Intesa Sanpaolo S.p.A. (ISP) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the first half '21 results, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Simon, and I'll be your coordinator for today's conference. [Operator Instructions] Today's conference is being recorded. And at this time, I would like to turn the call over to Mr. Carlo Messina. Sir, you may begin.

Good afternoon, ladies and gentlemen, and welcome to our first half 2021 results conference call. This is Carlo Messina, Chief Executive; and I'm here with Stefano Del Punta, CFO; and Marco Delfrate and Andrea Tamagnini, Investor Relations Officers. I'm very proud that even under stress from the pandemic, we achieved excellent results. We've delivered a net income of EUR 3 billion, the best first semester since 2008, and this puts us firmly on track to deliver a full year net income of minimum EUR 4 billion. We strengthened our rock-solid capital position and delivered even more NPL deleveraging, leading to the lowest NPL stock and NPL ratio since 2007. And we successfully completed the merger with Italy's #4 bank and performed Italy's largest-ever branch disposal while experiencing multiples lockdowns. Our people were very busy, but ISP never stopped being a delivery machine. So my appreciation goes to all those who made this possible. Our resilience and our solid capital position underlined by the results of the EBA stress test made ISP one of the best-positioned European banks to paying high and sustainable dividends. In May, we paid EUR 700 million cash dividend. And in October, after the end of the ECB dividend ban, we will deliver an additional EUR 1.9 billion cash distribution from reserves to reach the total 75% payout for 2020. We also confirmed a 70% payout ratio for this year with an interim dividend of EUR 1.2 billion to be paid in November. We have already accrued EUR 2.1 billion of dividends in the first half of the year. Now let's dive into the details of our results and turn to Slide 1. We had an excellent first half. Net income was up 18% on a yearly basis. And looking at Q2, net income was EUR 1.5 billion, making it the best second quarter ever. First half operating income was the highest ever, thanks to best-ever commissions. Net interest income grew on a quarterly basis and the growth in customer financial assets added an additional EUR 44 billion to fuel our wealth management engine. Operating costs were down 2.3%. We further reduced our NPL stock by EUR 1.6 billion and had the lowest ever first half NPL inflow. NPL ratios are down to 3.1% gross and 1.6% net according to EBA definition. This performance puts us in a position to upgrade our outlook to a minimum net income of EUR 4 billion for the full year. Slide #2. While delivering excellent results overall in Q2, we set aside more than EUR 300 million pretax as an additional buffer to strengthen the future sustainability of our results, with EUR 200 million for additional provisions on specific NPL portfolio to further accelerate deleveraging and EUR 125 million to strengthen insurance technical reserves against current and expected gaps between claims and premiums. This is -- thanks to the one-off benefit of EUR 460 million coming from the realignment to book values of the tax values of certain intangibles introduced by the Italian legislation issued last summer, which allows for the recovery against an upfront cash payment of the past turndown provisions in the P&L at the full tax rate. Slide #3. ISP is well prepared to succeed in the future, thanks to our solid fundamentals build over time. The common equity ratio is well above the regulatory requirements even under the EBA stress test adverse scenario. And we allocated more than EUR 6 billion pretax as a buffer to succeed in the coming years. We carried out impressive NPL deleveraging, and we have an efficient Wealth Management & Protection company with EUR 1.2 trillion in customer financial assets. The combination with UBI will deliver synergies of over EUR 1 billion per year. And we have successfully evolved towards a light distribution model and a strong digital proposition, an important enabler for future gains as well as keeping us competitive for our customers in that prospect for new talent. On top of that, we are proud of our role as the engine of sustainable and inclusive growth, and we remain fully committed to supporting the transition towards social, cultural and environmental improvement. Slide #4. Our solid fundamentals will allow us to continue delivering best-in-class sustainable profitability. Rewarding our shareholders remains a priority. And as already said, for 2020, we paid EUR 700 million cash dividends in May and following the end of the ECB dividend ban in October, we will deliver EUR 1.9 billion additional cash from reserves. We confirmed a 70% payout ratio for this year with an interim dividend of EUR 1.4 billion to be paid in November. We have already accrued EUR 2.1 billion of dividends in the first half. We are the engine of Italian social economy. In addition to our direct support to Italian society, EUR 1.5 billion out of the total EUR 4 billion dividends we'll pay this year will go directly to families and individual investors as well as to charitable banking conditions that are our shareholders, sustaining their inclusive action to support social and cultural projects and people in need. Through this, we can add the real economy benefit from the fact that the majority of our institutional investors receiving dividends, manage families in private investors manner. Slide #5. After 18 months strongly impacted by COVID, the Italian economy is recovering. The national recovery plan strongly focused on investment reforms, will provide additional support for the requirement. In this context, ISP will provide more than EUR 400 billion to businesses and households to support the recovery plan. Slide #7. Despite the challenging environment, we delivered the best first half net income since 2008 and the best second quarter ever. Slide #8, let's take a look at the point of trend that will drive Intesa Sanpaolo in the future. In recent year, we reduced the NPL stock by more than 2/3 and we further increased our rock-solid capital base while also acquiring UBI and paying EUR 15 billion in cash dividends. Slide #9. While reducing NPL stock and strengthening capital, we also increased the already high share of revenues from commissions and insurance income, which now stands at 52%, and we further improved the cost/income ratio. Overall, we have a unique, resilient and efficient business model. Slide #10. We are far better equipped than our peers to tackle the challenges ahead, and we have a best-in-class risk profile, one of the highest capital buffers and we are one of the Custodian leaders in Europe. Slide #11. I'm very proud to highlight that while delivering the best first half since 2008, we rapidly and successfully completed the merger and nice integration of UBI Banca and the largest disposal of banking branches ever done in Italy. This is even more impressive if you consider that most of this was now working pro forma. Slide 13. On this slide, you can see the highlights of our strong performance, but let me give you some color on the following pages. So Slide 14. In the first half, we continued to improve across all key indicators. In particular, net income was 18% higher than last year, and we deleveraged the NPL stock by more than EUR 15 billion on a yearly basis. Our common equity Tier 1 ratio improved significantly. Slide #15. Our excellent performance allows us to create sustainable benefits for all our stakeholders. Contributing broadly to society has always been a key part of our DNA. So you can see this in our robust support to the real economy and our strong ESG focus. Slide 16. As you know, we immediately responded to the COVID emergency, and we continue to do so with a complete set of actions to care for our people and customers, support the real economy and society and ensure business continuity. Intesa Sanpaolo has a duty to leave a positive mark on broader society and to support the transition to go social, cultural and environmental improvements. Slide 17. It is a very challenging moment that we remain committed to being the engine of sustainable and inclusive growth. As part of our ESG program, aimed at consolidating our leadership around ESG climate topics, we are investing in ESG training for ISP people and corporate clients. You can go through the details on the next page, but for the sake of time, let's now move to Slide 19. In this slide, you can see that we are the only Italian bank at the top of the main sustainability ranking. Slide #20. In the first half, while merging UBI despite COVID, we delivered excellent performance driven by high-quality earnings. Commissions grew over 13% more than compensating for the decline in net interest income. Profits on trading were solid and fully realized. Revenues were up 2%. We have continued to be very effective at managing costs with administrative expenses down 5.4%. Operating margin was up 6%, the best first half ever. Gross income reached EUR 4.3 billion, up 38% when excluding the Nexi capital gain. We have been very conservative in provision as we maintain the December 2020 macroeconomic scenario without taking into account the recent improved forecast and use more than EUR 300 million from the Q2 one-off positive impact from intangibles realignment as a buffer to further strengthen the sustainability of our results. Net income reached EUR 3 billion, which becomes EUR 3.3 billion when excluding costs concerning the banking industry. Slide 21. Q2 was the best ever second quarter for net income. In comparison with the same quarter last year, commissions were up almost 18%, reaching the best ever Q2 results and operating margin was up double digit, thanks to revenue growth and cost reduction. Gross income was up 80% when excluding the Nexi capital of EUR 5 billion. On a quarterly basis, net interest income trajectory became positive after 5 quarters of steady decline. Commissions increased more than 2%. Insurance income increased by almost 50%, and net income was stable at a record high level. Slide 22. In this slide, you can see that on a quarterly basis, net interest income increased by 2.2%, mainly due to positive dynamics of spread. On a yearly basis, the decrease was due to financial components that were affected by the reduction in the size of the securities portfolio as a consequence of the integrated management of ISP and UBI portfolios and by NPL deleverage. The commercial component is growing, thanks to positive dynamics on both volumes and spread. Net interest income was also affected by strong increase in retail direct customer deposits, which impacts net interest income in the short term, but boosts our Wealth Management engine in the coming quarters and years. We'll continue to manage our revenues in an integrated manner to create value. And in this respect, I can anticipate that due to the huge liquidity we have now, we will be very selective in our new bond issue plans for the second part of the year. As you will see in the next slide, in the first half, we recorded strong yearly growth in commissions, which more than compensated for the decline in net interest income. Slide 23. The first half was our best first half ever for commissions. We did this while successfully merging UBI despite COVID. Slide 24. Customer financial assets increased by almost EUR 100 billion on a yearly basis. Assets under management, the net inflows were positive by more than EUR 8 billion in the first half of the year. In the past 12 months, we recorded an extraordinary increase in corporate and household deposits, which will fuel our Wealth Management engine in the coming quarters and shows once again the resilience of Italian companies. Slide 25, we continue to be very effective at managing costs while we keep investing for growth. Slide 26, we are proud to have one of the best cost/income ratios, and this chart illustrates our leading position in Europe. Slide 27. NPL stock has continued to decline sharply with 23 quarters of continuous deleveraging. Slide 28. As you can see in this slide, loan loss provision declined by over 50%, and the annualized cost of risk is down to 43 basis points. And we recorded the lowest ever first half NPL inflow with Q2 being the lowest second quarter ever for gross inflow. As I said before, we have been conservative in provisioning, maintaining the December '22 -- 2020 macroeconomic scenario in our models without considering the improving outlook, which would have implied a benefit of EUR 200 million. Slide 29. Our fully loaded common equity Tier 1 ratio is 15.7% on a pro forma basis, including DTA absorption, which will compensate for the future Basel IV impact. Our capital buffer versus regulatory requirements is well above our peers. And our fully phased-in common equity Tier 1 ratio is 14.4%. Slide 30. Our best-in-class capital buffer versus regulatory requirement increased by 80 basis points on a yearly basis. Slide #31. And when it comes to capital strength and leverage, ISP continues to be a European leader. Slide 32. We have a best-in-class risk profile in terms of the ratio of capital to illiquid assets. ISP also enjoys a strong liquidity position and almost EUR 120 billion in excess, medium and long-term liquidity. Slide 33. Last Friday, the EBA published the results of the stress test, which showed a good outcome for ISP despite a very severe stress applied for Italy. Even in the adverse scenario, ISP's capital position is well above the requirements of the supervisory authorities. And in all the 3 years of the scenario, we do not trigger any NDA restrictions. Slide 34. If we compare ISP to the other top listed European banks, we are clearly one of the winners in the EBA stress test adverse scenario in terms of capital buffer. Slide 35. As you can see from this slide, the adverse scenario that also stressed the risk-weighted assets that we sold to BPER in the first semester without considering the related benefit of capital as a manageable impact on ISP, thanks to a resilient business model, a solid capital position, high-quality loan portfolio with a low risk profile, a well-diversified trading portfolio, with low exposure to volatility risk and strong contribution from stable income and limited operational losses driven by also sales model and exposes to bigger risk. And I want to highlight that we do not have any MDA restrictions, even in the adverse scenario. In the EBA exercise, we fully paid additional Tier 1 coupons in the incentive schemes as normal in each year, and the impact on capital reflects this. Peers with MDA restriction cannot fully pay additional Tier 1 coupons for incentive schemes in the adverse scenario. So without restrictions, their capital position will be lower and the peer average capital impact will be 505 basis points with ISP gaining 2 positions in the range. In summary, the EBA stress test confirmed that ISP is a very low risk bank even in a very severe scenario for Italy. Slide 37. In closing, let me recap the key points that demonstrate the sustainable strength of Intesa Sanpaolo. Our resilient and profitable business model outdelivered even under continuous stress from the pandemic and while successfully completing the merger with UBI Banca. First half net income was EUR 3 billion. This was the best first half ever for operating income and commissions. Costs were down significantly, and our cost/income remains one of the best in Europe. We strongly reduced our NPL stock. Our capital base is well above regulatory requirements even under the EBA stress test adverse scenario. The UBI combination was completed quickly with great success and synergies will reach EUR 1 billion per year. ISP is fully equipped to succeed in the future and on track to deliver a minimum full year net income of EUR 4 billion. Our resilience makes ISP one of the best positioned European banks to pay high sustainable dividends. We will distribute EUR 1.9 billion in additional cash from reserves in October, following the end of the ECB dividend ban, meeting the 75% payout ratio for 2020 envisaged in the business plan. For 2021, we have already accrued EUR 2.1 billion towards our 70% cash dividend payout ratio for this year's net income. We expect to distribute EUR 1.4 billion of this as an interim dividend in November. Intesa Sanpaolo is an unstoppable delivery machine, and let me thank all the Intesa Sanpaolo people once again for this. And now I'm happy to take your questions. Thank you.

[Operator Instructions] And we'll now move to our first question over the phone, which comes from Delphine Lee from JPMorgan.

So I'd like to ask first on net interest income. At the start of the year, you mentioned that NII this year could still be slight -- potentially flattish. With a 3% decline so far in the first half, do you think this is still achievable? And could you maybe point us to what tailwinds could we have in the second half or how you're thinking about the second half outlook for NII? And my second question is on the interim dividend. Can you maybe just explain a little bit the rationale for maybe not paying a little bit more than EUR 1.4 billion, which is just below 50% -- or 46% payout ratio? Is it just out of prudence? Is there a call from the ECB for prudence, just trying to think about the rationale for that?

Thank you. So on net interest income, what we think can happen in the second half is an increase in comparison to the first half. So that's our expectation. If we look year-over-year, it is a challenge to be flattish. My target is to work in order to have good dynamics from the commercial, components of the net interest income on the spread components and on the government bonds yields components. On the other side, the real question mark is the dynamic of deposits. Because you see that quarter-by-quarter, we are increasing the deposit base. And this means that we are -- we have to put extra efforts in order to try to manage the increase in net interest income. So I consider this positive on the structural basis what I think, is the point of strength is Intesa Sanpaolo Wealth Management. So in the future, deposits can be moved into Wealth Management. But in the short term, this point remains -- the most important remain -- the most important question mark for the dynamic of the net interest income. At the same time, the deleveraging stock reduction nonperforming loans will continue to bring some negative on net interest income. So the net-net expectation is to continue to have growth in the second half in comparison with the first half. On the total dynamic year-by-year, we have to look for the dynamic of deposits and also the other points of the -- managing of total revenues and not line by line by the corporate investment banking. So if they decide to make some capital gain on the portfolio, there could be some reduction in net interest income. We have to check, but at the same time, what I consider really positive is the trend of commissions that, by definition, will more than compensate any possible negative dynamics driving by increasing deposits or by disposal of government bonds by corporate investment banking division. But net-net, I hope to be in a position to deliver a flattish dynamic year-on-year. Looking at interim dividend. When we work on -- for the first time on the item of interim dividend because this is the first time that we decided to pay interim dividend, I have to give you in full transparency my view. My view is that in a year like this, we -- it is much better to work on the forecast on net income and on that base to derive the dividends that can be paid as an interim dividend. On this point, let me tell that we think that the very conservative approach that we can have on net income is to realize minimum EUR 4 billion. So I didn't consider fair to pay more than the 70% on the expected net income for the year as interim dividend. So it's my decision, which is not something related to the ECB. But I think that on this point, it is much better to be linked to the year -- full year basis. Also because, as I told in the first quarter conference call -- first quarter results conference call, I'm preparing the new business plan. So I'm working this year in order to create condition for the new business plan. And in the next 6 months, I will evaluate all the levers that it is possible to use in order to reinforce the sustainable profitability for the future. So I'm not managing Intesa Sanpaolo in a short-term view, I'm managing Intesa Sanpaolo in a view of medium-term results. So that's the reason why I think that it is safe to remain in a position to look at the forecast for the year and not the short term. And also aiming in the short term meaning that the 6 months results spike due to the one-off that we use partially. But in any case, it's something that I consider more fair to work on a yearly basis and not only in the 6 months.

And we'll now move to our next question over the phone, which comes from Antonio Reale from Morgan Stanley.

I just have a follow-up on net interest income and then 2 questions that are kind of related. The first one is, I remember part of the activism behind the previous NII guidance was really reliant on a recovery of loan demand in the second half of the year. Now volumes in the quarter were flat. Can you share with us what you're seeing in terms of loan demand across different products? And -- or do you see most opportunities to grow the loan book in the second half of the year? That's my first question. The second question is kind of connected. You've mentioned you've de-risked your balance sheet significantly. And I wonder if that allows you now to go after this call and in particular, I'm thinking about consumer finance, for example, which is simply the product, one of the few were for a number of reasons, you had a relatively low product penetration. To what extent the integration of Poste Italiane will be -- can give you a platform for you to reach your natural market share? And can you just help us quantify the potential impact from this, if that makes sense? Lastly, looking at Slide 11, you reiterated your pretax synergy guidance of above EUR 1 billion. You've talked about 80% phase-in, in 2023; about 50%, if I remember correctly, in 2022. And I wonder if you can be more precise now on your expectations for 2021. You've acquired, there will be need to find the final perimeter. So that's my question. Also, I mean, if you can talk about upside risk to the synergies from product factors, that will be a great addition?

Thank you. So the line was not perfect and so I hope to be in a position to answer to your question in the right way. So our net interest income, the dynamics and the possibility to have a second half increase in comparison to first half was considered probably optimistic, if I understood correctly. I think that we will have a contribution from spread because we increased the TLTRO III in June. And so we increased it by another more than EUR 10 billion, the user drop of the TLTRO III. So we can have a benefit in the third quarter and in the coming quarters, deriving from this. In terms of volume, there is a recovery in Italian real economy. We are not talking about something that there can be a 10% increase in volume. But I think that starting from this quarter, we can have some increase in the volume of loans. At the same time, we are accelerating in the conversion of deposits -- from deposits to Wealth Management products, the real point of attention is that we are converting EUR 4 billion, and then we have an increase of EUR 5 billion coming as new model. So that's the kind of acceleration. If we continue to make conversion, we will not have an increase in deposits. It is possible also another increase in net interest income coming from the reduction of deposits, and this can be positive in this environment. Then on the government bond portfolio, there could be some increase in the portfolio, not -- we are not talking about EUR 20 billion. But in any case, there could be some increase also in the portfolio. So I think that we can try to play in the game of a second half increase. By definition, we try to compete for planted dynamic. We will see at the end of third quarter, it is not easy, but we want to try this -- try to have these results. We will see during this quarter if there is something that we can achieve. As I told you, deposits remain the most important areas in which we can try to have some positive. On derisking and consumer finance, I want just to elaborate on derisking. We are continuing to reduce nonperforming loans because we think that the nonperforming loans is an area which today we are, for sure, best practice. But if you want to look for the cost of risk in the future of the new business plan, my intention is to maintain provisions that are linked mainly to net inflows, not on extra coverage during the different years for the vintage of nonperforming loans as they can increase the amount of provision to economic figures. So that's the reason why I'm really concentrating on making a clear analysis on the nonperforming loans portfolio that can have some impact on provision for the future. If we are in a position to identify other nonperforming loans that can create for the future impact on economics during the business plan, we will try to work in order to realize further deleveraging. On the other side, this will allow us to move into a more dynamic that can allow an increase in loans. Consumer finance is really an area in which we have under penetration in comparison with our peers. Poste Italiane can be a player that can accelerate our growth in this sector. We will give the figures during the presentation of the new business plan. But for sure, this is a platform that we can use in order to accelerate the growth in consumer finance. Looking at synergies with UBI, in 2021, we think to have in the order of EUR 100 million, EUR 150 million synergies coming from UBI. The first year is probably the one that we are accelerating, and we will have on cost synergies. In the first semester, we had EUR 30 million of synergies related to personnel cost and EUR 30 million related to other administrative expenses. We think that at the end of the year, we can be between EUR 100 million and EUR 150 million. Then the acceleration will be in 2022 and in the next year, as you correctly told.

We'll now move to our next question over the phone, which comes from Christian Carrese from Intermonte.

The first one is on, again, net interest income. I see some improvement in terms of spread -- the commercial spread in the quarter. I was wondering what is the reason maybe lower State guarantee loans. So if you can elaborate a little bit on that? And what do you expect for the second half of the year, or let's say, also in 2022, given some consolidation in Italy taking place? The second question is on cost of risk. Default rate was quite stable in the first half. What do you expect in the second half? And usually, you use part of the positive one-off offset to free up some resources for following years. We are in the process to present a new business plan in February. So I was wondering the EUR 460 million positive tax one-off or if you have in mind to do some extra provision, for example, this year?

Thank you. On net interest income, the dynamic is mainly due to -- the positive of this quarter is mainly due to the spread and it's mainly TLTRO III. So that's the component. On the other side, we started with inversion in financial portfolio and volumes maintained a flat contribution considering the days that we had in this quarter. The dynamics of competition in Italy from this point of view can bring some impact on markdown, but the most important part of the pressure on the spread side on the asset side was due to the guaranteed loan and the conversion into the guaranteed loan with repayment of short-term indebtedness from the companies. I think that at the end, we are close to the end of this process. So I think that looking at this point of view, there should not be significant threats during the second semester. Looking at the cost of risk, the run rate of our cost of risk is today between 20 and 30 basis points, probably close to 20 basis points, then we are adding some extra provision in order to accelerate NPL disposal. And as I told, the NPL disposal means lower provisions in the future, lower provision in -- during the business plan. So my expectation is that the run rate should more or less remain in the range of the one that we had in this semester. It is possible that we can add something in order to accelerate the deleveraging during the second part of the year. We will monitor the situation. In any case, also considering the reinforcement of derisking for the group, my expectation is that we will not exceed, in any case, the 60 basis points that we gave to the market in last quarter. Today, the range is not absolutely 60 basis points, but it's 30 basis points, that's the real trend of the group. But in any case, it's -- what I would consider important is the trend of provision in the next 4 years and not in this semester. So that's what will remain concentrated in the next semester.

We'll now move on to our next question over the phone, which comes from Andrea Filtri from Mediobanca.

I'll just follow up from what you just elaborated on. So cost of risk. If you could -- you've already told us that you have refrained from releasing macro overlays, which would have benefited for around EUR 200 million. Can you explain us the dynamics and the mechanics and the timing that kind of restricts your ability to shift the usage and the allocation of overlay provisions across accounting years? So what will you have to do by the end of this year? And what will you have to do by the end of next year regarding the overly provisions made in 2020 so that we can better understand when these could hit P&L in the form either of allocation or of releases? Secondly, on risk-weighted assets, there is a EUR 6 billion reduction in market risk quarter-on-quarter. That's taking us close to the bottom on this front. Can you explain us the dynamic there, what's happening? On capital return, the ECB itself was expecting banks to start paying out dividends referring to 2020 and 2019 profits. Will you update the market on dividends regarding 2019 profits later on? And finally, I just wanted to understand if you're charging negative interest rate via fees? And if you can quantify this for us in Q2 and on how many deposits that you're charging this fees?

Negative interest rates, not significant. So it is not significant for us. So it is something that we do not consider strategic. On capital return, 2019 was clear and transparent in the first quarter presentation. And I told to the market that 2019, we've entered into the capital plan of the new business plan. So we decided to consider this in the capital plan for the new business plan. So that was clear to the market starting from last quarter. So it is not a surprise. Looking at market risk, we -- the way in which the risk-weighted assets ready to market risk are calculated is based on something that is the historical series of volatility in the market and also dimension of portfolio. And so in this quarter, we had a reduction of this impact, deriving from the fact that this quarter was the one in which we had the entering of some positive phase and reduction of volume that we made 6 months ago. So it's a mechanical impact coming from the reduction of volatility and reduction of volume of portfolio. Looking at cost of risk, we are in -- in cost of risk, you have to move in analysis on the scenario and impact coming from -- on a yearly basis. But if you are in a condition, we have something extraordinary like last year in -- with COVID, you have to change the scenario, and you have to increase in the case of negative. Or in case of positive, you have to change the impact on generic provision. In this case, so related to this semester, we decided to postpone in the second part of the year the inclusion of the recovery of GDP in the future that we will have according to the last trend of dynamic of GDP in Italy. We have some flexibility on this point, some quarters of flexibility. And we will see at the end of the year, it is likely that this will be changed at the end of the year, but we will see what's going to happen.

So is it fair to understand that the overlay provisions related to the macro scenario tend to come first or to be more automatic or mechanical than the ones that you have made more -- with the more accurate analysis of each sector and so on?

Sorry, I didn't understand that because your line is not good. Could you repeat that?

Yes. No, no. I just wanted to make sure I understood correctly. Is it fair to say that, therefore, the component of overlay provisions related to the macro scenario is more kind of automatic and mechanical, whereas the component of overlay provisions related to the more specific analysis made on the sectors, et cetera, allows you more flexibility to kind of postpone?

Yes. Yes. Yes.

We'll now move on to our next question over the phone, which comes from Azzurra Guelfi from Citi.

A couple of questions from me. One is on the fees. When I look at the breakdown of the fees, the improvement has come mostly from the asset management and the credit cards. Can you explain a little bit this increase in the credit cards? And what's the outlook for fees for the second part of the year because net inflows were quite strong in the first half? The second one is on the moratoria. The moratoria continue to expire, but there has been a bit of a deterioration in the default rate, which probably was expected, is just to see if there is anything that you want to flag on that? And how do you expect the residual of the moratoria to develop in the second part of the year? And the last one is just a clarification on the dividend, if I can. You are accruing, if I understand well, EUR 2.1 billion of dividend in your capital and not just the interim dividend, right?

Yes, Azzurra, we made a deduction from the capital for an amount of EUR 2.1 billion of dividend. So we made the accrual of the dividend using the net income of the semester. But looking at the interim dividend, we will pay a 50% of the forecast, EUR 4 billion net income, and we'll apply 70% to EUR 2 billion, more or less, as approximate 50% of net income forecast. So the real money that is in our common equity ratio, that is in the future availability of our shareholders is 2.1. It is not 1.4. Looking at moratoria. The default rate is 1.9% today. So with a slight deterioration in comparison to the first quarter, it is likely that in the next quarter, there can be some limited further deterioration. So our expectation is not to exceed in any case between 2% and 3% during the 2021. We are checking the situation, but I consider this as very positive dynamics from the moratoria and not consider significant threats to our results. Only 3% of this amount of moratoria is related to higher-risk clients in higher-risk sector. So I have to say you that my expectation is that we can have a deterioration, but not so significant. That's the reason why we think that the expectation on the cost of risk that we made in the first quarter is really conservative, but we want to maintain flexibility to have an approach on 2021 in order to create condition for increase in profitability starting from 2022. This is our expectation. And we will work on the different loan book and nonperforming loans portfolio in order to identify what would be the areas in which we can have an impact in the future and try to assess this problematic within the end of 2021. So that's full transparency from my side at this point. Looking at fees, we had a rebound in all the commercial activities, so not only Wealth Management, and that's linked to the reduction of lockdowns and starting some form of investments from companies and families. And our expectation is that this can continue to be positive. Looking at the Asset Management, mission is -- remain and will be of net income generation.

Domenico Santoro from HSBC.

A question on fees. I wonder given the message that we got from the other Italian wealth manager, this is going to probably be another record year in terms of performance fees. So can you give us the update or performance fees of your asset management company as of today or an indication whether they're going to be higher than last year? That would be useful to factor the seasonality in Q4. Given also that these performance fees are paid 100% back to PMs, I just wonder whether we should include also the same seasonality on cost? And whether your 2% -- minus 2% is something that we can model also for the end of the year in terms of cost, given that -- my understanding is that synergies from UBI left are quite minimal. Going forward, is that beyond 2021, can you give us an idea -- we know how much the synergies related to UBI, but it would be nice also to understand the direction in terms of cost because I see much variance in terms of consensus, mid-single digit, high single digits, it will be very useful for us to model profitability? And then a question on capital. From last call, I remember that they were mentioned something like 30 bps of regulatory headwinds for 2021. I just wonder whether there is an accrual of this already in this quarter and how much is left for the second part of the year?

So starting from the impact on capital, the -- we think that we can probably confirm this dynamic and probably could be better in 2021. If something can be moved in 2022, we will see at the end of the year. But in any case, with a range absolutely manageable from our side. Looking at the fee performance, then I would elaborate on cost because it's something that it's probably more strategic, and I understand that will be, from your side, something to better understand the position for the future for the group. On performance fees, we had, in the first semester, EUR 120 million of performance fees with an increase in comparison to last year, it was more or less EUR 40 million of performance fee in the first semester. Second semester could be a good semester, also looking at performance fees depending obviously on market conditions. So if market condition continues to be positive, we can exceed the performance fee of last year. I think it will depend on the real dynamics of the market. But also from this side, our expectation is to have some positive. But if you allow me, I have to tell you that what I consider really very important is the positive answer that we are receiving from our clients in conversion of retail deposits. So that's real positive in the dynamics in our commissions. And you know that in our business plan, our expectation is to work on the EUR 100 billion of extra deposits that we received by the clients in the last 2 years. And that's something that I think can be in a significant part is converted into Wealth Management in the next year. So we are testing these attitudes of the clients and the results are positive. And so that synergy is really positive for the future. Looking at the cost base and the dynamic of the cost base, for sure, there will be seasonality. And the trend, of course, that, that's something that is physiological in the trend of the cost base. We think that the dynamic of cost could be something that will move into a negative trend. So for the future, there could be negative -- so a reduction of cost in absolute terms. We have the cost synergies on UBI, but we have also significant areas of further reduction in terms of cost base related to reduction of branches, reduction of real estate, reduction of IT costs and reconversion of IT costs. That's what we are working on in the business plan. Business plan will be, for sure, based on some continuity on the real point of strength of the group and the managing of Wealth Management and very good results that we had in cost reduction will be 2 component strategic in the plan. The other part of the story is the trend in terms of reduction of cost of risk that is linked to reduction of nonperforming loans. That would be the other part of the story strategic, and that's the reason why we are working hard in order to reduce future impact coming from the stock of nonperforming loans.

We'll now move on to our next question over the phone, which comes from Hugo Cruz from KBW.

Just 3 quick questions. First, on the P&L, if you could give guidance for the tax rate in the second half? And then with the new plan, can you confirm that the EUR 5 billion net income is still a starting point for 2022? And you're talking about cost-cutting. Is there a risk that we could see or should we be assuming material restructure charges, one-offs from the new plan? That's it.

So the tax rate in the second part of the year will be the usual one. So we'll not have -- nothing extraordinary. So we will move between 28% and 30% tax rate. So our expectation is not to have other positive or one-off in the tax rate. Looking at the profitability for 2022, for sure, EUR 5 billion is the minimum level. So we are working on the preparation of the plan in the sense of creating conditions for accelerating net income growth for the future. And I have to tell you that the point of profitability is linked with the cost of risk, that's -- and revenues. On the cost base, we are in a position to benefit from a significant portion of synergies coming from UBI. And the possibility to have significant integration charges is limited during the second half of the year. We will have probably something, but not so significant. There could be something if we find some smart way of managing nonperforming loans, it could be something on the cost of risk, but integration charges should not be something that we'll increase in a significant way. There could be something, but not EUR 1 billion. So that's for sure.

We'll now move on to our next question over the phone, which comes from Britta Schmidt from Autonomous Research.

I think you kind of just answered one of my questions. Just to confirm, you expect cost of risk to be in the region of 60 basis points unless there are additional charges for additional NPL disposals, whether you can just confirm that? My second question would be what sort of volumes are we talking about? And how do you think this will impact net interest income going forward? And the third question I have is one on IFRS 17. When do you expect to apply this? And have you given any consideration to what sort of P&L or potentially CET1 impact that might have?

Sorry, I didn't understand the third question. If you can repeat because I didn't understand the third question, sorry?

Third question was on IFRS 17 on the insurance business, where the accounting is going to be changed under IFRS where a compensation margin, of course, be accounted for, which could impact. There's a bit of management discretion as to how much you want to show as a change in P&L versus change in equity of the insurance business.

Yes. Okay. Okay. So looking at the first question, which is very important from my side because as you understood correctly, we are working in order to reinforce the profitability for the future to possible further deleveraging on the nonperforming loans portfolio and 60 basis points is the cost of risk improving further deleveraging. So that's the level of cost of risk, including further deleveraging of the balance sheet, so far the reduction of nonperforming loans. That's more or less the level we think we can achieve. If we were not in a position of making further disposal, cost of risk can be probably lower than this. That's our expectation. But we are working, but not for the sake of reaching 2% of nonperforming loans ratio, but because we are selective on the nonperforming loans portfolio, they can have a negative impact on -- during the business plan period. On looking at the net interest income, the volume effects could be positive. That's our expectation from both sides, the loan side, and we think that we can have a recovery of the loan book during the second part of the year, is linked to the acceleration of the GDP in the country. The fact that companies are coming back to investments, looking at the funds coming from next-generation EU as a positive lever for growth. In Italy, there are a lot of companies that are tracking to enter into the investment mode. They will use a portion of deposits and they'll reduce credit granted by banks. So we think that this can be positive for the volume. At the same time, there will be a reduction of deposits, both from the corporate side. Mainly from the retail side, we can have positive on net interest income. We will see -- we'll make the monitor, and we will tell you quarter-by-quarter evolution. On IFRS 17 on insurance business, we don't feel to have a significant impact. We are still working on what would be the allocation on equity, on profit could be probably something that it is not significant in terms of impact for our group. That's our expectation. In the next 6 months, we will make the final analysis. But first results of analysis are not significant, and it will be part of the new business plan and the solvency ratio and the capital allocation of the insurance business in the new business plan.

Can I just follow up on one point? Regarding further NPL deleveraging, do you expect this to have a meaningful impact on net interest income?

Sorry, I don't think that this can have a significant impact. It will depend on the size. But in any case, we can consider not significant an amount that could be EUR 50 million. So if that's something that is absolutely meaningful, then we will see what is reality because we are still checking in the different portion of NPL what would be best solution for the further reduction of nonperforming loans. Consider that we will have to work probably also on unlikely to pay portfolio, and so this means that we will have to enter into a more in-depth analysis. But my expectation is not to have a significant impact on net interest income. At the same time, we will have a significant benefit on future provisions and on shortfall for the futures.

We'll now move on to our next question over the phone, which comes from Patrick Lee from Santander.

I have one on dividend and one on your asset management fee income outlook. And firstly, on the dividend, you commented earlier on that interim dividend of EUR 1.4 billion is kind of a conservative assumption based on full year net income with it being roughly half our expected full year income. But hypothetically, if your actual outcome is, let's say, much more positive, would you consider a much bigger final dividend than the EUR 1.4 billion? Or would you stick to some sort of a 50-50 split between interim and final dividend as a matter of principle? And in that context, and I think is that -- given that many banks are now considering share buyback as an extra tool for capital return, would you -- and with your capital obviously quite comfortable compared to your own target, would you consider buyback in the medium-term supplementary way to return capital over and above the cash dividend? The second one on fee income. I think you've kind of partially answered that. I guess you saw a very big increase in financial assets over the last year and a strong corporate and retail deposits in turn that helped strong inflows into asset management is as strong as you're expecting corporate starts to draw the positive invest, consumers start to spend? Would you expect -- what sort of reversal would you expect to see in this? And I guess, in the context that you saw EUR 8 billion of inflow in the first half, which is around 4% of AUM in a more normal world, what would you consider as a more normalized level of inflow in your asset management business?

Thank you. So looking at the dividend, this year, we want to maintain this approach because this is a year of transition between the old business plan and the new business plan and the year also affected by COVID and by UBI integration. Then it is something I'm very happy that all the community consider normal that Intesa Sanpaolo can deliver such a strong net income generation. Such results, believe me, we made a lot of work in order to be sure to have a contingency plan to manage this organization to be a leader in Europe. And this year has been a very tough year due to the COVID and integration of UBI. I think that it is safe for the shareholders to have in this year 50% and 50% first semester, second semester. Starting from next year, we will elaborate -- in the business plan, we will declare the policy and the rule of the game for the interim dividend for the future. So if this is -- probably, this will not be the rule of the game for the future for the interim dividend? We will decide in the new business plan? On share buyback, I prefer to pay a cash dividend. That's my personal view. You know that I consider a priority to pay dividends. That's a clear point of myself and of Intesa Sanpaolo. But I think that there is also a social responsibility in paying cash dividends, if you are an organization like Intesa Sanpaolo. And we have a lot of shareholders, international shareholders that are at the end, the retail investors that are investing in mutual funds. But at the same time, we have also foundation. And without our dividends, the foundation cannot give money to the community, cannot give money to poverty, cannot give money to hospitals, cannot give money to social activities. So there's something fundamental in the way in which we manage the social responsibility in Intesa Sanpaolo in paying the cash dividends. There are a significant number of retail investors, we think shareholders, that need this money also to main consumption. So I think that cash dividend is something that for a company like Intesa Sanpaolo is the best way to an organization to have a clear understanding of the kind of shareholders that you have. At the same time, share buyback can be something that we can consider for the future because that's absolutely something that can be main part of the analysis of the new business plan. So I cannot exclude that in the new business plan, we will use also share buyback. But my first reaction is that cash dividends would be the preferred one, but share buyback will be part of the analysis. On fee income, the line was not so good. So I hope to have understood correctly your answer. And the fee income generation of this quarter is based on a significant amount of inflows coming from -- mainly deriving from retail deposit conversion. And there's also a component related to commercial activity, as I told in previous answer -- question-and-answer. But the main driver that I see for the future is the inflows, not only the net inflows that are the EUR 8 billion, but gross inflows. So the possibility to work with the money of our clients, also in converting from a kind of investments in bond mutual funds converting into balance sheet, the mutual funds are moving from an investment into insurance into another, provided that clients want to move the portfolio. So that's the main areas in which I see the possibility to give the right product to the right clients. So without closing and entering into something that can create some operational risk or reputational risk for the bank. But the delivery machine that we have in terms of conversion of retail deposits and moving this money into Wealth Management and Protection products is the point of strength from Intesa Sanpaolo.

We'll now move to our next question over the phone, which comes from Ignacio Cerezo from UBS.

Two questions for me, please. The first one is on payouts on capital in general. I mean your current capital position is obviously very strong. You seem to be able to maintain it through quarters basically without suffering any erosion basically on it. Your earnings generation is improving. I know you have high payout actually, but do you see some merit in increasing the payout to even higher levels? And we were seeing some peers in Europe paying partially up to 100% or even above 100% payout, not just for '21, but also in coming years. And the second question, a bit more detail on the wholesale funding savings you mentioned before. So I can see that you have around EUR 4 billion maturities of debt in the second half. Actually, maybe Stefano, you can quantify how much can you say from that in terms of net interest income for the next 12, 24 months?

So on the wholesale funding, I will leave the floor to Stefano. I want just to point out on the payout ratio. On the capital position, the group and the capital plan, so payout ratio and the different amounts, for sure, we will have a minimum capital level. So it will not be a target, but it would be a minimum capital level. So this means that we define the payout ratio and the dividend policy according to the fact that we will have a minimum level of capital. So today, I cannot tell what would be the level of payout because in reality, we have to finish the work on the plan. But what I can tell you is that we will have a minimum level of capital and that will be something also part of our risk appetite framework. So we will move into something that is more based on minimum capital and then we'll elaborate on excess capital. The capital position is strong and believe me, I think that for the majority of you, it is clear at this point, it's completely with you. But the inclusion of DTA in our common equity Tier 1 ratio for the next 3 years is really something that is a point of strength for us to have possibility to have recovery of DTA. Because we will enter, for sure, in the new business plan in the Basel IV environment. So that would be a plan -- Basel IV plan that it will be by definition for all the competitors, a Basel IV plan, and we have already in instruments in order, to mitigate or to compensate the Basel IV impact through the DTAs. Now Stefano, do you want to answer on the wholesale funding question?

Yes. Thank you, Carlo. Well, of course, you see the liquidity position of the bank, I think your point is very well taken. Clearly, we will be very, very selective in accessing the market in the next months. Let's say, our original business plan at some EUR 3 million, EUR 4 billion of issuances in the second half of the year. Again, certainly, unless there is an explosion of new loans, I would say that we'll be below that. So very, very selective. For the following years, of course, we will have to see the business plan. Everything will be revised in the context of the business plan. So I cannot give you guidance now. In any case, we will remain very selective in general. So the savings can be significant.

We'll now move on to our next question over the phone, which comes from Andrea Vercellone from Exane.

Two questions from me. The first one is on income from insurance. Can you explain why it dropped relative to last year, both in Q1 and in Q2? Was there anything special last year? Or was there less commercial activity this year given that it's a nice product to sell? So just a bit of color on that. And the second question, it's on associated impacts of NPL disposals. In the past, there's been never any impact on the contracts you have with your services, Intrum and Prelios. Should we assume that, that is the case also going forward, i.e., you can pretty much sell whatever you want and it doesn't trigger any penalty that you have to pay to your partners?

Yes. So we think that it is a smart approach to try to involve the partners. So that's an area in which we rely a lot on Intrum and Prelios also in terms of possible disposal. So that's a way in order to mitigate any kind of discussion. In any case, we do not see significant impact in case of transaction that will not involve our partners. But as I told you, I think that they are able to work with us and I think that we can rely on the support of both Intrum and Prelios also in this action of reduction of nonperforming loans. Looking at the insurance business, the insurance business is a dynamic that was from one side affected by the change of perimeter. So the UBI insurance companies that we consolidated in this quarter and a dynamic, very positive during last year and probably some negative dynamics in the first quarter of 2021 and now positive in the second quarter. So that's a mix of dynamics that is affected by this factor. And the second point is that the first semester of last year benefited -- sorry, if I use this word for something that was really dramatic, but from the lockdowns -- during lockdowns, you cannot have claims. It's difficult to say that you can have a negative impact coming from the insurance. Just now we are back to normality -- or seeing the normality and so there could be some lower contribution from the insurance business. But in any case, these remain a significant point of strength in the ending -- in the hedging of the insurance business, of the ex-UBI will increase the scale of the group and also the amount of net income of the insurance company.

We'll now move to our next question over the phone, which comes from Alberto Cordara from Bank of America.

I have 2 questions. So the first one related to a conference that you had in Italy, where you have been talking about EUR 400 billion of loss that you can make available to the Italian economy in the context of the recovery that we're going to see. I would like to ask you a bit more about this. I know that maybe this is creating a bit of business plan, but this was maybe a very interesting comment. So how we should see loan growth moving forward in connection also with the recovery plan? And the second question related to the fact that I see -- I saw that you changed your guidance for this year, so from over EUR 3.5 billion earnings to over EUR 4 billion. Previously, you also gave a guidance for over EUR 5 billion of net income in 2022. I just wanted to know if this guidance still holds?

Yes, Alberto, beautiful your title on the research by original that I like very much. So as usual, we made the first, when I was appointed CEO on a different plan. And so you are very good also in title of research. Looking at the EUR 400 billion loans that we can give to the real economy in Italy, for sure that there's a linkage with the acceleration of the next generation plan in the country. If you consider that out of this money, EUR 150 million can actually devoted for families and for small business and another EUR 76 million for green circular economy and another EUR 60 million for infrastructure, transportation, urban regeneration and then EUR 20 million for hospital research. And so this means that the linkage with the next generation will bring us to have an acceleration of this money starting from the second part of the year and moving into the -- in 2022. So that will be probably the area in which we can have an acceleration and the main portion could be between '22 and '24. These are the timing in which I think we can be in a position. We are starting with companies in Italy to support them in making selection of projects in which they can participate in Italy. So we are setting a machine in organization within different divisions that can support companies in order to be ready to enter into investments arising from next-generation EU. Looking at the net income, I have to tell you that I'm really preparing the overperformance considering the EUR 5 million in 2022. So that's for sure, and my purpose is to create a condition in order to overdeliver on our promises as usual. But looking at the plan, all the work that we are doing during 2021 will create benefits during the plan, but especially in 2022. So I hope to be in a position to present the plan with an amount of net income in 2022 that could be higher than EUR 5 billion.

We'll now move on to our next question over phone, which comes from Andrea Lisi from Equita.

Just a quick clarification on the interim guidance. I was just wondering to understand if in defining your previous guidance that was well above EUR 3.5 billion, do you really anticipate factoring in the benefit from the intangible's alignments or not?

The guidance is including the one-offs. So the net income is absolutely improving the one-off. The real point of analysis is, as I explained during this call, is the kind of ability that we have to reinforce profitability in 2022. And that would be the main target of the next 6 months in my organization. I want a complete full due diligence on the nonperforming loans portfolio and on the loan book portfolio because I want to be sure that the provisions in the next business plan will be really built upon new inflows of nonperforming loans and not on the stock of nonperforming loans.

We now move on to our next question over the phone, which comes from Fabrizio Bernardi from Bestinver.

A very quick one. Sorry to bother you with this. I lost part of the call, so you may have already answered this. I was wondering whether you may have any very residual interest in domestic M&A, especially looking at the banking assets that may become shortly available, including, let's say, seaside and/or mountains areas? Or maybe you are now definitely out of this game after the UBI deal?

We made the right move because we had the possibility to make the acquisition of the best company in Italy apart from Intesa Sanpaolo. With the best quality of people because the UBI people, I have to tell you, are really strong. And I think that Intesa Sanpaolo will have a lot of value to the action of a person coming from UBI. Having said that, we made the right move, the right timing, first moving Europe, but now for us, the game is completely closed. And so we do not see any kind of possibility in domestic M&A.

We will now move on to our next question over the phone, which comes from Giovanni Razzoli from Deutsche Bank.

A question on the dividend very quickly. If I'm not mistaken, in 2021, you are going to pay about EUR 0.21 of dividend per share between ordinary interment results. If I look at the guidance of net profit for next year and also I add the top-up of the dividend -- of the interim dividend that you are going to pay next year, this 2021 census seems we didn't reach also for 2002, which would leave Intesa Sanpaolo with 9% dividend yield also for next year, that is one of the highest in Europe. I was wondering whether I'm missing something or whether my calculations are correct?

You made the right calculation and I'm completely with you. And as I told in previous call, paying dividends is also a social responsibility for a company like Intesa Sanpaolo.

Ladies and gentlemen, this concludes today's question-and-answer session. Mr. Messina, I'd like to hand the call back over to yourself for any additional or closing remarks.

So just thank you again for being with us today and may you and your family stay well. So thank you. Thank you again.

Thank you, sir. And thank you, ladies and gentlemen. This does conclude today's call. Thank you very much for your participation. You may now disconnect.