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 Group Third Quarter 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.

Thank you very much and welcome everybody. Before starting, as usual, let me remind that you'll find the presentation, also the press release on our website in Investors Relation page. The second part will be a Q&A section reserved to the financial analyst, and please limit to only 2 questions for analysts to leave room to each other for some other questions. Thank you. I'll leave the floor to Mr. Castagna.

Thank you, Roberto. Good evening, everybody. We will try to be very quick this evening. A very solid, strong set of results, I would say both in terms of profitability and the balance sheet, 9 months in which we have reached 93% -- 94% of net profit higher year-on-year. Q3 is 134% higher than Q3 '22, leading to go over the guidance we gave of EUR 0.18 per share and EUR 1.2 billion of net profit. Of course, we'll be more precise about that, in the upcoming presentation of the industrial plan early in December. Going down on Page 7 to the different results. Let me stress the excellent results in core revenues, which is higher 26% year-on-year, pre-provision income is up 31% with the cost income which is below 50% at 48% with a Q3 cost income at 46.5%. A good reduction also in terms of loan-loss provision, down 23%, leading to a profit before tax of plus 63%. Very good also the reduction -- continuous reduction in NPEs. We are now below EUR 4 billion in volumes and at 3.5% of NP ratio, which is 1.8% of net NPE ratio, with the EBA is 3.2 the gross ratio. Good occasion also stress 2 good news for us. One is the upgrade of Standard & Poor's to investment grade for our bank, joining Fitch and DBRS. We've been granted BBB- with a positive outlook which for sure will help us also in the bond issuing in the next few months. Also, in terms of capital, good news. We have eventually authorized by ECB to apply the Danish compromise to our bank assurance company, which of course will be -- already inserted in this common equity Tier 1 ratio at EUR 14.9 million pro forma, but of course, will be officially included, starting from the presentation of the date of December 23. This business model, I would say, is now very well-integrated also with our digital and ESG strategy. Speaking of digital, on Page 8, you can see how much the branch-based transaction have been reducing during the years and at which even accelerated pace are growing the app mobile based transaction, basically 3x the volume of 2019, before the COVID. Nowadays, as we already know, the transaction on the app are almost EUR 10 million more and 1/3 more than the branch-based transaction. All in all, we have more than 85% of the transaction of the bank through remote and mobile. Also, the sales of our products are now 39% done through remote omnichannel. That means that at least all the sales that are not done completely in the branch are growing more than -- almost 4x the number that we had in 2019, growing considerably year-by-year. Of course, the comparison between '23 and '22, is only between the first 9 months in '23. So, our forecast is to overcome 40% by year end. The same is also for the contact center, our commercial activity -- remote commercial activity starting from only 6% in '19 of commercial contacts, the other were inbound answer to question made by client. Now, we have completely inverted. Now, 55% of the commercial [ comp ] are driven by commercial activity. Page 9 some highlights about our ESG integrated business model. We have, in terms of business, joined Net Zero Bank Alliance and identified the 5 priority sector. We have reached almost 60% of green new loans to corporate enterprise out of the target of reaching 65% by the end of 2024, EUR 100 million to non-profit sector, 1.5 billion of issuing of green bonds by the bank which really [ arrived ] to the -- more than 2 billion done in '22, which were first bank in terms of new issuing of green bond. In terms of people and community, we are on the right pace to reach 30% of women in managerial position. We started 21% in '21 and now we're above 27% with an increase of 31%. We have devoted more than 131,000 hours of training -- ESG training to our employees as well as 4,000 hours to our client. In terms of organization, we've now a sustainability committee at Board level established in April of this year '23, and we've today published the Green, Social, Sustainability Bonds framework aligned with taxonomy. In terms of strategy, of course, also for the ESG strategy and the ESG new action plan, this will be fully integrated in the upcoming strategy plan based on 4 areas of development, risk management, credit, the finance and wealth management, and disclosure, of course, in line with the upcoming Corporate Sustainability Reporting Directive. Also, in this field, we got 3 new recognitions by the rating agency, MSCI upgraded from BBB to A our ESG rating, as well as Sustainalytics upgraded from medium risk to low risk our bank, and [ Standard analytics ] confirmed AA with -- positive outlook. Let's have a look on Page 11 to the main figure. All in all, as I said, net income almost doubled the year-on-year with considerable increase both in core revenues at yearly level and also quarter-on-quarter, 26% year-on-year and 4% increase quarter-on-quarter, driven, of course, by net interest income, which grew 52% year-on-year and 7% on quarter-on-quarter. A very solid result also in terms of operating cost. We have an increase year-on-year only of 0.8%, well below the guidance of 2%, 3% that we gave at the beginning of the year. pre-provision income is up 30% and 6% on a quarterly basis, and profit from continuing operation pretax profit are high to 63% year-on-year and almost 7% on a quarterly basis, leading again to a net income at 94% higher than last year. On the right side of the slide, you can see the net interest income, the core revenues, the pre-provision income, and the net income, compared with the previous to Q3 in '21 and '22. As you can see, the net income is more than doubled in the Q3, '23 and '22 and more than 3x the Q3, '21. On page 12, let's have a look to NII trend. Not only 52% increase year-on-year, but also a very good increase also Q3 and Q2 is 7.3% which allow us to confirm a guidance, which will be in the region EUR 3.25 billion. Most probably we will be a bit over that, led by the commercial spread, which grew 30 basis points on Q3, driven especially by liability spread, which grew 29 basis point. Only one basis point for asset spread, which is still having a good return. As far as the sensitivity is concerned, we confirm and observed the possibilities of around 33% considering both commercial and derivatives a sensitivity for 100 basis point 12 months of EUR 300 million, and ready to comply with potential new scenario let's say more probably in the second part of 2024. In case of inversion of the rate trend, we have a wide room to limit the NII sensitivity by expanding the size of the replicating portfolio, which is now edged only for EUR 15 billion. Let's have a look to our franchise in terms of loans. What we want to stress is the quality of our loan portfolio, which is in turn of course as shown by the cost of risk and the reduction of NPE. We've almost EUR 100 billion of customer loans is a bit less than 3% since the beginning of the year. Most of them comes from non-financial corporates. Meanwhile, households are only down EUR 300 million year-on-year -- year-to-date sorry. Financial public administration and others instead are growing 0.5 in Q3 leading to positive results. But what is important to stress is the very low risk profile out of these EUR 100 billion, 69% are secured, 41% collateralized, 21% with state guarantee, which if we go to the household of course is much more -- is much higher to 95% collateralized. If we go to small business is 74% secured, 45% of, which with the state guarantee. Also, in terms of total non-financial corporates, 57% is secured, 31% with the state guarantee. Also, in terms of real-estate collateral, we have 3/4 of our real-estate collateral located in North of Italy with a loan-to-value at 60%. In terms of deposit, total customer funding is EUR 205.4 million, slightly below EUR 206 million of last quarter, but almost EUR 6 billion or more than EUR 6 billion higher than year-to-date. Especially, we had some EUR 9 billion of increase in asset under management and asset under custody. Meanwhile, the deposit base decreased over EUR 3 billion. Only EUR 3 billion fostered the growth of asset under management custody. On the quarter, I would say that in Q3, we have this reduction of EUR 600 million, but let me say that the volume effect is up EUR 1.1 billion, meanwhile the market effect is down EUR 1.7 billion. The retail base is huge. We have deposit guarantee for more than EUR 57 billion, 81% of the household deposits are guaranteed by -- guaranteed scheme, and out of EUR 100 billion of site deposit, more than 80% are retail and SME deposit. On Page 15, let's have a look to the net fees. Very good results. We were down to EUR 1,408 million down from Europe [ 1.44 billion ], growing at 0.5% in terms of commercial banking fees with a reduction of 5% in term of management intermediation advisory fees. The results in terms of commercial banking fees have to take in account the reduction of EUR 25 million more cost for EUR 25 million in terms of new synthetic securitization costs, the cancellation of fees on excess liquidity on current account, which happened since the second quarter and will account for EUR 30 million year-on-year, and these 2 negative figures were more than offset by strong contribution for basically all the remaining components of the commercial banking activity, particularly from cash management and payment service, which grew year-on-year 30%. In terms of quarter result, you see that in terms of commercial banking fees, we have a result which is higher than Q2, and notwithstanding EUR 8 million of higher cost on synthetic securitization. Meanwhile, we still have reduction in terms of management advisory fees, led especially by lower production in terms of fund SICAV almost offset by higher fees on certificates and asset under custody products, basically BTP. In terms of total investment product sales, we are up EUR 500 million to 9 month '23 to 9 month '22. Let me stress that we had both Q3, '23 with a solid performance of EUR 4.1 billion of investment product sales. But especially in October, we had EUR 1.4 billion of placement, to which we have to add EUR 1.2 billion of BTP [ Valore ] placement. I would consider very good also the performance of the cost control, of course, the cost income, which went down to 48% from almost 55%. Year-on-year, we went up only 0.8%, and quarter-on-quarter, we're reducing Q3 on Q2, both staff cost and also, let's say, we had results, which is equal in terms of other administrative expenses and depreciation amortization. This shows us the -- strict cost control is embedded, I would say, in the bank. We are, of course, preparing all the potential offsetting of increase in cost of personnel and administrative cost. Also, for the new business plan, for which, of course, we will be more precise in December to the presentation of the plan. Let's pass on Page 17 to the asset quality. We already say that -- we can say that the turnaround is now complete. We've been reducing during these 6.5 years more than EUR 35 billion, EUR 34 billion of NPE passing from EUR 30 billion plus EUR 8 billion matured of new inflow to NPE from '17 to now. Now, we are below EUR 4 billion, 3.9% is the level in September '23. We have so reached 3.2% as per by definition and 3.5% of NPE ratio go down to 1.8% of net NPE ratio with bad loan ratio down on to 0.6%. Also, the cost of risk, of course, has been reducing over 2023 with a constant cost, which is now around 47 basis point, 48 basis point. Let's say in terms of comparison with our target of the current business plan that the EUR 3.9 billion of NPE -- of volume of NPE has to be, compared with the forecast of EUR 6 billion that we had for '24 and the gross NPE ratio, which was 4.8%, meanwhile now, as I said it's 3.5%. We have also increased the charging already the cost of risk to EUR 900 million the target of disposal of NPE of which -- from EUR 700 million, EUR 500 million of, which have been already executed, by the third quarter '23, the remaining EUR 400 million will be done for a part in the fourth Q and a more significant part in 2024. On Page 18, the prudent policy that we are applying for our provision. The quarterly NPEs, as you can see, are on a basis of around 45 basis point. The migration rates are still very well under control with below 0.9% annualized in the 9 months 2023, cure rate around 5%, net default rate 0.75%. The disposal of a small ticket unsecured brought, the bad loan coverage a bit below the previous numbers. We are now 59%, and which is 68% including the write-offs. Meanwhile, the UTP coverage grew from 42% to 43.1%. Of course, the disposal of unsecured small tickets led us to have now a share of secured NPE, which grew from 66% to 69%. In terms of Stage 2, we have an increase to EUR 12.8 billion coming by a different methodology following the application the threefold effect and new automatic trigger in the watch list of our trade portfolio, more severe of course trigger. Edoardo, do you want to…

Sure. Thanks a lot, Giuseppe. Good evening, everyone. So let's go to Page 19, which as usual shows the evolution of our debt securities portfolio. In the last quarter, we had a small increase in total volumes EUR 600 million, mostly concentrated in the amortized cost component. The share of amortized cost component remains stable at around 72%. On the right side of the same slide, you see the composition by counterparty with -- where the most important information related to the share of Italian Govies being below 39% as opposed, to a strategic plan target or threshold of 50%. Important to underline that the share of Italian government bonds in fair value of the comprehensive income, is as low as 20.8%, while the remaining part is concentrating in the amortized cost part. Another point, which we always like to emphasize is, that at the merger date the share of Italian Govies was slightly above 99%. Page 20 is -- shows the contribution to capital via comprehensive income by P&L of the trading activities and of the bond portfolio. So our reserves on that securities are now EUR 565 million negative on an 8 basis with very low sensitivity that is confirmed. We keep hedging the whole of the portfolio using the swap strategies, so that we remain only exposed to the spread between the market rates, the government bond rates and the risk free rates the swap rates. On the right part of this slide you see that the total net financial results went down from EUR 8.4 million to EUR 22.8 million. But this is the result mostly of the certificate cost we explained in the August presentation, in the second quarter presentation that, certificates contribute for accounting due to accounting constraints to the net financial results. But their contribution to the P&L is quite similar, to a negative component of NII. So the reduction from 63 to 76 is simply the effect that, the pure effect of the increase in market rates in average level of [ arrival ] during the quarter. Turning to Page 21. This is snapshot of our liquidity and funding position. So, first of all, on liquidity, we keep maintaining an overall cash position above EUR 40 billion even after reducing the exposure down to EUR 16.7 billion and while maintaining a positive net ECB position of EUR 5.6 billion, thanks especially to the deposit of EUR 22.3 billion. Funding is continued, our activity to tap the -- wholesale funding market also in this quarter with EUR 750 million of covered bond on the issuance. Needless to say, this is the area where we expect important tailwinds, important future contribution to our P&L owing to -- today's new investment grade assignment that has been announced by Standard & Poor, A-3 short-term, BBB-. So, with positive outlook as far as long-term is concerned. On the right of this slide, part of this slide, we show LCR and NSFR, LCR 160% as opposed to a plan target that was to keep it above 140%, NSFR is 127% as opposed to a plan target which was to keep NSFR indicator above 100%. Finally, I think that Page 22 gives a very strong picture of the evolution of our capital. So, we increase capital base, since the beginning of the year of 150 basis points, mostly, because of organic capital generation and this is before the application of Danish compromise, which adds on top of this 150 bps, additional 60 bps. Coming to this last quarter, no big movements apart again from the Danish compromise with Q3 performance contributing for 60 basis points, 30 -- negative basis points from dividends and 81 coupons, the 9 bps due to the fair value comprehensive income and debt reserves correspond to what we have already commented in the dedicated slide and there is a mixture of additional effects that is negative for 9 basis points. The authorization for the Danish compromise has been received a few days ago from ECB for application of the Danish compromise on November 3. Worth also highlighting the level of MDA buffer, which is on a stated basis at 559 basis points, and once Danish compromise is considered on a pro forma basis, is 620 bps. Capital ratios are consistent with the evolution of a Common Equity Tier 1. We have Tier 1 at 16.7%, and Total Capital ratio is at 19.7%. Finally, short mention to the windfall tax where the Board, as we have observed also, the rest of the market has done resolved to submit to the approval of general assembly the proposal to set up a dedicated undistributable reserve, which is quantified in EUR 378 million. This reserve is of course fully accountable, fully included in [ CD1 ] capital. The final part, let me turn again to Giuseppe.

Just a quick word to consolidate the number and the figure that we have announced up to now. We believe we are confident that solid track record of these years and of course, especially of these last 9 months together with the capital generation enable us to provide a growing shareholders per operation -- which of course will be explained in more detail in terms of ambition from profitability and shareholders remuneration in December, in 12, December with a new strategic plan. Let me just only stress that we are well above the results that we announced and EUR 143 million is very much in line a bit above the guidance trajectory, which in turn is almost 75% above 2022 results. As well as the guidance that we gave for '24, and of course that will be precise in the business plan is, already 12.5% higher than 2023 results. In terms of over delivery of the plan, we've already I think expressed all the figure that we have summarized in the middle part of these slides. Let me stress only that what are for us the potential upside to be included in order to bet even better, the performance we are engaged to do. First of all, the resilient NII the higher for longer rate scenario together with the improvement of the investment grade will enhance our capability to produce NII also for the next quarter. The improved diversification for, which we've built up the base during '23 with the bank assurance and payment service business, but also I would say with the strong room for improving our asset under management strategy with the increase of EUR 6 billion of deposit -- of indirect deposit this year. The strict cost discipline we have been able not to grow in terms of cost, we are determined to be able to continue to have a very good cost structure also in view of the next increase of the new contract. Together, of course, with a very solid, low-risk profile, which is benefiting not only from the material derisking we have done, but also from our capability to enhance through guarantee and collateral our loan portfolio together with proactive credit management activity, which allow us to detect, intervene immediately for any potential new inflow of NPE. All in all, profitability, capital generation, good portfolio, and I would say, a very solid track record from this management team would I hope and we are confident that we'll be able to convince that it's worth to wait for the next months in order to understand what we will announce as potential results for the next 3 years. So that's all for the time being. I will leave the floor to you for your question, and together with Edoardo, we are ready to answer to your question. Thank you very much.

[Operator Instructions] The first question is from Noemi Peruch of Mediobanca.

The first one is on NII. If you could give us some color on the evolution of NII in 2024, and in this context, if you could just share with us your expectation for Beta and also your strategy on deposit, because we are seeing the time deposit went actually down, while for the rest of the sectors they are up vis a vis 2022? And then, I have a question on insurance. Clearly, the contribution has been a bit volatile, less probably due to IFRS 17 and if you could give us a bit of color on the expected contribution from this business going forward, will be very helpful. And lastly, what do you see as risk or opportunities from the digital euro implementation and if you would consider investment in this regard, probably in your next business plan?

Thank you, Noemi. Let me say as far as NII, we think the forecast for 2024 is to have an average Euribor which will be higher than '23, because, of course, the starting point is higher, most probably will be higher until the second part -- the final quarter of 2024. Why we say that, most probably again, I don't want to go into detail for '24 because we will present the number in one month's time. But, of course, we feel that NII will be a strong part of our presentation. We think that we can use the better forecast of NII to devote some of the Euribor average increase, to lose a bit of Beta. We want to -- we are still at 30%. We think -- we haven't used the tool any time deposit. We have all-side deposit. Our strategy for this year was basically to stay strict to the 0 point, something of time deposit, not increasing our cost. Notwithstanding that, we were able to keep in line, I would say, or even better of some competitor, our deposit base. If you consider the increase in indirect deposit, we are on a positive -- very much positive side. So, basically, if we consider that we can have '24 in line with '23, there is room to foster some new deposit in time deposit, spending a bit of Beta in this reward. For the rest, we think the Beta is really stable, will be even more stable due to the fact that we don't expect further increase in Euribor by ECB and this should bring some advantage in terms of volume for us. Insurance contribution expected again, I cannot say anything for '24. You will have all the details in one month time for this year we had. Of course, as you know, we don't have yet of 2/3 of the company and we have a contribution of around EUR 40 million. So, we expect that the figure that we gave when we presented the first business plan to be deployed in 2024 will be almost the same during the new business plan. Risk opportunity for digital euro. Frankly speaking, something we are not yet concentrated in terms of expect -- waiting for exactly what is to come. We know that the limit of 3,000 should in some way protect the deposit base of the bank, but let's wait and see how this will be applied, when will be decided and of course our digital attitude will, in my opinion, help us to be reactive also in this respect. But it's a bit too early to have some figure about that.

The next question is from Giovanni Razzoli of Deutsche Bank.

Two questions. One clarification on your commercial performance. If you can please repeat what was the subscription of the BTP Valore, and if you can give us an idea of what were the amount of placement of certificates? I haven't found them in the presentation, but they were around EUR 5 billion at Q2, so you are pretty much strong into this and so, we would like to know, what was the contribution in the third quarter in terms of volumes? And then another question is on the capital. What regulatory wins that we expect for the Q4? Because if I look at your capital position and I include also the already disclosed benefits from the JV in the payments, you are running basically with a CET-1 ratio of 15.5%, and you just mentioned that in 2023, you booked something like 150 basis points of cash flow generation. So, it seems to me that the trajectory of the CET-1 is approaching 16%, which is clearly well above consensus of 15%. So, I'm wondering whether the regulatory wins in the Q4 will be higher than expected, or my understanding is more or less correct?

Good evening. And thank you for your question. BTP Valore, we had on top again of the placement that we shown on our Page 15 slide. Two different amount EUR 1.2 billion, I would say, in October for the recent BTP Valore and the 1 in April was EUR1.1 billion. This EUR 2.3 billion have to be added to the EUR 12.2 billion, which you find in the 9 months '23 indication on Page 15. Meanwhile, certificates are included in the investment prior to placement, and in the 9 months were EUR 1.4 billion capital. It is a bit too early to say that [indiscernible] because we had 14.9%. But secondly, because -- as you're well known, we were expecting 2 things. One was positive and is the Danish, which we are very happy to consider now a matter of fact. The other is the headwind. We don't know -- why you are perceiving could be higher, I don't know. We don't have a clear idea. But we expect, as we already said, that will be in the region of the positive coming from the Danish. So, I would say that a more precise figure is, around 14.3%, 14.4% currently, including that wins. So, this is our indication. Of course, also, this above 14% give us room to have different strategy in the remuneration of our shareholders.

The next question is from Adele Palama of UBS.

A couple of questions from me. So the first one is on NII. I'm trying to understand, if you think that the third quarter today result is the peak NII that you have given that you had a pass through on loan of 95% since first quarter 2022 until today. So I mean, I understand you don't want to guide an a precise number on 2024, but can we expect that the NII will go down versus 2023 excluding the contribution from the replicating portfolio? And then regarding replicating portfolio, could you give us some details on the size, the majority, the exit yield? Or like the contribution that you expect from that portfolio in 2024 and that's it?

Adele, NII -- many parts I would say in this question. So let's talk about the positive one. As I said before, we think NII will be, generally speaking, higher because of the entry point of Euribor in '24, which will be 40, 50 as an average will be 40, 50 basis point higher than '23. Another positive, I would say, comes from the possibility to utilize the replicating portfolio, but this will come only when the interest rate will start to go down. Otherwise, it doesn't make much more sense to lose money, applying to a stable interest rate, some different policy. Third positive is the issuance of our bonds in general or our paper, because thanks to the investment grade from the third rating agency, we think that we can reduce the cost of issuing. What is negative, I would say, generally only the level of volume that you want to reach. So, if we decide to push on the accelerator to increase our deposit, we will utilize more of this room generated by the positive in order to increase the volume of our deposit and to pay some time deposit, for instance, which up to now we basically didn't apply yet. All in all, I don't see how could see lower than 2023, frankly speaking. But again, this is something that we can expand a bit more in the presentation of the plan. I hope -- I have been clear.

Okay. But the guidance for the full year 2023 is implying a lower NII in fourth quarter?

No. Why you think it would be lower? I don't think so. I think it's more or less stable. If you add the same result of '24 of Q4 to Q3 to the first 9 months, you will reach a bit higher of the guidance we have given. So I don't think there is and -- which is about so, I think that EUR 10 million, EUR 20 million, EUR 30 million on EUR 3.2 billion does make such a difference.

Okay. So, can I add another question on cost? Is the guidance for the full year 2023 of 2.6 or around 2.6 including in the fourth quarter some top-up for the national contract, so some one-off.

We haven't. Of course, their contract is not concluded, so we didn't give any provision already done. We think that if, as we all hope, the contract will be concluded by the year end. There will be room in our cost base, to accommodate 1 month or 2 months of potential cost of the contract for the first year.

The next question is from Andrea Lisi of Equita.

The first one is again on the increase in Stage 2. You have explained that you have also changed the methodology. If you can provide a bit more color on that, and if it is also to be assumed some increase in overlays, or if they should be considered stable versus the previous quarter. And the second question is, again on the insurance business. We have seen in the draft of the budget law. There is the possibility of the introduction of a guarantee fund for the life insurance business, if you have already quantified a potential impact for you?

Here, we are. So Stage 2 no is exactly what I said. So, we think that we have changed the methodology. Sorry I am looking for the right page this one, okay this one. The EUR 1 billion more in the Q3, which is again below the 1 year ago, comes from a very volatile effect. The increase of Stage 2 comes from the 3-fold effect, which is the rule for which if a rating deteriorated of 3 grades, even though it comes from one, so the better to 4, which is still a very good rate, you have to consider it into Stage 2. The second is some new penalizing automatic trigger in the watch list, which of course help our credit manager to detect any position at the first moment to anticipate, of course, an intervention. On the other side, of course, we have reduced of about EUR 2 billion the increase that was present in the second quarter. So, as you can see, there is a very volatile situation. Maybe going forward, we can better understand the volumes, but we think it would be not so much different from this one. In terms of overlays, we are stable, we are exactly at the same level around EUR 200 million. As far as the assurance, it's a very small impact. Should it be in the region of EUR 3 million for BPM Vita.

The next question is from Marco Nicolai of Jefferies.

I wanted to ask a question on default rates. So, if I'm not wrong, it decreased again from the previous quarter. I wanted to know if you could explain, you know, somewhat the different picture that, comes from some macro-indications. For example, the Eurostat bankruptcy indicator, which is showing a worsening trend in terms of bankruptcy since already a couple of quarters and the message that you and the other banks actually, are giving in terms of default rates. So what could explain the difference, why default rates, are still improving, compared to a macro picture which is worsening somewhat?

Maybe we are learning from the past mistakes, it's just a guess, but I think that as I tried to explain many times, we have now a completely different set of control in place for old life, long of our credit portfolio. So, we have monitoring, detection, anticipation of potential default trigger and so on. So what I feel is normally the banking system catch inflows normally, some months later than the real deterioration of the economy. But having said that I think that in this case after 10 years, of continuous practice on reducing tackling, since the beginning the credit portfolio management, we have been able, to improve our performance and possibly to intervene early, rather than wait for the deterioration.

The next question is from Hugo Cruz of KBW.

A couple of questions, one on replicating portfolio, if you could give us a bit of more clarity on what you can do there, would it be increasing hedges or, is there room, for example, to increase the size of your Govies portfolio given that it's quite a decent shape of the yield curve there? And second, if you could clarify on the regulatory headwinds, if you could give us a bit more, timing or the size of the potential impacts over next couple of years will be great?

Yes. This is Edoardo Ginevra replicating portfolio. So the starting point is our deposit base of around EUR 100 billion. A stable component of the deposit base is some 55% of these numbers in the area, over EUR 55 billion. The current size of the replicating portfolio is around EUR 15 billion. So, theoretically, we can fill the full gap between EUR 15 billion and EUR 55 billion. More realistically, we have room to increase quite significantly almost double the EUR 15 billion, bearing in mind all the various constraints, regulatory, especially in terms of supervisory outlier test. This is a tool we didn't want to use to invest too much in the current rate environment, because of the negative curve, the negative slope of the curve, because of the expectation of stable interest rates. We are in a sort of vigilant position, to be able to exploit the inversion in the curve, with a more regular curve or expectations of neither changes in rate scenario in order to produce an effort in this direction. Good point. You said in terms of balancing this strategy, also using fixed-rate Govies or securities. This is an alternative we can consider. As you have seen, we didn't increase significantly the balance in the Govies portfolio. We have room there to invest a little bit more. On the questions of headwinds we are in discussions with ECB as also you said -- we are waiting for a decision from them, which is expected to come around year end. But we are confident that this impact is absorbed in the numbers that we've shown, or put it more precisely, more or less comparable to what we have in the pro forma impact of the positive impact of the Danish.

[Operator Instructions] Mr. Castagna, there's a follow-up from Andrea Lisi of Equita.

Yes, just about the potential impact of regulatory headwinds on capital. Just to understand if you have room to optimize your risk asset in order to offset just this?

We have room in managing our capital structure, of course, which we have done up to now. We have built-up quite consistent Common Equity Tier 1, which will be abundant to accommodate any potential headwind from ECB. We are still, as I mentioned before, we are increasing also our securitization program, which of course is costly in terms of commission, but is very effective in terms of building up capital. So -- we have also, of course, some, because as you know, when there is an inspection on model, these last for months, sometimes years. And of course, in the meantime, we are able to adjust to the indication of ECB, also the request. So that's why we cannot say that we expect such a consistent figure coming out from the model.

The next question is from Pamela Zuluaga of Morgan Stanley.

Just to follow-up on the deposit betas, overall your NII guidance, you were mentioning that you might increase your appetite for deposit volumes, which could result in higher deposit yield offerings. So could you give us an idea on how much could we see deposit beta growing under this type of scenario? And then another follow-up. How do you see that second editions of BTP Valore impacting the main revenue lines in Q4? If we take into account that the October issuance raised almost EUR 17 billion?

Sorry, I cannot really be more precise on beta. We are only saying that we think we have room, to foster some increase in volumes, because we see that the beta is quite consistently in the region of 20 basis points, as far as the commercial activity is concerned, 30 if you consider derivative. So I don't know. There is room to go up to 40, if we would like to give a push to our deposit volume, which again is still something that is good, because in turn, when the interest rate will go down, likewise the BTP would be ammunition to convert into asset under management. So for us, the growth in volume of deposit, direct or indirect, is very important. That's why we are happy we have grown EUR 6 billion this year. We think that in 2023, we've been very good at maintaining a solid base of deposit without utilizing interest rate, or basically time deposit. You take also in account that have we bank, which was one of the first digital bank, which is very good at using interest rate, in order to increase the deposit side. So, we will opportunistically exploit, also this opportunity basically sacrificing some few points, some few points in terms of price to get possibly more volume. But this is just, I would say, a tactical strategy, It's not something that is going to change, the balance sheet -- the P&L of the bank. BTP Valore, I don't think will have any impact in Q4, because I don't think there is an issue in Q4. I think in the October -- in October I already said.

Yes, the one in October yes -- 6th of October?

It's Europe 1.2 billion, but they are not going to impact on the capability of the bank, to place investment product in the region of possibly even more than EUR 4 billion, starting from the EUR 1.4 billion of October.

But I mean, if the question is on the P&L of Q4, you have on one side the positive commission, which is one-off 50 bps. And on the other hand, you have the opportunity cost for deposit, are transformed into assets under custody, which given that this happens only for 2.5 months, it is more or less it's difficult to match the 50 bps of the one-off.

Mr. Castagna, there are no more questions at this time.

Thank you. So, let me thank you all the people linked to our presentation. And this time, the new meeting will be only one month time. So, I hope to have all of you again in December for the business plan presentation. Thank you very much.

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