO, so if the last forever, then you have forever the impact I was describing. Given that TLTRO is expected to be reduced, then the effect in 2022 for the next 12 months, conventionally calculated as of 30 June is higher than the effect as of December 2023 because the residual maturity of TLTRO is reduced by 6 months. And this is, in turn, higher than the level as of end of 2024 because -- sorry, end of 2023, so for the total year of 2024 because we remain at this stage with a very limited amount of the pro funding.

The next question is from Tarik El Mejjad with Bank of America.