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

[Interpreted] Good morning. This is the Chorus Call operator. Welcome to Credem's conference call presenting full-year 2022 results. [Operator Instructions] Let me now turn the conference over to Credem's General Manager, Mr. Angelo Campani. Mr. Campani, you have the floor.

[Interpreted] Thank you very much. Good morning to all of you. Thanks for joining us on this conference call. Let me start by looking at our full-year results for 2022. As you know, it was definitely a very intense year and characterized by geopolitical tensions in Ukraine. Unfortunately, that had an impact and added to the effects generated by COVID in the previous year, thus leading to an even more uncertain scenario characterized by high volatility. Against that backdrop, our group managed to reconfirm its features of being able to rapidly respond and seize opportunities. In 2022, we closed the year with results that were definitely excellent and outstanding. And I'm very pleased to tell you that we closed with the best profit ever, and not considering the positive contribution of the badwill coming or stemming from the merger with Caricento. And that proves that our group managed to grow and rapidly adapted itself to the changes brought about by the backdrop, the general backdrop. And that was possible, thanks to the quality of our people and their ability to work as a team and to have a strong sense of belonging. And I think that is of paramount importance to generate value over time regardless of the economic cycle. And that's why I would like to thank our coworkers warmly. And let's now move on to Slide #2, starting from my position as a new General Manager. Let me show you some key points and present you with the possible growth forward going forward in our group. We start from Page 3. If you highlights on the results we achieved even in -- even, well, despite the ending of government measure, loans went up almost 3 percentage points. We outperformed the industry, and we are around 4% year-on-year, up 4% year-on-year. And as we already proved over the last 10 years, we've managed to increase aggregate amounts and constantly improving the quality of our assets. Bottom right of the slide, you will see the gross NPL ratio further down, landing at 2.1%, and that is a level of absolute excellence, let me say, if we compare it to the industry average in Italy, but also to the European industry average. Moreover, we are heading towards NPL 0. As you see, net NPL on total loans is around 0.9%. That's a net NPL ratio. Let's move on to Page 4, that's profitability and capital soundness. We definitely recorded an improvement in our profits, net of badwill is up 23%, reconfirming profitability level at the top of the industry with our ROTE and ROE, respectively, of 11.5% and 9.8%. And we -- the group proved to be able to generate capital organically, and that led to a further improvement in our capital soundness. And I'm very, very pleased to share with you that ECB gave us a Pillar-2 request that is the lowest in Italy. Thus, reaffirming our soundness and the soundness of our business model and the way we monitor and manage risks at group level. CET1 ratio lands at 13.7%, with a very strong buffer about 616 bps buffer on the SREP requirement. And we have a dividend proposal -- dividend distribution proposal of EUR 0.33 per share. We are on Page 5 of the presentation. Let me show you some slides that go back to the way we are growing strategically. In this slide, you can see the ability our group showed to retain high profitability even -- well, during different economic cycles. Over the last 11 years, we've managed to increase our capital position by generating capital organically and retaining ROE levels that are of absolute excellence, let me say, both versus the European -- the Italian and European peers. And these results are generated to the high diversification that characterizes our business model and that I'm confident will further help us also against this economic backdrop that is characterized by uncertainty, a lot of uncertainty. We're now on Page 6. And here, you see a snapshot of our business model. And this is one of the factors that enabled us to provide results in a consistent way. This is our business. You see it's very wide and diversified, very thorough. That's why we decided to further extend our business lines, generating value and as single business lines, but also fully embedded in the way we do banking and rolling out synergies from a consolidated perspective. So, we have Credem Banca and its network, and then we complete the service model with extended banking service and consumer finance so that we can meet the needs of both households and corporates from loans to factoring, leasing, etc. We've strengthened our private banking group with our legal entity Credem Euromobiliare Private Banking and Banca Euromobiliare and the Credem Private Business Unit. And this will come on stream on February, the 18th. And through our network, we will be providing assets under management products, thanks to our product factories in the wealth management area. Let's move on to the next slide. Here, you can see how we've opened up our different business supply -- our pipelines, so to say. And if we look at volumes at the end of 2022, including Private Credito Emiliano business unit that's already embedded in the private banking [ pool ] or hub, as you may want to call it, as I hinted out before, you see the aggregate figures are consistently distributed or broken down among the different lines loans are mainly on the commercial bank, extended banking services and consumer credit. And funding is mainly focused on commercial bank and private banking. And so they will have a very important strategic [ way ] in managing the wealth of private clients, and it will be very satisfactory going forward in generating fees that will benefit our P&L. And then commercial bank, assets under management and insurance to further increase the value we generate. Let's move on to Page 8. Wrapping up, this shows overview. Here, you see the impacts of diversification on our revenue sources. You see that our strategy is then translated into a high diversification of the different types of income streams. The first quarters were characterized by an increase in NII, thanks to an increase in the interest rate, but also fee income is quite high and offset very well our income sources. That further reconfirms our ability to grow revenues and income in a sustainable way in the long term and therefore, offsetting volatility of economic cycles. Let's move on to Page 9 in the presentation. Let's have a look at -- let's look ahead of us, and we want to confirm our investments in the way we are resilient and able to adapt to change, especially today in the current economic backdrop. We want to do so and seize new growth opportunities by strengthening the pathway we have started with a lot of projects in our pipeline, and we normally have 38 initiatives running in parallel. And 8% to 10% of total revenues are used for these initiatives and span across all the business lines in the group. Just to give you a hint, we will keep on focusing on our offering in asset management and bancassurance. We will focus -- in 2023, we will focus on the project of Credem Euromobiliare Private Banking. We will keep on offering products and services to corporates with an innovative digital offering or proposition. And then as we did in 2022 that we have strong commitment to consolidate our consumer finance or credit operations with the Avvera company, and then we will focus on commercial business units to further strengthen our distribution model and also grow in a sustainable way. In addition to these business lines that are vertically oriented, we will have to keep on planning, growing also across the board, so to say, along the different axes of development or growth. Digital transformation is very important, cybersecurity, data analytics and the use of artificial intelligence and branding, and making people more brand aware and then, of course, focus on sustainability, I will tell you more about in a few minutes. Let me underline that, that should not be possible without the very strong ability to change and transform our people show. 400 people are normally involved in these group activities that make it possible for the group to grow and generate value. Let's move on to Slide 10, the next slide. And here, we talk about the digital approach, the transformation, digital transformation process, which is of paramount importance for us. Let me show you some figures and share some figures with you that show how committed the group is in evolving our digital platform so as to offer an multichannel offering that can be distinctive also going forward. Internet banking retail is showing that there are more and more clients using them, up 4%, both private and corporate, with an impact that is around well over 70%, 7-0 percent. And 94% of overall transactions take place through digital channels. And that really, as witnessed, the growth we have shown from the digital perspective. We can adapt very promptly to the change in customer or client behavior, and our proposition includes both benefits stemming from technology, but also benefits that are leveraged on the excellent relationship between clients and the bank from funding to loans to other services. And then next slide. We focus on sustainability. We underwrote the charter for equal opportunities, and we try and help the community. For instance, we're trying to help people who are affected by the Ukrainian war. We do so directly and indirectly. And we try and evolve competencies and skills on ESG issues, both for our coworkers and the Board of Directors. We have specific training programs. And let me tell you also what we are trying to embed, the ESG rationale into our credit policy. In 2022, we updated our credit policies when it comes to credit granting or loan granting and resolutions, and then other financial operations with specific focus on the positioning of our counterparties when it comes to sustainability themes with a focus on climate and environmental issues. So, we came up with a short list of indicators that were embedded in our credit issue resolution process, and we applied it to 1,000 corporates where we already are operating. And in 2023, we will keep working on the ESG front. And ESG criteria will be applied to the entire corporate network and the entire portfolio -- loan portfolio. That means directly involving clients to collect relevant info, relevant data. And now it's -- for us, that is critical because corporate do not seem to be ready for it, but we are ready to support them throughout this transition phase. Next slide. And here, we get to the nitty-gritty of our full-year results. Page 13. In 2022, we had a year with rates that supported our revenues. And, of course instead, commissions were impacted by the negative performance of market. But the group growth stem from the digital innovation and enabling us to show a sustainable growth over time. The revenues increased more than costs. Therefore, we had an operating result growing, or up more than 23.4%. And LLPs are limited, and we have not seen a meaningful deterioration of our loan portfolio, thus being placed at the top of both in Italy and abroad. And in Europe, EUR 317 million is our adjusted net profit, our best result ever, not embedding -- not including the badwill for the acquisition of Caricento. Page 14. Let's have a look at our net interest income. We have a sizable increase over the last 2 quarters, and that was in turn driven by the strong growth of interest rates following the Central Bank monetary policies. But also I would like to underline the outstanding work of our networks that managed to further -- to generate extra loan volumes that led to an expansion of our net interest income. Over the last quarter of 2022, we still benefited from a positive contribution of about EUR 9 million between TLTRO interest and what we have for the mandatory reserves with the Central Bank. And that should end -- already starting from the first quarter of 2023. So, results were mainly focused in the customer spread. Bottom right of the slide, as you can see, growing 66 basis points versus an average industry growth of 54 basis points. Let's move on to Page 15. We drill down into a greater level of detail in our net interest income. That's the average rate applied to loans and is around 73 bps versus 64 bps of the industry average. Still strong repricing on deposit around 7 basis points versus the 10 basis points applied by the industry. If we look at 2023, we will have a lower contribution of -- in funding, but we expect to further grow on the asset side. Let's move on to Page 16. We complete the picture of net interest income with our securities portfolio breakdown. Over the last quarter, our breakdown is practically unchanged, always highly diversified. The exposure on the domestic market are all accounted for as held to collect, and that enables us to lower volatility on capital. Page 17, non-interest margin. Recurring margin is EUR 200 million. Our core NIM, consistent with the previous quarters of 2021, despite the market performance, we're all very much aware of. And banking fees went up more than 9% year-on-year. And the total non-interest margin is affected by performance fees that are lower, and that I'd characterize 2021 in a very positive way. We will keep monitoring market performance also in 2023, focusing very much on customer needs and being aware that a recovery may generate room for our revenues, both recurring and performance fees to further grow in 2023. We are on Page 18. Let's look at operating costs and D&A. Payroll, excluding some non-recurring items in Q4 is consistent with the group growth and is tied in with the high increase in revenue, especially in Q2 of 2022. As to admin expenses, in the last quarter, we had a non-recurring IT item, about EUR 5 million for ICT (sic) [ IT ] expenses that are tied in with the new private legal entity. And at year-end, we are applying some inflation factor that will also be applicable in 2023, but in a very manageable way and that can be absorbed or taken in, thanks to the revenue growth. Next slide is Page 19. These are loans to customers. And as I said at the beginning, in 2022, we no longer have the effects of government measures with the end of moratoria and therefore, keeping up of the D&A effects on our products. Yet, we managed to increase our loans to customer 4% year-on-year. And the consumer finance went up more than 25% year-on-year and led mainly by Avvera. And let me stress that both residential mortgages and leasing stood their ground at year-end despite the strong increase in interest rates. And then short-term loans also have grown nicely, especially at year-end, whilst we have mortgage -- other mortgage or other loans is flat, EUR 3.1 billion of state-guaranteed loans granted during the COVID emergency. We are now on Page 20 of the presentation, group customer funding and net inflows breakdown. We have a net production of assets under management and insurance products of EUR 388 million, showing the positive decisions made by the group. Of course, the increase in yields made sure we had an increase in AUC products with positive net inflows in excess of EUR 2 billion over the last quarter. We've had very sizable insurance net inflows. And if you consider our business model, that could be really a source of opportunity also to work and channel these masses to the wealth management or investment wealth, especially if the market conditions were to consolidate or improve. Page 22 -- sorry 21, this is deposits, asset under management, insurance. Direct deposits have a very meaningful impact. And insurance is around EUR 39 billion, and they are affected by the negative market performance versus 2021. And next slide, we have bond issuances and maturities against funding to institutional agencies. In 2023, we had 3 issuances. The first green serial bond, the EUR 600 million January covered bond in Q2, and the social Tier 2 that enabled us to further increase the capital efficiency -- our capital efficiency through a mirroring transaction with Credito Emiliano improved our buffer on the MREL requirement. We have no immediate maturities. We're very flexible in 2023 to look into other possible issuance that may further strengthen our MRL buffer. Page 2023 (sic) [ 23 ]. Here, we briefly look, as you know us very well, we look at the credit quality. We keep on reducing the gross NPL ratio. It was 2.1% as the NPL range -- gross NPL ratio on loans. It stands at EUR 736 million. That is a piece of information of outstanding quality versus the industry average. And coverage, we've always improved our coverage levels. In 2022, we are around 71% on bad loans. And total NPL, we land at 56% coverage. If you look at the capital shortfall and further additional -- the addendum and calendar provisioning requirement, coverage stand at more than 61%, which is a very high level compared to the industry average. And then the incidence of net bad loans is 0.23% compared to the 0.92% of the industry -- 0.9% of the industry, sorry. And one last thing. Again, the asset quality and as I said at the beginning, we closed 2022 with better results and expected with a cost of risk, which is 11 basis points and also factors in further updates in IFRS 9 scenarios and also an update of our depreciation policies, impairment policies on analytics so that we have coverage levels that are always in line with the ECB requirements, both as far as addendum and calendar provision [ requirements ]. So cost of credit is 11 basis points. So a very limited amount. And then let's have a look at assets and liabilities. You see how loans have grown because of the seasonality effect we have at year-end and then short-term loans. And then we record a reduction in loans to banks because of the excess liquidity effect with the ECB because of the reimbursement that were made -- the TLTRO reimbursement that were made at the end of 2022, EUR 1.4 billion with a natural maturity of the tranche we had in December and then 1.2 billion instead is referred to an early redemption or repayment that we made for March 2023 maturity. And so reimbursement is slightly more than 30% of the previous exposure and is in line with market performance. We are now on Page 27, liquidity position -- liquidity ratio. Despite what I've just mentioned about TLTRO, we have -- we retain a high level of LCR, also thanks to the eligible collateral we had after the reimbursement. In 2023, we expect slowing down a decline in the ratios because, of course, there will be further TLTRO reimbursement maturities. However, let me reassure you that we'll be well above requirements, thanks to the fact that we are very flexible and we can resort to institutional wholesale funding initiatives that we can run also in the short term. And then next slide, we wrap up with growth. Again, gross NPL ratio, CET1 ratio at both group level and holding level, that is a prudential perimeter. Our banking group level is 15.2% and 13.7% at holding level. In 2022, the group reconfirmed its strong ability to organically generate capital and managed to offset the negative impact driven by the market on valuation reserves. And then the increase in loans, the loan growth, especially in Q4, led to a reduction in RWA. Also thanks to benefits deriving from TRIM that were already recorded in Q1 2022, the current level of CET1 ratio enables the group to retain, as I said, at the beginning of our presentation, a high capital buffer versus SREP 2023 result, that is to say 616 basis points, 6-1-6 basis points and a dividend proposal of EUR 0.33 per share. That's it for my part, and thank you very much for your attention. And we now open the Q&A session.

[Interpreted] [Operator Instructions] First question comes from the line of Christian Carrese with Intermonte.

[Interpreted] Excellent results, and that further reconfirms the soundness of your bank. Let me focus on 2 points. The NII on the one hand, looking at Page 14, if I'm not mistaken. It's clear that Euribor in Q4 is much higher than, of course, it was in the previous year. Let me try and understand the underpinning rationale you have when it comes to 2023. Lower contribution from the TLTRO, and benefits starting from -- benefits deriving from rates. What do you expect from the competitive scenario around deposits? And what are your assumptions as to loan increase? So NII maybe should give a contribution to the govies, the Italian govies. Another question on Slide 7, if I'm not mistaken. And the scenario you gave for the single business lines, also the private banking and the project you are rolling out. Could you elaborate, if we assume revenues as 100, how much is the contribution coming from the single business lines?

[Interpreted] Let's start from the NII. As you correctly said, the 2022 effects were very, very positive in the second part of the year and it's an increase in the customer spread and a much faster repricing on the loan side was on the deposit side. We're still, of course, applying it but in a much, much slower fashion. And that impact, of course, will be dragged down to 2023. However, we expect a much faster repricing because of the competitive scenario we are starting to see not so intensely, but we're starting to see them on deposits as well. So just to give you a benchmark or the beta on deposit today is about 5%. Expectations are that in 2023, it will be around 25% [ versus loan ] it will be 45%. So the impact on the cost of deposits, the customer deposits -- well, costs will be higher next year -- well, this year, 2023. And there are other effects we have to factor in when we have to look at the 2023 buffer, as you were saying, that will be the end of TLTRO. The cost of institutional issuance will be -- issuances will be full year and not a partial one as we had in 2022. As a guidance, I could tell you that about an increase of around 21%, 22% in our NII for 2023 versus 2022. It's an estimate, of course, because the speed of the repricing on deposits still has to be confirmed and checked. So it might well be even a higher figure. As to the business lines, I'm very pleased you asked this question because the pathway we started sharing our business model with you and the figures in our business model is very important. And shortly, we'll disclose the opening up of the -- the birth of the coming on stream of Credem Euromobiliare Private Banking because then we'll be able to tell you about the contribution each business line can give you. And it will be tied in with stated figures. I think we'll be giving you more info either within the half-year report, interim report or the full-year 2023.

[Interpreted] Next question comes from the line of Giovanni Razzoli with Deutsche Bank.

[Interpreted] I have 2 questions and a clarification. You, in your press release, you said that CET1 was impacted by valuation reserve, probably refer to BTPs. Could you elaborate on it? How much have you recovered to the present day? Dividend policy, you have increased your dividend payout by 10%, but it's still at the industry minimum. Your direct competitor is around 50%. Others get to 100%. Given the market scenario, what we see from Italian and European banks, of course, shareholders remuneration is a distinctive feature for banks. Do you think you can be more somehow sensitive to this issue in the medium term? 10% is already a first step. But would you envisage maybe increasing your payout going forward regardless of your dividend per share growth? And then a business question. Lot of rumors, impact on business -- the impact of business fees for the sale of third-party products. What could be the impact on your accounts? And what would be the adjustment required for your distribution model or business model to go along with that? Should that proposal be rolled out in the coming years?

[Interpreted] I'll start from the trickiest one, the one on dividends. I think you know us very well. You know what our DNA is like, the group's DNA. We want to be consistent, progressive. And as I said, consistent, we want our capital to grow. We want to be very sound. As you see, that is recognized by regulators as well. And that is of paramount importance to be able to grow and generate. Well, we need to generate capital to support the business lines I talked about beforehand. The other factor driving us, which has been our distinctive features for a long time, it's our long-term view, our long-term perspective. Mr. Razzoli, you said that you've seen that last year, there was a sizable increase in our dividend. And there was a one-off component as well because somehow it was offsetting what had happened in the year before that. And this year, we have reconfirmed it and further increased it, rounded up with a 10% increase. As you know, our Board of Directors is the one making decisions as to dividend policies. But I have -- I think that this trend can reconfirm what you said. Indeed, as profitability grows, it's all -- well, we are going to be aware and sensitive from that perspective as well, meaning a [ rare moment ]. And as to the valuation reserves, there's no specific reference to BTPs. It's not an accounting category that has that type of effect. It's instead another type of situation. It's the steepening up of the interest rate curves and the widening of customer spreads. There's no specific issue tied in with BTPs. As you know, our portfolio is very well diversified. As to the last question about capital, I would hand it over -- I would hand it over to Alessandro Cucchi, who's in charge of planning to give you more detailed info.

[Interpreted] The inducement topic is of very importance -- important -- it's very important to both us and the entire industry. We cannot draw conclusion depending on how the inducement topic or theme will be dealt with. On our side, we are running simulations, and we're trying to see the impact. So how we can adapt our business models and -- going towards consultancy? There are still talks at different levels. So, we're still waiting to see how things can evolve. And in the meantime, we're trying to ponder upon how we can update our business model accordingly.

[Interpreted] Next question comes from the line Manuela Meroni, Intesa Sanpaolo.

[Interpreted] Congrats on your excellent results on my behalf too. First question. One is on the NII. Your guidance, you said it's going to grow 21%, 22%. What is the assumption you made for the loan growth? And could you elaborate on the NII sensitivity? And then another question on commission. Some banks are reducing commissions on deposits. Do you also expect to have to do the same thing? And what's your guidance on commissions, on deposits, including commissions on AUM products for 2023? You have EUR 5 million one-off cost for the development of the private banking project. I was wondering in 2023 what can we expect? Will there be further one-off costs to complete the initiatives you outlined in Slide 9 and the renewal of the labor contract, salary contracts?

[Interpreted] Well, I'll start from the non-interest income. We assume a 3% growth on the loan side as aggregate figures. So NII and loan growth. And then the sensitivity between the interest rate hikes, we're talking about 100 basis points of rate hikes. So, we assumed an impact on our NII equal to EUR 90 million, EUR 9-0 million. And as to costs, the estimates that we have factored in are consistent. As you rightly said, they rely on the development and growth of different business lines. It's a growth of 3.5%, we assume. And a part of that growth, 0.06 is tied in with inflation, as I mentioned before, but that will have an impact. That will be definitely felt in a more meaningful way in 2023. As to commissions -- fees and commissions, on current accounts, we've already rolled that out. You've probably read that in the papers with canceled commissions that were tied in with negative rates for the obvious reason that I don't have to explain. And that was very important because we want to be very close to our customers. And so generally speaking, the expectations we have vis-a-vis fees and commissions for 2023 is that of keeping them flat, stable. Just to give you a sensitivity, the fees and commissions tied in with negative rates, for instance, they were about EUR 3 million per quarter.

[Interpreted] Next question comes from the line of Luigi Tramontana with Banca Akros.

[Interpreted] I have one question on the -- in NII and the importance -- the contribution of TLTRO. You've already reduced your exposure vis-a-vis the ECB in a sizable way at year-end. You still have EUR 5.7 billion worth of exposure. How much of that EUR 5.7 billion matures in June, has a maturity in June? Throughout the year, what will be the evolution of the NII? Maybe more positive in the first half and slower in the second half. And the other question is about capital. You have a capital buffer that is indeed very sizable, 6-1-6 basis points, 616 basis points, and you are still very cautionary -- cautious and prudent. And could that be used for external growth purposes in the commercial bank or maybe on some product factories?

[Interpreted] I will say that TLTRO, it's EUR 4.9 billion in 2023, EUR 4.5 billion in March and the remaining EUR 0.8 billion in March 2024 -- and EUR 200 million, sorry, in September 2023. That's the maturity profile. We'll stick with the maturities. And to give you an economic sensitivity, I'll just -- I'm picking up the TLTRO page. The quarterly impact was about EUR 9 million. So that is going to be the missing amount from that perspective. And then when it comes to the capital buffer you mentioned, as you -- as I said, for us, in our view, in our long-term view, it is an element of paramount importance. We want to be sound. We want to be able to fund organic growth of our businesses because some of them are RWA intensive. And therefore, it's very important for us to keep on developing our aggregate figures, growing our aggregate figures. And we are interested. And I'm not saying this for the first time. Of course, we are willing to open up to the M&A world. The M&A world has some fundamental rules for us, in our opinion. It must be a value-generating transaction, a value-creating transaction. And it's not -- and it should never be a distressed transaction. It should not have put our capital plan soundness in dire straits, but it should somehow have a geographical fit. The opening up of our business lines would enable us to -- we do not rule out seizing opportunities to further enhance or strengthen our individual business lines. I have, however, to say that for the time being, we have no open files, so to say. We are, of course, open to look at, but we are very much focusing on our organic growth for the time being as you could probably see from the presentation.

[Interpreted] Next question comes from the line of Riccardo Rovere with Mediobanca.

[Interpreted] If I may, one question only. As to the cost of risk, you talked about 15 basis points, not much, and you've updated your models for the new scenario. You've adopted new policies. You have another EUR 40 million shortfall when it comes to the calendar provisioning and addendum. Considering the model update to the new scenario and considering this EUR 40 million, is it reasonable to think that you already played ahead of the curve in 2022? Or is it a wrong reasoning? And I would like you to elaborate on what you currently see on your asset quality. Data were not so excellent in December, and you are in geography where the manufacturing industries play a major role and probably the comment on the negative figures was referred to the manufacturing industries.