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

Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the full year 2023 Banco BPM Group Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Arne Riscassi, Investor Relations Manager of Banco BPM. Please go ahead.

Good evening. Thanks for joining the conference. As a reminder, the results documentation is available on our website in Investor Relations section. And as you know, the Q&A session is reserved for financial analysts, possibly with a limit of two questions each. Now I'll leave the floor to our CEO, Mr. Giuseppe Castagna. Thank you.

Thank you, Arne. Good evening, everybody. Welcome to the full year '23 presentation of Banco BPM. Very glad to present our results. This time, I think we are the last bank to present result, so maybe it would be also easier for you to make comparison and look at the results or the full picture of the banking system. Let's say, we are satisfied of our performance, which not only is better than guidance, but it's also very close, much closer than only 3 months ago versus the business plan target. We were able to handle the year with a plus 85% of net fee profit year-on-year, beating the guidance of EUR 1.2 billion and reaching EUR 1.264 billion with an ROTE of 12.4% versus 7% in '22. Common Equity Tier 1 ratio is higher 132 basis points at 14.2% versus a guidance of 14% with a very comfortable MDA buffer of 542 basis points. Most of all, it's important to notice that we have built the possibility to give, to increase the shareholder remuneration from the guidance of EUR 750 million to EUR 848 million, leaving 67% as our payout ratio with a proposed dividend per share of EUR 0.56. I remember that in 2022, we were able to distribute EUR 0.23. So it's more than 140% as dividend distribution. On Page 7, let's look also having a view not only to the results, but also to the road map to the business plan. Let's say that we have not only in all the main item above the guidance, but also much closer to the target results. Core revenues are EUR 4.340 billion, almost EUR 9 million above guidance and only EUR 110 million below the target 2026. The same for operating costs. We are EUR 30 million below guidance and EUR 130 million below target 2026. Pre-provision income, we are EUR 120 million above guidance and even over the strategic plan target of EUR 2.750 billion. Cost/income is down to 48% previous -- last year was 54% with a guidance of less than 50% as well as the strategic plan target. Cost of risk is 53 basis points compared to 62 in 2022 and 45 in -- as a target for '26. Let's say that out of this 53 basis points, 9 basis points related to the front loading of new disposal of NPE targeted by the plan already front-loaded. So the real cost of risk would be 44 basis points for 2023. Our business model is very well diversified. You can remember that we stressed in the business plan, how much we will change our scheme with the recent product factory maneuver that we had done last year related to the Bancassurance and the Payment System. Let's say that the result on Page 8 of the product factory contribution in revenues is EUR 863 million compared to EUR 800 million of the guidance, and with a gap to the target of EUR 380 million because the target plan is EUR 1.180 billion. If we want to include pro forma, the Vera Vita results, which was only incorporated at the end of December '23, we increased our results for 2023 to EUR 924 million. This means that the difference vis-a-vis the target of the business plan has been reducing by EUR 125 million from the target of 2026. We are very confident that with the incorporation of the product factories and on the new joint venture [ e-money activities ] and in P&C will be reaching the target of the plan easier than we forecast 3 months ago. On the right side, you see the state of the art for our product factory. As you know, we have already confirmed our shareholding in Anima, in which we are the main shareholders, in Agos, where we have a joint venture with Crédit Agricole. And on the bottom part of the slide, you see the new Bancassurance Life that basically started from the first of January '24, we will fully own 100%. Of course, the implementation of the new company will come due in 2024 with full steam of the all new product factory, especially boosting '25 and '26 results. As far as Vera -- P&C Bancassurance, the strategic alliance with Crédit Agricole started again in January '24. We are already experiencing some good results, and we will keep you abreast of the potentiality of the joint venture during the next quarter's presentation. As far as the Payment System, we have signed a deal with FSI and Iccrea for the new payment company, which the closing is expected in the first half of 2024, from which we will give you updated information about the new opportunity arising from the new activity. On Page 9, let's have a look to the reduction of cost of risk. It was 81 basis points in 2021, 62 in '22 and 53 in '23 with what I said before that almost 9 basis points out of 50 comes from the new disposal target already front-loaded in 2023 cost of risk. The net NPE ratio is now below 2%, 1.8% and 0.6% is the net loan ratio. Needless to remember that, as you know very well, we have been able to reduce more than EUR 26 billion starting from the merger, and the top global derisking was almost EUR 35 billion during these 7 years. The gross NPE is now EUR 3.8 billion if we consider already the disposal target of EUR 700 million. We are basically already to the target of our strategy plan at lower than EUR 3.5 billion and 3% of NPE ratio. Strong capital base, good, very good liquidity funding position. As I mentioned before, we are already above the target of the guidance for 2023, 14.2%, even after increasing the payout to 67% versus 50% last year. Last year, let me remember that the end of year, the common equity was 12.8%. So a massive increase. The strong contribution came mainly from organic performance, 300 -- almost 330 basis points gross coming from the organic performance. 151 basis points is net of dividend. We started the year with a very important issue in wholesale bonds. Last year, we were able to issue EUR 3.8 billion of which EUR 2 billion Green and Social. In January, we already issued EUR 1.5 billion, half of which is Green and Social. Let me remember that in November, we got full recognition by all the rating agency of investment grade and we are already taking advantage with the new emission of the new standing with a much lower cost of funding. NSFR and LCR are comfortably at almost 130 basis points and 187 basis points. Total liquidity is at almost EUR 42 billion at year-end 2023. Let's go on Page 12 to the set of results. On the left, you can see the comparison year-on-year. We have a net interest income, 42% better than '22. Core revenues, 22.5% better. Total revenues 14%. Cost, which stands with an increase of only 1.3% considering, including the cost of labor increase as far as '23 stake was concerned related to the increase of the National Contract. The pre-provision income is 29% higher than last year with the reduction of loan loss provision, we stand at 48% better than last year in profit before tax. The tax rate is still 30%. So we were able to have a net profit from continuing operation 63% better than last year and after the systemic charge and PPA, we stand at EUR 1.264 billion versus EUR 685 million, which means almost 85% better in 1 year. On the right side, you can have the evolution of the last 3 quarter of 2021, '22 and '23. And you can see the evolution, constant evolution, the pattern that will give us also a good set for having better results and continue this pattern also in the next year. On Page 13, let's make some consideration about NII. We stand at EUR 3.289 billion, the guidance better, almost EUR 40 million than the guidance of '23, and 42% better than last year. On the quarterly trend is stable quarter-on-quarter. Of course, it's 20% better in relation to last quarter '22. The commercial spread has been increasing during the year. Now we have a commercial spread, which is 441 basis points with the starting point in end of '22, which was 294 basis points, mainly, of course, driven by the liability spread, which increased up to 257 basis points versus an asset spread quite constant at 154 basis points. The overall cost of the deposit in 2023 was 73 basis points. The sensitivity for 100 basis points of rate reduction is EUR 250 million, considering NII and NFR, as you know, a part of [Technical Difficulty] NFR related to the certificates that we issue and including the certificates the static sensitivity is EUR 250 million. On Page 14, we will try to give you some more information in order to consider the figure that we have in mind. We have presented in our strategic plan presentation. We started with a guidance of EUR 3.25 billion for 2023. As we mentioned before, we are EUR 40 million ahead, and we had the target for '26 of EUR 3.50 billion. This was, of course, with an interest rate scenario that at that time, we consider feasible considering a reduction year-by-year of the Euribor. 4% in 2024, 3.5% in '25, 3.1% average in '26. Let's consider now an alternative negative adverse case, which will bring down interest rates starting very soon, which is not what we really imagine but it's just a worst-case scenario that we want to illustrate to you in order to make clear that our target is really possible even if we consider a new Euribor ending 3.2% in '24 and 2.5% in '25 and '26. This will bring a potential reduction in gross revenues in terms of NII of EUR 170 million in 2026. Let's say that, of course, starting from this situation of weaker and faster reduction of interest rate, we can exercise some mitigation action, very effective. Just to mention some of them. The bond issuance in which we plan to issue EUR 50 billion at fixed rate, and of course, we consider in the business plan, the historical leverage of our cost of wholesale funding. In the alternative case, we could mix 75% fixed and 25% floating. And of course, taking into consideration the new spread that we had with the issuing in January this year. Certificates, the same. We are considering the planned historical average, as far as our spread is concerned. The new spread is much lower. The time deposit, of course, considering a faster reduction of interest rates, we imagine in the plan to issue in the 3 years, EUR 9 billion of time deposits at 50 basis points below Euribor. The reduction and the possibility to issue less time deposits also only for EUR 1 billion less could bring a considerable advantage in terms of reduction of negative effect of the reduction of rates. Lastly, the new lending, normally each year, we lend EUR 15 million per year of floating rate loans, it would be enough to convert 15% into fixed rate at origination or to swaps to our client. And the global consideration of all these very simple maneuver would reduce to EUR 50 million to EUR 70 million, the impact of a faster reduction in the terms we mentioned before. Imagine that we have already EUR 40 million of advantage at the end of '23, it's easily to understand that also considering the further mitigation action related to the increasing commission coming from a new environment of lower interest rate, the NFR contribution and the potential cost of risk reduction in an environment more favorable. This allow us to be very consistent and committed in confirming our strategic plan figure and, of course, the consequent remuneration targets. Let's go to the balance sheet. We have been growing year-on-year, EUR 11 million in terms of total customer funding, of course, mostly concentrated into assets under custody driven by the BTP. The real growth in volume was almost EUR 5 billion. The rest is market growth. Our deposit base is very much fragmented. There is a strong retail base. The guaranteed deposit contribute to EUR 57 billion out of EUR 98 billion of deposits, 82% of our household deposits are guaranteed. Let's go on Page 16, to the loan. We have experienced this year for the first time in 10 years, a reduction in loan growth. We are now at EUR 97.3 billion, EUR 2 billion reduction since last quarter. Let's say that we have been very much concentrated considering the difficulties due to the interest rate to increase the loan growth. We were concentrated on reducing the high risk loan. And out of this EUR 2 billion, EUR 1 billion comes from mid-risk categories. The year started a bit better with an increase in stock of EUR 700 million, even though we cannot yet consider a growth for this year in which we consider the stock will remain more or less at the same level of last year. Let's say that again, we are concentrating our new lending, which was EUR 19.4 billion in 2023 versus the best rate in classes, 95% versus low-mid categories and 3/4 of the new loans are concentrated in Northern Italy. On Page 17 is the trend in fees, which is 1.3% lower than last year. Let's consider that this year, we had EUR 45 million in lower fees from current accounts coming from the removal on fees on current account related to the negative interest rate. So like-for-like we grew 3% and in commercial banking fees we grew 8% like-for-like. Meanwhile, versus last year, we grew EUR 1 million net. In the Management and Advisory fee, we have a reduction of 3.2% year-on-year, which was 5% after 9 months 2023. So we are already experiencing an increase in the asset under management activity starting from last quarter and increasing massively in January this year. Let's say that out of the investment product placement, which was EUR 4 billion in Q3 of '23, EUR 3.9 million in Q4 '23, in January '24, we have already reached EUR 1.9 billion, which is a record target 47% more compared to January '23. And also in terms of commission, we are experiencing the double [ flow ] from commission into 2024 vis-a-vis January '23. Let's say that fee and commission have been also paying higher cost of synthetic securitization for EUR 37 million year-on-year, compensated by better fees on lending, payments, fiscal credit and other services like trade finance. Cost control was very effective. 1.3%, the increase in cost, considering EUR 50 million of new impact from the new contract of National Concept of Labor. As you see on the right side, the last quarter '23 was EUR 60 million higher than the average of the first 3 quarters. But even considering this, we are only increasing 1.3% below, very much below inflation, thanks to a strict control, both in administrative expenses and in D&A. This allow us to reach a decrease of 600 basis points, 6 full points in terms of cost income, reduced to 48%, starting from 54%. We already mentioned some figure about NPE and cost of risk. Let's here remember that out of the 53 basis points, 38 basis points are related to the default rate, which is in line or below the average of the banking system at 0.93%, notwithstanding that, the cost of new inflow is still at a very good level of 38 basis point, which we consider very prudent and efficient in terms of good coverage of new income in default rate. 9 basis points, as I mentioned before, related to the upfronting and the rest is the maintenance of a very low stock, which now has been reduced to EUR 3.8 billion, starting from EUR 4.8 billion end of '22. We were also able to increase our coverage, both in bad loans in UTP and the share of secured NPE stands at almost 70%. Stage 2 loans remained below 12%, EUR 12.2 billion. Edoardo, do you want to go ahead on...

So on the debt securities portfolio, you see on, in Page 20, is that the overall level remain at around EUR 36.5 billion, with a limited changes in the composition between amortized cost and the comprehensive income and fiscal continuing to go over a percentage share of the total 70% Italian government marks at 36.1%, well below the strategic plan limit of 50%. And they are mostly concentrated in the amortized cost component of the portfolio only first quarter of -- only 1 quarter, 26% with government bonds is in the comprehensive income. Worth mentioning that in the outset of this bank in the merger period, almost 100% of the portfolio was composed of Italian bonds. ESG corporate bonds are now -- covered now a share of 29% of the total were 24% at the end of last year. Whilst now on Page 21 the evolution of overall reserves has been positive from EUR 626 million negative at the beginning of the year, to EUR 488 million with an improvement linked to the evolution of the overall rates on our bonds. Sensitivity remains very low with an overall BTP below EUR 1 million, close to zero for example, obviously in a different -- form of income portfolio. And this portfolio contributed to generate an overall net financial results, which in the end, in the last quarter of the year has been positive for EUR 61 million if we exclude the component related to certificate -- cost of funding related to certificates. A negative EUR 13.8 million if we include the cost of funding of certificates. In overall, during the year, the overall, the net financial result has been minus EUR 79 million, of which minus EUR 262 million for certificate and other components plus EUR 184 million. Page 22 for liquidity and funding. We keep a very abundant level of cash and unencumbered asset, almost EUR 42 billion of which EUR 17 billion represented by the facility with ECB, almost EUR 20 billion eligible securities and EUR 4 billion other marketable securities. And our bond issuance has been very successful, not only last year, but also at the beginning of this year. As already mentioned, our CEO in the initial part of the presentation, who was mentioning to the issuance of EUR 750 million each in January 1, Green SNP number there and equivalent further. This liquidity position is reflected in very solid indicators, regulatory indicators. LCR is at 187%, NSFR, it is 129%. And this, despite the acceleration in the reimbursement of TLTRO, you see that we had EUR 39.2 billion at the peak end of '21. And now we are at EUR 15.7 billion more than compensated by the depo facility of EUR 17.4 billion, allowing us to stay in a very comfortable position, with an outlook of a progressive reduction of the liquidity indicator during 2024. Taking into account the overall liquidity rate environment. On top of these indicators, we also gave indications on MRL position where the past versus the total requirement expressed in terms of WA is as high as 8.9%, considering 2023 level of requirement or 6.9% if we go for 2024 level of requirement. Page 23 on Capital. Capital has been progressing very significantly over the year from 12.8% to 14.2% with 132 basis points of capital generation, allowing us to increase significantly the dividend payout up to 67%. The most important components of the moving parts of capital had been P&L performance, 245 bps. Dividends and AT1 coupons negative EUR 476 million the evolution of ever comprehensive income debt reserves, synthetic securitization, allowing us to add additional room of maneuver for our RWA density and absorption. The application of the Danish Compromise on Bancassurance, which accounted for most of these 125 bps of improvement that is reflected in this chart and the record headwinds from the adoption of new probability of default and most given default models that has been estimated in December used in conservative assumptions and will be finalized in March at a level which is already represented in this 141 basis points. Other components accounts 11 basis points. You see that further part of this slide also share Tier 1 and total capital ratios are well above minimum requirements. Now I will give the floor again to Giuseppe for the conclusion.

Yes, thank you Edoardo. Final remarks. Let's say that summarizing a very strong '23, which allow us not only to confirm the net income guidance for '24, but moreover and most important to improve our shareholder remuneration for '24. The net income growth of 85% and potentially to increase of EUR 100 million, almost the dividends for this year, which means to reach an ROTE of 12.4%, which would be 13.4% with the target common equity Tier 1 of 15% give us the opportunity confirmed EUR 0.90 for 2024, which will grow to EUR 1.1 -- more than EUR 1.1, including one-off. You remember the one-offs are related to the transaction with, of the [indiscernible] joint venture of the payment system joint venture and reduced by the cost of the agreement that we will have with the union in order to have an early retirement scheme of another 1,600 people, as we announced in our business plan. Let's give us some guidance, I would say, qualitative guidance about these results for '24. We envisage a slight dip of NII and a good bit in commission year-on-year with a cost discipline and general cost part, which will allow us only to partially increase the cost of the headwinds related to the new contract. The provision will be resilient, thanks to the upfront of the cost of risk that we have done for the new disposal, which will allow us both to reduce the NPE ratio at the same time to try to maintain at a very good level, the cost of risk. Also considering a prudent approach in terms of forecast as far as the full rate in which we envisage a slight increase related to the 0.9% of this year. So all in all, the most important things is adding the EUR 550 million of the interim dividend which we confirm, we are able to raise to EUR 1.4 billion, the dividend distribution in 2024, which let me remember, is equivalent to almost 19% remuneration over the current market cap and is a good boost in order to reach the EUR 4 billion distribution over the 3-year plan. Let's go on Page 26 -- on 26, to the comparison amongst the results we reached, the guidance we gave, and the target '26. As you can see on the left side, in all important items, we are well ahead of guidance and very close to the target '26, and this is, for us, is a strong, represent strong commitment in order to confirm all the figures that we gave to you in December, which means 3x net income over the plan horizon, which means -- compared to the previous plan, confirms a 67% of payout ratio over the plan horizon and the remuneration to shareholders, which will be 5.5x higher than the previous plan, reaching EUR 4 billion out of EUR 6 billion of net profit. Let's say that if we will be able, during this year to show that the EUR 1.1, over EUR 1.1 of EPS will allow us to distribute by -- by the first year of the plan, exactly EUR 2 billion out of our -- which is our commitment for 2026. So I think a very promising start, a very solid set of results, which comes from our story of not having a surprise or items which are not consistent with our story and what we say in our strategy plan and basis of the massing contribution that we expect from the new product factory, all the management team is again committed and engaged to deliver the results we promised. Thank you, and we'll leave the floor to your Q&A.

[Operator Instructions] The first question comes from Giovanni Razzoli of Deutsche Bank.

Two questions. The first one is a clarification on the regulatory wins that you are showing in the slide, which were 142 basis points in the full year of 2023. I was wondering how much of these were in the Q4? And how much of these were related to the EBA guidelines, because in the business plan you guided us taking 230 basis points from EBA guidelines. So I was wondering if you can acts as confining with those 2 figures. And do you have any updates on the time line of those EBA guidelines? And the second question is a clarification on the NII for '24. You are guiding for an increase in NII in 2024, if I see your slide. Can you share with us what kind of rate assumptions are behind the year's target?

Let me start with the NII, then I'll have Edoardo giving you an answer around the headwinds. Confirming, of course, the base of our strategic plan, we have a quite consistent increase in NII. If we consider the sensitivity that we showed to you today in our slide related to a faster reduction of interest rate, we still feel that we can be more or less in line with the 2023 results. As I mentioned, we have enough counterbalance measure, both in terms of NII, but of course, also in terms of net profit, which will allow us to match the results.

Yes. On the headwinds question. They were concentrated in the last quarter of the year. You may have noticed that we already tackled this issue when we presented the strategic plan, in December, anticipating headwinds for an amount which was estimated time at a higher level. And then -- still now has been optimized to an extent. We, all of them are related to EBA guidance.

So the 142 are all EBA guidelines, right?

141, but yes.

The next question is from Andrea Lisi of Equita.

First one is a clarification on the measures you intend to implement in the slide. You showed on Slide 14, understanding these are actions that are aimed to mitigate the impact of lower rates but are not something that you can start and stop immediately. So regard some kinds of implementation. So it is not clear to me if you're really starting with these actions or not? So if you can elaborate on this. Then the second question is, given the current environment and expectations of interest rates, if you have changed your assumptions as regards to certificates, and if you can provide us some indication on the impact of certificates and the trading line in the following years. And another element is what is your expectation of volume evolution for the next year?

Let's say, starting from the mitigating action, of course, the assumption for the mitigating action is the interest rate go down faster than what we expect, and as we expect, we don't think that before the end of Q2 is envisaged possible reduction of rates. Having said that, of course, some of that are already in place when we talk about historical average spread on bond issuance and certificates. Of course, we are already experiencing a good reduction in the spread. In terms of bond, I think is almost 70 basis points lower if you compare the new issuance this year to the comparable issue before the increase in the investment grade. And the same is, of course, also for the certificates and the bond we are issuing starting from January. As far as time deposit, we didn't started yet to issue time deposit. So it's not something that it will depend on when we will start. And again, time deposit is a measure that we want to implement if we see that the interest rate are consistently high. So if there is no reduction, of course, we will start to implement also attracting deposits through time deposit. This is not yet the case. And as soon as we should experience some reduction in interest rate, we could decide to reduce the size of the time deposit that we'll be issuing during the next years. The new lending, of course, again, and in interest rates don't go down is difficult that we can convert rates into fixed because as you can expect the clients who want to stay on floating rates until they don't see a consistent convenience in terms of which the rates. So in a sense, this is something that we are, it's very easy to implement. It doesn't take time to implement, but it should be the right condition to implement this measure. Now talking about, of course, the potentiality to do better in other, component of profitability like commission and NFR and so on. So it's something that we will -- we have already in our, let's say, tools, but yet we wait for -- now interest rate in Euribor is still at 3.9%. So there is no difference since when we started and we presented the business plan. But we are ready to face potential even dramatic reduction in the interest rate. Edoardo, do you want to?

Yes. On certificates, thanks for the question -- as we already said when we presented the plan, the contribution of certificates is minus EUR 300 million in the final year of the plan with a progressive decline that is driven by the reduction in rates. As it is clear from Page 14, this includes some marginal conservatism in terms of the spread that is used, and of course, will be, reflects an assumption of rate which may be different, may be reduced in this case, with exposure to the sensitivity of NII.

As far as the volumes are concerned, in terms of the stock -- on the loan stock, we think we will stay stable, as I mentioned before, in '24, but we envisage an increase in loan granted during the year in order to face a higher maturity of loans during this year. So basically, in terms of granting, there will be a growth of 5%, 6% this year compared to the [ EUR 19 billion ] of last year. In terms of total deposits, they will grow -- they will be stable basically during the year. Growing in terms of asset under custody because of the opportunity to still subscribe other Govies.

Next question is from Fabrizio Bernardi of Intermonte.

Hi, everybody. I have a simple question regarding the capital gain you are going to book on the digital payment business. As far as I remember, this is EUR 500 million, and there are EUR 300 million going through the commodity. So given that you are in a comfortable situation regarding your capital position. I was wondering if this gain in terms of commodity will it be used to offset the headwinds from a regulatory point of view? Or maybe we can assume that the top up in the dividend payment that you made in this quarter can be replicated even in 2024.

If I may. Thanks for the question, Fabrizio. Our total amount of EUR 6 billion net profit that has been the guidance target in the plan include the EUR 500 million. The distribution, of course, is to set. So whatever is the source this will be included in the distribution. We don't conversely, on the other hand, we didn't factor into this calculation the sort of headwind in capital. So the EUR 500 million is fully available for the distribution without correction out the EUR 200 million that is not included in CET1.

Let me add that as far as capital guidance for this year, we imagine quite consistent growth in terms communicability towards 15%.

So much higher than the 14% that you are projecting in the business plan?

As you can imagine, we started from 14.2% and the guidance was 14%. So we still think that the increase for the business plan remains the same. So at least for 2024, we don't have any headwind to include and the capital generation is still at a very high level.

The next question comes from Hugo Cruz of KBW.

First a clarification, you gave an NII sensitivity now of EUR 250 million, which includes the impact of the certificates. In the plan, I think you were talking about EUR 300 million moving towards EUR 200 million. So I just wanted to know if this is on a comparable basis? Or the plan didn't stick with the certificate? And also, on a comparable basis, are we seeing a decline in the sensitivity versus 3Q already or not? And what are you doing to decrease that sensitivity? And my second question was -- you've had the plan, you've done your marketing around the plan, are there any -- can part of the dividend be in the form of buybacks in the next few years? If you could clarify your thoughts on that?

So on sensitivity, Mr. Cruz, it's comparable to the previous one. We preferred to include also the NFR components and make it explicit to avoid any misinterpretation. So 100 basis points of reduction in rates from a point in time perspective static calculation provide a reduction in NII, EUR 300 million, and an increase in NFR of EUR 50 million, the total is net of EUR 350 million. And this is quite stable from -- stable in the last quarters. You may probably remember that we announced that during the plan, we will undertake a number of ALM measures. The most important of which is an increase in the hedging of deposits or if you prefer, replicating portfolio, which is currently at EUR 15 billion, and we expect to go to EUR 25 billion during the current year. This action is confirmed, has not been explicitly mentioned in the -- the mitigating actions -- may you read the Page 14, because these are -- these actions are on top of the plan should a different scenario materialize. But we confirm that the actions, including the plan to mitigate sensitivity with specific reference to the replicating portfolio are still part of the menu.

As far as buyback, we confirm what we said in the plan. We assume the first release related to '23 and the interim dividend to be paid as a dividend. So the former EUR 1.3 billion now raised to EUR 1.4 billion will be in the form of dividends. And then we have all the opportunity to share the shareholder remuneration, both by dividends and share buyback.

The next question is from Noemi Peruch of Mediobanca.

I have a clarification on your NII guidance up year-on-year. Which rates are you assuming and which deposit beta, please? And in terms of cost, we have seen a sizable reduction in the G&A cost in Q4. And I was wondering if we could consider this as the new run rate for 2024? And then I have a final question on deposits. We have seen the deposit base going down further in Q4. And I was wondering if you could give us some color about the competition that you're seeing in deposits. And what is, in your view the trade-off between keeping deposit EBITDA low and deposit outflows?

So thank you for the questions, Noemi. So when we drafted the plan, we assumed 2 rate cuts during 2024 starting from second half of the year. So from beginning of third, beginning of the fourth quarter. Now we are switching to 3 rate cuts during the year of 25 bps each starting from, again, more or less -- a little bit earlier than it was assumed when we drafted the plan. Deposit beta, so it has to be distinguished as far as current accounts are concerned. We have the usual split that we already gave transparency on which we did the spend rate to the market represented by indexed components of deposits some EUR 22 billion to EUR 23 billion on average during the year, which has a very high EBITDA around 80%. Then we have the part that is nonindexed that is the remaining something like EUR 75 billion that has low beta similar to what we experienced during this year, but of course, in a rate reduction environment. This, in this case, means sticky interest rate cost on our P&L. And this very low beta is in the area of 10%. On top, we expect during the year to increase time deposits, as Giuseppe Castagna mentioned earlier, this type of action didn't start yet. We didn't have commercial constraints to raise deposits during competitive pressure. In the guidance, we have factored that this instrument will be issued. This will have a contribution on deposit costs as well to level, which end of the year should be around EUR 4 billion to EUR 4.5 billion.

Thank you for the other two questions. Yes, I think I mentioned that if I don't -- I will give you the answer. Now on the NII we had, that is also written on Page 18, a one-off benefit of EUR 70 million, not replicable in the future, also considering that we are increasing, as we mentioned in the business plan, our investment base. So we have increased it by EUR 100 million investment over the next 3 years. So I would assume more the previous quarter rates rather than the Q4 rate. As far as deposits are concerned, of course, what you see, the final day of the quarter is -- could be very different. Frankly speaking, don't agree that we see an outflow in deposits, we are having a different deposit assets under custody, asset under management and deposit, which is something that we try to manage all together in order to maximize the willingness of the client to invest in some different assets and our opportunity to still increase the total deposit base. If we take, as of today, for instance, the EUR 98.8 billion in deposit is already above EUR 100 billion. So we are not every day modeling our deposit. We see the trend, and in case of a potential outflow that we are not experiencing we will deploy the time deposit, as Edoardo was mentioning, in order to retain a higher deposit base. As of today, starting from January '24, we have experienced again a growth in direct deposit base. And so the cost of deposit is still basically the same of last year -- last quarter.

I have a different follow-up. I can see EUR 18 million of positive one-off for D&A, but I was wondering also on the other administrative expenses there are quite -- that have improved a lot in the quarter. And I was wondering if this is the new run rate or not?

Let's say that EUR 10 million are real savings. We have a reduction in the energy cost in last quarter '23, and hopefully, we'll try to get more stores in 2024. Meanwhile, EUR 6 million were of lower amount of invoices received, which is something that happened in the last quarter of the year. So it's not replicable every quarter.

The next question is a follow-up from Mr. Hugo Cruz from KBW.

Going back to the slide with the mitigating action, Slide 14, can you talk about the timing? So if you have -- if the rates are lower, do you have the impact faster and then the mitigant stake until the end of the plan to work. So do you have an impact, an immediate impact, if we talk about 2025 because it's easier, right? The other plan is 3.5% and now if you assume 2.5%, that's 100 basis points different, right? So do we have the impact immediately and then the mitigants take 3 years to work out? Or actually the mitigants can be -- can take a lot -- have an impact much faster. How does that work?

It depends on the type of mitigating actions. Some of them may have an impact starting from now in any interest rate scenario here. I'm talking about the spreads on bond issuances and the spreads on certificates. Similarly, time deposits as long as we reduce the pace of conversion from current account, low-cost current account to have first time deposits, they have an impact starting from now. And this is what's happening since the beginning of the year. Other ones are more gradual such as the recombination of fixed floating between issuances and at the same time in lending. But for example, for issuances of bonds, we already split 50-50 instead of going fixed rate. I'm talking about the new issuance in January.

Next question is from Carlo Tommaselli of Societe Generale.

Yes. I have two, please. The first one is on the NPE coverage, which strengthened in the fourth quarter, your front-loading provisions in view of 2024. And despite the potential increase in default rate, I was wondering if you are thinking also about any chance of provision or release in terms of right back. This is the first topic. Also on provision, I was wondering if you -- if we could expect additional adjustment on real estate into 2024. And the last question, if I may, about the mitigation actions again, can you give us a sense of the size of each single contribution to this EUR 100 million of breakdown, please?

You can always ask, it's difficult to give a precise answer. But let's start -- let's start from the first question. If I understood well, what we were mentioning, I think we were talking about utilizing over lease in terms of increasing further coverage or maybe to keep the cost of risk very low. Normally, we don't use this kind of maneuver. We think, as we mentioned many times, our understanding over the delays is that if you want to utilize them when the time are difficult, you are in the wrong side because, of course, the overlay increase due to the model when there is a worst scenario ahead of you. So we think that is a prudent approach to keep overlays as they are, don't utilize overlays for coverage of NPE. So basically, we don't think, especially in this scenario, which prudently we can imagine an increase in default rate slight increase that we mentioned out of 0.9% in '23, an increase up 1.2% in '24, which, of course, is the banking industry approach I feel. So what we see on the forecast of next year -- of this year, so we think that on the opposite we can leverage on the upfronting that we have done this year in order to maintain even in case of default rate increase, total cost of risk, which is not higher than to what we realized this year. In terms of real estate, basically, again, we have a very comfortable balance sheet this year. As you know, we mentioned in our business plan that we want to dispose over the plan to rise -- up to EUR 700 million of real estate assets. So basically, we have, let's say, paving the way to be able during the next quarter to start with these disposal, which, of course, some of them come from the old merger between the banks even before the last merger in 2017. We have now EUR 2.4 billion of real estate that we want to reduce massively this amount and having better results than expected. We are trying to adjust the evaluation in order to be ready to have disposal. And of course, we are very, very prudent in the -- also in the valuation approach. The mitigation action, of course, we have some figure, but I leave to Edoardo, maybe he can give you more details.

It's like giving the Coca-Cola formula. But it's easy in this case. It's more or less the past that we defined is linked to the spreads accounts for around 50% of the total of the mitigated actions. For the remaining 50%, we gave ideas or actions that can be readjusted in terms of the total impact. So for example, we can readjust the mix of fixed and floating, we can push more or less on the accelerator for conversion in time deposits and similar gain, remix new lending between fixed and floating. So, as the example levels that we gave in the presentation, the split is 50-50 in, or the mitigation effect between the spread and the other levers. If we want to create additional mitigations, we have the options to consider to switch to more fixed on the remix side or more floating or fixed -- on the asset side or more floating on the liability side for 3 levers of bond issuance, new lending and time deposits.

Let me say, I understand that for you it's not that easy to mobilize. I think this maneuver that we were able to have in order to mitigate potential downside. But it's the day-by-day work that we do basically and the capability of a bank to forecast potential difficulties in the environment and to anticipate through flexibility and capability and through a very strong customer base. I think is what makes a difference between the bank and another. And the consistency of the results that we anticipate every year almost by 7-year to you, I think, give a proof of the capability of the bank to manage all these items time for time.

[Operator Instructions] The next question comes from Adele Palama of UBS.

Yes. I have a question on the regulatory headwind that are still pending. So during the business plan you said you have Basel IV plus the new definition of the Danish Compromise. So it's 130 basis point plus around 100 basis points related to the RWA dynamics. And I'm just wondering if this headwind are still in place? Or if they are lower now? And then a clarification on the NII for 2024. So you said you expect NII to go up year-on-year. And I just -- sorry, if I repeat this question again. But so your cost of funding is expected -- not cost of funding, but the cost of deposits is expected basically to remain stable versus the fourth quarter '23 in 2024 -- is what you are saying?

No. Headwinds we have already provided, I think, enough clarity on our plan. So really no need for us to provide additional details. What you have in the plan is a clear outlook of what we can experience in, with a highly conservative estimate is usually in our case, for the expected headwinds coming from Basel IV. To tell you very clearly, we don't expect any problem on our capital position to maintain the capital position that we have anticipated in the plan and on which we are already 20 bps ahead despite increasing the dividend of EUR 100 million. So on cost of funding, I think you gave me an opportunity to clarify better, the overall impact of the various beta assumptions that earlier [indiscernible]. So the point is that at the end of the day, the combination of the various maneuvers leads us to have a cost for our retail funding increase of another -- managed to over 30 bps versus what we experienced in 2023.

[Operator Instructions] Mr. Castagna, there are no more questions registered at this time, sir.

So let me thank you. Let me thank you all the participants and the colleagues who make answer to -- for our presentation. Again, let me say that it's a good occasion to confirm our commitment for deliver all the results that we anticipate to you. And I think next quarter will be even more understandable starting to deliver more commission for any potential downside in terms of NII, which basically we still don't consider. Thank you very much.

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