BPER Banca SpA (BPE) Earnings Call Transcript & Summary

Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the conference call on the First Half 2021 Consolidated Results of the BPER Banca Group. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Piero Luigi Montani, CEO of BPER Bank. Please, Mr. Montani, go ahead.

Thank you very much, and good evening, and welcome to participants for joining us tonight. I'm here tonight, together with the CFO, Roberto Ferrari; the Head of Planning and Control, Alessandro Simonazzi, the Manager responsible for preparing the company's financial reports Marco Bonfatti; and the Head of Investor Relations, Fabio Pelati. As you know, the first half of the year was extremely important for the BPER Group because with the integration of the 33 branches on 21 June, we completed the integration of the going concern consisting of 620 branches, which have enabled our group to make a significant leap in size. The 6-month results are already partially reflective of the contribution from the newly acquired business units, and they are extremely positive and reveal a significant growth in volumes, increasing profitability, continuing improvement in credit quality and confirmed financial strength. So moving on to highlights for the period. It is worth noting that the successful completion of the integration process is testified by the excellent retention of banking relations with customers from the newly-acquired branches, which bears witness to the attention we paid to our new customers and the specificities of our footprint areas. And as you can see also, I mean, the churn rate is confirming this trend, and we're confident that this will continue during the future will not be very far from the results we have. As you can see, I mean, the -- I mean, the volumes that we got from the newly acquired business units are almost consolidated. And so the overall gross banking product from Intesa Sanpaolo and UBI is at EUR 96 billion of volumes, with EUR 3 billion in funding and indirect funding and deposits, EUR 41.3 billion. As I was saying before, we have 620 branches that have onboarded the group, and there were, I mean, 5,107 employees that entered to the group, but 22 have left. And so now the head count that has been included in the group from the acquired business unit is 5,085, and personnel accounts for 33% of personnel altogether and branches account for 40.6%. As you can see volumes are on a strong upturn, total funding grew to EUR 263.6 billion, up 42.3% year-to-date. Working direct deposits amounted to EUR 165.1 billion. Net loans to customers increased to EUR 76.3 billion, plus 43.9% year-to-date. The net profit for the period amounted to EUR 501.8 million and was contributed to both by the newly-acquired business units and multiple one-offs that we have already mentioned on other occasions. Excluding one-offs, profit before tax amounts to approximately EUR 260 million, net EUR 189 million, with operating income up to EUR 1,590 million, driven by growing revenues, primarily from a pickup in net commission income, boosted by a gradual recovery, I mean, in -- and placement of asset management in Bancassurance products. The annualized cost of credit, net of EUR 310 million worth of additional loan loss provisions, of which EUR 50 million in the second quarter aimed at increasing our coverage levels settled at 70 basis points. Our credit quality continues to increase, with a gross NPE ratio of 5.7% and a net NPE ratio of 2.8%. The NPE coverage rose to 51.8% from 49.5% in the previous quarter. And the annualized default rate is 0.8% on the total stock of loans on a steady downturn since the end of 2020 when it was 1%. Capital strength is confirmed with a CET1 ratio of 13.5% and ramping parallel with a robust liquidity position. And then moratoria amounted to EUR 8.1 billion as at 31st March 2021 and got down to EUR 3.2 billion in total as at the end of June. So let's now focus on total funding, which amounts to EUR 263.6 billion, up 42.3% year-to-date, with the newly acquired business units contributing EUR 72.9 billion. More specifically, direct funding was up 56% and indirect funding was up 35%. Total funding was up 3.3% quarter-on-quarter, as you can see in the slide, primarily due to the 33 branches acquired from Intesa Sanpaolo, which contributed EUR 5.8 billion. Net of this contribution, total funding would be to, I mean, EUR 2.5 billion, up 1%, thanks to the positive commercial input. Moving on to the next slide, direct funding rose to EUR 98.5 billion, with the newly-acquired going concern contributing EUR 31.6 billion. I would like to remind you that 95% of direct funding from customers consisting current accounts and site deposits at a very low cost. And direct funding grew 4.3% quarter-on-quarter, driven once again by the Intesa Sanpaolo branches, which contributed EUR 2.2 billion approximately. And net of this contribution, the growth rate would have been EUR 1.8 billion, equal to 1.9%. Indirect funding is similarly going up. It registered a significant growth to EUR 165.1 billion, posting a 35.2% growth, with net -- with the new business units contributing EUR 41.3 billion. Indirect deposits rose by 2.7% quarter-on-quarter as a result of the EUR 3.6 billion contribution from the 33 branches of Intesa Sanpaolo, with a large share of assets under management EUR 1.3 billion and life bancassurance EUR 1.4 billion. On a like-for-like basis, the growth would have been EUR 1 billion. So it would have been 1.5%. It is worth noting that the growth in deposits was also underpinned by the strong performance shown in the placement of assets under management and life bancassurance, which totaled EUR 1.2 billion in the 6-month period, largely in excess of the entire amount for the last year. In the last quarter that we're focusing on, I would like to underline that since it was a little bit higher than the previous quarter because even though it was a good month -- quarter anyway, but the increase was due to the fact that in the first quarter, the branches had to focus very much on sales and distribution. And then after the UBI branches were acquired, of course, they did not only focus on sales and distribution, but also on maintaining relations and retaining relations with the existing customers. So the branch was -- branch network was a little bit distracted by this. And so there was a little bit of a reduction, but it's still a very good quarter. And this trend of growth also continued in July from what we could see. Net loans to customers totaled EUR 76.3 billion and were up 43.9% as compared to the end of 2020 and the quarter-to-quarter increase [Technical Difficulty]. We've got news that probably the financial community was not listening to the translation, but apparently, everything is working. So the quarter-on-quarter increase was 1.2%, thanks to the Intesa Sanpaolo branches contribution. But net of this input net loans were down 0.4%. But once again, in this case, I would like to underline that after the acquisition of the UBI branches there were -- there was a lot of focus by the branch network on funding because that was the most important part in order to retain customers. And so there was a slight decrease in loans that we are recovering. And in the second part of the year, we are expecting that growth will be ranging between 1% to 2%. As far as loan payment moratoria concerns, as I was saying before, they went down by 60% from EUR 8.1 billion in the first quarter to EUR 3.2 billion as at the end of June. But what I feel urgent to underline is that this EUR 3.2 billion -- I mean, the breakdown of this EUR 3.2 billion is as follows. I mean 63% of these outstanding moratoria rated from 1 to 5, that is the best ratings we have internally. And the default rate on expired moratoria is in line with the default rate of performing loans. But a very marginal amount of them is Stage 2 or Stage 3, which means that this moratoria were more of a circumstance. And we have no worries, no concern about the development for the future. And as far as state guaranteed loans are concerned, they are stable. Actually, they amount to EUR 6.5 billion and were up 7% quarter-on-quarter. We have already talked about credit quality. This Slide #12 is extremely important as it emphasizes the continuous improvement in this area that the bank is making quarter after quarter, particularly with regard to the growth in net NPE ratios, which were respectively 5.7% and 2.8% as at the end of June, which is important because not earlier than December last year, the NPE ratio was 7.8%. And also, the NPE coverage ratio was up to 51.8% from 49.5% in the previous quarter, in particular bad loans coverage is 60.9% now and due to this, coverage is 43.1%. It is important to underline that performing loan coverage is likewise up to 0.6%. It was 0.5% in the previous quarter and it was 0.3% at the end of 2020. Performing loan coverage was also driven by the increase on coverage in the Stage 2 loans, which amounted to EUR 9.4 billion in the first quarter, EUR 9.5 billion in the second quarter as at the end of June and accounts for 12.9% of total performing loans and coverage. Stage 2 coverage was up to 3%. And I would like to remind you that we have adopted an extremely conservative approach to classification of loans in Stage 2 as we have included in this class medium high rated exposures to sectors, which were most affected by the health emergency, such as restaurants, hotels, travel agencies, transport and leisure, even in the absence of signs of impairment so that we could monitor the situation more accurately. As far as the default rate is concerned, on Slide 14, we can see the development of the default rate over time, which was 0.8% in the first half of the year, lower than 1% for 2020, which -- and also the average recovery rate is up to 7.1% and confirms the positive trend observed in the previous years. The securities portfolio amounts to EUR 27.1 billion, up by EUR 2.4 billion year-to-date following the reinvestment of part of our excess liquidity, which we would otherwise deposit entirely with ECB at negative interest rates. Italian government bonds are steadily growing as well and now amounts to EUR 8.3 billion. It should be noted that the Italian bond portfolio accounts for 40.7% of the total bond portfolio, which confirms the group's diversification strategy. Finally, the bond portfolio duration is 2.3 years, down from 3 years in 2020. We'll now focus on the income statement. As we have already said, the 6-month period closed with a net profit of almost EUR 502 million and was inclusive of the newly-acquired business units and the number of one-off items. Net of these one-offs, profit before taxes, I had already anticipated, amounts to approximately EUR 260 million and one-offs include integration-related costs, totaling almost to EUR 88.9 million -- almost EUR 89 million, of which EUR 18.4 million in personnel expenses and EUR 70.5 million in other administrative expenses. Then there were additional loan loss provisions that we made, and they amounted to EUR 310 million, of which EUR 160 -- EUR 260 million were expended in the first quarter and EUR 50 million in this latest quarter. Goodwill impairment amounted to EUR 230 million, and badwill generated by the going concern acquisition for an amount of EUR 1,150 million. So EUR 1.15 billion was inclusive of our recovery of badwill taxation from Intesa Sanpaolo for an amount of EUR 316 million. A few words on our net interest income, which amounted to EUR 730 million almost for the 6-month period, of which EUR 632 million from commercial activity with customers, EUR 55.6 million were contributed to by the securities portfolio and EUR 56.7 million were contributed to by the TLTRO-III funds net of the interest paid on excess liquidity deposited with the ECB. The spread reduction in the 6-month period was primarily due to excess liquidity held with the ECB that you know -- and the lower securities portfolio contribution. As you know, excess liquidity is about EUR 23 billion now. Turning now to excess liquidity held with the ECB. We're confident that we will gradually run it down, including -- and we're working on this by thinking of some actions. But this will be run down as a result of funding being shifted from direct to indirect deposits, which is connected with the expected increasing loans by 1% to 2%. We expect that in the second half, there will be a positive impact on net interest income from both the ISP branches contribution and growing lending volumes. So there are other initiatives that we are taking, but without overdoing in order to compensate the low interest rates with the ECB. As far as net interest income is concerned -- net commission income is concerned, I'm sorry, it reached EUR 734 million with a growing share of indirect deposits and bancassurance related fees, which accounts for 42%. In particular, net commission income for the second quarter amounted to EUR 405 million on a strong upturn from the previous quarter, 27% up, supported by both the contribution from the newly acquired going concern and placement of indirect deposits and -- indirect funding products, I'm sorry. Traditional banking fees also registered a significant increase to EUR 223.1 million. Trading income and dividend, Slide 20, illustrates the fact that the 6-month period was very positive, with trading income totaling approximately EUR 120 million as we benefited from positive market performance and capital gains on securities disposals. But this, I mean, area was also -- was always yielding positively, and we're continuing the trend. As far as operating costs are concerned, they totaled EUR 1 billion and were impacted by approximately EUR 98 million in one-off charges, mainly in relation with the going concern integration process, staff training, rebranding, advertising and advisory. And more specifically, EUR 70.5 million in higher administrative expenses and EUR 18.4 million in higher personnel expenses. On this point, I would like to underline that between the first and second quarter, if we remove these extraordinary costs, the costs in the first quarter would have been EUR 467.2 million. In the second quarter, they would have been EUR 546.5 million. But we should remove from this latter part, EUR 5.8 million that were not related to the integration, but there were one-off costs due to the pandemic and other minor expenses, but they had an impact anyway. So the costs for the quarter would have been EUR 540 million. As far as the cost of credit is concerned, provisions amounted to EUR 576 million, including EUR 310 million additional provisions, which also take account of the very conservative approach that we have adopted when it comes to provisioning. Even though there has been no evidence so far of a significant deterioration in credit quality as classified by the indicators that we have mentioned, excluding the additional loan loss provisions, the annualized cost of credit is 70 basis points. But we are confident that the cost of credit in the future will decrease as it would benefit from the prudential approach we've always adopted and particularly from the improvement we have observed in credit quality. As far as liquidity is concerned, the situation is very strong. The -- I mean the total eligible assets have grown to EUR 29.9 billion, and our LCR exceeds 200%. I think it's 215.5%. And we have no problems on that or on the contrary. So -- and also the CET1 settled at 13.52% comfortably above the SREP requirement and up 10 bps from the previous quarter. So the profit for the -- so on account of the profit for the period and other minor drivers for a total of 22 basis points and partially offset by the effect of the RWAs, whose impact was 12 bps from the acquisition of the Intesa Sanpaolo business unit too. Let me close by highlighting that the key messages of the first half of the year are that there's a growing underlying profitability, continuously improving credit quality and also the capital position is extremely sound. And we have completed the integration of the going concern that we have acquired. And so we can look at -- to the future with more optimism because we think the import for the future will be significant, and we can now focus -- will place a stronger focus as we have done in the past, but we will place a stronger focus on commercial growth and cost reduction and on the integration -- I'm sorry, of the going concern, and we'll also focus on cost reduction through a leaner operating structure and a more rational cost base. I would say that this is -- everything we did and illustrate -- tried to illustrate all of the work we did in the 6-month period. And thank you for your attention. We'll now take your questions.

[Operator Instructions] The first question is from -- by Domenico Santoro from HSBC.

I have some questions on the numbers. I would like to understand with respect to the guidance that you provided some time ago on net interest income. And if I remember correctly, it was EUR 400 million altogether. I think there's an impact also from the PPA. So on top of the higher liquidity that you have illustrated and that, in fact, reflects the trend in the ECB. Part of this drain -- can part of this drain be absorbed and how do you expect it will evolve in the following years as an effect of the PPA? Then on costs, I think that your guidance was EUR 525 million. I understand that there are some one-offs. But the number that we should consider, is it still going to be the same for the next part of the year? Or in light of the second quarter trend, is it too ambitious? Or should we, in fact, rebound it over to 2022? Then I have a question on provisioning. Now that you have done a lot of cleanup in terms of coverage, I mean, what is going to be the recurring provisioning rate for the future? And what about the capital regulatory aspect that you want to add, for instance, on the ARB models? And then I've more of a qualitative question. You are a bank to which -- I mean, for which the access to deposits with the ECB on a percentage basis, I mean, is one of the highest at all -- it was one of the highest compared to all of the other Italian banks. So can I understand -- I mean, I understand that you were involved in an integration process, but there are some -- are there any commercial sales and distribution strategies that you want to focus on in order to reduce this impact of deposits held with the ECB on your net interest income.

Well, I will try to follow the order of your questions. So as far as the guidance on net interest income, I mean, we have given a guidance of EUR 400 million, as you said, and the impact of PPA was non-material, basically, almost not significant, and we can confirm that. In terms of costs, you were asking whether we can confirm the guidance we gave. And we do confirm it also because in the first quarter -- in this quarter, we are benefiting from the lower cost for personnel that -- and so when we gave this guidance, we -- I mean, we took account of this, and we can confirm that. And then as far as liquidity is concerned, it's true that we've got a lot of liquidity, especially if we make a comparison with other banks. But we should remember that liquidity exploded, so to say, or boomed after the acquisition of UBI. Before that, it was not at these levels. And so we're trying to address this sort of a huge problem, and we have been focusing on that for just for a few months. I understand that liquidity is a big problem. It's always -- liquidity is a problem when banks run out of liquidity. On the other hand instead, we are safe from that, but actions are there. And when you have excess liquidity available, then you can think of conversion strategies, which is something we are thinking of. So not only do we want to speed up on loans that would slow down because of other things, but we want also to enact some sort of an interesting conversion or shift strategy because as you could see the placements that we made in the first and second quarter were significant. And so output in the 6-month period exceeded the levels of last year, and July was a very good month, it was a good month. And so we do not have the projections yet, nor do we have guidance or actually results for the month of July. But we're confident that the month will be following the same trend. And so on the one hand, it is a problem. On the other, it is an opportunity. As far as your question on capital is concerned, the CFO will answer to your question.

Domenico, your question on capital, as we said last time, we do not have any headwinds for 2021 or 2022. So we do not expect any positive or negative impacts. The first negative impact will be in 2023 from Basel III, but it will be partly mitigated by other positive impacts connected with the rollout of the models. And so the Basel III impact may, in fact, be lower than 50 basis points. As far -- I'm sorry, I was referring to Basel IV, the CFO says. As far as provisions are concerned, the guidance, we're giving is lower than 70 basis points. And on the ARB of Unipol Banca, which is lower, this is the question. Yes, CFO is answering. The process is integrated with the requested -- the application that they made for transitioning to our models, also for the UBI assets. And so we expect that by the end of 2022 or by 2023, this will happen. And this is one of the positive effects that will reduce and mitigate the impact of Basel IV.

The next question is from Noemi Peruch from Mediobanca.

I have 3 questions. The first question is a follow-up on your guidance on the cost of risk because you said minus 70 basis points. But I would like to get clarification on whether this is the guidance for this year in terms of underlying cost of risk? Or does it apply also to next year, 2022? Then my second question is a brief question on costs. Do you expect any further additional one-offs for the second half of the year? And my third question is about the M&A. You have just completed the integration of the 2 acquisitions, and I would like to understand how you're approaching your business plan, if it's going to be -- if there's going to be an alternative for value creation that contemplated an M&A or if it's not contemplated?

Well, the costs were projected for the future, and our approach was very prudential, meaning that if we had had to base ourselves on what comes from our models, we should have indicated a much lower cost. And the topic was very much debated internally, and we thought it was appropriate to consider the risks that may come from the pandemic. And as I said in my presentation, all of the evidence in this regard, and you can see that also from the trend of the Stage 2 exposures are positive. But for us, as it applies to everybody, models do not take these circumstances into account. And we wanted to be much more conservative and prudential and wanted to keep our cost at a higher level than the models predicted. However, we would be pleased to be denied or to be proved that our prudence and caution was too much, so to say. But as far as these one-offs are concerned, no, we do not expect any or there may be some adjustments, but it would be marginal. And as far as M&As are considered, we're now working on our business plan that we are going to complete by the end of this year or beginning of next year, and all options will be evaluated. But I would like to be precise. I mean the acquisition of this business unit for this bank was extremely important. I was describing the impact before, but 30% of our personnel and 40% of the branches reflect a very big leap in size. It's true that the bank is used to having high volumes. But the specific weight is very high, also because the bank is working 60% in its -- in the northern part of Italy, Lombardy and Emilia-Romagna. And I mean the -- in terms of future projections or outlook, I mean, this needs a large -- an important focus. I mean the integration proved successful and was very good because the customers were transferred accurately and well. And -- but of course, there are some cues and tails that we want to work on so that we can fine tune the process. We want to work particularly on the revenue synergies. Your question that you made before is important because we have to focus a lot on this. Integration, for us, is our top priority. We have not yet thought of any other acquisitions or operations or deals, but it's true that the market is developing. We may be involved because the market -- I mean that there are not many banks that have -- that are major players and the bank will evaluate and consider its convenience and for its customers and shareholders. And if that applies then, I mean, these options will be considered, but our top priority is the integration of the going concern we have acquired, which is the most important asset to us, for the time being.

Next question is from Adele Palama from UBS.

I have a question on the outlook for 2022. If you could give us color on the development of the net interest income, fees and costs and the cost of risk?

Well actually, we have covered most of these factors because the cost of credit has just been hinted at now. For the costs, over time, we have confirmed our guidance. I do not think there are any open issues unless I'm wrong.