Credito Emiliano S.p.A. (CE) Earnings Call Transcript & Summary

Good morning. This is the chorus call operator. Welcome to Credem's preliminary 2020 results presentation -- preliminary results. [Operator Instructions] Let me now hand the conference over to the General Manager, Mr. Gregori, Nazzareno Gregori.

Good morning. Thank you. Good morning to all of you, and thanks for logging in. We've just closed the year that we surely won't forget. 2020 really upturned everyone's lives, and we would never have imagined it, and we were met with a huge challenge of a dramatic change. And the effect on the economy were very, very fast and very far reaching, and they still require a strong ability to adapt a strong flexibility, not to be passive when faced with this deep transformation, but at the same time, to turn this transformation into an opportunity. We went through an emergency, and that really highlighted, and the sense of responsibility our people have and the attitude they have towards innovation. Thanks to the investments we made in the past, both in the digital universe and in welfare. We managed to prove we've been very resilient achieving results that went beyond any -- even the furthest expectations we had. And before walking you through the results, let me -- underlying that now more than ever, being a team can really make a difference in achieving common goals. And that is why I would like to extend my deepest thanks and congrats to all the people who are part of the group for their ability to generate value under adverse conditions that really makes me proud. And we are fully aware that we have to move on along these lines, even over 2021. 2021 is still marked by uncertainties, challenges and further changes indeed. As I said before, the results we managed to achieve, confirm the effectiveness of our strategy and the way we engage in banking activities. And that is even more true if we consider this against the current economic and health backdrop. Let me summarize our main strength. Loans. Despite fierce competition they are still growing, well, outperforming the industry above industry level, around 10% per year. The NPL ratio is further declining, confirming an excellent quality in our assets. And this is where the main challenge will take place over the next few years. And I'm sure that our starting point is a competitive edge at least for the next couple of years. The profitability is in line with 2019. And despite the current economic -- adverse economic conditions, I can see them really one of a kind, extraordinary. And the figures you see on the screen enable us to generate capital in an organic way, improving our already excellent capital soundness, and to go back to rewarding our shareholders in compliance with the regulations. In a nutshell, the overall picture I give you is confirming what I said before and proves the value of a team that was able to take up the challenge coming from outside and make a difference. Before we deep dive into the detailed figures, let me stop for a minute to tell you how our organic growth path is still really delivering outstanding results, and that really is helping us to talk about the consolidation in the industry, which is -- which has been very trendy, especially in the financial press. We've increased our total business of 58% in the last 7 years, exceeding EUR 100 billion, and that really proves that you can grow through organic growth. Size-wise, it's similar to having acquired a mid-sized bank without having had to pay any integration cost or capital increase. So -- and if -- we will -- let me say, we'll still actively look into any external opportunities. And if opportunities will come along, we will seize them. We will grasp them as it happened with the [indiscernible]. But in the meantime, we focus on the way we do banking, that also in adverse economic side caused us -- proven to be very effective to ensure sustainable growth that will be confirming, also going forward. And the results of our strategy, generating, delivering positive impact, not only on volumes, but also on revenues. Despite the pressure on income sources in the banking industry, we still managed to constantly increase our core operating income, net of one-offs. And starting from 2013, we've managed to generate an incremental core operating income of EUR 180 million. And this growth is even more meaningful if we take into account the difficulties caused by the pandemic. And the pandemic also really spread up the digital migration trend in process, really removing behavioral barriers -- or barriers to behavioral change, and that has really led to a change in customer needs. And our will is to provide an offering that can match the benefits stemming from the use of technology and all positive items that stem from human relationships. And in order to do that, we have to raise awareness of customers in using digital channels and improve the customer manage a relationship when it comes to assets under management, insurance protection through listening to our customers and trying to understand their need and provide them with solutions. For many years now, we've invested in technologies and digital culture, thus achieving excellent results. In 2020, during the hot months of lockdown, we managed to protect our people, especially through the use of remote or smart working, and to promptly meet customer needs by increasing digital migration. And I can tell you that digital migration will be supported by new technology releases that will take place over the year. We are also making further process -- progress, sorry, when it comes to sustainability. And in 2020, the whole group was fully committed to the same sustainability. And we think that working on sustainable growth is a long route, is a long pathway, and it also means involving customers. We will have to us more info from our customer to integrate those data into our processes. And it's a value objective for all of us, for our shareholders, stakeholders, customers and the environment at large. Here, we list only some of the activities we've been running in 2020. And they really lay the foundations for the development, we will be focusing on, also going forward, and be more and more the center of our strategy. In the first quarter, we defined objectives to be defined by 2023, and that means a stronger involvement of all stakeholders. And stakeholders will be -- sustainability objectives will be embedded in the objectives of our management. Let's deep dive into figures now, given the government support, and in order to also somehow answer some questions that you may have. Let me show you some data. Of course, showing our role to ensure customers, they could have access to government initiatives. So the measures undertaken, moratoria loans were EUR 3.6 billion with a reduction staffing now. And that really shows the credit worthiness of our clients is very good, and they are already paying back outstanding loans. And 74% of moratoria was for exposure with the PD lower than 1.3%. As to -- when it comes to state-backed or state-guaranteed loans. We played a role issuing at the end of the year, about EUR 2.2 billion worth of state-backed guaranteed loans. If we go back to the income statement. 2020 was really a complex year, and the results we achieved fully confirm the resilience our group has. The -- our operating income is in line with 2019 and is up 0.2% in this recurring component. That is to say net of the results of our financial activities and performance fees, that characterized 2019. As we had already said in the 6 -- or in interim report, we prove we can manage cost and cost items in a very flexible way with an operating result, up 1.8% versus 2019. And all that without impairing or compromising our strong commitment when it comes to investments. And let me reiterate, investments are paramount importance to improve the way we engage in banking activities and to achieve results like the ones we are commenting now. Net profit in excess of EUR 200 million despite about EUR 52 million of additional provisions to really make up for the emergency triggered by the pandemic. And then we have positive tax items in the range of EUR 27 million because of the realignment of tax value being realized with book value of real estate. And 2020 was reaching one-offs. So let me show you this other normalized income statement chart, normalizing 2019 and 2020 because -- in view of the recurring items. Because we had a lot of one-off items, but we normalize this with discount is, and we end up with an operating result -- operating in -- growing about 7%. And net operating profit in excess of EUR 200 million, up 1.7%. We were talking about net profit as last item. So our business model is very sound, very strong that -- and it enables us to make all the necessary investments required by the market to keep our competitive edge. If we drill down into a greater level of detail, over the last quarter, we had a reduction in the interest income because of the subordinated debt we issued in September and the decline in interest rate. The contribution of TLTRO3 is also supporting aggregate figures. But the strong competition is really having a very strong impact on -- or pressure on customers' spread. So the only way we can retain our NII strong is to expand volumes, and we are focusing on that. As I've just said, the competitive scenario over the last year had an impact on average rates for loans, both for us and for the industry. And let me be clear, I don't expect that trend to change in 2021 because of state initiatives and also because of the generalized rate level, which is affecting new loans, newly issued loans. The decline in the customer spread is also affected by the cost of deposits. For us, it's close to 0. So there's no more room for further reduction, unlike the industry, which still has about 50 basis points of cost on deposits. This is only a partial view that enables us to better understand how customer performance is. But on aggregate level, we can pick up funding at negative rates. Let's now talk about the -- our portfolio, securities portfolio. We've declined our BTP exposure. And in 2021, we want to reduce its impact by reshuffling our portfolio and focusing on other type of securities and improving on geographic diversification. More than 70% of the production in Italian govies is HTC. And also to take into account valuation results, the average duration is 1 year lower than 2019. Let's now look at noninterest margin. And we have recurring core components that are up 3% versus 2019, our core NIM. And in Q4, we had an increase of 15.5% when it comes to insurance and asset management activities, also thanks to the picking up in volumes. Over the last 2 quarters, we are bearing higher costs because of the excess of liquidity of the ECB as a natural consequence of the expansion of direct deposits. And then we have banking fees. We might restate, also, our noninterest margin starting from this year already. And taking this into account, to the contribution of banking fees is basically in line with that of 2019, given the clear impact of a long lockdown we had in spring and the restrictions we had over the last part of the year, which prevented it from growing, meaning banking fees. And then look at the insurance income, in excess of EUR 15 million over the last quarter, proving the strong focus of the group on bank assurance activities. Let me now focus on costs. As I said at the beginning of the presentation, we proved we can really effectively manage cost, and we did so throughout 2020. That led us to a cutting of operating cost equal to 2% versus 2019, fully absorbing the impact of the new collective contract for the personnel framework agreement. And we've tried to really support our growth. But this year, we've managed to really dose our costs when faced with a more challenging external backdrop. We never forgot our strong focus on investments that are necessary to get ready for the future. And this translates into a 5.5% increase in D&As versus last year -- versus 2019. Let's now have a look at volumes, starting from loans. This aggregate figure, loans to customer is about 10% versus the total, meaning from 2019. Also, thanks to moratoria. That led to the growth of other types of loans and mortgages. Let me say that leasing and residential mortgages growing, respectively, leasing, 5.9%; and residential mortgages, 12.5%. And so they were not connected to any government initiative. They testify, they bear witness to the strong work of our sales network and the will of our customers to keep on investing in the future. If we compare ourselves against the rest of the industry, I'm very proud to say that this is the 10th year running, where, in loans, we record an overperformance where we overperformed the market. And that really enabled us to achieve a new all-time high, meaning market share evolution. It's 1.9%, the figure we stand at. So let's now talk about the deposits, the inflows. Direct inflows, direct deposits really show a sizable growth. Also, thanks to the net deposits of our client corporates. And net of moratory, they increased their cash positions. Despite the difficulties and uncertainty characterizing markets in the first half of the year, we really witnessed a strong recoup of assets under management that landed at EUR 1.5 billion, almost. Meaning customers are really acknowledging the competencies and skills we have in assets under management -- in asset management. And that leads to a strong development in stocks. Assets under management are up 6.6% versus 2019, despite the market. We really recovered what we lost through the years in the first months of 2020. That really should give a better return on management fees that, on average, were penalized during the year. Direct inflows and direct deposit is really showing an impact on direct deposits, up 17% versus 2019, showing, once again, the fact that customers choose us because of our soundness. And then we will try and somehow enhance and support the switch to assets under management, and that will be a nice catchment area to support growth in the next couple of years. Let's talk about bonds issuance. We issued subordinated bond in September so the holding worth EUR 200 million. And then subsequently in the last quarter of the year, Credemtel went back to the market with subordinated loan in excess of EUR 107 million, partially replying maturities of about EUR 50 million. For 2021, we are very flexible -- we can be very flexible in looking at different opportunities, both for the next EUR 750 million maturity, we're talking covered bonds. And the new MREL requirement compliance. And here, I'm really confident we will manage to achieve the required targets in a very, very short time, also considering the issuance of senior nonpreferred in 2019 and the Tier 2 issuance I mentioned before. Let's now talk about credit quality. Let me underline that NPLs are further declining, thanks to another disposal of bad loans we did at the end of the year. Thanks to the effective management of NPLs. Also, net of disposals, the net flows are negative. So 2.9% is the figure we get to when it comes to total NPLs. Whilst the European average is 3.8% -- oh, sorry, 2.6% -- yes, 5.4%, sorry. And further credit deterioration is expected. If you look at total NPL, we had a decline of 14.3%, and that had also an impact on there, relative impact on net NPL ratio, 1.44%. And we have the same incidents also only considering bad loans. We very much pay attention to coverage, NPL coverage, especially now. So you see an increase in NPL coverage, which stands at almost 72%, whilst the overall amount is -- of NPL coverage is 52%. If we look at capital shortfall, coverage is really at the top of the industry, 51% of the total and almost 74% of bad loans. As I said before, from a capital viewpoint, the shortfall on the performing loans was also very important that took up most of the impact of provisions booked on the income statement, thus not having an impact on regulatory capital. Overall, provisions at year-end is in compliance or in line with the volumes we saw in the previous year. Let's have a look -- let's now have a look at the cost of risk. It's clear that cost of risk was affected in 2020. I mean it was affected by the stronger write-downs and impairments -- collective impairments because of the macroeconomic scenario, deterioration because of the pandemic. But despite that, almost EUR 52 million worth of nonrecurring provisions. We have a cost of risk, which is well below the system average before COVID. And if we were to normalize it, it would be around our all-time lows around 19 basis points for 1991. Of course, we will still feel the effect of the pandemic. We won't be immune to that. But we enter this very problematic, with this troubled period with the best possible asset quality. The credit worthiness of our client will enable us to manage any possible increase in NPL and keep our cost of risk in line with that of 2020, if not lower. Yes. So we look at the last slide, we're talking about assets and liabilities, and income statement. Loans to customer grew more than EUR 1 billion, and the increase in loans led to the reduction of due from banks. And deposit went up about EUR 2 billion. Our exposure to TLTRO3 was kept stable, flat, which also in view of the total amount that we may request ECB to issue. Liquidity ratios are above regulatory levels, thus enabling us to be fully flexible when it comes up to defining funding strategies. Let's now move to the last slide in the presentation. Let me wrap up by looking at consolidated capital ratio. So we went up about 0.5 percentage point in our CET1 ratio, now landing at -- standing at 14%,1-4. We are very happy with our capital position that grants as a very strong buffer on minimum requirements, and that enables us to confidently tackle any volatility increase and to keep on funding the increase in loans. And we have new software treatment. And we already included -- factored in a EUR 0.20 dividend in our figures. RWA, we factored in an increase of EUR 1.6 billion. And the weighting of our insurance holding was also factored in, and it was completed in the last quarter. Thank you so much for your attention. Let me now move on to your questions. Thank you very much for logging in.

[Operator Instructions] The first question comes from the line of Mr. Riccardo Ruggeri with Mediobanca.

A couple of questions, 2, 3 questions, if I may. First of all, let me try and better understand about the moratoria. You said that they are declining in number. Is it reasonable to think that those are getting out of moratoria right now are also those clients that have less problems. And in there, should there be a deterioration in the quality of assets, in those who access moratoria, do you think we can expect it towards the end of the cycle because people may try and leverage or use moratoria till the very last possible day. Do you think this interpretation is correct? And the second question, cost of risk. I want to be sure I really grasped what you meant. 2021, you expect cost of risk in line with 2020, maybe better. Or meaning lower the cost of risk. And then the weighted risk -- RWA. Was there any -- did you adapt -- was there any adaptation in the models? Did you include PD or LGD factors?

Thank you very much for your questions. On moratoria, we agree to what you -- I agree with what you said. Those who, of course, leave the moratorias earlier have less problems. Those who retain them or stay in are those who are going to use them till the very last minute as an opportunity. So I fully share what you have just said. As to the cost of risk, yes, indeed, it's true. I said so. We think that 2021, we can retain the levels of 2020 or even lower for a number of reasons. I mentioned before, the quality of our customers, et cetera. As to the RWAs there are some figures, some comments. And I'll hand it over to Mr. Morlini, who can give you more details.

Yes. That's correct. More than adjusting the model, we have an RWA density, which is higher, higher density, because we are starting to embed and factoring the corporate performance. And in 2020, of course, we have to discount the effects of the pandemic. And we've seen, in that respect, a shift already on ratings. That is leading to a subsequent increase in RWAs in line with the model. So more than adjustment or adaptation of the model. The model is working. And it really is already embedding and factoring in a deterioration, we expect on RWAs, due to the corporate performance. We will expect for them in 2020. They will be worse than those we had in 2019.

Daniele, so is it reasonable to think that this will go on in 2021, too?

Yes. It's reasonable to think that this will be the same in 2021. In 2021, we will have the advantage of no longer having to discount the insurance business that was about 70 bps. This year, we discounted that on all of our figures. So in terms of capital generation, we are quite confident for 2021. But it's -- RWA inflation is something we expect at system level, at least for those who have internal models.

Next question.

Next question comes from the line of Luigi De Bellis with Equita SIM.

I have 3 questions. Could you give us some color on the expected trend when it comes to NII commissions and costs? And then the inflows trend, what have you recorded both direct and indirect deposits. After a good Q4 and then a recruitment of new financial advisers, what's your strategy after the stabilization you've achieved in 2020? And another question, could you give us an update on your strategy when it comes to external growth? What are the typical features of a potential target of yours? Would you be looking at the assets under management, asset management world, too?

Well, first question, the trend, what we foresee for 2021, we assume a noninterest income, that should be growing about 2 percentage points. The same applies to the interest and noninterest. And management fees, excluding performance fees, it should be around 2%, 3%, exception made for some market trends, if that should happen. Whilst for financial, should be about 2%, 3%. This is what we expect trend-wise in our revenues. As to the inflows and recruitment trends, as this year, as you probably see, our deposit, our inflows went up sizably. Direct deposits, I've already made a comment during the presentation. And our task is to turn that shift towards assets under management. We're also moving on with the recruitment actions. Bear in mind that we're going to very much focus on the new private hub because we think that focusing on private customer is -- will enable us to develop -- to grow the more valuable type of deposits with a lot of value for us and for our clients, for our customers. And of course, we will keep on hiring financial advisers and bankers to achieve our growth targets. And the growth targets, basically, when it comes to deposits, customer deposits, the target is roughly 3%, slightly below 3% overall. And about 5% for assets under management. So it's also depending on how the market perform. These are data. Insurance, we expect growth in excess of 3% because we're very much bet on that target. And asset management and insurance are very much consistent with our wealth management growth expectations, and the private hub or [indiscernible] private we have. And as to the growth strategy, I want to be provocative when it comes to inflows -- sorry, organic growth. I want to somehow be provocative. When it comes to external growth or organic growth, we need 2 strategies. One strategy is depending only on our will and that's for organic growth. We think -- and I gave you data for our deposits and inflows. So despite one-offs, we are willing to grow. But we very much think that size matters. It gives a competitive edge. And therefore, for us, it's even more so if you consider our business model because with our product factories, we are going to produce more and more synergies, unfold more and more synergies as we go on. So we believe in M&A. But as I said, we are going to be active in looking for these type of solutions and assessing them because we have to focus on integrations or acquisitions that will be value-accretive and will not bring in further issues. For the [indiscernible] though, we proved that when it came to it, in a very limited amount of time, we got to the core of the matter. And we think that growing in size is important. External growth does not only depend on us. So we need to have another strategy, too, which we are going to pursue regardless of the other leg of the strategy. But don't -- we'll have no doubt that should opportunities arise, we will seize them. Next question.

Next question comes from the line of [Sabristo Bernarde] with [indiscernible].

Can you hear me? This is [ Sabristo Bernarde ] with [indiscernible]. A question on dividends. I'm surprised, I am happily surprised that the dividend is twice as much as due because it was computed at holding level and not at the bank level or I had calculated, computed it differently. My question is considering all the issues when it comes to paying out a dividend throughout the year, and there's an ECB ban that will be in place until September. So dividend policy, can it be more flexible when you rather than paying an interim dividend sooner or later after September, provided ECB will enable that will allow that? Are you going to pay out a one-off dividend, given your capital ratios that are excellent. You are at above rep average, so your capital base whether you take COVID into consideration or not, it's a very sound capital base. So could you give us the picture of what your dividend payout policy could look like going forward? You paid the dividend that is in line with the previous years. But with your capital base, and your asset quality that is better than that of the previous years, net of the M&A, maybe you can do better. You can do more, dividend-wise.

Well, first of all, let me say the following. Dividend policies are decided upon by the Board of Directors and not by management. And as we have always said time after time, this is a decision that has to be made by the Board. Having said that, we really complied with the constraint provided by the ECB on dividend payout. I do not rule out that maybe in the next few months -- and we may think other things. But as you also said, if we think about possible acquisitions. We have to bear in mind what will take place in the -- what will happen in the next months, in the coming months. So we're going to be conservative inevitably. If -- and the decision, as you said before, to pay out more dividends, will be looked into, should we keep results as we are producing without maybe considering of engaging into an M&A deal.

Nicholas Binda with Intermonte.

I have 3 questions. The first one is on NII. Are you going to increase your take-up 0.3 in the next auctions for 2021? And could you remind us the contribution of the security portfolios to the NII, unrealized gains in your securities portfolio? And what you said this morning, hiring more resources in 2021. What's the estimated impact on cost for 2021, always.

Could you repeat the first question because I could not hear you properly.

Sorry, can you hear me now?

Yes, now I can hear you.

I was wondering whether you are going to increase your take-up of TLTRO3 in March, the next auction?

For first question, we are looking into that. We want to leverage that opportunity deriving from TLTRO3 in the coming months. It will depend on how things will go in general. The contribution of securities portfolio to NII is about EUR 12 million per quarter. So if you compute that and you add that up, you will end up with the figure for 2021, should be EUR 12 million of [ MAS ] generated by the -- of the NIM, noninterest margin are generated by the securities portfolio. Then costs and hirings, if I'm not mistaken, you mentioned.