BPER Banca SpA (BPE) Earnings Call Transcript & Summary

Good evening. This is the chorus call conference operator. Welcome, and thank you for joining the BPER Full Year 2020 Consolidated 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 for joining this conference call today. This is Alessandro Vandelli, CEO, and I'm here with Roberto Ferrari, CFO; Alessandro Simonazzi, Head of Planning and Control. I really hope that despite of this prolonged pandemic emergency, you and your families have been keeping safe and healthy, confident that we'll be able to overtake this emergency soon and turn back to our ordinary life. 2020 results returned very positive messages, in line with our strategy, focused on enhancing profitability, improving furthermore our asset quality, maintaining a very solid capital position while seeking when possible, new growth opportunities. A few numbers are self-explanatory of what I have just said, 2020 net profit of over EUR 245 million, gross and net NPA ratio, respectively down to 7.8% and 4%. Common Equity Tier 1 ratio at 13.52%, excluding the impact of the capital increase. These are overall a concrete evidence of our strategy. And at the same time, a good starting point for future. Now if you turn on Slide 5 of the presentation, which is already available on our website, we can start with the overview about the main messages and the overview of 2020 final year results. I think that the 2020 final year results give us back 3 main messages, fully in line with our strategy. First, resilient profitability; second, a remarkable step-up in our already sound capital and liquidity position; third, and further significant improvement of the asset quality. So first, profitability. Net profit is at EUR 245.7 million, thanks to confirmed ability to generate revenues and to contain operating costs despite the difficult economic and financial environment. Good news came in particular from revenues, mainly related to the strong increase of net commissions and the resiliency of the net interest income as shown by the core income that is at the highest level over the past 6 quarters comparable on a like-for-like basis. To complete the overview, it must be mentioned the improving trend of the staff costs compared with the first 2 quarters of the year. The third quarter, as you know, shows the usual as seasonality, mainly thanks to the effectiveness of the redundancy plan foreseen in our business plan. A final point on the cost of credit, which comes at 101 basis points, but it includes also a precautionary estimate of the foreseeable impact on credit of the deterioration in macroeconomic scenario as a result of the pandemic. Moving to -- moving on to capital and liquidity. The group's capitalization is growing further, even excluding the increase in capital for the acquisition of going concern from the Intesa Sanpaolo Group, with a pro forma fully loaded CET1 ratio at 13.52%, showing a remarkable increase of 150 basis points since December 2019 and 50 basis points since September. If we take into account the effect of the rights issue, it stands at 15.90 basis points. The positive picture comes along with our very strong liquidity position with LCR index into over 200% and the liquidity buffer close to EUR 20 billion. These 2 important elements, profitability and capital position allow us to propose a cash dividend of $0.04 per share for 2020, in line with the ECB's recommendation but at the same time, confirming our commitment to shareholder remuneration. The third point is on asset quality. Again, we delivered another impressive improvement on it, achieving the lowest NPE ratio over the last 12 years as a consequence, of our clear strategy and strong commitment to get closer to the best-in-class peers. In fact, the gross and net NPE ratio sharply reduced, respectively, to 7.8% and 4% compared with 11.1% and 5.8% at the end of 2019. This is the result of a good mix of combined actions as, for example, the positive job made to improve the quality of the performing loan book, the default rate is down in Q4 at 1%, the disposal of bad loans and UTP. And lastly, the strong contribution of our bad loans management company BPER Credit Management. In addition to these 3 main focuses and talking about business, we experienced a growth in performing loans, up by 0.9% versus September '20 and 3.8% versus December '19, also supported by government measures related to the health emergency, mainly attributable to retail and small business segments. On the other side, total funding, including the Bancassurance segment reached EUR 185 billion, up by 5.5% versus December '19, showing an increase both of direct and indirect funding as well as in Bancassurance business. Now moving on to Slide 6. We cannot forget that in 2020 we worked also to tackle the pandemic. Our first goal was to put in place safeguards to protect the health of customers and employees and to ensure the operational continuity of business processes, which were further strengthened. In fact, over 50% of employees were able to work on a remote basis. Then our priority was also to strengthen and promote initiatives in supporting families and businesses in this moment of economic and social difficulty caused by the protracted health medicine, also thanks to the support of our branches and central services, which were fully operational in compliance with current regulations. To date, we have accepted over 100,000 applications for moratorium and disbursed funds for state guaranteed loans for over EUR 3.5 billion, while promoting numerous charitable initiatives and fundraising at the service of the territories and communities served. Furthermore, and we are very proud of this, we achieved important objectives and results on sustainability, thanks to our strong commitment in integrating it within our business model in order to continue to create value for our shareholders and stakeholders, the environment and society. For example, CDP, carbon disclosure project included our bank in the A list, which knowledges the commitment to fight climate change and the [indiscernible] agency raised the bank's rating for EE minus to EE, furthermore, confirming the strong value of its commitment to the environment. At the end of 2020, we inaugurated in our bank, one of the largest photovoltaic parts in Emilia Romagna, which immediately had a positive impact on the reduction of emissions. Last but not least goal. This is another strong message from 2020. As you all know, we are finalizing in few weeks, the acquisition of a going concern from Intesa Sanpaolo Group. A very important strategic deal which will allow the deeper group to achieve a significant dimensional growth, both in terms of market shares and number of customers. We are almost at the end of the activities, and I'd like to thank all the staff of the group for the excellent job they are doing to ensure the best execution process. At the same time, I'd like to welcome our new colleagues within the group and send a message to our new customer that we are making all possible efforts to provide since the beginning, the best services they deserve. Now we can go quickly through our 2020 results. Please move on to the next Slide, #8. We start with an overview of the funding. Total funding in December 20 reached EUR 185.2 billion, including the contribution of asset under management from Arca Holding of EUR 17.4 billion. Direct funding in December is at EUR 63.1 billion, up by 8.8% compared to December '19 and up by 5.6% versus September '20, confirming strong preference for liquidity of our customers. Indirect deposits recorded a very strong performance in December versus September, with an increase of 4.1%, asset under management performed well in the quarter, up by 4% versus September higher than pre-crisis levels. Bancassurance continued to show a very positive trend, reaching a stock of EUR 7.3 billion, which means plus 0.8% versus September and plus 7% since the end of 2019. Despite the low amount in Q1 caused by the pandemic outbreak in 2020, the net inflows in asset under management in life insurance product, reached EUR 1.1 billion. And for the first time, total assets under management, including Bancassurance, exceeded the threshold of EUR 50 billion. We are really pleased with our progress in this sector also in light of the strong increase of our customer base expected from the acquisition of the going concern from Intesa Sanpaolo Group. Let's turn to Slide 9. Net performing loans up by 3.8% since December, plus EUR 1.9 billion. This trend is also supported by the government measures to sustain the economy due to the pandemic crisis. During the year, more than 100,000 moratoria were rented on loans to customers for a total of EUR 11 billion, equal to approximately 20% of total gross loans. At the end of 2020, the moratory moratoria amount to EUR 7.2 billion. Defaults on loans for which the moratoria was not renewed are marginal to date. We also disbursed funds for the state guarantee loans for over EUR 3.5 billion. The quality of the performing loans book is still confirmed with a particularly low bucket of high-risk exposure, only 2.9% of the performing book. Let's move to Slide 10. On nonperforming exposure, once again, we record an important improvement in our asset quality. Let me underline that this improvement is due not only to the activity of the staff dedicated to the disposal projects but also to give credit management, our company specializing bad loans recovery and to the credit department with all the actions performed to reduce the UTP stock. Gross NP at the end of December amounts to EUR 4.3 billion with a ratio of 7.8%, down from 8.8% in September and 11.1% in December '19, also thanks to EUR 1.6 billion disposal over the year. Net NPE stock is at EUR 2.1 billion, with an improvement of the ratio at 4% from 4.7% in September and 5.8% in December '19. Another good news is that the decrease of the NPE stock that come along with an increase of the NPE coverage to 15% from 49.3% in September. We continue our job quarter after quarter to improve asset quality, delivering positive results. The expected macro scenario is uncertain, but we think we are well equipped to face it, and we confirm our strong commitment to accelerate further our asset quality improvement. The acquisition of the going concern from Intesa Sanpaolo will be another important step in this process. On Slide 11, we can see, first of all, the default rate at 1% from 1.7% in December '19, clearly due to the measures taken by the government related to asset management, but in my opinion, it is also linked to our improvement in the origination process. Moreover, the average recovery rate on bank loans reached a peak at 6.9% from 6.3% in 2019. It was 3.7% in 2016, showing a very positive long-term trend, demonstrating that our servicing platform BPER Credit Management proved very efficient. On Slide 12, the securities portfolio reported an increase close to EUR 1.4 billion versus September and by EUR 5.7 billion since December '19, mainly led by our large buffer of liquidity to be invested and positive market expectations, in particular in the fixed income bond market. Italian government bonds stock at EUR 7.8 billion, weighing 31.5% of the financial assets portfolio and Italian bond exposure is 10.9% of the total assets. Now we can move on to profit and loss figures on Slide 14. Note that the comparison between full year '20 and full year '19 is not possible because of the change in the perimeter of the group, you remember the acquisition of Unipol Banca and Arca in July 2019. The fourth quarter of 2020 instead is comparable to the fourth quarter 2019. Having said this, we are very proud of the net profit reported in 2020 of EUR 245.7 million, thanks in particular to a positive ability to generate revenues and control of cost despite the difficult macroeconomic environment, one-off costs for the acquisition of the going concern, EUR 29 million, and the other nonrecurring items of EUR 59.3 million. The result benefits from the positive impact from tax of EUR 67 million. We can move on very quickly to Page 15. On this page, you can find details on the fourth quarter. The net profit for the fourth quarter is at EUR 45 million, impacted by the growth in core income to EUR 593 million, operating cost at EUR 437 million including cost related to the strategy with Intesa Sanpaolo, and cost of credit of 25 bps contribution to funds for EUR 24 million. So overall, so here, I have to say that this represents a positive set of results. We can move on to Page 16 for some details of the profit and loss, starting with the NII. To be more consistent to the group's accounting policies in the fourth quarter, an amount of EUR 23.1 million previously accounted for in net interest income was classified to commission income. This amount refers to Finitalia, a company that entered in the scope of consolidation following the acquisition of Unipol Banca. Due to this item, net of which the decrease is equal to 2.2% quarter-on-quarter. On NII, we have the positive impact related to the TLTRO-III, we took up in June EUR 14 billion. And at the end of September, we took up EUR 2.7 billion. The TLTRO net contribution in the quarter was EUR 36 million. On the other hand, we record a reduction of the yield in the bond portfolio along with the reduction of the mortgages and credit facilities due to the new issuances at lower yield related to loans granted by the government. On Slide 17, net commission amounted to EUR 297.7 million in Q4, EUR 274.6 million net of the already mentioned accounting effect. Up by 4.8% quarter-on-quarter on a pro forma basis, reflecting a significant recovery after the decline in the second Q 2020 due to the effect of the health emergency and the prolonged period of the lockdown. And details commission of asset under management showed a very positive performance up by 8% quarter-on-quarter. Commission of Banca as well rebounded significantly, commission of credit cards, collection and payment is up 4.6% quarter-on-quarter, while the company referring to loans guarantees also increased by 3.3% quarter-on-quarter net of the accounting effect. Now the weight of the commissions on the core income is above 46%, in line with our target to reach a good balance between NII and commissions. On Slide 18, dividend trading income. In the fourth quarter, trading income was very positive, even if a bit lower than in the previous ones, equal to EUR 42.6 million, mainly supported by fifth income bond trading and favorable equity market performance. Moving forward, on Slide 19, operating cost in Q4 amounted to EUR 437.4 million are not comparable with the previous quarter, mainly due to nonrecurring expenses related to the strategic deal with Intesa Sanpaolo and seasonality effects. Staff costs are up quarter-on-quarter due to the use of seasonality but declined by 6.5% year-on-year, benefiting from the positive effect of the redundancy plan. Other administrative expenses amounted to EUR 147.4 million, showing an increase quarter-on-quarter mainly due to higher costs related to the [indiscernible] project we have been working on, amounting to EUR 21.1 million in Q4. We recorded also an increase in D&A to EUR 50.5 million from EUR 43 million. Let's turn to Page 20. Provision and other items, we accounted loan loss provision for EUR 134.2 million in fourth quarter. Cost of credit at 101 basis points. Take into account the worsening of the economic scenario caused by the health emergency and the objective to increase the coverage in all categories of NPE. In Q4, we accounted a contribution to single resolution fund relating to previous year of EUR 10.9 million, something from the settlement of irrevocable commitments granted by cash collateral. Turning our attention now to liquidity. We can move on to Slide 22. About liquidity, we consider our liquidity position very sound. Our total eligible asset increased at EUR 28.1 billion, along with the back of an encumbered eligible asset of EUR 10 billion, and that's the liquidity of EUR 9.9 billion made by redeposit to the ECB. ECB exposure of EUR 16.7 million in December '20 entirely composed of TLTRO-III. SCR index is at 200.1%, so well above the 100% threshold as well as the NSFR ratio stands well above the regulatory floor. I would like to draw your attention to our capital position on Slide 23. We confirm our very positive capital generation and sound capital position, excluding the impact of the right issue, CET1 ratio fully loaded pro forma at 13.52% with a significant increase year-to-date of 151 basis points. CET1 ratio fully loaded pro forma at 15.9%, embedding the capital increase. We have also some extra buffer to exploit in Q1, like the ID model extension to Unipol Banca loan portfolio. Now in conclusion, let me highlight briefly key messages on Slide 25. We continue to record a very resilient profitability despite the complexity of the current situation caused by the health emergency and the process of acquisition of the growing consumer from Intesa Sanpaolo Group. I would like to underline the further important improvement in our asset quality, with a tangible decrease in NPE stocks and an increase in coverage. Also, our capital position highlighted a very positive trend with a capital generation of above 150 basis points, together with other 238 basis points of capital related to the completion of the right issue. We confirm once more the high strategic and industrial value of the deal with Intesa Sanpaolo Group, which will lead to a significant growth inside and improvement in the competitive position in Italy and a significant increase in the customer base. This acquisition will provide important support to revenues in terms of both interest income and commission, especially in asset management and Bancassurance. It will also accelerate the improvement in asset quality despite the situation of high uncertainty, while at the same time, reducing the group's cost income ratio. All these factors should provide support for the group's profitability and should enable a tangible increase in shareholders' remuneration in the future, of course, maintaining solid capital ratios. 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 Noemi Peruch with Mediobanca.

So I have 3 from my side. The first one is on M&A. I appreciate the fact that you still have to merge the going concern and the operational effort that, that entails. But now the DTA benefit for M&A is low. And it looks too big to ignore. So can you please update us on your M&A strategy also in light of this incentive and the regulator push towards consolidation in Europe? My second question is on moratoria. You indicate that the -- you granted EUR 11 billion moratoria in the year. But now the active moratoria stands at EUR 7.2 billion. So I infer the EUR 4 billion moratoria expire in the quarter. Is that a correct way of interpreting the number? And if it is, can you give us more color on this? What is the fault rate on those that expired? And are they mainly retail loans? My last question is on the going concern. Soon, the transfer of the clients will be effective. So my question is, how are you monitoring the behavior of those clients? And have you seen a part of them exercising the withdrawer right? Or -- and have you implementing a particular strategy to retain this client?

Thank you very much. Okay. Thank you. Thank you for your questions. About the first one and about the M&A strategy, I think that is very clear on our strategy because we are finalizing a very significant acquisition. Let me say that after 1 year, we are ready to complete the first acquisition of the going concern from Intesa Sanpaolo. I think that this is probably the most important deal for BPER. And I think that will have an important effect in our position in the banking system in our country. What I can say is that we are open to a further potential M&A. But now, as I said many times, the focus is only on the integration of this growing concern. Obviously, you can imagine for BPER Group to increase the size more or less 50% is crucial to have this kind of focus on this deal. After that, we are ready if there will be the condition to analyze potential other M&A deals. Let me remember that thanks to this acquisition, our total ounces will reach EUR 120 billion. So a very significant increase compared to the present side of our role. On moratoria. What I can say is that this reduction from EUR 11 billion -- I think the right figure was higher than EUR 11 billion, probably was at the beginning, EUR 11.8 billion. Now is EUR 7.2 million at the end of 2020. So this was, let's say, a dispairment of moratoria and the decision not to renew this moratoria, mainly on the private sector, so families and mortgages. And let me say that till now, what we can say is that the default is not material. And so we have another reduction in January, but we are analyzing if it's possible to renew a part of this moratoria. But let's say, this trend is, from my point of view, a very positive signal in the quality of the portfolio. Yes. The last point, if I remember correctly, is the -- about the churn rate and what we are doing to monitor this point, but in particular, the action for the coming weeks because I think it's important to remember that the weekend, the last weekend of February, the 2021 of February, there will be the completion of the acquisition of the going concern of the UBI branches. So there aren't many actions. We believe that BPER has the quality to maintain the customer base coming from this perimeter. Let's say, the surprise is that probably the size in particular of indirect funding is higher than expected. So we think that it's possible to have a positive effect on our balance sheet and profit and loss. I repeat, there are so many actions performed by our strategy that I think is extremely important to maintain it so late in low level. Let me give the floor to Alessandro Simonazzi to give you other flavor about this point.

Good evening. What concerns the retention of the new clients coming from the UBI perimeter, we have a specific project, named anti-churn project with 3 main drivers. One is pricing, specific pricing and dedicated pricing for the new clients. The second is an important advertising campaign to make our brand well-known on the new territories. And the third is listening to the clients to prevent potential churns during the next months. So we are quite engaged in maintaining and improving our client base also in these vehicles. We know that this kind of client could be potentially war territory for other banks, but we are quite engaged in maintaining and conserving this kind of approach also with the new clients.

The next question is from Jean Neuez with Goldman Sachs.

I had a question which you may have put some more in the disclosure, but I haven't had time to find it yet. I just wanted to ask you about what the Stage 2 loans evolution looks like because you're showing nicely all the NPEs, gross net trends, default rates, et cetera, et cetera, which is great on the performing book. But I wanted to -- obviously, there has been the moratorium, so it's understandable that the default rate hasn't been too impacted so far. I just wanted to understand what your classifications for state -- from Stage 1 to Stage 2 had done and whether there was any signs that you could share for the ultimate peak of NPLs that you're expecting as and when we get out of this situation? And the second thing I just wanted to ask is whether that -- now that you're 2 weeks away from -- 2, 3 weeks away from completing the perimeter purchase, whether you could give us a bit more refined guidance as what you expect the contributions to be throughout your P&L for this year and for your outlook?

Thank you, Neuez, for your questions. First was about the staging. In September, the Stage 2 -- the weight of the Stage 2 on the performing portfolio was 10.5%. And in December, is 12.2%. But let me underline a crucial point. The increase in Stage 2 is mainly due to the extraordinary and prudential reclassification activity carried out by our credit department. According to specific triggers, more specifically, the counterparties with medium high-risk rating and belonging to industrial sectors more heavily hit by the COVID-19 crisis have been massively reclassified to Stage 2, even if they have not yet shown a credit war business deterioration. So is, in my view, it's really important to underline this point, there is not yet signal of deterioration but to have a very prudent approach, we decided to reclassify this bucket of client to Stage 2. And this is the first element. About, if I understand correctly, your second question, so the benefit coming from the going concern. Let me say, looking at the P&L, I confirm -- I do confirm the estimate of roughly on a full year basis that this year, we have only 10 months for the perimeter coming from UBI. But let's say, in a full year basis, we expect to have a profit before tax around EUR 200 million. This is our best estimate at the moment. I think there are many other effects coming from this acquisition. Let me say, and underlying probably, another important point is on asset quality. You know that this is -- in every quarter, during this call, I'm underlining the positiveness of our action on asset quality. And also this quarter is the same. But another important step will be thanks to the acquisition of this going concern. Because the mix of our asset quality and the asset quality coming from this perimeter will allow BPER to reduce further the NPE gross ratio. Our expectation is to be not far from 6%. and you can imagine that we were at 23.5% in June '16, I think, is a very positive result, and we would like to transform what was a weakness some years ago in a point of strength of BPER Group. So I think there are some important messages coming from profit and loss, but also from asset quality. And at the end, confirming the capital position because our expectation is that we have a significant bad will coming from this acquisition, partially to use for provisioning. And we said also in other -- in previous calls, EUR 200 million for -- has recovered. But we think that there is potential we can have more room to use this bad will. And we think also here one of the opportunities will be on the deteriorated portfolio to have a better quality. This is, I think, let's say, a collateral set of this acquisition. But in my view, thinking about the next year, extremely important for the trend of BPER Group.

Okay. Just as a follow-up, very briefly, EUR 200 million on what kind of cost of risk?

Well, in this, we estimate a cost of risk between 80 and 90 basis points.

So EUR 200 million on 80, 90 basis points, right?

Okay. EUR 200 million before tax. So...

Yes. But on 90 -- 80, 90 basis points of cost of it?

Yes, I confirm.

The next question is from Christian Carrese with Intermonte.

The first question is on net interest income. I saw some pressure on asset spread in the quarter. And I would like to understand what you expect in the coming quarters, looking at new origination and also some details on the reclassification you decided to do this quarter between net interest income and fees. And still on net interest income, can you repeat what was the contribution from TLTRO in the fourth quarter? And what do you expect the contribution to be in the coming quarters due to the change in the condition of TLTRO? The second question is on trading. It was quite a good quarter, quite good because I would expect some losses coming from the securitization in the fourth quarter, booked in the trading income. So if you can elaborate a little bit what was the driver of trading? And what are the realized capital gain currently -- mainly on your Italian govies portfolio classified as at amortized cost? The third question is on capital. I'm not sure, but I think that there wasn't in this quarter, the softer impact and Unipol Banca migration, risk-weighted asset migration, in terms of migration. So if you can elaborate a little bit on this, when do you expect to have a debt impact? And finally, on dividend payment, you are proposing $0.04. Is it correct to assume that if it will be approved, you are going to pay in May as the previous year?

Okay. Christian, thank you very much for your question. I will take, first of all, your question about capital and I do confirm that there is an impact coming from the potential treatment of software assets, the impact is limited in 13 basis points. On the other side, I confirm that we expect to have the authorization to use the internal model for Unipol Banca portfolio, we hope, in Q1 2021. The impact of this activity will be roughly around 40 basis points of capital. So this is another important point. I asked Roberto Ferrari to answer your question about NII and the trading.

Okay. Christian, on the TLTRO-III contribution, in the fourth quarter, the net contribution was EUR 36 million because we had EUR 42 million from the liability side, minus 1% and minus EUR 6 billion -- minus EUR 6 million for liquidity redeposited to the ECB at minus 50 basis points. We are considering the opportunity of taking also the last part of the TLTRO-III for EUR 1.7 billion. So the additional impact and contribution should be around EUR 2 million per quarter. But I would say that also liquidity will grow up. So we are -- probably, we will stabilize the contribution at around EUR 36 million, EUR 37 million per quarter. In terms of trading, we had very positive reserve in the last part of the year. So actually, we took the opportunity to realize positive reserve and this is actually the main reason of the good result of the trading portfolio. At the same time, we still have a positive reserve of around close to EUR 500 million in amortized cost nowadays. So this is a very updated figure.

About dividend of $0.04, I confirm that this, first of all, is -- the amount is in line with the indication by the ECB. And so we are absolutely in line with the guideline by ECB and the payment in cash will be by the end of May.

Okay. Just on the reclassification between net interest income fees that was due to consumer credit upfront, if you can give something?

Yes. It was exactly a component of NII, but that was correctly reclassified as a commission. So this is a one-off effect, more or less a EUR 2 million per month. This is now in 2020. So starting from 2021, there will be -- so an homogeneous trend in all 2021. So this is a decision taken with our auditor about this point. So only -- and it's changed between NII and commission.