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 2023 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.

For being here, before leaving the room to Mr. Castagna for our presentation, let me remind that you can find on our website the presentation in the press release and the Q&A is a result of -- to financial analysts and please ask you to have only 2 questions for each to give room also the other analysts to do more questions. Thank you very much. Proceed to Mr. Castagna.

Good evening, everybody. Thank you for being with us for the Q2 presentation. I have to say that we are very proud with my management team to present a very strong set of results. If we start from Page 6 on the left-hand side, there is, let's say, what we have been harvesting during the last year in order to get very strong results in terms of profitability and strengthening balance sheet. On the right side, what we are seeing in order to generate future revenues in the next quarter to come. Starting from the left side, we have had the best performance in terms of P&L in the first part of the year, with EUR 624 million of net income, which is 78% more than last year. We have been able to generate 140 basis points in 6 months of capital of common equity Tier 1 going up from 12.8% to 14.2% stated and 14.8% in terms -- if we consider also the Danish compromise. On the other side, we were able to further reduce the NPE ratio. We are now down to 3.8% in terms of growth and 1.9% in terms of net NPE ratio as well as we still have a very sound CR around 180% and so far around above 10% after having reimbursed basically more than half of our TLTRO facility. On the right part of the slide, again, what we have been doing during the last months in terms of high-value transformation initiatives. As you well know, we have announced a few weeks ago, the creation of the second largest player in terms of payment business in Italy with a significant revenue growth potential, and we have been able to join this company with a very strong consideration for our side up to EUR 600 million. On the other side, we are still in the process to reshaping the bancassurance deal, as you all well know, in May, we have exercised the column 65% on Banca [indiscernible] secretion. And we are in the process in the second part of the year to close also the joint venture with the Credit Agricole for the non-life part of this business. On Page 7, some flavor about the results that we got Q-on-Q, you see that total income went up 6% on Q1 and 21% year-on-year. Cost income 1 full point lower than last year to 47.8% in Q2 '23 versus Q2 '22. And also, cost of risk was down to EUR 121 million, which is 12% lower than Q1 and 21% lower than Q2 last year. With a pretax income and the net income, almost 100% better than the previous H1 2022 to at EUR 441 million as pretax and EUR 624 million in H1 '23, which is, again, our record level in the first semester of the year. These results bring us to increase again the net income guidance for the full year '23, which was EUR 1.14 billion in Q1 when we had the Q1 presentation, which was EUR 0.75 per share, and we are able now to increase to more than EUR 1.2 billion, which means above EUR 0.80 per share. Let's go back to what we have done during this period in terms of product factory, we have from one side, on the left, increased our full ownership of product factory, let's say, apart from [indiscernible], which are our private bank and our corporate and investment bank activity. We have now 100% of Banco BPM EBITDA and [indiscernible], which will be merged together, creating a wholly owned life bank insurance company. On the right side, what we have done in order to strengthen with the key strategic partners. The other participation in the other JV starting with Credit recall, which we have added to the stake of -- in Argos, which is 39%, and we almost recently increased the long-term commercial agreement with Credit Agricole in consumer credit. We have recently added the 35% of the joint venture in non-life bancassurance. And together with this, the new partnership in payment business with FSI and the Clear Bank, in which we will have almost 29% of the stake. During the last year, we have also increased from 14% to 21.7%. Our participation in our asset management company, Anima, which we are the first shareholders and very happy shareholder to say, together today, they had very good results. The strategic rationale is, of course, to develop with the top level of partners a range of products to offer to our clients to try to access a significant influence through direct involvement in Nolans and management in all the product factories and also to obtain a long-term stream of revenue and dividends out of the stakes that we have in this participation. In the meantime, we were able to extract almost EUR 1 billion of value from the last 2 transactions, more than EUR 400 million from bancassurance and almost EUR 600 billion in consideration for the payment system. Just to recap on the payment system, as you know, is a EUR 2 billion NPV deal based on 3 strategic pillars. One was the preservation of the current P&L contribution, which in '22 was EUR 140 million. This is a business that in the first half of '23, is growing 10% year-on-year. So give us a lot of opportunity to increase the stake of revenues from payment system. The second pillar was to have an upfront value generation as you know, we will get EUR 500 million closing and EUR 100 million as a deferred payment obtained in a few years, which will mean 32 basis points for the upfront and 50 basis points for the total consideration of increasing common equity Tier 1, which, of course, is not yet included in the figure I showed of the current [indiscernible]. The third pillar is the upside that will come from the streaming of dividends and from the virilization of this company, which will be the second payment system company in Italy. And possibly, we will start also some value from the increase in value that we will have from this participation. Some figure, this new company would represent 10% -- we'll have 10% of market share, almost EUR 9 million on payment cards, 400,000 points of sales and almost EUR 110 billion on transacted business volumes all in all. On the right side, you see also the different composition as shareholders. The 2 banks will have 28.6%. FSC will have 42.9% on the people-- on the shareholding in people. In Bancassurance, I already said, we have exercised the call on terabit. Now in the second part of Q4, we will have Credit Agricole to purchase 65% of the stake in BPI and Max Dan P&L and [indiscernible] for a consideration of EUR 260 million for the 65%, which -- for a total value of EUR 400 million. This will come together with the signing of a 20-year distribution agreement for this joint venture. The rationale is to have an insurance group with a leading player on the P&C market to have the possibility to have a single commercial offer to our customer, unifying the product catalog, which until now was split into 2 different companies and of course, to extract the most favorable value and synergies from the product factory together with the favorable treatment that we expect to get from the approval of the Danish compromise. Let's go on Page 12. Before going through the figure of Q2, let me say that on the right side, we wanted to show the clear pattern of the new profitability trajectory that you can follow through the last 3 years, I would say H1 '20 was still a year of restructuring with the NIM, net is at EUR 1.7 billion, going up to EUR 2 billion in '21 and EUR 23 million and now reaching EUR 2.5 billion. The same you see in the cost income, 64% H1 '20 then down to 55%, now down to a further 4 to finish with net income, which was EUR 100 million in H1 '20, EUR 350 million in H1 '21 and '22 and now reaching EUR 624 million in H1 '23. This comes, of course, from the strengthening of net interest income, which grew 50% year-on-year, but also to the very good tenure of the other income revenues and cost control. I would say that Q-on-Q, we have a reduction, but a small reduction in operating cost from EUR 640 million to EUR 635 million. A reduction in loan loss provision from EUR 137 million to EUR 121 million, together with the increase in income lead us to a profit from operations pretax of EUR 540 million versus EUR 470 million of Q1. After taxes and systemic charge, this brings to almost EUR 360 million in Q2 versus EUR 265 million in Q1. Going to the year-on-year results, let me just stress that the net profit from continuing operations is up 65% and the net income is up 78%. Let's say that this comes also from a net financial results, which is completely different from H1 '22 in which we had an overperformance of EUR 177 million. this year, we have a loss that then we will explain further on of EUR 42 million, notwithstanding that net income of H1 was for almost 50% coming from something that is not anymore a profit in H1 '23, we still have realized an increase of 78% in net income in the first part of the year. NII growth on Page 13, we have the 49% already mentioned, which means 9% in Q2 versus Q1 with the commercial spread, which increased to 42 basis points versus EUR 357 million in Q1 coming from an asset spread, which we still are able to maintain at the same level over the last 2 quarters, 152 basis points and an increase in liability spread going from EUR 141 million of Q4 22 to 2.04% of Q1 '23 to 250 basis points of Q2. Of course, this is thanks to the Euribor trajectory, which is growing in the last 22 from 264 to EUR 339 million, the depo cost for us grew from 45% 0% in Q1 to 71% in Q2, which means that our EBITDA is still at a level -- these numbers allow us to increase our guidance of NII for 2023 from EUR 3 million to EUR 250 million based on the same level of debt rate from ECB, no further hikes in the last part of the year. And of course, with the same level of data and which means a sensitivity of EUR 300 million or 100 basis points of increase of rates. Let's talk about the balance sheet. We are keeping our performance, not really aggressive on customer loan we are happy to stay more or less EUR 1 billion lower than the first 2 quarters. But the quality of our asset is better and even more as you see on the right part of the slide, the secured loans to household nonfinancial companies grow to 68.8% of which 23% with state guarantee. If we consider only the SME portfolio, this secured part is up to 73.6% and the state-guaranteed loan, if we consider only the nonfinancial companies without the household is up to 30.6% vis-a-vis 6 slightly more than 6% in 2019. On the left bottom part of the slide, you see the new lending, which shows a performance, which is lower than last year. There is, of course, a lower demand, but also what we don't see is the refinancing that we saw until H1 '22 due to the interest rate that were stable and we had a lot of companies refinancing and getting longer maturity during that period. Of course, this is not happening anymore. The total of general lending is now EUR 10.2 billion vis-a-vis more than EUR 13 billion in the first semester of 22 million. Let's say that in July, we saw a recovery of lending. We have granted EUR 2.2 billion in July -- but our policy will still be very prudent, addressing the best rating classes of clients and of course, in our territory, which are mostly north of Italy. Let's also stress that new lending to corporate enterprise is almost 56% green related. In terms of customer funding, we have increased 2% Q-on-Q and 3.3% year-to-date, the customer funding, total customer funding, up almost EUR 7 million since the beginning of the year, more than EUR 4 billion in last with, let's say, Q-on-Q, the same level of deposit, but a strong increase in asset under custody driven, of course, by the obvious placement during the last quarter. All in all, the customer funding is up year-to-date, EUR 7 billion in assets under custody, EUR 1 billion assets under management. And since the beginning of the year, a couple of million lower of deposit transformed into assets under custody. Also, deposit base is very resilient. We have a huge retail base, EUR 57 million of guaranteed deposits, the average retail, which means household and SME deposit size, EUR 21,000. The composition of the site deposit is 80% coming from retail and SMEs. Let's go on Page 16 to net fees up to EUR 948 million year-on-year, with a growth of EUR 9 million, 1.8% in the commercial banking pre and a reduction of 5.8% into the management and advisory fees. These result is very good in our opinion because it comes after the cancellation of the fees of excessively put on current accounts which we gave back to our client in Q2 and this lower contribution of EUR 40 million as well as higher cost for synthetic securitization for EUR 11 million. So all in all, we have a very strong performance from many fee-driven activity, one for all the payment services, which is EUR 26 million year-on-year. And also the fees on lending year-on-year are still very consistent EUR 5 million more than last year. On the management termination advisory fee, we have a reduction % year-on-year, mainly due to lower fees from funds and [indiscernible] due to the increased interest rate environment, which accounted for EUR 51 million, that was partially compensated by higher fees, both from certificates, which we issued with fees for EUR 60 million. And the government placement, which gave us almost EUR 12 million of fee contribution. Cost control is still very strict. As I mentioned before, we have a small increase year-on-year, but -- in Q2 were lower both than Q1 '23 and Q2 '22, 1.4% on Q1 and 0.5% on last year. This allowed us to have a very good 47.8% of those income in the quarter and in the first part of the year, this goes down to 49.5% as the gross income. For the first time, we are below 50%. The count evolution since the merger, we have reduced more than 5,000 people. We are now below 20,000 people, thanks to the last early retirement scheme signed in January. We will have another 250 person leaving the bank, 100 of them have already left and this allowed us to go below 20,000 people. Also in terms of branches, we have almost reached our target of 1,300 brands, closing almost 17 brands in May 23. Let's talk on Page 18 of asset quality. We are very proud of the reduction we had starting from the merger, we were at 24%, and now we have to 3.8% in terms of gross NPE and again, down to 1.9 in terms of net PE ratio. So with the same figure of the best in class in net NPE ratios in the country. Consequently, also our cost of risk is declining, even though we continue to have a very prudent approach in provisioning the new income -- the new inflow of nonperforming and still managing and increasing cost in the stock of NPE that we have. And in fact, we see that now we have maybe the highest coverage vis-a-vis our competitor. We will continue to decrease NPE to dispose NPE. We have done EUR 100 million of disposal in Q2 23 as a part of the EUR 700 million we have already provisioned EUR 4. And out of this EUR 300 million will be disposed in the second half of 2023. The overlays go up from EUR 160 million to EUR 200 million. The prudent provision policy is very well shown on Page 19. As you can see, we still have a coverage of below 50 basis points, but still at a very consistent level. The gross NPE was down from EUR 5.5 billion to EUR 4.2 billion, with a reduction in the first part of the year of EUR 600 million of NPE. The bad loan coverage was down because of the disposal of the -- we were mentioning before. But as you can see, the UTP coverage is still increasing to 42.1% versus 40% of the last 2 quarters. The share of secured and NPD is increasing to 66% as well as the total NPE coverage is growing still at 50.6%. This is thanks to a very good default rate. We are still experiencing also up to July. We have a default rate, let's say, gross default rate of 93%, 0.93%, which if we account the steel rate go down to 0.70% at a level even below 22, which was a very record year. The Stage 2 are mostly at the same level, but let's say that this comes from inflow top down of EUR 1.8 billion coming from the client that benefited from the measure coming after the flooding in [indiscernible] and exclusion of EUR 1.5 billion coming from better in their ratings. Let's me pass the floor to Edoardo Ginevra for the financial aspect of the presentation.

Thanks, Giuseppe. So Page 20 gives an idea of the visit on the evolution of our financial portfolio and shows that there are basically limited evolutions versus the first quarter of the year, with total outstanding stable at EUR 36.1 billion, 72% of them represented by amortized cost component, and this is for the left part. On the right, you see that corporate accounts for EUR 5.5 billion covers for EUR 30.7 billion. Share with [indiscernible] is stable at 7.6%, confirming our diversification policy adopted since the merger between Banco and BPM. Italian [indiscernible] in his representation worth mentioning that they represent only accounted for it, they booked at ever competitive income only for a percentage of 20.7%. The remaining part is booked at amortized cost. On Page 21, we see the representation of -- on the left, our reserves on debt securities at fair value and comprehensive income. Here since the first month of the year, we have seen a positive evolution with the net amount that used to be EUR 626 million at the beginning of the year, now down at minus -- or to be honest, up at minus EUR 416 million, which confirmed a very low sensitivity level, the basis point value of our government portfolio as the compare income is only EUR 300,000 million close to 0 for Italian of this. The financial results, some information given on the right part of this slide, the total was EUR 34 million negative in Q1 and now it's EUR 8.4 million negative, but this is the combination of the separate diverse effect. On one hand, we have a positive contribution from financial assets and financial activity that is as high as EUR 55.1 million. On the other hand, we have the cost of statistics that is accounted for among the components of net financial results due to Bank of Italy accounting rules which is EUR 63.5 million, and which is the outcome of the evolution of the interest rates. Needless to say, these instruments are, in any case, helpful both from a P&L perspective because they generate positive commission contribution in terms of placement and restructuring and from a balance sheet perspective because they can replace institutional issuances and can be accounted for can be computed for MRL purposes. Going now to Page 22. Here, we see a positive evolution on our requiring funding position under many respects. So first of all, liquidity -- total liquidity measured as the sum of cash [indiscernible] now is as high as EUR 44.5 billion used to be EUR 40.7 billion 3 months ago. Exposure with ECB despite we reimbursed EUR 9 billion of TLTRO, now we have a positive net exposure measured by the difference between the EUR 9 billion, EUR 21 billion and teras of EUR 17.7 billion. This, of course, excludes the reserve requirement calculation. LCR for in the last quarter went from EUR 199 million to EUR 179 million. This is the result of the limited impact from TLTRO reduction, the EUR 9 million we invested in June. Bearing in mind that, for example, if we go back to 30th of September of last year, we had a similar level, EUR 179 million with EUR 39 billion of TLTRO usage. As communicated in previous occasions, the steady-state level or the long-term level of the LCR is expected above 140% even after full set reimbursement. In the bottom part of this slide, we also represented our funding activity, which was quite sustained in June with EUR 750 million of green senior nonpreferred, that EUR 750 million of covered bond market that we opened very recent. Green bond issuances are now at EUR 1.5 billion since the beginning of the year. We have also published our new social sustaining bonds report. We have also been happy to see modes providing a positive signal in terms for our credit, I think by switching to a positive outlook in June 2023. Let's go now to Page 23, which gives the breakdown of the capital evolution in the last quarter. So first of all, an important piece of data to look at is that we went from 12.8% to 14.2, 140 bps increase in this -- in the first half of this year. This mentioned before taking into account the pro forma benefit of the Danish compromise, the conservative estimate of this performance benefit leads to a potential total of 14.8%. The breakdown of the data in the last quarter is given -- represented in the work, the capital work that says that net profit gave in the second quarter, we gave a positive contribution bps which had been dedicated to the dividends and AT1 coupon to that matured in the same period. Positive contribution also from our capital-light model activities represented in the balance sheet actions component, contributing for 22 bps, positive contribution from reserves for bps and other components, including among other things, DTAs for 10 bps. Capital ratios are represented in the bottom left, Tier 1 is 16.6%. -- total is now very close to 20%, 19.5% with RWA below EUR 59 billion capital buffers, both in terms of NDA and in terms of excess of CET1 capital on minimum CET1 requirements are above 50 bps. -- which become 612 bps if we included the proportion [indiscernible]. Now again, I'll leave the floor to Mr. Castagna.

Thank you, Eduardo. Just to conclude on Page 25 and 26. So let's say-- that let's recap very quickly that these outstanding results in terms of profitability, NII and I think on operational efficiency with the reduction cost income, the reduction of cost of risk, coupled with the solid balance sheet presentation, which bring us to have less than 2% of net NP and, let's say, a very unattended the capital generation, 140 basis points in just 6 months allow us to lead to a further upgrade in P&L guidance. Page 26, you can see how we think our profitability for '23 will increase from EUR 0.75 of earnings per share to EUR 0.80. Let's remind that in '22 was only EUR 0.46 just 1 year ago and an increase from 11% to 12% of return on tangible equity. If we reduce to 13% common equity 1, the return on tangible ex will be 13%. The higher profitability allow us to increase the dividend, the payout and with this -- with the same current payout level of 50%, we are able to have an increased guidance of around 9% of edge dividend yield in 2023. But what next, let's say that we also have upside expectation from the new strategic plan to be presented in Q4, both related to new guidance for 2024 EPS guidance, we still confirm EUR 0.90, which is again 12.5% more than the guidance of EUR 23 million. This will allow even yield of almost 10% in 2020 fall at current payout level, but we will also take advantage of our strategic plan to reconsider our capital distribution, the strong profitability and the capital generation will be reflected in an additional shareholder remuneration, which, of course, we will propose to our AGM next year. That's all on our side. Let's give the floor to the questions.

This is the Chorus Call conference operator. [Operator Instructions] The first question is from Antonio Reale with Bank of America.

It's Antonio from Bank of America. I have 2 questions, please. One on the use of capital and one on the outlook for NII in 2024, please. On capital, and you never had this much capital, 14.8% is a record high for the bank. You still have some regs headwind to digest, but you also have at least 30 basis points coming from the payments business and all the organic generation that is implied by your guidance, which means the likely the level of capital is set to stay above 15%. Now very few banks in Europe have this much capital. So my question for you is how are you thinking about the best use of capital for a bank like yours. Noninterest income growth is a focus for next year, and you've been investing in some of the product factories like you showed on Slide 8, life insurance payments -- so I wonder how you see the trade-off between using some of this excess capital to grow more in products like private banking or asset management where you could possibly want to do more versus doing share buybacks here. Also, do you have a go-to CET1 level in mind which you want to run the bank? That's my first question. My second question is on the outlook for 2024. You've increased 2023 guidance for net profit and for NII. You didn't change the EUR 0.90 EPS guidance for 2024. Can you talk a little bit more about the outlook that you expect for NII next year, at least directionally on the evolution of NII in 2024 compared to 2023. Is there any reinvestment contribution from your interest rate hedging strategy that we need to take into account? That's my second question.

Let's say, of course, there were 2 questions that we left on the end of the presentation. Again, we have an extraordinary opportunity with our new business plan in December to give you more detail about what you asked for. But let me say, we wanted -- we have, first of all, a bank which we want to have industrial projects. We were, I think, very good during this year, which, of course, were not here in which we had always such a capital to still take all the opportunity from the capital management action to increase our stake in all the product factory. And this brings us now with a very solid and with a good level of confidence to replace potential and a reduction in the future year with fee commission coming from this product factory. And of course, we are now satisfied what we have done. But still, we have opportunity because as you said, we are not at the maximum level of each of these investment opportunities that could be in the future, we will look at them very attentively as we have done up to now. Of course, we know that investing capital in industrial activity means to get the reward and the return, which would be better for our shareholders rather than have, for instance, a share buyback or increasing in dividends. So it's very much possible that if we will confirm this level of capital after that we are also waiting for some headwind from other change. But if this level of capital will be confirmed, we are very confident that there will be room for reconsidering and increasing our shareholding distribution strategy. As far as 24 is a bit too early to say, we are already announcing that we will do 12% more than 23%, which is already something vis-a-vis most of the competitors. We want to be sure of the situation end of the year in terms of [indiscernible], in terms of global GDP growth or recession as it appears in the last few days let us make the home work, but for sure, we will have some good -- we feel that we can have some good opportunity also to increase that guidance. That is better to wait some months. Let's say, for instance, you were asking just directionally, NII, of course, we haven't considered any other increase in 2023. If this will be the case, of course, we think that we will have a very strong part in '24 better than H1 '23 and then possibly the potential decline coming from the possible reduction of interest rate. So we still have to have a clear idea of the Euribor movement coming from ECB, but for sure, NII should be at least at the same level, if not better, than '23.

The next question is from Noemi Peruch with of Mediobanca.

I would like to go back to a car return, if I may. Clearly, the quantum will be revealed in the strategic -- the update of your business plan. But I just wanted to have more color of your line of thinking last year. Clearly, we know now the capital gain on the payment unit on day 1 and also the EUR 100 million deferred payment. And so first of all, here, what's the time line of this further payment? And is it reasonable to expect that all of it will be paid out and further top-up will be announced during the strategic update. And do you expect this top-up to be a one-off or potentially a way for share buyback to structurally integrate your payout policy. And then my second question is more on deposits. So how do you see the post market evolving, both in terms of demand and competition? Is the BTP still the preferred option? Or are some deposits getting more traction? And if you could share with us also the deposit EBITDA in Q2. Thank you very much.

Thank you, Noemi. Let's say, difficult to give more color that we try to give up to now, let's say, that contribution from the payment system should come in the first half of 2024, but we will have of course some more precise data by year-end. The further EUR 100 million we have, I would say, by 27 million. For the kind of shareholder remuneration, this is the real issue. So we want to consider how much -- there is profitability and capital. Profitability would lead us normally to have a higher distribution of dividend, but capital would lead us also to try to exploit our best our capital in order to get a good return for our shareholders, especially at this level of price of our bank, which is still 0.6% on the tangible. So there would be a combination of the 2. We want to have the opportunity, having the business plan to be done in a few months to try to give you the best color as possible by December. But again, we feel very much comfortable in increasing our shareholder remuneration in any case. About deposit. No, I wouldn't say we are very concerned about increasing our total deposit base because with the interest rate going up, deposit -- direct deposit go to foster assets under management or like in this case, assets under custody. Then when the interest rate will go down, maybe will be the opposite. So we have to be able to increase in any case. As we have done during these plastic years, the total volume of direct and indie deposit in order to give our clients the best possible opportunity. And never like in these months, we say to our colleagues that they can offer to our clients the best proposition vis-a-vis risk return opportunities. Of course, come starting from the deposit for risk erection to BTP for a prudent investor to, of course, assets under management for people who want to take a proactive approach in that investment. We have opportunity in all these things. We are very happy to do that. We gave -- we had more than EUR 1 billion of placement of BTP in the last Q. So we are in a position to do whatever is better, the important for us is to grow into the total deposit base and to exploit in the subsequent the capability that we have to attract deposits.

The next question is from Christian Carrese with Intermonte.

My first question is, let's say, I would like to make just a quick recap of the journey since the merger back in 2016. Just to say how nice was the turnaround you and your team have done in this period. So it started with EUR 1.6 billion losses and 24% gross NPE ratio. Now we are you are targeting EUR 1.2 billion-- more than EUR 1.2 billion net profit in 2023 with a gross NPE ratio below 4%, and you did this kind of turnaround without the capital increase, so well done. Congratulations. Now I was wondering what is the next challenge you see starting from the capital position that is very solid with common equity Tier 1 at around 15%. I was wondering what do you think is the best way to use this excess capital? You already said something on the payout to buyback or cash dividend but I would add also maybe what do you think about the investments in technological transformation digitalization. So are you -- do you think that is also the time to maybe increase to boost investment on technology, maybe to save more money to forecast rationalization and also to boost maybe some revenues? Or do you think that after this kind of turnaround, there is room for a new kind of a new merger so to grow in Italy through acquisition. So this is my first question. The second question is on the financial results. I see the certificates, the impact of certificates on this line. So I was wondering if you can give us a sort of guidance, what do you expect from the trading for the full year. Of course, we have to look at maybe net interest income increase of the guidance on net interest income together combined also with the cost of the certificates.

My team and I, we are very proud of the results we achieved. There were not always good time, but for sure, we had some good opinion on us coming also from broker and investors. So thanks for the observation. Maybe the thing that we are more proud is that we were able to go through that difficult time without asking money to our shareholders. We never have capital increase, and I think maybe it was a unique case for banks in that period, apart maybe from Intesa. Next challenge is a bit of what we have said. We show that we want to invest in the industrial project. I think the payment system investment shows that we don't want only to cash in, but we want to invest basically 60% of what we get will be invested in the new joint venture. We have other product factory in which we can still increase our share and we will follow very attentively all the opportunity to foster future revenues for the bank. We know that sometime in the future, interest rate will go down, and we have to be ready to substitute with more commission and fee, the lower NII. And this is our strategic idea. Of course, it's very important also what you said on cost reduction. We think that it's now the moment we have invested a lot in terms of digital. So I think we have one of the best-in-class digital proposition for our client coming from the WeBank experience and still very much appreciated by the market. What we have done maybe less is to reshape the IT infrastructure of the bank. You know that we -- since 1st of July, we have a new top line manager, which is responsible for the innovation of the bank, and we will be in charge of IT, operation and so on. And this will be his task. He is working already in order to give you some mint on the business plan. But for sure, we have now enough room in terms of capital strength to provide money for new investment aiming to reduce cost in the future. I don't think M&A is on the top on the table right now, apart again, not amongst banks, at least there could be something on the factory, but not in the banking sector for the time being. For NFR, I ask Eduardo, maybe to give you a more precise answer. So coming to the component of the cost of certificates, you probably have seen in Page 15, we gave the stock level of the outstanding bonds, which went from EUR 4.8 billion to EUR 5 billion. This generates the cost component, which we described in NFR side, which is given by the market rate, but mine plus spread, which is consistent with the spread that we normally pay on the wholesale market. So depending on the maturity, but let's say, currently between 150 and 200 basis points. And we believe that this is quite similar to what we observed other things equal in the other banks that have similar activities in insurance of certificates in the on balance sheet. But I believe that with these ballpark numbers, you have an idea of what could be the guidance.

The next question is from Giovanni Razzoli with Deutsche Bank.

My question is on the evolution of the cost for 2024 because so far, we have seen banks providing a relatively optimistic trend for the cost in '24 despite the tourist that we are experiencing that we will experience probably at the top of the renewal available contract and the overall interaction environment. So I was wondering how do you see the cost. Overall cost base evolution for 2024? And the second question is on the evolution of the funding cost in the second quarter. It seems to me that the deposit EBITDA has increased in the Q2 versus the Q1 to above the 33% that you are mentioning in the target for the full year. Is my understanding correct? And can you give us an indication of the evolution of the deposit EBITDA for the second quarter.

Let's say, my opinion is that if we don't do nothing, the evolution of cost with inflation, a new contract for our colleagues and so on, of course, they will bring to some increase. What we were very good up to now is to contain this cost through different actions, and this is quite clearly shown having Q2 ‘23 with lower cost than Q1 and Q2 '22. But of course, this is the time for providing serious and possibly also with cost investment, but we need to try to reshape the IT and operational system of the bank. So this is our target for sure, one of the pillar of the next business plan. Of course, it's not something that come immediately in 1 year. So we'll have, let's say, a tactical move to contain in the next quarter, but also a strategic view for reducing a solid stable reduction of the cost base in the future. We know that there is room for that. Amongst the many things we have been able to do during this year, for sure, the investment in the IT system and the cost efficiency in the operation was not our top-level worries, but now it is. So now we have to work very consistently in order to lower the cost to serve, the cost base, and we will invest in this very attentively. For the funding cost, maybe-- on the deposits. So the question on this, overall, we are on average since the beginning of the year, below the amount -- the number that is implied in our guidance. In general, the behavior of deposits is very stable as far as those deposits that have a contractual rate fixed between the bank and the client are very stable in terms of pricing. The only ones that move are the contracts where there is some indexation mechanism with this in mind, which account for less than 25% of the dollar. With this in mind, we confirm the guidance that we gave, the 33% on the overall year and leading to the amount of EUR 3.25 billion NII.

The next question is from Marco Nicolai with Jefferies.

I've seen the NPL ratio moved down quite a bit Q-on-Q. Can you give us more color on the move. On the other side, default ratio dipped slightly, slightly up. So do you think this level of NPL ratio is kind of the bottom? And shall we expect stability from here? Or you see it in a different way? And also, can you give us some more color on fees towards the end of the year. Obviously, you canceled the commissions on excess liquidity. So is the impact -- the negative impact of this all embedded at this point or we should expect more negatives? And similar, do you have any views on the impact of synthetic securitizations going forward.

No, we don't think we are at the bottom of NPE because we still-- as I mentioned before, we have been already provisioning for another, let's say, EUR 500 million of disposal already accounted for with the IFRS 9, of which at least EUR 300 million will come in Q3 and Q4 '23. And then, of course, opportunistically, we still have continuous opportunity to have a single name disposal. Of course, all this will bring you to a further reduction will depend also on the other side, that means the inflow of NPE up to now where this default rate distribution is very comfortable. This should bring us to lower even more by year-end, the NPE ratio, but let's wait and see if there is some deterioration that could bring to a new higher inflow. Let me remember that end of '22, everybody thought that in '23, we would have had the double of default rate of 2022, unfortunately, it didn't happen. For fees, no, again, in -- up to now in the first part of the year, we had only 1 quarter impacted by the excess liquidity given back to our clients. So we'll have another 2 quarters in which this will work. And I would say that would be for an amount of almost EUR 30 million, 20 to EUR 30 million as well as we will have some further burden from synthetic securitization -- we have just completed another securitization a few weeks ago. So all in all, we think that if we exclude these items, we will have some results in line with H1. Otherwise, we have to run a lot in order to substitute this impact on fees with more activity on commercial banking and assets under management. And of course, is our target. So we are working for that. As I mentioned before, July was a very good month in terms of investment cloud placement. But again, let's wait and see what will happen in the next few months. I would say that we would be very happy to match H2, say, level of H1.

The next question is from Manuela Meroni with Intesa Sanpaolo.

The first one is on the NII. Could you please share with us what is the deposit EBITDA in the second quarter and possibly divide it between retail deposit beta and corporate deposit EBITDA and the same for your guidance for the full year for the 33%, how much is retail, how much is corporate. I would like also to understand on the NII, if you have some hedging strategies like a replicating portfolio able to protect your NII from a decline in rates? And the second question is on the cost of risk. What is the cost of risk implied in your 2023 guidance? And if you are assuming the use of a EUR 200 million over a provision?

I will give you the second answer, and I will pass to Edoardo. The guide -- basically, we didn't give guidance for cost of risk or 23. We are still a bit prudent in our assumption when we target EUR 1.2 billion, which of cost of risk that could increase a bit in the second half of the year because of what I was mentioning before, the possible deterioration of the economic environment, but there would be really a slight increase. Why we still have cost of risk a bit [indiscernible] because we want still to provision very much at the same level we did before the new inflow. It is possible, let's say, this is an upside having now 30% of nonfinancial corporate covered by a state guarantee. The more this will go into the NPE inflow, the less will be the cost of risk because we will not any more obliged or willing to provision 35%, 40%. And this could bring, of course, in the next few quarters some further reduction in cost of risk, of course, with an economic environment, which is still at this level. Over the lease, we don't like too much to say that you can use the overlay because basically the overlays are at the current level of quality of your portfolio. So if there is such a deterioration on the market to give you the need to use more provisioning, normally, you find yourself with not such a late like now. But again, this is our -- I know that other banks say that they can use a related. Of course, if the release will still be there, we have a buffer to use. Let Edoardo answer to the guidance for beta and replicating strategy.

And of course, starting from replicating strategies. You probably have a observing the share -- the current shape of the yield curve that-- which sees still an inverted shape between the short term and the long term, meaning that, yes, replicating strategies are the right recipe to use in a period of declining rates, but this needs to be implemented gradually depending on the evolution of the curve. Of course, we already have a significant amount of such strategies in place, which we normally use for purposes to steer the overall sensitivity of the P&L. Turning to the how to call the breakdown of the EBITDA, basically, our determinants of the EBIT, as I said, we pay the previous question, is the distribution is the split or deposits between indexed contract and the remaining part, which is not indexed. The index contracts are at 25% of the total base of this 25%, 1/3 is vis-a-vis institutional counterparts for contracts such as treasury contracts relationships and the remaining 2/3 are mostly retail and SME that are used to improve the relationship and bring cross-selling. Corporates, in that segment, we use a very limited to intend, if not 0, such contracts. And so far, even in corporate, we have observed in a non-index contract, very low level of sensitivity. EBITDA, overall, in the quarter, the one that you observed is more or less the same level of the overall guidance for the year. And this has been consistent toward the segments, of course, with a higher elasticity for a larger account to corporate in a situation and much lower for the retail web-base.

The next question is from Andrea Vercellone with BNP Exane.

I have some clarification again on the certificates. So you have EUR 5 billion of certificates, which at the moment are costing you booked in trading EUR 62 million per quarter. Directionally, if rates go up, it will cost you a little bit more. If rates go down, it will cost you a little bit less. Is that correct? Or there's something else that we should take into account? Then I'd like to have an idea of the average maturity of these certificates and whether commercially, you are thinking of further increasing the notional because clients are probably asking for it.

Of course, your point is correct on the directional interpretation of the certificates component. Of course, we didn't include into this cost of certificates the smoothening due to the commissions that we have on this instrument, which is related not to the stock, but to the issuances bearing in mind that we normally are as a market maker of the instrument, we tend to replace part of them in the portfolio of our clients with new issuances refreshing them. In terms of stock, I believe that the current one is consistent with our recent history, and we don't expect to change it of a significant magnitude. In terms of how this is reflected in the overall profitability, of course, is a component which is similar to the cost of institutional funding with some specificities and is reflected overall in the behavior of the NII and the P&L of the bank that is clearly observable in the last few quarters, presents a significant sensitivity to the increase in interest rates, positive sensitivity to the increase in interest rates.

How much of this EUR 5 billion is with your retail clients and how much of it is with institutions. It's all for retail clients. Most of the EUR 5 billion have been sold to our clients, but a limited part has been placed into other networks of banks that use across our factory or certificate as a factory for issuances to be distributed in such smaller networks, normally.

The next question is from Andrea Lisi with Equita.

The first one is on the investor in the business, if you can provide us at least primarily, which is the contribution or expectation of the contribution you're expecting on top of the EUR 140 million fees you already received from this business. So if you can already elaborate a bit more on this? And the second question is on the sensitivity of NII not to rate increase, but to the change in beta. So if the EBITDA in, let's say, 1% point differently from your observed EBITDA estimate or if it is a beneficial guidance, which will be on with respect to the EUR 25 million that you have an estimate for the full year.

Payment business it's very, very early to say what will be the new production with the new private factory because as you can imagine that it will be, first of all, another, let's say, 9 months before the closing. Then there will be some further period in order to have the, let's say, the IT as migration into the new company. And this will mean that at least for 12, 18 months, we were still working as we are working right now. So without any upside possibly from the new strategic option. But with the upside of the growth, which up to now is 10% coming from the increase of this kind of business. Of course, then when we'll be in the new company, but it's something that we will explain better in our industrial plan starting from the second part of 2015, we can have some more color about what we expect.

Yes, I didn't expect to answer to a question on a second derivative, but at the end of the day, what we are talking about is this beta is a parameter that measures the sensitivity of interest rate to the evolution of rates. So if rates remain stable, whatever is the EBITDA, your NII remains stable. What we put in our guidance is stability of rates at the current level set by ECB 375 million for the deposit facility. Having said this -- if we have in mind, the EUR 300 million sensitivity or NII, 200 basis points in -- 200 basis point increase in rates, an increase in 1% of EBITDA means a decrease in this sensitivity of EUR 10 million. Order managed, of course.

The next question is from Hugo Cruz with KBW.

Just some clarifications on capital and capital return. So on capital, do you think you need to run the bank at the CET1 ratio of 14% to 15%? Or do you think you can go below that? Second, I think you said there will be some regulatory headwinds, if you could give some guidance there. Third, can you remind us of the capital impact of the Vera Vita deal? And if it's already included in your guidance for the Danish compromise? And finally, when you're talking about increasing shareholder remuneration, there's buybacks, but in terms of dividends, are you thinking about increasing your payout above 50% or just extraordinary dividends.

So capital, no, I don't think that '14-'15 is a normal common equity Tier 1 for rail or business. So we think that, as we said before, we will use this capital, both for industry and nasal growth and for capital distribution and profitability distribution to our shareholders, in which patent and gen level, we say that it's better to wait for our industrial plan just to have a better knowledge of the situation we will have in front of us for the next years. Headwinds, we mentioned many times before in the previous presentation that we are still waiting for some change in the model for corporates, we frankly we don't have such a clear idea. We will see when this will come Iliad by end of the year or Q1 '24. But of course, very well manageable by the capital we have at our disposal. Capital impact on Vera Vita, maybe a can answer to this. So we have an impact of the Vera Vita transaction and combined with the transaction on the non-life business, without considering the [indiscernible] compromise, which is between 12 and 15 bps negative. But this is the outcome of a number of assumptions, including those on PPA, so it can be considered as a prudent quantification. The same on your question on Danish compromise, where we reported an amount which doesn't change after the acquisition of Vera Vita. It can be possible that -- it is possible that the actual amount, the actual mitigation due to the initial promise can be increased after the Vera Vita deal. Last question, remuneration, I mentioned before, this will be a mix of -- I wouldn't say extraordinary dividend because it would be a new policy on dividend distribution. Possibly cope with some extraordinary buyback coming from the capital generated.

The next question is from Delphine Lee with JPMorgan.

Just very 2 quick ones, just a follow-up of the previous questions. One on NII is just on the deposit beta. Can I just ask what your assumption is for the exit, as IDA for this year and what you have at 24. And then on the capital return. Just wondering if I understand correctly, you're going -- the buyback would only be extraordinary. I mean -- so you're just thinking about increasing the dividend payout at this stage? Or am I getting something wrong?

I think that for beta, the exit is in the region -- for 2023 in the region of around 40% that we assume that is implied in our guidance. I don't know if it answers your question on beta, and then I'll leave the floor to -- About the remuneration, again, we say that we will manage to understand what is the best possible return for the shareholders. This will be, of course, coming together from profitability generated and the capital stands at the level at the moment that we will have the business balance plan done in front of us, for sure, it could be also the 2 measures together, I would say, we will give the new policy on dividend, possibly together with a potential buyback coming from the one-off generated with the transaction we have done.

The next question is a follow-up from Noemi Peruch with Mediobanca.

So just before, you mentioned industrial projects, epoetin growth in product factories. So my question is, in which business would you like to grow? And what time line do you have in mind?

We mentioned before, basically, we consider ourselves in a very strong position in terms of where we wanted to be as a product factory. if you would ask to me 1 year ago, if I talked to that the bancassurance was available, I would say no before Cattolica was taken by Generali because I didn't have any chance to do that. And then following the event, we were able to do something very interesting for us. And let's say that with the current situation, we are very healthy as we are in a different situation. We could consider to increase, if possible, if the event will be in the position to allow a different share, for instance, in asset management, this would be something that we will consider.

Mr. Peronaglio, there are no more questions registered at this time.

Thank you very much to everybody in order to have another conference to follow. So thanks for being with us, and have a very good summer. Thank you.

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