BPER Banca SpA (BPE) Earnings Call Transcript & Summary

Good evening. This is the Chorus Call conference call. Welcome, and thank you for joining the conference call on the full year 2022 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 the BPER Banca Group. Please go ahead, sir.

Thank you. Thank you very much for joining. And I would like to give you a short overview of the results we achieved in 2022, which was a particularly significant year for BPER Banca, marked by important accomplishments as we saw in the previous quarters that we illustrated. The last part of the year closed with extremely positive results with improving profitability, a very good improvement in credit quality. And as far as profitability is concerned, the year closed with a profit of EUR 1.449 billion, including EUR 946.2 million worth of nonrecurring items that are primarily accounted for by the badwill, recognized following the acquisition of Carige. Excluding these one-offs, net profit amounts to EUR 500 million, in terms of volumes. So the -- of course, there was an uptrend in net interest income and revenues are going up by 19%. With reference to volumes, volumes are on a strong year-to-date uptrend on the back of many elements, both Banca Carige's onboarding since the end of June '22, and the positive and very effective commercial input that we announced in the previous quarters. Direct funding was up 13.3% year-on-year and net loans to customers were up by 15.2%. Again, in lending support to households and businesses continued as usual with new loans in 2022, totaling EUR 16.5 billion, 25.8% increase. Credit quality is improving further. And the additional derisking has enabled us to further downsize our stock of nonperforming loans. The gross NPE ratio is, in fact, down to 3.2%, and the net NPE ratio is now at 1.4%, respectively, compared to last year, they were 4.9% and 2.0% at the end of 2021. And the coverage levels have risen further, at 57.1%; bad loans 77%; UTP 49%; and performing loans are -- I mean, their coverage is growing to 0.77%, it was 0.68% in the previous quarter. As far as capital is concerned, the bank's capital strength is confirmed with a pro forma fully phased CET1 ratio that factors in the full benefit deriving from Carige's DTAs and it's now at 12.9% or 12.8%. And then on the basis of some other transactions that have already been foreseen for next year, it will improve further. Our sound capital position is the basis for us to propose a dividend payout in the amount of EUR 0.12 per share, which is twice the level of last year, so twice the level we resolved upon last year. The year that has just been closed was also marked by important accomplishments and one-offs that we have already mentioned. But first and foremost, I would like to emphasize the successful completion of the integration of Banca Carige that was closed successfully, I would say, at the end of November with the deemed merge of the 2 banks, and I'm referring to both Carige and Banca Monte di Luca, followed by the complete migration -- full-scale migration of the information systems of the 2 networks, which -- and this further step in the process of banking consolidation has made it possible for us to increase lending and funding volumes and further strengthen our competitive position on a national scale. With regard to nonperforming loans, I would like to mention the major sale of a bad loan portfolio, which we closed by the end of the year last year, which drove our gross NPE ratio to 3.2%. This transaction is part of the broader derisking strategy that the BPER Banca Group has effectively pursued in recent years. And now let me remind you that this indicator will decrease further during the next few months as a result of the disposal of 2 UTP portfolios and the NPE platform, and on the basis of these disposals there will be an upside also in terms of CET1 that will get to 13.2%. Among the other transactions that were significant for us, I would mention the strategic partnership on payment cards, which we concluded and completed with Nexi in December, whereby, Nexi was, in fact, transferred our merchant acquiring and management -- with POS management business, and this will enable us to leverage a degree of specialization they have. The branch network rationalization continues combined with enhanced digitalization and also our customer service model was improved in an omnichannel innovation logic. These one-off initiatives, and I'm sure you know as you've always followed us, but these one-off initiatives fit within the past that was charted the 2025 business plan that we presented in June last year, whose implementation is already delivering significant upside in terms of streamlining the operational structure and increasing efficiency and profitability. Before I give the floor to Mr. Luca Santi, I would like to remind you that we have 72 integration tracks in place that we are perfectly in line with the timing of. And I would like to say that, in about a dozen of the key projects, we're even ahead of the time schedule, and we have had the opportunity to start up and roll them off beforehand, and this was done in -- by the beginning of this year. And of course, this also brought about some expenses that we had to take before. But of course, taking them before, we will now pay them -- for them later. Having said this, I would give the floor to Gian Luca Santi that will go into the details of the -- of course, of our results.

Good evening, everybody. So we're going to go into the details of the numbers. As an introduction, I would like to say that the numbers for Banca Carige will be consolidated in terms of balance sheet starting from 30th June, whereas in terms of income statement, they started to be consolidated from the first of July. So economically speaking, we're starting to see them in the last 2 quarters of the year. In terms of volumes and in particular, direct and indirect deposits, you can see that there has been the consolidation of Carige that had an impact. And what is important is the resilience that we are observing in terms of funding from retail and corporate customers. So also in the fourth quarter, we have been able to grow our volumes, and this is important in terms of the upside that is reflected in the net interest income we're observing. In terms of indirect funding, we are growing. We grew also in the last quarter and a year that was marked by an important market effect. You know that the impact of the -- underperformance of the market was about EUR 17 billion in the year. So the capacity of our branch network is coming out significantly in terms of stock but also in terms of net funding. As you can see, we've been able -- we've been resilient, so we've been able to gather positive net funding in all quarters of the year, which pays witness to the resilience of our branch network -- of our branch network that can, in fact, work and operate even in adverse market conditions. Moving on to loans. We can see that there's good resilience there and even a slight increase in the last quarter, which is the result once again of efficient work conducted and made during 2022, for us to achieve a growth in terms of stock. To that extent, we had to grant EUR 16.5 billion worth of new loans. So this is an excellent result in terms of loans, in terms of consumer loans and also in terms of corporate lending because you can see that [ CBI ] that we have just introduced Corporate Investment Banking unit that has just been introduced, they're starting to work very well and performing work very well even in a customer segment that did not belong to BPER that much in the past. And as the CEO was saying before, asset quality has improved significantly. Obviously, the one-off transactions enabled us to go down to 3.2% in terms of gross NPE ratio and 1.4% in net NPE ratios among the best-in-class. And actually, net -- nonperforming coverage remains high, and you will see there's a little bit of a slowdown because we have disposed of a significant bad loan portfolio in December. So there's a couple of numbers that I would like to give you in addition to what you can see there. There's a cure rate of about 16%, which is -- which bears witness through a good performance of our nonperforming loans going back to being performing, and default rate of about 10% to 11%, which is in line and also the danger rate, they are both in line with the system. So the good quality is confirmed. As far as the securities portfolio is concerned. What I would like to mention there is that you can see that following the consolidation of Carige, we have now got -- we have some sort of imported/onboarded a large share of Italian government bonds, but our idea for the future is that of reducing that stock to about 32%, which we think is the share that we should have as an ideal share of our portfolio. The duration is quite short because you can see that we are reporting the 1.9 years to 2.1 years for the overall portfolio, we're going up to 2.1, in fact, for the Italian government bonds. Moving on to the income statement. For sure, this year was -- or the 2022 was not an easy year for comparing ourselves with the previous year, including Carige and including what we had in terms of one-off transactions. So we had to work a lot also to make the results and data comparable somehow for you to make your estimation. So the 2022 recurring data was -- we reconciled it with 2021, even though 2021 recurring results do not include Carige, so that's not one -- a like-for-like comparison that we can make. But still in the following slide, you can see that there's a focus on the one-offs that we carried out during the year. If that's important for you to have an overview of how you can get to EUR 503 million from the other data that we had. So EUR 18.4 million is accounted for by the capital gain on the bad loans disposal that we call bridge transaction, then EUR 300 million primarily comes from the disposal of the merchant acquiring business to Nexi. EUR 200 million, you can see there is mainly traceable to the EUR 176.6 million booked in Q4 for the workforce optimization costs or the redundancy fund that obviously will not start -- I mean it will start in 2023 with 560 people net being involved in this maneuver. And then we have the cost for the Carige acquisition process, EUR 55 million. Then there is a EUR 7 million in software impairment costs of course, some procedures, IT procedures that are no longer used and that came from Carige have been discontinued. And then EUR 60 million comes from the Carige's collective LLPs. So by onboarding there, net loans, we had to take EUR 60 million in collective loan loss provisions. Then there's EUR 833 million in badwill, EUR 1.5 billion was the original badwill, then the net of the items is EUR 833 million. And indeed, an excess, you've got a breakdown of all of these items so that you can, in fact, understand better what the breakdown is about. But I would move on to the income statement and the net interest income. So as you can see, we have a very good performance in terms of net interest income in the last quarter plus 19%. Plus 19% reflects both the improvement in the commercial spread and the yield on the securities portfolio. And then we also issued institutional bonds, I would remind you of the EUR 400 million in Tier 2 at 8% and then there's a senior at 6% for EUR 800 million in the last quarter, which, of course, brings the cost for institutional net interest income that is higher. But then as far as TLTRO's are concerned, we did not recognize in the fourth quarter all of the interest income that comes from the TLTRO's, because we preferred to go for a different option that is following the deadlines that we will have in 2023. And so by doing that, we have a penalization in the last quarter, but will be -- we will have a benefit or an upside in 2023. Other things that are important to follow in the following slides. And if we go to -- actually, it's in the same slide, we've got the commercial spread in the fourth quarter benefited from the spike we had -- we have observed in the interest rates. And of course, this was reflected in the interest income, and we have reached 2.90 there. We are starting to see an interest expense there is increase from 4 basis points to 23. And I would like to say that as far as our models are concerned, we have a beta of 30% that is embedded in the models. As far as retail customers are concerned, we are at about [ 2%, 3% ] and -- and we do not get to 20% for corporate customers. So we do not expect we will reach the data that are embedded or implied in our assessment models because there's some sort of a [indiscernible] in our funding that is higher. As far as net fees and commissions are concerned, there's one thing that we are confident about for 2023 because in spite of the adverse market conditions, we have been able to grow. In assets under management, again, we have grown also in bancassurance and in traditional banking services. So in the fourth quarter, all of the fee-based assets went up, which is an important message that I wanted to convey. As far as operating costs are concerned, well, EUR 985 million is the figure, including the one-offs that we have listed in detail. So EUR 166 million from the workforce optimization effort. Then we have EUR 31.3 million from the Carige acquisition process in the last quarter of 2022. As a whole, the cost for that item amount to EUR 55 million. But then there's a EUR 10 million for onetime allowance that we paid to the employees. Looking at the recurring costs, the figure is higher. So from -- so you can see that we are higher there. But as the CEO was saying, what we expect for 2023, in terms of guidance, we're giving you EUR 2.6 billion, EUR 2.7 billion in operating costs. We're very close to Q3 -- to the Q3. What -- where's the delta? Well, on many projects, we are in line with the time schedule. But on some projects, we could be ahead of the time schedule. And so of course, we took the expenses before even though they were supposed to start in 2023, we started those projects before this implied some costs were taken in 2022, but we will benefit from that in 2023. Among some -- among the other relevant items, I was saying, EUR 55 million in Carige's acquisition process costs. But there are some other costs that we could not allocate. For instance, some unused holiday leaves by some employees that had to support Carige's workers. And so those costs were not allocated yet, but they amount to about EUR 20 million. And then in the last quarter, there's also an inflation-related energy-related costs back in 2023 will, of course, be capped because we've been able to renew the contracts with our providers and suppliers and so the prices were stabilized, and we will not see these spikes in costs in 2023. As far as loan loss provisions are concerned and the cost of risk, as you can see in the last quarter, we have EUR 274 million in LLPs, but let's go into the details of that amount. So EUR 60 million comes from the collective loan loss provisions from Carige that was restored. Then in the last quarter, there were EUR 50 million in overlays that amounts to EUR 150 million for the year and then EUR 130 million, so that's what the overlays. And then EUR 130 million is, in fact, attributable to the derisking process because, of course, there will be NPE flows in 2023. But we want to be ready with our stock also to dispose of some additional NPE portfolios at a price that is compatible with the market trend. So 59 basis points is the recurring cost of risk, excluding the overlays. So excluding the overlays for the year, that would get -- that would come to 43 basis points. If we also remove the coverage for future derisking, then we go down to less than 40 basis points for 2022 in terms of cost of risk. I would conclude the part by talking about the capital -- talking about capital, the slide is quite self-evidence. So we've got an illustration of the fully faced CET1, of course, the market generated some capital losses in the OCI reserves, the Carige impact is in terms of deferred tax assets, and you saw the benefits in terms of the 63 basis points and the badwill is represented there. But then there are also 45 basis points in deductions concerning, first and foremost, DTAs and shareholdings. There are some thresholds as far as individual DTAs and shareholdings that you cannot overcome -- that you cannot -- or actually you have to deduct from capital, those surplus -- that surplus. And so we've got some deductions there. And then there are some deferred tax assets that were generated in the fourth quarter. Then in terms of upside, as the CEO was saying before, we basically have already -- we've already got some binding offers for the platform and the UTP portfolio, so the NPE recovery platform and UTPs. And so we have highlighted the pro forma of the effects of these transactions. And now I will give the floor again to the CEO for the conclusions.

As Gian Luca was saying, correctly, we have brought forward much of the work that was embedded in our business plan and we are ahead of the time schedule with some projects. The year was very committing, challenging and we're pleased with actions, we have completed most of the actions we have -- with the only one that we wanted to complete by the end of the year, UTP disposal. And I would like to say that the 2 transactions that we're just mentioned account for about -- for more than EUR 2 billion in -- and with the disposal of the UTPs between the first and the second quarter, we should get to 2.5% gross NPE ratio. So we think that this result should not be taken for granted because, of course, until the closing is done, that should not be taken for granted, but it is, in fact, there within reach, and we have had the opportunity to bring forward some of the activities in the business plan, which will be an advantage to us for the next year, both in terms of implementation and also in terms of costs that we have already incurred and paid for. So we are ahead of the business plan, both in terms of project delivery and economic financial targets. I think that we are, in some cases, ahead of time -- the time schedule by 1 year. So we're ready to face the challenging macro scenario from a -- from a position of strength for the next year. As far as the guidelines or the guidance actually for next year, the net interest income that we foresee is of about EUR 2 million -- EUR 2.2 million (sic) [ EUR 2 billion -- EUR 2.2 billion ], then net fees and commissions is as well -- a net operating income, EUR 4.3 billion. Operating charge is EUR 2.6 billion and EUR 2.7 billion, as Gian Luca was saying before. And then the recurring net profit EUR 770 million, EUR 780 million is our guidance. Then in terms of LLPs, we expect a cost of credit of 40 to 50 basis points with no release of overlays in a scenario -- in a basic scenario, baseline scenario. This is all we're very satisfied with the achievements we have attained and also we are in line with the business plan and even ahead over the time schedule. We're very confident about the results that we will deliver next year. Thank you.

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

I'm seeing the breakdown of the badwill allocation of Carige, with respect to June, and I was wondering, what has changed compared to June. What has changed to such an extent that you had to post EUR 300 million in losses -- in additional losses? And then my second question is about the cost of risk. I would like you to give me some color about the cost of risk for the Q4. I've seen that your coverage level has been increased in the performing loans, particularly for Carige. And I would like to understand whether your models have been updated for the IFRS 9. And what assumptions you have included in that? And my last question is about cost. Your guidance is -- ranges between EUR 2.6 billion and EUR 2.7 billion, which is a 4% different stuff. How can you -- what's the difference that can account for the delta between EUR 2.6 billion and EUR 2.7 billion?

Well, let's start from the easier part. Bad -- the badwill of Carige apart from the interest rates curve. Well, the difference there is accounted for by the resolution of the distribution agreements that were -- very much of an unknown factor, so to say, or at least a source of concern when we were dealing with that and not only -- not in terms of resolution, but in terms of timing. We were -- we're performing because we concluded them, but still, they have -- we terminated them. But of course, this has an impact on the badwill. And however, we now have the opportunity to go on without having this open issues, let's say. Then in terms of the cost of -- the costs, so I've given guidance about it. That's where we think we will land, but there's no reason why it should be EUR 2.6 billion and EUR 2.7 billion, this is a very high-level guidance that I'm providing you with. And then there's inflation, of course, that may have an impact, and the range is quite justifiable. We're making some forecasts. The forecast and the guidance we gave you, of course, are quite clear, but there's a caution involved. And so that's why there's a range in the guidance I provided. Then I do not remember your next question was about the cost of risk?

So you have increased the cost of risk for the performing loans. So my question was whether you have changed the IFRS 9 model or the assumptions for the GDP or inflation?

The CEO, Mr. -- the CFO, Mr. Ferrari is answering. So the IFRS 9 models, now -- we're quite progressively updated. We have a total overlays of 100 -- I'm sorry EUR 180 million of overlays were done and taken in 2022. So we also took account of an adverse macroeconomic scenario and possible effects coming from the viability of our borrowers. And also, we took account of some effects associated with an increase in energy costs.

Next question is from Deutsche Bank, Giovanni Razzoli.

I have a first question on net interest income, because if I have understood correctly, I think you have adopted a different option for -- in terms of accounting treatment of the TLTRO in net interest income by penalizing, so to say, the fourth quarter so that you can gradually take an advantage and benefit in the next quarter. I would like to understand whether this assumption I have -- I am making is correct. And what benefit you will get in the future in terms of net interest income for 2023? Another clarification I would like to get from you based on what you said during the conference call. I think you hinted that EBITDA at 2% -- 20% for corporate, but I think that the guidance in net interest income for 2023, you estimated at 20%. So you are prudentially above the level you're seeing now. Could you explain better what your sensitivities for net interest income in different -- in different scenarios of deposit details. Then another question is about the redetermination of the distribution agreements with Carige. I would like to understand whether the cost was fully incurred, I think you were referring to EUR 100 million. I want you to understand whether this is the cost of the badwill that you have already expensed, because you hinted at that during the business plan as a maximum cost basically. But then I'm sorry for the many questions I'm making, but I have another about the fact that I think you are well ahead in terms of time schedule with many projects of your business plan, the scenario is more positive. But if I remember correctly, the business plan envisaged more than EUR 600 million in profit for 2024. So do you think you will basically adjust your guidance. How would you -- how should we consider the payout for the shareholders because there should also be a step-up in the payout considering these premises.

Mr. Montani is answering. As far as the TLTRO is concerned, what you said is correct. What you said is correct. It's true that we were penalized in the last part of the year. But for the next year, we've got EUR 80 million of a benefit of an upside that we get from this bringing forward of the projects. In terms of sensitivity, I think that Roberto, the CFO, Roberto Ferrari, will take the floor. In terms of the commercial distribution agreements, EUR 100 million is more or less the right amount, but there's another agreement that we are going to terminate shortly, but all of the costs were incurred. And as far as the business plan for 2024 -- or actually, the guidance for 2024 is concerned, where you're looking too much ahead of time probably. We've given guidance for 2023, and we wish that everything would go well. But as far as the remuneration or actually the payout for the shareholders, what we can say is that if the numbers are positive, and I think they will, there will be no difficulty for us to get closer to the target of the 50% that we had foreseen in -- by the end of the plan period. But I would not venture into 2024 before we get the end of 2023, which is I need to see what happens first before making predictions.

The CFO is answering some questions. So 10% EBITDA compared to the 30% that was embedded in our models. Well, that means that we gain about 4% in sensitivity. So by lowering the sensitivity by about 10%, then 5% -- net interest income increases by 5% Yes, correct.

Next question is from Andrea Lisi from Equita.

My first question is again about net interest income. In particular, I would like to have your guidance. You had -- you provided a guidance of EUR 2.2 billion. What levels of Euribor are assumed in that case because we have seen different targets of a new Euribor at 2.5, but the curve -- the forward curve points to higher levels. So if you could give us guidance for a potential further increasing rates by 50 or 100 basis points. But then my next question is about the evolution of your loan portfolio in terms of net interest income, what are you expecting for the next year and then for this year, actually. And then another question is about capital. So in particular, like other peers, must be subject to inspections by the ECB. And so is there any headroom for you to -- in terms of risk-weighted assets? My last question is about -- is more strategic. Now that Carige been integrated, would you be open to further consolidation phase in the industry.

Mr. Montani is replying. In the Euribor, 2.5 is correct. Then the inspections by the ECB was another question, the impact would be about 40 basis points. And then as far as whether we are ready for another consolidation step, this is a question that you made basically. I would like to say that we need to be conservative and prudent -- in a little more than 1 year, let's say, 15 months with -- we have absorbed 620 UB branches, 1.0 million customers have been onboarded, 5,500 employees were onboarded and then EUR 20 billion with Carige assets. And then EUR 50 million mass volumes and then again 3,000 employees and branches from Carige so. So a little less than -- a little more than 1 year between UBI and Carige, 8,400 extra headcount has been acquired. And even though we're very happy, even though everything was successful, very well performed in all perspectives, we must be realistic that 8,400 people cannot be integrated in a short time. So it needs time for us to settle -- and for all of the business plan projects to be accomplished, it showed that we are ahead of time with some projects, and we're happy with that. We're confident that everything will be completed successfully, but we're also realistic because we need some time to settle down. Then, of course, the future -- I mean is the future. So there's nothing on the table, that is an addition to what we have declared and what we have stated, our objective is that of completing the business plan and possibly bringing forward some projects, but that's it. I would give the floor to Gian Luca for some other part of your questions.

Yes, the last question was about the evolution of our loan portfolio. You've got about EUR 14 billion loans coming to maturity at 1.9% interest rates, and we think there's going to be an uplift to 2.4%. This is what will happen in terms of evolution of loans coming to maturity and interest rates relating there too.

Next question is from Francesco Colamartino from Citywire, Italy.

I would also make a couple of questions that are more of a strategic nature. One on private equity, I think, and one is more about financial counseling, so to say. Cesare Ponti, the role of Cesare Ponti will be enhanced in the future. And so I would like to know if there's more details that you can provide in terms of what contribution Banca Cesare Ponti will provide in the future? And then the second question is about the strategic central role of the financial advisers that will come, I guess, from Banca Cesare Ponti and the role that will play.

Well, Cesare Ponti was a theme that we included in the business plan -- the revenue generation that comes from that was one point, but in fact, the real point was backed of redefining, so to say, the profile of the bank and plan is there. We're working on it. We have said that the finalization and the achievement of this objective would have come this year. And I think that this project will in fact be completed in the second part of the year or around the second part of the year. But for sure, Banca Cesare Ponti is -- plays a significant role. And the central role of the financial advisers is there as an objective we have, and we will work on that because we think we would be more attractive, more appealing. We would be able to manage the portfolio and the asset management and assets under custody portfolios of the bank better. So once all of this role of Banca Cesare Ponti is better defined, we're well communicated. But it's true that we will, in fact, enhance the role of Banca Cesare Ponti, both in terms of its brand and in terms of its footprint, Milan. And we're also working on the restyling of some branches, not only in Milan, but somewhere else so that we can reposition Cesare Ponti with some corners -- within the branches. So Banca Cesare Ponti corners within the branches. So it's something that we're discussing.

Next question is from Marco Nicolai from Jefferies.

If I take the NII -- and I'm sure, yes, the NII for the Q4 and your guidance. I understand for Q2, I understand that the beta is very low now also Euribor is destined to -- effect to increase. And so I would like to understand the moving parts that you expect in this area also in terms of quarters, so on a quarterly basis. And the same applies to the net fees and commissions income, even though I understand that in the last quarter, there's more of a seasonal effect, but I think you will get more to a 2.1 than 2.2 for this quarter. So -- in the fourth quarter, in the operating costs that exclude the one-offs, there's still an import from nonrecurring elements. Is that correct? That's it, I would say. These are my questions.

Mr. Santi here, answering the question. Then your guidance for the net interest income [ 4x ], 2.3. There are some fees and commissions, including the performance fees, as you said, there's a seasonal effect in Q4. So it's true we are optimistic. But Q4 [ x4 ] is a little bit of a -- too much of an optimistic forecast and the same applies to net fees and commissions [ x4 ]. Well, we should consider that the first 2 quarters will for sure be excellent. But that beta that will not get to 30%, it would be a little bit less than that, but still faced with side deposits that as we were seeing -- we seen before, was priced at EUR 0.20, and the -- with EUR 4.60, any bond and ING, of course, the customers are not -- are moving around. And so we will try to also come up with some products that will try to intersect the customer deposits and AUM needs that customers may have. But we cannot expect the same spreads that we will get in the first and second quarters in the second part of the year. So there's going to be an adjustment, and we tried to reflect that in our guidance. Probably there was a part missing. For the -- your question about the fourth quarter, you're right. There are some nonrecurring elements, and we tried to describe that by talking about the projects that were brought forward and then there was a onetime allowance that was paid to the employees that rose from an adjustment to labor contracts of employees coming from different banks. So there's -- there are some nonrecurring components that we cleaned up a little bit in the slide we proposed -- we presented.