BPER Banca SpA (BPE) Earnings Call Transcript & Summary

Good afternoon, this is the Chorus Call operator. Welcome and thank you for joining the BPER First Half 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Alessandro Vandelli, CEO of BPER. Please go ahead, sir.

Okay. Good evening, ladies and gentlemen. Thank you all for joining this conference call today. This is Alessandro Vandelli, Chief Executive Officer; and I'm here with Roberto Ferrari, CFO; and Gilberto Borghi, Investor Relations Manager. First of all, let me say once again that I hope you and your families have been keeping safe and healthy. And I'm confident that if we or our patient and active caution, we'll be able to overtake this madness and turn back to normality. Today, we will have a bit longer presentation than usual, as we'd like to share with you our view about 3 main topics: first of all, the key points of the first half 2020 results then an update on the strategic deal with Intesa Sanpaolo and finally, revise outlook for 2021. Before starting the presentation, let me say that, as you all know, our strategy has always been driven by seeking new growth opportunities, enhancing profitability with a strong focus on derisking and capital solidity. Our recent history clearly confirms this strategy. We acquired banks, last was Unipol Banca, simplified our banking group. Last month, we completed the streamlining process with a corporation of 27 banks based in Piedmont. With a good level of profitability and improving at the same time, our asset quality and capital position, CET1 ratio reached 12.6% from 12.1% in March '20. Overall, a good starting point to look at the future, another step following the same strategy, growth and profitability with the same attention to asset quality and capital. Looking at the past, I'm confident we will be able to deliver well also in the near future. Now if you turn on Page 5 of the presentation, which should be already available on our website, we can start with the overview of the first half results. And before going through details, I'd like to underline a couple of key points, updating the current situation relating to the health emergency. As I mentioned you during the last conference call, we reached very quickly during the lockdown, we reacted very quickly during the lockdown with in mind few key priorities, such as to protect behalf of employees and customers, to implement support measures for households, small businesses and companies, while ensuring operational continuity of corporate processes also by introducing innovative working methods. Now the peak of the crisis seems to be over, at least in Italy. We confirm that currently, all our branches and central services are fully operational. Our quick response to support families and businesses during the crises has allowed us to accept to date over 100,000 requests for moratorium and to provide funds for loans granted by the state for over EUR 1 billion. We have been promoting, at the same time, many other initiatives and the fundraising at the service of the territories and communities. We are convinced that the collective effort that the countries' deployment can drive a recovery, but we are aware that the countries remains particularly fragile. Now we can go through our first half 2020 results. Please move on the next Page 6. I think that the first half 2020 delivers 3 main messages. First, Brazilian profitability; second, a remarkable step-up in our already sound capital position; third, a further significant improvement of the asset quality. Profitability. First half net profit came at EUR 104.7 million, showing a resilient profitability also thanks to the confirmed ability to generate revenues and contain operating costs. On account characterized by the slowdown of the economy and by the effects of the health emergency. It must be said that the result includes some nonrecurring items, such as the accounting of additional loan loss provisions for approximately EUR 90.5 million related to the worsening of the macroeconomic [ context ] closed by the health emergency and other [ external ] charge for EUR 36.1 million, partially offset by positive income taxes for the period for EUR 68.9 million. The cost of credit annualized is at 71 basis points, excluding nonrecurring items relating to the worsening of macroeconomic scenario and the sale of the mezzanine and junior tranches of the bad loan securitization Spring, equivalent, respectively, to 35 bps and 6 basis points. So the stated cost of risk is at 112 basis points. The second quarter net profit was EUR 98.6 million, much higher than the EUR 6.1 million in Q1. Capital. The quarter, we have been able to -- this quarter, we have been able to further improve our already solid capital and sound liquidity position. We have been able once more to manage capital in a very effective way, increasing our CET1 ratio fully loaded by 50 basis points at 12.57% versus a level of 12.07% in March 2020. In addition, our liquidity positioning is very strong, as shown by LCR index at 162% and the liquidity buffer reached EUR 14 billion compared to EUR 11 billion in March '20. All this, moving on Page 7, introducing the asset quality. We must underline another very positive result. In fact, our strong focus on asset quality allowed us to get the lowest NPE ratio in stocks since 2009, thanks to the further reduction of the NPE stocks. Also thanks to the recent bad loan securitization called Spring, gross and net were down, respectively, 18.2% and 12.2% since the end of 2019. The gross and the NPE ratio dropped to 9.1% and 5%. Post Texas ratio dropped to 70.8%, showing a significant reduction by 8 percentage points since December '19. Meanwhile, the annualized default rate remained stable at 1.7% versus 2019. Finally, talking about business, we experienced a very positive performance of loans also supported by the activity related to the measures promoted by the government for the health urgency. The total funding, which includes the Bancassurance sector is at EUR 173.4 billion, recovering by plus 4.7% for the low level reached in Q1, which was affected mainly by the market effect relating to indirect deposits. Now let's go very quickly into the analogy of the first half results starting from the balance sheet. We can move on to Page 9. We start with an overview of the funding. Total funding in Q2 is EUR 173.4 billion, including a contribution of assets under management from ARCA Holding of EUR 16.5 billion. I remind you that total assets under management of ARCA are about EUR 31 billion in June '20. Direct funding recovered in Q2 after the slight decrease in Q1, plus 4.7% compared to March '20. Indirect deposits and Bancassurance recovered as well in Q2 versus the end of March 2020 at the same pace plus 4.7%, showing a resilient trend in Bancassurance and sustained net inflows in Q2 more than doubled compared to Q1. Moving on to Page 10. Net customer loans up by 3% since March '20 and by 1.1% since December '19. Also supported by the measures of the government to sustain the economy. This result is also even more positive. If we take into consideration the bad loan securitization, cold Spring, which helped to lower significantly the growth of the net NPE stock as we are going to see why in the next slide. In first half '20, loan origination has shown a very positive trend, up by 18.6% versus first half '19. The good quality of the performing loans book is still confirmed by a particularly low bucket of high-risk exposure, only 3.5% on the performing book. Let's turn to Page 11. This is a very important slide because it is the confirmation of how we were committed and focused on improving asset quality. And here, you have the results. We were very successful in driving the improvement to asset quality, just a few numbers. In mid-'16, we had a gross and net NPE ratios respectively at 23.5% and [ 14.5% ]. The same numbers are now at 9.1% and 5.0% almost 1/3. Gross and net stocks are back to 2009 levels. Net bad loans are well below EUR 1 billion, also as a result of EUR 5 billion of bad loans disposals in past 2 years. Along with the very positive workout made by our servicing company and internal structures. So we know that our job is not over, especially because the [ expected market channels ] seems not to be as favorable as it was some months ago, but we reiterate our commitment to focus on progress in quality improvement going forward. The translation with Intesa Sanpaolo addresses also this angle among others. Moving on to Page 12. We show an annualized default rate at 1.7%, at the same level of 2019 and a very positive number of the recovery rate at 7% from 6.3% in 2019. It was the 3.7% in 2016, the first year of our specialized company BPER Credit Management. On Page 13, the securities portfolio reported an increase by [ EUR 3.3 billion ] compared to December '19 and by EUR 2.4 billion since March '20, mainly led by our large buffer of liquidity and positive market expectations. We invested mainly in Italian and Core Euro government bonds and the agencies. The Italian government bond stock increased to EUR 7.5 billion, weighing 33.9% of the financial assets portfolio and 11.5% of the total asset. Now we can move on to profit and once figures on Page 15. A few comments here. Net profit for the first half of the year of EUR 104.7 million, thanks in particular to high capacity to generate revenues and effective control of management costs. It was highlighting that this result includes the impact deriving from the accounting of additional credit adjustments for approximately EUR 90.5 million, relating to the worsening of the macroeconomic context caused by the health emergency. The result includes also other extraordinary expenses for EUR 36.1 million. And you can see details in the call-outs of the slide. The previous nonrecurring charges were partially offset by positive income taxes from the period -- for the period for EUR 68.9 million, mainly due to the tax credit relating to the conversion of DTA pursuant to legislative decree Cura Italia and the release of intangibles assets, goodwill for the tax proposes. We can move on very quickly to Page 16. As for the Q1, I'd like to remind you that the comparison between the first half '20 and first half '19, detailed profit and loss data is not on a like-for-like basis due to the acquisition of the control of ARCA and Unipol Banca since July 2019. So my comments will be focused on -- when necessary on the quarter-on-quarter trends because the first 2 quarters of the year are not comparable -- are comparable only with the last 2 quarters of 2019. About Net Interest Income, we show a comfortable NII growth, plus 0.7% quarter-on-quarter at EUR 310.3 million and also ordinary NII that is net of IFRS 9 and IFRS 16 effects, we have an increase by 1.3% quarter-on-quarter. NII resiliency is mainly due to the improvement of the spread, plus 8 basis points, led by the decrease of the cost of funding and a slight increase of the asset yield. Given the current difficult macroeconomic scenario and the low negative interest rate environment, this can be considered overall a positive result, looking at the outlook for the year. On Page 17, the net commissions. Net commissions amounted to EUR 245 million in Q2, down by 8.4% quarter-on-quarter due to the effects of the health emergency and the prolonged period of the lockdown. Even the presence of a slowdown, we recorded resilient performance in Bancassurance sector. Substantially unchanged quarter-on-quarter, while the lockdown impacted on the other segments, such as asset under management commissions, we decreased by 10.6% quarter-on-quarter. Cards, collections and payment sector, minus 8.2% and the company referring loans and guarantees commissions dropped by 5.6%. It's worth highlighting that the analysis on the monthly trend of net fees in Q2 leads to be cautiously optimistic about the possible recovery of net fees in the coming quarters. In fact, the data shows that in June, net commissions return to the pre-crisis level, in line with the first month of the year after a negative trend in April and May in conjunction with the lockdown period. On Page 18. In second Q, credit income was very positive, showing a strong increase at EUR 46.8 million versus inversus EUR 5.6 million in Q1, influenced by the rebound in financial markets after the turmoil following the health emergency crisis. The quarter sees also dividend for EUR 12 million. Moving forward, on Page 19, operating costs amounted to EUR 410.1 million, down by 0.2% compared to the Q1 showing, in particular, a positive performance in staff cost, down by 2.5% quarter-on-quarter benefiting from the first positive effects of the redundancy plan. And able to absorb some inflation effect relating to the renewal of the national labor agreement signed in last part of 2019. Other administrative expenses amounted to EUR 116.9 million with an increase by 2.1% quarter-on-quarter, mainly due to higher costs related to the extraordinary projects we have been working on. On Page 20, we accounted loan loss provision for EUR 157.8 million in Q2, including additional provisions for approximately EUR 40.5 million due to the worsening of the economic context. EUR 50 million had already been recognized during the fourth Q. And then EUR 16.4 million, referring to the sale of the mezzanine and junior tranches of the securitization of Spring bad loans portfolio. The cost of credit annualized is at 71 basis points, excluding nonrecurring item. It is at 112 basis points, including additional loan loss provision related to the health emergency, which count for 35 bps and the sale of mezzanine and junior tranches of the bad loan securitization Spring for 6 basis points. Net provisions for risk and charge amounted to EUR 17.2 million. About liquidity on Page 22, we consider our liquidity position as very solid. Our total eligible assets increased at EUR 27.1 billion, along with the bucket of an encumbered eligible asset of EUR 11 billion and [indiscernible] liquidity of EUR 3.2 billion made by deposits with the ECB. It's good exposure of EUR 15 billion in June '20, mainly composed by EUR 14 billion of Tier 2 and 3. I remind you that we entirely reimbursed the EUR 9.7 billion of Tier 2 in June. LCR index is at 161.8% as well as NSFR ratio stand well above the regulatory floor. Page 23. On capital, another very important slide. This is the third pillar of our management action after the other 2 represented by the resilient profitability and the strong asset quality improvement. Our capital position is confirmed to be very solid. As we were able to increase significantly the CET1 fully loaded by 50 basis points in the quarter bring [ innovation ] to 12.57% from 12.07% in March. The CET1 ratio phase in stands 14.11%, with a very large buffer of 600 (sic) [599] basis points over EUR 2 billion versus the minimum capital requirements set by the ECB at 8.125%. The main positive effects on the CET1 ratio in the quarter have been retained earnings, 31 basis points; the SME (sic) [PMI] supporting factor, 22 basis points; the policy contribution of the fair value other comprehensive income reserves for 21 basis points; and lower goodwill and intangible asset for only 3 bps. On the other hand, we have an increase in RWA for a total negative impact on CET1 over 27 bps due to the increase of loans and the securities portfolio. We have also some extra buffer to exploit by the end of the year. As you all know, the UBI model extension to the ex Unipol Banca credit portfolio and the C.R. Saluzzo. On the next Page 25, my brief final remarks. So in conclusion, the may takeaways for -- from the first half results are resilient profitability despite a very difficult macroeconomic scenario and a conservative approach to credit risk with significant additional provision of EUR 90 million in the half year. Again, a step forward in improving asset quality. And obviously, this will continue to be a focus for our group. All this, combined with a very solid capital ratios and the large liquidity buffers. Here again, our commitment is to preserve and even improve this comfortable situation in the future. So we are going to face new challenges, but confident that we are well equipped to do a good job in the interest of all our shareholders. Now let's go to Page 27 to share with you an update about the Intesa Sanpaolo transaction. And then finally, an overview of the Rise 2021 economic and financial outlook. We now move on to a brief update on the acquisition of the going concern from Intesa Sanpaolo, which we announced back in February 2020. On Slide 27, you can see a summary timeline of the key events of the transaction. Following the initial announcement in February, today, we announced the agreement on revised transaction terms with Intesa Sanpaolo for the acquisition of the going concern. In particular, this agreement envisages the definitive methodology for the calculation of the consideration for the going concern, which we'll describe in details in our next slide. Given the successful conclusion of the public tender offer of Intesa Sanpaolo and UBI, the acquisition of going concern is now subject to deeper obtaining regulatory approvals and this inclusion of BPER's right issue, which we expect to launch as soon as practical in the second half 2020. On Slide 28, you can find a recap overview of the perimeter being acquired and the key transaction terms. Based on yesterday's agreement the price of the going concern is now determined in a definitive manner as equal to a multiple of 0.38x the CET1 capital of the going concern, bearing in mind that the capital allocated to the going concern will be in line with the one of UBI, which recorded the CET1 ratio of 13.4% as of June 2020. All other terms remain as previously communicated to the market and include items contractually defined, such as 532 branches, up from the originally agreed 400, 500 in February agreement. Mainly located in the Northwest regions of Italy and [ Lombardy ], approximately EUR 26 billion loans to customers, RWAs capped at EUR 15.5 billion. Asset quality is aligned to debt of the UBI for a portfolio of EUR 21.5 billion plus EUR 4.7 billion in performing loans. Gross NPE ratio for the going concern of 6.5% based on UBI's figures as of June 2020. I would also like to remind you that the going concern would be composed of assets and liabilities, strictly related to the branches acquired with no head office, no central structures and no future obligations with reference to current distribution agreements. On Slide 29, we want to stress once again the strong strategic rationale of this transaction for BPER. This acquisition will enable BPER to announce its scale and positioning and increase its client base by more than 50% with new clients mostly located in the Northwest regions of Italy, one of the most dynamic areas in Europe. From this, we expect significant returns in terms of [ regional ] efficiency as well as revenue generation as further illustrated in the following pages. On Slide 30, you can see more clearly what we have just mentioned in terms of announced scale and positioning BPER. Vis-à-vis other Italian listed commercial banks following the acquisition of the going concern. Let me repeat once again, this transaction is about client growth, revenue growth, greater efficiency rather than simply expanding our branch network. Moving on Slide 31. We provide you with a detailed overview of the contribution of the going concern in term of distribution network, which, again, you can see it's mostly represented by branches in the Northwest region of Italy, more than 57%, and in particular, Lombardy. The highly complementary footprint of the going concern with significantly enlarged BPER multiregional presence in the wealthiest Northern Italy Italian regions, bringing in total approximately 1.4 million additional clients. In particular, the contribution of the going concern will increase BPER market share in Italy by 2.2%, bringing it to 7.6% based on number of branches. [indiscernible] will see a market share increase for BPER from 1.3% on a standalone basis to more than 6% pro forma for the going concern. Following the acquisition, BPER will count on a market share of more 5% in 11 regions in Italy from 7 on a standalone basis. On Slide 32, we illustrate with additional details how this branch network is expected to contribute to BPER's franchise, not only in terms of branches but also in terms of business volumes. As you can see, based on the data available to BPER at the present date, we estimate that more than 70% of contributed assets and liabilities are located in the Northwest regions. This contribution is expected to leading to a threefold increase in loans market share for both the Northwestern Lombardy as well as a 6x increase and 9x increase in Lombardy and in Northwest regions. Now moving on Page 34. We'd like to give a quick overview about the economic and financial outlook for 2021. In light of the outbreak of COVID-19 pandemic which is expected to result in a deterioration of the macroeconomic scenario on one side. And the acquisition of the going concern on the other, the outlook and the economic financial expectations related to BPER Gruppo vis-à-vis what previously outlined in industrial Plan 2019-2021 have changed. In this regard, we have revised the economic and financial targets as presented in the 2019-2021 industrial plan while maintaining continuity with the strategic guideline previously defined. The economic outlook at the base of the Rise projections reflects a significant decline in the GDP for 2020, equal to minus 9.4% with only a partial expected recovery in 2021, plus 5.4%. Despite revised macro estimates, we believe BPER is strongly positioned to face proactively the changed environment. With improving asset quality ratios, solid capital position and strong liquidity ratios as well as a more diversified business mix, where commission-based volumes over total revenues have grown by 4 percentage points versus the same period of the last year. In this context, the acquisition of the going concern is even more relevant for both industrial and strategic point of view. Lastly, the envisaged right issue will allow BPER to maintain a strong capital position to support a broader RWA base. Moving on to the last Slide #35, we provide you with a summary overview of the revised estimates for BPER on a standalone and pro forma basis for 2021. Taking into consideration the scenario outlined before as well as the key strength of BPER coupled with the acquisition of the going concern, we estimate that the group is well positioned to achieve a net income of more than EUR 375 million in 2021, driven by revenues in excess of EUR 3.4 billion, operating cost of [ 2.1 billion ], corresponding to a cost-income ratio of 60% with 90 basis points of cost of risk. In terms of asset quality, the [ adopted ] actions currently being assessed coupled with the better asset quality profile of the going concern mean that we expect the gross NPE ratio of the combined and BPER group including the going concern in the 9% area. We expect the group to maintain a very solid capital position with the CET1 ratio fully loaded in the region of 13% in 2021 on a combined basis. Incorporating [ cost of CoR ], the impact of the right issue, while delivering a return on tangible equity in the 6.5 region. Let me conclude by confirming our commitment as management team to deliver the completion and subsequent integration, the going concern with maximum rigor and continued focus on profitability, asset quality and capital strength, in the interest of all our stakeholders. Thank you all for your time and attention. Now we are ready to start the Q&A session and to take your questions.

[Operator Instructions] The first question is from Andrea Vercellone with Exane.

A couple of questions. The first one is on your target of 10% circa fully loaded [ Telco Tier 1 ] ratio for the combined entity 2021. I was just wondering whether you can share with us the size of the capital increase you have assumed to get to that number. Second question is on the PPA on the assets that you're buying. You had assumed EUR 150 million first version, what have you assumed now? And third question and last is on BPER standalone, H1 results. I'm just wondering if you have accrued any dividend in your core Tier 1 ratio as of now? And regardless of whether you have or you haven't, do you consider it's a possibility to just not pay a dividend for the 2020 results in order to minimize the size of the capital increase you are going to have to do?

First of all, I do confirm the 13% target of the CET1 ratio for the combined entity. What I can say for now about the size of right issue that we estimate a right issue of EUR 800 million area. This is what we estimate, probably could be less. But anyway, this is the message. And in this 13% target, there is a side roughly between EUR 750 million and EUR 800 million.

Can I stop you 1 second?

Yes, please, go ahead.

What do you see as the logic of raising EUR 800 million and reach 13% fully loaded core Tier 1? When you're perfectly fine with 50 basis points less, you have plenty of buffer. So why would you aim high, that's the logic that underlines your thinking?

Well, I think that taking into consideration the macroeconomic scenario, I think that is correct to be very prudent on the size of the right issue. I agree with you that probably looking strictly to the figures, it's possible to complete this acquisition with a lower level, but I repeat only from a very prudent approach, I can say, EUR 800 million area. Then when we are close to the right issue, we decided the right side. Anyway, I would like to stress that we think we have a very comfortable capital position also because we have some buffer to take advantage in the second half 2020. And so -- and the other point we didn't accrue any dividend for this first half 2020. And it is possible to evaluate the possibility not to have a dividend to reduce the size of the right issue. On -- about the PPA, we -- what I can say that at this stage, we estimate EUR 200 million of additional provisioning on the going concern perimeter. And we think this is the right way to use partially the badwill coming from this acquisition. We estimate a badwill of roughly around EUR 1.2 billion. And 200 of this badwill for the additional provisioning on the credit perimeter of the going concern.

The next question is from Adele Palama with UBS.

A couple of questions for me. So can you give us a guidance on the NII evolution for the remaining part of 2020. And I was wondering if you are considering to increase the TLTRO pickup? Then another question is on the government guarantees. I would like to know if you expect a higher use of the government guarantees by year-end? And if you can share the proportion of loans as of today that are covered by the government guarantees? And then on the CET1 ratio target of 13%. Can you tell us which are -- if there are any regulatory headwinds included? And which are the assumption on RWA inflation?

NII -- let me say that we are particularly satisfied for the trend in this first half 2020. It's absolutely in line with the second half 2019. So the same exactly numbers of the second half 2019. Our expectation is to increase the NII in the second half. We think that some support is from the TLTRO III and I do confirm that we are going to take the full amount of TLTRO III probably in September. And so the expectation is that after EUR 618 million, the second half of the year is more close EUR 650 million. So this is an expectation to have a good increase in the NII. So for the NII, this is our expectation for TLTRO. I confirm the -- that we are going to use the last part in September. I'm thinking about your question on net CET1. There are no particularly negative event on this in 2020 and 2021. What I can say on a positive elements. As we said before, we are waiting to have the internal model applied to the perimeter of Unipol Banca and also on the small perimeter of Cassa di Risparmio di Saluzzo so we expect to have an impact roughly between 35, 37 basis point. So to be very close to 13% of common equity tier 1 considering this benefit from the alignment to internal model. So I repeat this is an absolutely positive trend also in the common equity one. About the government guarantee, as I said before, now we have more than EUR 1 billion, covered by 100% guarantee. These are mainly loans below EUR 40,000. Then now there are more or less EUR 1.2 billion with moratorium and 33% covered by state guarantee and a higher level, roughly EUR 3 billion, of other facilities, temporary facilities with a state guarantee of the same level of 33%. And now we have a significant amount, around EUR 2 billion of new loans with guarantee by SACE or Mediocredito Centrale with a guarantee between 70% and 90% of the loans. So what I can say is that after the first phase, where the activity was concentrated on small loans below EUR 38,000, now the activity is more on the corporate side. And in particular, we have a significant flow of loans granted by SACE and Mediocredito Centrale. I hope to have -- to completed the answer to your question. And if you again, I did it for your questions.

Can I -- sorry, can I ask you on the EUR 650 million remaining NII for the second half? Do they include also the NPL income loss from the sale of NPLs from Spring?

Yes. What I can say, the highest benefit in the second half is from the TLTRO III because you know that the benefit from the TLTRO III was only for 6 days in June. And so the full effect we have only in the second half of the year. And the benefit we estimate between EUR 6 million and EUR 7 million per month. And this is without any other element explained largely the increase of the NII in the second half.

Your next question is from Giovanni Razzoli with Equita.

The first question is on the going concern transaction. Clearly, we have also now all the moving parts now fixed. Is it fair to assume that the price of the going concern cannot exceed EUR 790 million. That will depend on the risk-weighted assets, if I'm not mistaken, you said that risk-weighted assets would not exceed EUR 15.5 billion. So the price that you're going to pay should not exceed EUR 790 million and so this is my first question. The second question is actually a clarification on the Slide #34, where you are showing us the contribution that you expect from the going concern that is EUR 140 million. If we do the math and I see EUR 930 million of operating income, 60% of cost-income ratio out of there in order to get the EUR 140 million bottom line, roughly speaking, out of EUR 26 billion of loans, you need -- you are implicitly assuming 100 basis points of cost of risk in 2021. That if I'm not mistaken is your guidance for BPER standalone in 2020. So it seems to me that you have been extremely conservative there. I was wondering whether my understanding is correct. And if you succeed into reducing the cost of risk by some 10 basis points, the leverage that you have on the bottom line on this going concern is very significant. If you -- I assume 70 basis points of cost of risk, you would end up with the same revenues to something in the region of EUR 200 million, that is a major improvement. So I was wondering first of all whether my calculations are correct, if you do share my thoughts. And if you can also share with us what kind of synergies on the revenue side, you can assume on the going concern so it should have additional operating leverage to these profits? Because clearly, that would dramatically reduce the [ fee ] paid on this going concern. Very last question. I've seen that you have increased the asset under custody as a result of a major wholesale agreement. I was wondering whether this can have a tangible impact on your fee income on indirect collection going forward. Sorry for the long list of questions.

I try to give you all the answer to your question, but please remind me if I forgot something. First of all, price is correct. The maximum level now we can say, is EUR 790 million. Our expectation is to be below EUR 750 million. So it depends obviously on the size of risk-weighted assets, and this will be possible only when we can share with Intesa Sanpaolo the perimeter of -- first of all, of the credit and the loan portfolio of the 532 branches of UBI. But we think that this is the range. About the going concern and the BPER plus the going concern in 2021, we estimate 90 basis points of cost of risk. Is -- let's say, a very prudent approach also because today, we know very well that UBI has a good credit quality. But at the same time, we are out of the UBI. And let's say, in this 90 basis points, there is a very prudent approach. I think thinking about the macroeconomic scenario that I have today is correct. Going through the details about, as you said before, operating income, cost-income ratio at 50%, why EUR 140 million net income. This is -- the reason is because between the cost of risk and the gross profit, there are other cost related, for example, to the recovery fund and so on. So we estimate also some cost related to this part of the profit and loss and also here a prudent approach lead us to have this EUR 140 million of additional net profit for BPER with the going concern. About the -- [indiscernible], I would like to say that a significant part of this [indiscernible] are from Unipol Group. And is a quite stable amount, around EUR 55 billion. There is an agreement with Unipol Group. So is an important activity for BPER, but at the same time, a positive contribution for BPER in terms of commission and fees.

[indiscernible].

About the synergies. In the first year of this acquisition, 2021, there is no synergies. We expect to have the opportunity to exploit synergies in the coming years. As I said many times, using our product factories, in particular, in asset under management in factoring consumer credit. So are not present in 2021, the expectation is to have a positive contribution in the other years. We are thinking about also on the opportunity for a new industrial brand because if there will be the acquisition of this perimeter of branches, there is an important increase for BPER Gruppo looking at total assets from EUR 80 billion to EUR 120 billion, EUR 115 billion, EUR 120 billion. So there is an increase of roughly 50% of the size of the group and also considering the macroeconomic scenario, we think is important to work on a new business plan. We see at the beginning of the year, if it's possible to have a comprehension a better understanding of the evolution of the scenario, but it's crucial to have a new business plan, and this business plan will be possible to have a better comprehension of the potential also in terms of synergies for BPER Gruppo, thanks to the perimeter of branches from Intesa Sanpaolo.

And if I may a follow-up, can you elaborate a bit also on the churn on the customers that you expect on this going concern? Because it seems to me that the profitability of these perimeter is quite good. So it is going to be important to retain as much customers as possible. I think this kind of transaction, clearly is a risk envisaging the branches disposal?

Well, about the churn rate, typically, there is an estimate around 10%. But what I can say is that today, we examined, for example, the churn rate on the perimeter of Unipol Banca because we expect also, in this period, we have a churn rate roughly around 10%. But after a significant period to date, we are below 5%. So it's a very positive trend in this area. So we hope to repeat the same performance also in the going concern perimeter. What I can say that now working on Unipol Banca the effect is lower than expected, is below 5%. We see in the coming months, but anyway, is an important message for BPER that is possible to maintain under control also this important rate.

Your next question is from Patrick Lee from Santander.

I had 2 questions, one on the going concern and one on the course of risk outlook. Firstly, on the going concern estimated earnings of EUR 140 million for 2021, just I think it's kind of a follow-up question, follow-up on the earlier question. I think back in February, your estimate then was the going concern was a net income of EUR 165 million. Now I know, of course, the load is definitely now, but you're also buying a 20% bigger book. With the increment -- or the incremental non-scientific I'm completely performing. So on my best guess, you might be penciling something of [indiscernible] of around 30%, quite a bit higher than what UBI is saying in their business plan. So can I just ask you to give us a bit of color on your initial thinking of this -- what is extra caution? Is it just the matter of the cost of [indiscernible] of the 90 basis [indiscernible]? Or is there some change in thinking in terms of revenue capacity or the cost-to-income ratio? Secondly, on cost of risk, with the first half cost of risk at 110 basis points, would you still stand by our previous indication of around 100 basis points for full year 2020? Is this basically saying that cost of risk is going to fall to the same 90 basis point in the second half of the year? That's it for me.

Well, first of all, about the cost of risk of this year. So in the first half, the cost of risk was 112, and we estimate for the end of the year 100 basis point. I repeat also here, I think it is correct to have a very prudent approach because with EUR 90 million already booked in the first half as additional provisioning, we don't expect to have the same -- pays the same amount in the second half. So it's possible to see something lower. Anyway, we think that at this stage, a target of 100 basis points is, in my view, correct. If we be better, it's fine. But anyway, to be prudent, we think that 100 basis points is the better estimate. So in 4Q, EUR 50 million of provisioning, in the second one, EUR 40 million. I don't expect to have the same pace in the third and fourth quarter. But anyway, something more on the ordinary cost of risk and something less probably in extra coverage. Yes, we changed the cost of risk in going concern perimeter. And as I said before, without any deep analysis on the portfolio is very difficult to estimate what will be the cost of risk of UBI. Looking at the balance sheet of UBI, typically, there is a cost of risk lower than the cost of risk at BPER. At the same time, BPER as you know, completed a very strong action on asset quality. We are particularly proud for the results on this year. But in terms of cost of risk, to have a new coverage and ready to complete some disposal. Obviously, there was a higher cost of risk. Let me remember only the last disposal of BPER, the Spring securitization, we have no impact on profit and loss on the disposal and only EUR 16 million on a disposal of EUR 1.2 billion of gross. Only to say what was -- how was important to complete as the provisioning in the year before the disport. Having said that, I think that in a very prudent approach, 90 basis points is our expectation, but probably the cost of risk on the UBI perimeter could be lower. Also because, as I said before, we want to complete on the PPA as the provisioning of EUR 200 million on the perimeter of UBI.

The next question is from Christian Carrese with Intermonte.

I have a few question on commercial trends. The first one on net interest income. I was quite surprised by the trend seen in this quarter in terms of both asset spreads and liability spread. If you can elaborate a little bit what do you expect also taking into account of the guarantee, the government guarantee is what you expect in terms of asset spread going forward and the lower cost of funding is related to maybe Unipol Banca, now lower cost of funding. So if you can give some color on that? The second question. [indiscernible] so the cost of risk 2020, still your guidance is for 100 basis points, the PPA, the usage of PPA will be [ IOPPA ]. You said EUR 200 million or EUR 300 million. If you can just clarify on that. And they will be booked by the end -- you expect by the end of the year. The third question is on NPLs. You just did the disposal of EUR 1.2 billion NPL with a positive tax effect due to the [ correct area ] decree. I was wondering if you are planning additional disposal by year-end. And if the tax -- positive tax effect has been booked in full in this quarter, or there will be some additional benefit in the second half? And finally, on Common Equity Tier 1, basically, you are ready on a pro forma basis at 13% common equity fully loaded, no headwinds, you expect no tailwinds as well in 2020, 2021? So just if you can clarify your dividend policy for 2020, if I'm not mistaken, you said no accrual in the first half. So if you can elaborate maybe on 2020, what do you expect? And after the -- on a pro forma basis, what kind of dividend policy do you see? And finally, on the going concern, you talked about the churn rate, so in your estimate, you said on average usually is in the area of 10%. There is any, I can say, noncompetition agreement to Intesa Sanpaolo, can you share with us on the [ bill ]?

So well, I try to remember all your questions. I start from the last part of your question. To confirm, first of all, that the extra provisioning of PPA on UBI perimeter is EUR 200 million not EUR 300 million, EUR 200 million. And so that we completed the disposal activity and this was, let's say, the last important disposal in the last 2 years, you know that we completed EUR 5 billion of disposal. Probably there could be something before the end of the year -- on the UTP side because we are analyzing some opportunities. We'll see but anyway, the significant and positive impact on taxes was on the first Q, and we have no significant expectation on the second half. No accrual, as I said before, on dividend. We think that with this very particular year we prefer to see quarter-after-quarter, the trend. Let's say, we are a little bit positive. Now after the positive trend of Common Equity 1 in the second Q. So 50 basis points more. So we are more relaxed on this side. But I repeat, we prefer to see the second half. You know that ECB is said to be very prudent on the dividend policy. And only after the third Q is probably possible to say something on this exclusion point. Roberto Ferrari, please go ahead for the NII and some consideration about this point.

On asset spread, we expected marginally lower due to the growth in government-guaranteed loans and you know that the spread on government-guaranteed loans is actually lower. And also the capital impact is very low. On the cost of fund of funding, actually, we do expect it substantially lower due to the TLTRO III and the fact that we are very committed to reach the minus 1% benefit. Due to the redemption of retail bonds of mainly of Unipol Banca, but something of BPER as well. We had, for example, a redemption of our covered bond in July by EUR 750 million that was issued in the past and also lower cost of funding on U.S. dollar because we have a portfolio of USD 2.2 billion, where the cost of funding now is close to 25 basis points. So it will have an impact also on this side.

Okay.

Probably the last question was about the presence or not of no competition agreement. I confirm that it's present in the agreement with Intesa Sanpaolo. So we think that there is the opportunity to manage correctly the churn rate. So there is an agreement for 2 years, and this is extremely important for BPER.

Just a follow-up on the PPA. Do you expect to use it by year-end or?

Well, it depends on the timeline of the acquisition. Let's say, it's not simple to give you a clear view on the timeline because now we have no opportunity to analyze the IT system, to go deeply to understand exactly the process. So what I can say that we would like to complete the acquisition of the going concern as soon as possible. But please don't ask me any estimate the timeline because now without no possibility to analyze inside the structure of UBI IT system is very difficult to explain to express anything. So my expectation is that after the acquisition, thanks to the badwill there will be this PPA, but really, I'm not able to give you a timeline for the reason that we are out of the UBI, and we must expect, I think, after the new Board of UBI and probably after that is possible to have some insight in UBI system to understand how many months need to complete the migration and so on. I think that this will be possible probably at the end of September. But I repeat as soon as possible is obviously our objective.

Your next question is from Noemi Peruch with Mediobanca.

I have 3 on asset quality. Firstly, a follow-up on moratorium. Are the EUR 1.2 billion you mentioned installments due by September? And if so, can you disclose the underlying amount of loans under moratorium? Secondly, can you please share with us the evolution of stage 2 loans in the quarter? And did you migrate part of the loans under moratorium to stage 2? And lastly, you're currently running with 1.7% default rate. What is the implied default rate in your guidance of 190 bps in 2020, 2021?

So I try to give you some elements about, first of all, the moratorium on a EUR 1 billion in installment and the amount of the loans on the moratorium here is roughly EUR 10 billion. Let's say, the second question was about Stage 2. And sorry, [indiscernible] do you want to -- so we have the opportunity to have the Chief Lending Officer here with me, so please.

Good afternoon. We have recorded a slight increase in stage 2 rate currently is slightly lower 10% of the total performing -- the amount of -- performing credit assets.

How big was the increase in Q2 versus Q1?

Roughly 1%.

So in general, what I can say about the asset quality, till now there are no significant changes in the different perimeter of our credit portfolio and also the confirmation of the level of default rating at 1.7%, the same as the last year. So my expectation is that probably only in the fourth quarter could -- would be possible to see something different. Right now, what we can see is obviously a trend extremely, let's say, positive, but influenced by the moratorium, the intervention by the state with a guarantee. I repeat, I think the crucial point will be the fourth quarter 2020 to understand that what will happen after moratorium and intervention by the state with guarantee. So till now, I repeat, the trend are in general policy for the portfolio.

Do you mind to give us some color on the default rate embedded in your guidance?

We estimate an increase of the default rate at 2%. This is what we embedded in our estimate, and we hope that is not optimistic, but very prudent. And this is the figures that we have in our estimates.

Your next question is from Hugo Cruz with KBW.

Just quickly. So can you give us guidance for your tax rate in the second half of 2020? Also, if you could give tax rate guidance for 2021 to the pro forma? I was wondering if there could be any DTA absorption given that you now have a larger perimeter to absorb those DTAs? And then finally, I think there was a question around your dividend policy. In 2021, I don't think you have answered, if you could -- if you did, then if you could repeat that would be great.

Okay. For the 2020, our expectation is to have a positive rate -- tax rate for the year. So let's say, there is a significant policy level. I don't know how significantly is to say, 68%, 69% positive. So we estimate to have roughly EUR 80 million to add to the gross profit to arrive to the net profit. So the year is obviously absolutely positive. Next year, at this stage, our estimate is to have roughly something between 20%, 25%. This is what we can say. Obviously, it depends on the going concern perimeter, on the size of the badwill and so on. But if I have to give you a range, we think, is between 20% and 25%. The other question was that on dividend policy. On our estimates on the Common Equity 1 target for 2021 of 13% area, we estimate a 25% of dividend yield for 2021. I think that we have to review all the elements if in 2021, we are ready to a new business plan. Let's say, this is only in line with the dividend policy of the last year. So it's a confirmation also for 2021, but probably, we need to review our policy when we are ready for the new business plan. But at this stage, the 2021 figures are with 25% of dividend [indiscernible].

Your next question is a follow-up of Andrea Vercellone with Exane.

Sorry to ask some more questions. Two are clarifications on what I initially asked, and one is a qualitative one. On the PPA, am I correct, that EUR 200 million is a net figure? So the provisions you've been making is roughly EUR 300 million. Second one is again on the size of the rights issue, which, in my opinion, is the only thing that matters right now. Everything else is very interesting, but that's the question. Is it fair to say that if you do transfer an amount of risk-weighted assets below the cap, and you do buy the business at around EUR 750 million figure you gave before, then the rights issue could be EUR 750 million rather than EUR 800 million, or am I reading too much into it, and the market should just have an EUR 800 million in mind? And the final question is, when are you actually going to get access to the going concern in order to then speed ahead with all of your calculations and estimations and so on before you actually acquire it in December. Can you take a look at it before? Or it's just up to Intesa, and then you'll just get it?

So I start with the easy question. And it is about the PPA, EUR 200 million is a gross figure. About also when it's possible for BPER to have access to data of the going concern? We think that it's possible to have end September, beginning of October. It's difficult to say because it's not a decision of BPER, but that must be the renewal of the Board of UBI. And probably after that, it's possible to have access to data and information. As I said before, analyzing the right issue, we -- and I said, EUR 800 million area. Let's say that probably we might think that we have to decide the size of the right issue before going into the details of the going concern because I hope that BPER will be ready for the right issue after the summer period. My expectation is in the second half of September, hopefully. I'm not sure, obviously, but we are working on the authorities to have ready the right issue for the second half of September. So for this reason, we have a cap is EUR 15.5 billion of RWA. We have a good estimate that we'll refine, thanks to the date of June '20 of UBI, but to have the exact number is probably not possible before October. And frankly speaking, I hope to complete the right issue by October, probably at the beginning October. So there is a little bit range, let's say, also considering the period, I think that now what I can say is EUR 800 million area, but probably at the beginning of September is possible to have the right size of the right issue. But anyway, what must be clear that we have to decide the size before going through the details of the going concern. So there is probably a little range of risk-weighted assets that we must take into consideration when we decide the size of the right issue.

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

Okay. Thank you. Thank you very much for your attention. And sorry for a very long conference call. Thank you all. Bye-bye.

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