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

Good day, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the 2022 half year results, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Nadia, and I will be your coordinator for today's conference. [Operator Instructions] I remind you that today's conference is being recorded. At this time, I would like to hand the conference over to Mr. Carlo Messina. Sir, you may begin.

Thank you. Welcome to our first half 2022 results conference call. This is Carlo Messina, Chief Executive Officer; and I'm with Stefano Del Punta, our CFO; and Marco Delfrate and Andrea Tamagnini, the Investor Relations officers. Today, I'm going to walk you through an excellent set of results for Q2 and the first half. But first, let me say a few words on the overall situation we are passing through. Even if there are some elements of possible concern like growing inflation, prosecution of Russia-Ukraine conflict and unstable political situation, I remain positive, and my confidence is based on facts. First of all, the Italian economy is now much stronger than it was during the previous crisis, thanks to solid fundamentals. Despite the level of government debt, which is high but sustainable as in many other countries, Italian household wealth is one of the highest in Europe, coupled with one of the lowest debt levels. Italian corporates have stronger financials than in the past with much lower leverage. And the banking system is far more solid and better capitalized than during the previous crisis. Secondly, and even more important, our bank is now much better equipped to face challenging environments for multiple reasons: a best-in-class risk profile with NPS stock that is a fraction of the past, a far stronger capital position and top-notch cost income. But in any case, we are aware that the strong rise in inflation is driving inequality in Italy. So that's the most important part of the negative consequences of the situation. And at Intesa Sanpaolo, we are active with many solidarity initiatives like to support our own people. So Intesa Sanpaolo people, we decided to provide a one-off contribution of EUR 50 million to mitigate the impact of inflation. So it's equivalent to EUR 500 each, including -- excluding managers or managers equivalents. Turning to our business. In the first half, we worked along 2 dimensions: first, delivering excellent economic performance in the short term; and second, building a strong bank for the future by continuing to execute our business plan, which is well underway. In the first half, we delivered EUR 2.4 billion net income while provisioning EUR 1.1 billion for Russia, Ukraine. Excluding these provisions, we would have delivered our best first half since 2008. We confirm that this year, we will deliver more than EUR 4 billion net income, assuming no critical changes to commodity supplies. Even in a conservative scenario of posting 40% coverage of the entire Russia-Ukraine exposure, we will deliver net income well above EUR 3 billion. Regarding our business plan, I want to remind you that if -- it is a real industrial plan that creates the bank for the next 10 years. And all the key industrial initiatives are well underway, and I'm proud of the progress that our people are working so hard to deliver. In particular, our technology evolution is moving quickly with significant investments in the rollout of our new digital bank, Isybank, is well underway, including the appointment of key management and the setup of the tax delivery unit with 230 specialists that we hired in the market. Over the past 2 business plans, we have built a resilient delivery machine fully equipped to face the most difficult global challenges with confidence. And now we are improving also the technological area of our group. We are among the best banks in Europe for NPL stock and ratios, and we are very efficient. Our underlying cost of risk reflects our status as a zero-NPL bank and our common equity Tier 1 ratio is solid. Now let me provide the highlights of our results. Let's move to Slide 1. In the first semester, we delivered excellent operating performance thanks to a well-diversified and resilient business model. We delivered net income of EUR 3.3 billion when excluding provisions for Russia and Ukraine. We achieved the best ever half year and second quarter for operating income and operating margin. Net interest income slowly accelerated on a quarterly basis. The second quarter was the best quarter ever for insurance income. We confirmed our high strategic flexibility in reducing costs. Massive deleveraging has allowed us to reach one of the lowest NPL stock and ratios in Europe. And ISP zero-NPL bank status is driving a very low underlying cost of risk. Slide #3. Overall, we are fully in line with our EUR 5 billion 2022 business plan net income target when excluding provisions for Russia and Ukraine. Slide #4. Despite the challenging environment, we delivered high-quality results with the best ever half year for revenues and operating margins. Net interest income grew by 2.5%. Commissions were very resilient, and the decline is almost entirely due to performance fees. Profits on trading were very solid. Revenues grew by 1% and operating margin by 4%. Operating costs decreased by 2.5%. And we have been conservative in provisioning, and net income was almost EUR 3.6 billion when excluding costs concerning the banking industry and provisions for Russia and Ukraine. Slide #5. Q2 performance was excellent with the best ever second quarter for revenues and operating margin. On a quarterly basis, net interest income strongly accelerated, up 7%, more than compensating for the slight decline in commissions. Insurance income was the best quarter ever, up 16%. The total contribution from commissions and insurance income was up 1% in a very difficult environment, demonstrating the resilience of our Wealth Management, Protection and Advisory model. Net income was EUR 1.6 billion when excluding EUR 300 million Russia-Ukraine provisions. Slide #6. In this slide, you can see that net interest income accelerated on a quarterly and yearly basis despite the impact from NPL stock production and from the strong increase in retail deposits, which is a valuable asset in the new interest rate scenario and remains fuel for our wealth management engine. Let me remind you that the interest rate increase is a strong upside for us because for a 50 basis points rate rise, net interest income can increase by EUR 900 million. Slide #7. Customer financial assets were EUR 1.2 trillion. Short-term direct deposit increased EUR 16 billion on a yearly basis. Net assets under management inflows were EUR 11 billion on a yearly basis. The decrease in assets under management and assets under administration was due to negative market performance. In the first semester, Valore Insieme, our advanced advisory service for affluent and exclusive clients had EUR 8 billion in customer financial assets inflow. Slide #8. We continue to be very effective at managing costs, down 2.5%, and depreciation is up as we keep investing for growth. Slide #9. We are proud to have one of the best cost income ratios and this slide illustrates our leading position in Europe. Slide #10. Thanks to the massive deleveraging, NPL ratios were the lowest ever. Our underlying cost of risk stood at 27 basis points. Loan loss provisions were down compared to last year when excluding Russia and Ukraine. Let me remind you that we have EUR 400 million in generic provisions conservatively booked in 2020 for COVID still available for the future. Mainly all moratoria had already expired and the NPL inflows remained very low, even lower than [ prelinear ] crisis levels. Slide #11. Gross NPL stock reduction was over EUR 4 billion in the first 6 months of the year and almost EUR 5 billion on a pro forma basis for a total NPL reduction of EUR 54 billion since the peak of September 2015. The net NPL stock is now at just EUR 6 billion, and the net NPL ratio is 1%. As a result -- slide #12. As a result of this impressive deleveraging, NPL stock ratios are now among the best in Europe, and our underlying cost of risk is in line with being a zero-NPL bank. Slide #13. On this page, you can see an update on our exposure to Russia and Ukraine. The exposure represents just 1% of group customer loans. And also, our exposure is decreasing and is already down by EUR 400 million since the beginning of the conflict at constant exchange rates, dropping EUR 1.5 billion when considering the provisions booked in the first semester. Slide #14. Let me give you some more details on our Russia-Ukraine exposure. Only EUR 400 million in loans are currently under sanctions. Over 2/3 of those Russian customers refers to top-notch industrial groups, featuring long-established commercial relationship with customers part of major international value chains, with a significant portion of their proceeds coming from commodity exports. Our footprint in Russia is smaller and our lending to Russian clients is very limited, below 0.2% of group customer loans. The cross-border exposure is almost entirely performing and classified in safe stocks. Slide #15. ISP fully phased-in common equity Tier 1 ratio is 12.5%. This already includes EUR 1.65 billion of accrued dividends and a 100 basis point impact from the entire EUR 3.4 billion buyback authorized by the ECB but does not include the 110 basis points of additional benefits from DTA. Deducting only the EUR 1.7 billion of first tranche of the buyback, the common equity ratio stands at 13%, 14.2%, including DTA absorption. Slide #16, contributing to society has always been a key part of our DNA and our excellent performance allows us to create sustainable benefits for our -- for all our stakeholders. Slide #18. In addition to delivering excellent economic performance, we continued building a strong bank for the future by deploying our new business plan. The plan is proceeding at full speed and all the people of Intesa Sanpaolo are working hard across all the key industrial initiatives, which are well underway. The next slide provides an overview of what we have done in just 5 months. I'll give you some color on some of the most significant industrial initiatives. Slide #19. The first pillar of the business plan is massive upfront derisking, and we have already grown the NPL ratio of 1%, the lowest ever. We have also set up the new anti-financial crime hub. Slide #20. The setup of Isybank, our new digital bank and one of the most important initiatives of our business plan, is well underway. Domain Isy Tech, the new delivery unit for Isybank tech development, is already operational with 230 dedicated specialists. We hired the new heads of Isybank sales and marketing, digital retail and another 270 people working in this sector. We are already fully operational, and we have already defined the Isybank offering structure and functionalities. Slide #21. Several key initiatives to fuel our wealth management engine in the coming years are also well underway. We fully implemented a new dedicated service model for exclusive clients. We strengthened the advanced advisory service, Valore Insieme, for affluent and exclusive clients with EUR 8 billion customer financial assets inflow in the first semester. We leveraged our own asset management and insurance product factories to enhance our commercial proposition with the development of multiple new products and continuous enhancement of the ESG offering. Slide #22. We are accelerating our strong ESG commitment with a world-class position in social impact, a strong focus on climate and a leading position in the main sustainability indexes and rankings. You can go through the details in the next 3 slides but for the sake of time, let's move to Slide 26. The people of Intesa Sanpaolo, we have planned significant investments in our people and many initiatives are already well underway. We are quickly proceeding with the renewal of our workforce with 900 people hired since the beginning of 2021 and 850 people reskilled in the first semester. In the second quarter, we booked a one-off contribution of almost EUR 50 million so that we can give our people EUR 500 each to help mitigate the impact of inflation. Slide #27. Finally, let me remind you how we are supporting the Ukrainian population and our Pravex Bank colleagues with the implementation of multiple projects, including the donation of EUR 10 million to support humanitarian initiatives. Slide #28. In this slide, you can see the 4 pillars driving our strategy to take the unique ISP model to the next level. We remain committed to our EUR 6.5 billion net income target in 2025. And we can do this even in the current challenging environment for multiple reasons. Our target was not factoring in any potential upside from an interest rate increase. We have flexibility in reducing costs as continuously demonstrated in the past, and we have already achieved zero-NPL bank status with a very low underlying cost of risk. Let's now move to Slide 30. Looking at the macroeconomic situation, all the main institutions continue to forecast a scenario with positive GDP evolution in Italy. In any case, if we compare our current position to where we were at the beginning of the last downturn, we are even better equipped to face challenging environments for multiple reasons. As you can see in this slide, our capital position is much stronger, and our NPL stock is a fraction of what it was in the past. Slide 31. Furthermore, our business model is more resilient and efficient with commissions exceeding 50% of our revenues and cost income below 48%. On top of this, we expect an additional benefit from the interest rate increase. Slide #32. At the same time, when compared to our peers, we are far better equipped to take the challenges ahead. We have a best-in-class risk profile. We have a solid capital position with a large buffer versus regulatory requirements, and we are one of the cost income leaders in Europe. Slide #33. And finally, let me remind you that the Italian economy is stronger than in the past. The Italian debt is much more sustainable. Italian corporates are more resilient and the banking system is more solid. Slide 34. And thanks to its solid fundamentals through world-leading household wealth, our economy is expected to continue growing banked by strong government intervention and significant EU financial support. Slide #36. Let me now recap the key points that demonstrate the sustainable strength of Intesa Sanpaolo. Our resilient and profitable business model overdelivered even in the first semester with strong acceleration of net interest income. We achieved the highest ever operating income and operating margin. Costs were down sharply and gross income was best-in-class. NPL stock ratios are at record lows, and ISP is now a zero-NPL bank with a low underlying cost of risk. We maintained a very solid capital position with low leverage. We already allocated the EUR 1.1 billion for Russia and Ukraine, and we still hold EUR 400 million in generic provision related to COVID. Slide 37. So to finish, let me turn to the outlook. All the business plan industrial initiatives are well underway. As proven again and again, Intesa Sanpaolo is an unstoppable delivery machine. We are committed to overdelivering on our promises even in a challenging environment. This is thanks to all our people and through a strong and cohesive management team. In 2022, we expect to deliver best-in-class profitability in line with our excellent first half performance. We have already accrued dividends of EUR 1.65 billion in the first half. And we expect a minimum of EUR 1.1 billion to be paid as an interim dividend this November. The outlook for this year will be fine-tuned in the coming months based on the impact of the Russia-Ukraine conflict. We remain committed to our EUR 6.5 billion net income target in 2025 and to a 70% dividend payout in each year of the plan. The first half of the EUR 3.4 billion buyback is underway, and the second tranche is subject to the approval of the Board by the time of the full year results. So thank you for your attention. And I'm now happy to answer your questions.

[Operator Instructions] The first question comes from the line of Andrea Filtri from Mediobanca.

The first question is on NII sensitivity. We've seen the EUR 900 million, but it's always a bit hard for us to reconcile. I would ask you if you could please provide us the NII boost of Intesa Sanpaolo, if you were to adopt the forward rate curve, on the current [indiscernible]

I cannot hear you very well. So if you can repeat and speak slowly, please.

Yes. Is this any better?

Yes. Better.

Okay. Sorry. NII sensitivity, we have seen the EUR 900 million, but it's very hard for us to reconcile from outside. So I would ask you if we could please have the NII boost at Intesa Sanpaolo, if you were adopting the forward rate curve on the current balance sheet at 0 pass-through. The second question is if you could elaborate what conditions would you need to see in order not to undergo the second leg of the buyback. And then thirdly, congratulations on the initiative to support your employees during the current challenging inflationary environment. I don't think we've seen any other bank doing that so far. I wanted to ask you if you see any pressure on the cost side going forward, if inflation stays elevated.

so Andrea, I will explain -- I will give you an answer on the second and third question, and then I will leave Stefano Del Punta to give you the detail on sensitivity, so you can enter in more technical details. And -- but just on the first question, my point is that you have to look in the past at Intesa Sanpaolo. So looking at the figures of back Intesa Sanpaolo in the past, with the level of interest rate much higher than this, you can have the evidence in practical what can happen in a bank that have a significant market share. And they can maintain a degree of control on the evolution on net interest income. But on this point, I will ask Stefano to elaborate. Looking on the conditions for the buyback, I'm fully committed to deliver also the second tranche of the buyback. It is clear that we are today in an environment that not only for the Italian political situation in which I have to tell you, I'm not worried at all. I think that Italy, in any case, has such strong fundamental and any kind of parties or coalition that will win the election will be obliged, we believe, the next-generation new funds program. And especially if the coalition will be the results of the portion of the Italian families that has a lot of money and don't want to lose their money and wants Italy to remain with a clear focus on Europe and with the possibility to remain one of the best country in euros. I have to tell you, I'm not worried at all. So looking at the Italian political situation, I'm not worried. But what I have to consider, and that's the reason why we need the Board of Directors to move in further evaluation in the second part of the year, is these kind of attitudes of the ECB and supervisor to give this negative comment on the evolution of the real economy, also considering in scenarios, the possibility of a recession. So if -- and that's not what we are seeing, and that's not what we can consider slightly looking at the corporate side and the family side in Italy. Because all the -- the owner of companies in Italy and the majority of household support apart from the inequality area, so the area that are affected by the situation and probably poverty, is really one of the most important area that we have to consider in the future in this country. But also, the majority of the other players that we are used to talk with directly or through the metro branches are not negative on the evolution. They are ready to invest money. They are ready to work for diversification of sources of energies toward renewable sources. So there are a lot of attention in Italy to investments. So that's the reason why I think that this attitude to consider the recession as one scenario that has the high degree of probability is not what I consider the most likely scenario. But in case of a recession, we have to be in a position to consider also what kind of implication we can have in terms of performing the share buyback. And at this point, we will make evaluation, also considering the timing of a possible recession because if you look at the expectation of ECB, they are talking about a possible recession in 2023 but with a significant rebound in 2024. So we will see what would be a reality. In case of not having a recession, I'm fully committed to pay also the second tranche of the buyback. In case of a potential recession, you can consider just the possible postponement of this situation. That's what I think we have to consider for the future. But again, I have 0 signal in Italy of potential recession in our country. Possible slowdown. But for sure, what we have today also in conversation with the key part of the real economy society in Italy, it is not a recession, the likely scenario in our country. On your third point, so salaries, I think that this situation has forced all the CEO of the most important organization to consider the bank -- the company as a family. So in a family, in difficult conditions, you have to be close to the person that can have a need of support. And this is a situation for all the people that has a salary that is not equivalent to a management -- managerial salary. And I think that it is something that we have to give to our people in order to allow them to reduce the impact of this scenario. This is something for them. Just so it is not a component in a formal way of the salary, but it is something that we consider as very important. And I have to tell you that I hope that this kind of situation can be transitory, so it can be only the spike of a variant time. Otherwise, we would like to consider some form of compensation also in next year. So that's my point. We are a company that is performing very well, delivering a significant amount of net income -- a sustainable net income. And I'm pretty sure that it is part of the social responsibility of a CEO to be close to the people working within the organization that has a salary that is not so significant. So that's part of our of our commitment. Then on net interest income, I will leave this to Stefano.

Yes. Andrea, my understanding to your question is on the sensitivity. Sensitivity, of course, that we calculate -- is calculated in a very standard way. It is the way, I think, most of the banks actually invest this on the balance sheet. It's been around [ EUR 100 million ] and is pretty stable. Actually, it's a little bit less now because some of the sensitivity has already been captured by interest rate and removed. Okay. So it is, of course, [ they enter ] around 50 basis points above default rates started to drop because [indiscernible] Of course, if you look at the sensitivity and whatever the result, it's the asset that is lower than it was back in March because that has been already captured partially by the movement that we have recorded in the low -- let's say in the -- across the money market curve in anticipation for the move by ECB in July. So you will see also the account that our net interest margin is increased. Also, the financial components are increased. So of course, the sensitivity is always taken as a theoretic increase in net interest margin for around 50 or 100 basis points of direct parallel shift of the curve. But the curve never move in a perfectly parallel way. So the push of the [indiscernible] has already been captured because, of course, part of the curve has already moved up. The biggest part, of course, will come now that ECB is moving the [ super ] interest rates and will come, of course, from the fact that on the current account, we will continue to [ take zero ] on the impaired on the asset side with the price. So I don't know if this answers your question, but I mean the situation was [indiscernible]

The next question comes from the line of Azzurra Guelfi from Citi.

I have a couple of questions. One is on the NPLs. You continue your derisking and now you are almost already at the level of the target for the plan for your net NPL ratio of 1% versus a target of 0.8%. How do you think this will support already your cost of risk in 2023? Or it will be -- if in case of a recession, it will be more of 2024, where we see all the positive benefit also in light of the fact that you have released already some of your overlay? The second question, if I can, it's just a little bit of detail on your NII. I've looked at the sovereign institutions that quarter-on-quarter, you have actually decreased the amount of government bond. And I was wondering whether this is something that might change in the second part of the year, given the development of the spread as well. And if you can comment on what's your strategy on TLTRO. Clearly, you have liquidity, so that would be just something to continue to support the NII. And if I may -- sorry for the noise. Just a clarification on the interim dividend. You are talking about a minimum of EUR 1.1 billion, which if I calculate it correctly, is 70% of the minimum net profit of EUR 3 billion that you've given in case of a much tougher scenario. But would you consider paying only on half of the year, let's say, half of the full year profit when we come to the third quarter? Or it will be proportional to the amount of profit that you have already accrued by then?

Looking at the NPL, we are obviously at the level of being close to zero-NPL bank. So this means that our cost of risk is mainly related to new inflows. So the cost of risk embedded in our current situation is, for sure, a cost of risk that could be also for the next year say in the range of 30 basis points looking at current conditions. It is likely that the conditions can be probably with some form of slowdown. So it is likely that this best case of maintaining the cost of risk very low would not be the case in the next years. But I do not see any significant increase exceeding 40 basis points or 45 basis points also in an environment with a slowdown in terms of cost, in terms of GDP growth. What I think is very important is that according to this situation, we will have such an amount of net interest income in excess that our net income generation will be in significant acceleration also in case of a slowdown in real economy. In case of a recession in 2023, for sure, there could be some form of peak in terms of cost of risk than 2023 or 2024, depending on the timing of the potential recession. But again, due to our credit quality, our expectation is that in any case, we will remain between 50 and 60 basis points also in case of a recession. And again, the increases in net interest income will more than compensate this impact and a possible reduction in the trend of our commission. So net-net, in any case, what I'm seeing is an increase in the potential of medium-term value creation for the group in comparison with our original plan also in scenarios that can be considered a slowdown. And also in 1-year recession, I think that we can deliver very good performance looking at the increase in net interest income. Looking at government bonds, we reduced the government bonds portfolio. The -- we made disposal also realizing capital gain that this is a dynamic approach in terms of our corporate investment banking activity and treasury activity. So the level of this portfolio will move according not only to the condition and the potential to have net interest income but also on the potential of driving the possible trading income to the movements of the portfolio. So what I can tell you that I do not expect the portfolio to increase in comparison to the current level. And looking at the final question on interim dividend, the real amount of interim dividend will be fixed in November. We will have the timing, the clear evidence of 2 points. The first one is our ability to further derisk the Russia-Ukraine exposure. So at the timing in my view, we will have a clear understanding of our possibility to derisk the exposure that we have towards mainly, obviously, Russia. In time, we will have also some evidence on a slowdown in the real economy in Europe and in Italy because as you have the occasion to see in -- just in the today's news on the GDP dynamics, so Germany and Italy, because as you had the occasion to see in -- just in the today's news on the GDP dynamics, so Germany is suffering a lot. And we are not happy of this because Germany, in any case, is a key pillar of Europe. And there's a lot of interaction also with Italy, France, and we are delivering very good performance in terms of GDP but we have to consider also the dynamic in Germany. So at this point, we'll have another trigger that we will consider in November. And the timing, we will be in a position to have a clear understanding of what would be the final outlook. My expectation is that also in a worst case scenario, this amount of interim dividend can remain at the real minimum level that we can pay because my expectation is that it is possible to improve these figures. But we will have to check these 2 points. So exposure and the dynamics in Europe in not only Italy but especially in Germany.

And the next question comes from the line of Andrea Vercellone from BNP Paribas Exane.

I've got 3, one on NII, one on risk-weighted assets and one on Russia. On Russia, can you just give us an update about the size of the equity of your local subsidiary as of Q2? On risk-weighted assets, can you give us some comments on the drivers of the decline quarter-on-quarter, given that loans have actually gone up? And can you remind us of the regulatory headwinds that you still have to take between now and year-end, if any? And finally, on net interest income, can you disclose the current size of the structural hedge that you have? Can you comment on the rationale for increasing it in Q2? And if I'm not mistaken, you had already increased it in Q1, judging by the higher contribution to net interest income, which you show in your slides. And also finally, you mentioned in the answer to the previous questions -- a question that the sensitivity to 100 basis points increase in rates has declined quarter-on-quarter. It will be in the interim documents, but we don't get them yet. Can you just give us the number?

So starting from Russia, the equity value of our participation today is 0 in the sense it is completely devaluated. So we have no more exposure in terms of equity to the Russia -- to our Russia subsidiaries. Our risk-weighted assets, we had some benefit in terms of risk-weighted assets, working on collateral and on recovery of guarantees. And then we have some positive coming from some model adjustments in terms of probability of defaults. We had an impact of 10 basis points in terms of regulatory impact in this semester. We expect to have another 20 basis points in the second part of the year that we think can be compensated by our accuracy work on the risk-weighted assets, total amount of the group. And we will remain with 30 basis points during 2023. And those, in this case, there will be a possibility to compensate. And do not forget that we have a significant amount of DTA that we will recover within the period of the business plan. On net interest income, I will leave again the floor to Stefano, so he can elaborate more technically on sensitivity.

Yes. The size of our structural hedge related to the core deposits, there's an increase of the size of the hedge components. Basically, we now hedge almost 3x our core deposit base because at a certain point, we have adjusted the conclusion that the interest rate curve, so the forward rates were more than correctly anticipating the actual future expected move of ECB. Actually, in our real market, at a certain point, there was overshooting, so anticipating too much and too fast the increasing interest rate by the CVA. So we decided to increase the hedge deposit ratio. This also, of course, is reflected in the increased contribution from hedging that you can see in our presentation. And this, you would see in our hedge on [ EBITDA ] in that slide. In terms of the sensitivity to 100 basis points, that actually has decreased for about EUR 1.6 billion back in March to about EUR 1.2 billion now -- EUR 1.4 billion now, so it increased by about EUR 200 million. And this is the part that has already been captured basically by the movement of interest rates outside the [indiscernible] I hope these answer your question.

It does. Thank you very much.

[Operator Instructions] Now we're going to take our next question from Giovanni Razzoli from Deutsche Bank. We'll proceed to the next question. And the next question comes from the line of Britta Schmidt from Autonomous.

Two questions, please. One was on client behavior. What are you seeing on the lending side with customers reacting to the environment and also the outlook? Are you seeing any activity of customers drawing more on the overdraft to credit cards and personal loans. And also in the investment space, can you give us a bit of color on the trends in net new money, customer switching or taking out funds and some guidance as to how you expect that to develop until the end of the year? And then the second question was on the overlays. I think in the last quarter, you said that you didn't expect to use any more overlays this year. You haven't used any in Q2, but can you confirm that you don't expect to use any this year.

Sorry, could you repeat the second question because the line was not good, and I didn't understand the question?

Sure. The question was related to the overlays. You've got EUR 400 million left. You haven't used any in this quarter. And I think in the last quarter, you mentioned that you didn't expect to use anymore for the rest of this year. Shall we expect that this remains the case and that you'll carry the overlays through to 2023?

Okay. So looking at the lending and what we are seeing in the market, as I told at the beginning of my presentation, the situation in Italy is a situation in which there is a significant expectation from the corporate side to accelerate in terms of investments, the next-generation new funds are considered as really an opportunities in the field. So the trend of growth in terms of loan book that we are seeing today, so between 0% and 2%, probably is something that is underestimated, the real potential of investments that a number of companies want to consider. The first part of this investment probably would be self-financed because this company has a lot of money placed with the banking sector. So do not forget that during the COVID period, a significant number of companies placed a lot of deposits within the banking sector. So the first part of the investments will be, in my view, financing with the self cash flow, then they will have access to the banking sector. So my expectation is that in terms of lending, also in an environment with some kind of uncertainty today in terms of political situation but the attitude of the corporate sector remain very positive. Also because, especially if you look at the export-related sector, the kind of diversification of the Italian real economy is really very positive in a situation like this, especially if you compare with German that was much more relying on Asian counterparties or other counterparties that are more affected by this situation. The SMEs export-related company in Italy in my view are placed in the best way in order to continue to have significant cash flow. With the point of attention is as I told in my previous answers that the German situation for us remain very important. So if Germany can enter in some form of recession or some form of reduction of speed, we can have an impact also in the corporate sector in Italy, mainly the portion of the sector that is in the north of Italy and Northeast of Italy and are more correlated with the German situation. But looking at lending, my view is that the attitude is positive and we can see further increase in terms of demand of loans coming from companies. In terms of overlay, we have this EUR 400 million that are in a standby situation. Again, what I consider very important is to have a clear view on the future evolution of the GDP because I was surprised by the very positive results of this quarter in Italian GDP. And we have to consider also that it is likely to have a further positive trends in the third quarter due to tourism. In Italy today, it's not possible to find a place in which to try to have holidays so there is a boom in terms of real economy related to tourism in our country. So I think that also that the first quarter will be positive. So the final point of 2022, in my view, on average for all 2022 will be very positive, but probably with the slowdown in the fourth quarter, we will have to consider what kind of implications can this slowdown have in terms of 2023, also considering the shortage, the potential shortage of cash. I think that in case of a shortage manageable through some form of reduction, we will not enter into recession and in that case, probably the amount of EUR 400 million will be, in any case, enough to face also some review in terms of the future probability of the falls. If the reduction of GDP will be massive in terms of expectation for 2023 with a rebound in 2024, what we have to consider would be, is the average trend of the next 2 or 3 years. And so also, in that case, my expectation is that we will not have to place a further significant amount, then we will see but my expectation is that it will not be a significant amount that we will have to place also in case of recession in interim for 2023. The situation of having such a very low level of nonperforming loans net is very positive from our side, because at the end we will have all the cash flow available to face the potential increase in terms of cost of risk, maintaining the possibility of increase in net income in comparison with 2022. That's our expectation.

We're going to take our next question from Domenico Santoro from HSBC.

A follow-up on NII, and a question on fees. On NII, I mean, the direction now is clear. It's going to be positive. But I was just wondering whether you can help us to isolate the minus and the plus going forward, especially from the third quarter, in particular, how much money you're going to lose on the TLTRO side, whether this is going to be compensated from the impact from rates. And third, you mentioned the notion on the hedging would be hard to also understand what the reference rate, and since this has been a tailwind so far, I wonder whether from now on, instead will be a headwind to NII. And just a detail on the financial components, whether there was any impact from time value in the second quarter given that the inflow NP have just slightly increased. Then the fee line has up very well in the second quarter, has seen collection payments increasing. So I just wonder whether there was any repricing or any impact. And more or less, more broadly speaking, sorry, on your ability going forward to compensate asset management in case this continue to be under pressure with other parts of fees.

I will start from the fee and commissions point because -- on net interest income, okay, we can elaborate on the different components, but the trend is clear. We will have such an increase in terms of net interest income that you will see a growth and a significant growth in terms of revenues from this portion of economic figures. On fee and commissions, we have to manage in a more defensive approach. So we want to try to defend the level of revenues and try in any case, to accelerate the amount of fee and commissions also in an environment that is not so positive looking at the implication for fee and commissions. If I can just give you some point on commercial side, M&A and advisory fees and wealth management. So looking at the -- in the area of commercial that we think that on a yearly basis, so not considering some quarterly variation, but on yearly basis we will have a significant increase in this amount due to volume and pricing. So these 2 areas can bring a positive evolution of the conversion side. On M&A and corporate investment banking fees, our expectation is that, we had good performance in the in these 2 quarters; however, in third quarter we will have some reduction in terms of trends. But in the final quarter, we can have again a peak in terms of contribution from this fee and commissions. Looking at wealth management commissions, the main driver would be -- from one side, the insurance areas, this will continue to give positive contributions in the next quarters. And on the other side, what we call the Valore Insieme is this kind of advisory tool that we use in order to manage some of deposits and assets under management of our clients. We continue to increase quarter-by-quarter by giving us a positive contribution in terms of fee and commission. So net-net, this is an area that we want to defend. But my expectation is that we can continue to have good results in defending this figure. Then probably we can have a reduction in the third quarter and rebound in the fourth quarter, we will see what can happen also in the dynamics of the market. We are not relying on performance fees. So that will remain for 2022, a negative impact in the total amount of our fee and commission income. But I'm not so negative, also looking at this component of our revenue. For sure, this is not the option for growth for the end of the year in 2023. Net interest income will be the option for growth because what we expect for net interest income is to have a clear acceleration in 2023. During the second part of 2022, we will have a positive trend with a reduction in terms of contribution from TLTRO and the increase in terms of contribution from markdown. So with a clear trend in which with these 2 areas, the combination of the 2, 1 positive and 1 negative, which in any case give us a potential increase in terms of net interest income. Probably, we will have also a reduction in terms of negative contribution of the excess liquidity that we have in our figures. So volume will continue to bring positive contribution. And at the end, our expectation is that quarter-by-quarter, we can see increase in terms of net interest income. 2023 will be a year in which we can have really an acceleration and the significant acceleration in terms of growth of net interest income. On this point, we will give a clear outlook in November, in which we will have view that can also consider the real increase in terms of Euribor that ECB will be decide in the next month.

The next question comes from the line of Anna Benassi from Kepler Cheuvreux.

My question is, again, on NII. I hear all your comments here to the moving parts, but still I don't reconcile you have kept the EUR 3 billion to EUR 4 billion net profit guidance for this year, given the H1 results also affecting Russia, actually increasing the coverage, the user overlays, and more importantly, the speed at which NII has moved in Q2. So I would have expected at least to see the lower part to disappear. So I hear you want to wait till November, but making all the calculations, the most including what you said on contingency plan on cost, eventually I believe that the range should have been changed. On the politics, you were commenting that any coalition that will win the election is not a challenge, however, for our country. That's good and particularly from you that has such a knowledge of the country at such an important position to judge that. Actually, my question on that is about what we read on the [ FT ], is your knowledge to be put at the service of the country, given we hear you could be a candidate to become the Minister of Finance of our country, which is going to be good for the country, but will be a bit less so for Intesa. Thank you for any comments you are prepared to give on that.

Sorry, I think that this point on Ministry of Economy, is something that I think -- it is absolutely something that will not realize in any case. I'm really fully committed to executing the business plan. And I'm a CEO, I'm a manager, and when you are used to deal with thousands of people, motivating people and working for a managerial approach, it is unbelievable that you can be transformed into a politician or ministry, also technical ministry. I will continue to manage this organization. This organization is my family, and I demonstrated also with the support that I decided to give to my people in terms of EUR 50 million for inflection. I think that is fundamental in your life to be happy on the work that you are doing and I'm really happy on the kind work that I'm giving in this organization. I think the Intesa Sanpaolo need to have a clear execution of this business plan not only because we have to deliver in terms of net income, but also because we are transforming in a technological way this organization. And it is probably something that is underestimated by the market, but also because now there is a lot of view of something that is coming from very negative news Russia, Ukraine recession, inflation, political uncertainty in Italy. But what we are doing and what we delivered in these 6 months is really an unbelievable improvement of our technological area, working with Thought Machine in hiring super smart people from the market in order to increase the price to book of this organization in. The first part of my job, in this -- when I was appointed CEO, I decided to work with all the people of Intesa Sanpaolo into transforming this organization into a wealth management and protection company and giving to the people of the bank the dream and the ability to realize, to become a leader in Europe in terms of reputation and market cap. Now I think that we have to continue to invest in this area about the second part of the story in terms of potential re-rating of the group, and this will start from 2023, is when we will demonstrate how we will be able to transform also the technological approach of the bank. Believe me, I will continue to be the CEO of this organization for this business plan and if my shareholders will continue to support me also for the next business plan and also, if my people will remain proud to have me as their CEO. So 0 probability to do something different. Coming back on the point on net interest income, the implication on net income and the kind of correlation that you can have in terms of the delivery of the net income that we realized in these first 6 months and the kind of outlook. I have to tell you that in -- from a mathematical point of view, we have a potential of extra delivering, getting in our forecast in the number of items that we have considered. But I think that this is not the timing to give some improvement in terms of guidance because I consider that for a company like us to deliver a net income of EUR 5 billion in the case of no negative news in Russia, Ukraine and to deliver well above EUR 3 billion is something in case of some further [ deterioration ] is something that could be the best way to enter into 2023 that if we will not have a recession, we will allow Intesa Sanpaolo to give a really significant increase in terms of net income and also with the resection, we will be in a condition to increase net income in comparison with 2022 due to the increase in net interest income that we will have in 2023.

The next question comes from the line of Ignacio Cerezo Olmos from UBS.

A couple of quick ones. I know it's a small base, but if you can kind of elaborate actually on why it is the first time that we see UTP inflows rising a little bit. And interrupting the trend actually of declines we have seen in the last 2 to 3 years? And then the second one, if you can elaborate, give us a little bit of color basically about the execution of synergies coming from UBI's merger. I mean we've seen branches going down. The employee numbers basically are more stable in the last 2, 3 quarters. I mean costs are going down 2%, 2.5% actually. So just putting the synergy execution in context with obviously higher inflation, et cetera, around the total expense number.

Sorry, could you repeat the second question because the line is not very good. So I didn't understand. On the first one, I understood that we were talking about we are likely to pay [indiscernible] With potential increase that we had in this quarter in comparison with the other quarters. But second question, I didn't understand.

sorry, could you...

Now the second one was the execution of the cost synergies coming from the merger with UBI, how that is progressing? How do we need to think about it actually in terms of spending synergies within the number of branches going down more clearly than the number of employees. So again, just a little bit of color basically on how that is progressing?

Okay. So I understood. So on unlikely to pay, so there's -- in a trend of credit quality, you have a level that could be considered as a real -- the minimum level that you can have in the organization with EUR 500 billion of loans. So it's clear that in this environment, and also if you compare the situation of unlikely to pay, the dynamics with some positive cycles in the past in our country, the level of GDPs that we have today and the inflows that we are seeing from performing loans is very at the minimum. So we will have, in any case, some movements that could be 200 more, 200 less, but the level is so low that it is difficult to remain at this level without any kind of movements. My expectation is that we can remain in any case, with a very positive inflows coming from unlikely to pay apart from the case of potential recession but also in that situation, [ in case ] of only 1 year recession. So the expectation of the ECB. So 2023 will be in the worst-case scenario, a year in which due to gas shortage, you can have a reduction in GDP and then a rebound. Also, in that case, we think that our net NPA ratio can move from 1% to 1.5%. But at the end, will not change in a significant way the structural condition of our group. In this quarter, we had also unlikely [ two pays ] coming from the Russia exposure. This amounted for an amount of EUR 400 million. But again, also at this point, these are not companies that are performing with a negative cash flow. This is the implication of the sanctions that are not allowing these 2 companies to pay their cash flows to us. So it's something related to the [ sanctionary framework ] and not the cash flow position of the company. So due to Russia, this is the situation. In Italy, we think that we can have some further driving movements in terms of UTP dynamics apart from recession, but we are really close to the minimum. Looking at the synergies, the majority of the synergies today are coming from the administrative expenses from the closure of branches, but also from people because we had the exit of people in the range of 2,500 people in 1 year's time. And we expect we have further 1,000 people in the second semester of this year and then another 4,350 people in -- until 2025. This will be realized in the next years, but a significant portion of the exit has been completed, we will be -- the impact of the exit of 2021 is present in 2022 and 2023. So that will be a year in which we will have the majority of this component. In terms of synergies on administrative expenses, we had a delivery also in 2022. And the second part is 2023 will allow us to compensate for the potential increase in terms of inflection of some areas of cost. So we will maintain a dynamic with a negative trend due to synergies coming from this sector. And on the other side, on revenues, just let me tell you that we had some slowdown in terms of delivery of synergies due to the fact that the environment is not in favor of wealth management and protection increase of volumes. But at the same time, we maintained a significant potential upside coming from the retail deposits of UBI, it is something that will give us significant opportunities in terms of net interest income and these figures are already embedded in the sensitivity that we gave to the market. But a portion of this, I think, is driven from the UBI deal.

The next question comes from the line of Hugo Cruz from KBW.

Just a clarification on the interim dividend. I heard what you said about Russia and the macro that introduces some uncertainty. But if you didn't have that -- those situations, I mean, how would you like to think about the dividend? And I ask that because the minimum you are promising this year seems to be in line on a payout basis as a percentage of first half profit, with the interim you paid last year. So is that the way we should think about it a payout ratio on first half results or payout ratio on the first 3 quarters? If you could share your thoughts on this, it would be great.

So on interim dividend, we will try to use a rule of the game that is to have a clear outlook for 2022. And then to make 50% of the outlook and to apply 70% of payout ratio on the figure. For the time being, to give to the market our clear intention to pay interim dividend, so I will confirm -- I'm confirming that we will pay an interim dividend subject to Board of Director's approval, obviously. But that's my intention to propose the interim dividend is to try to give to the market what we consider a minimum level because in all the different simulation we made on potential impact also of a negative situation, that can act in during the second part of this year, this level of EUR 1.1 billion of interim dividend can be considered and is likely to be realized. The final definition of this figure would be realized, as I told, in November, because in November, we will have the figure of an outlook that would be absolutely realizable in our expectation. And then at this point, we will fix the amount of the interim dividend there. I can tell you that, for the time being, I consider the EUR 3 billion, that is what the amount of this net income is really the minimum that we can consider in terms of potential results for 2022. If the outlook shall be EUR 4 billion in November, we will decide to make 50% on the outlook that we will submit to the Board of Directors, the timing, then we will increase the final figures that we will give the market. For the time being, we think that we are on the conservative side.

The next question comes from the line of Andrea Lisi from Equita.

First question is if you can elaborate on your approach to [ reserving ] for exposure in Russia and Ukraine. And the second one is, based on your experience, at which level of Euribor, is it likely to observe a repricing on deposits and if your sensitivity already include that?

Sorry, can I just make a summary on your question, just to understand if these are the questions. So the first one was on Russia and Ukraine, what is our strategy. And the second point is what would be the potential implication of an increase in Euribors on our figures?

No, on the repricing...

No, on the repricing of deposits.

Yes, on repricing of deposit, okay. So looking at Russia, the strategy is to realize a clear derisking on our exposure. So we are fully committed to reducing the exposure to Russia. That's part of our commitment starting from the beginning of the war with Ukraine and with the position of all the Western countries. So the effort that we are doing in order to reduce our exposure is obviously limited by the sanctionary framework that is increasing the number of counterparties that cannot be used in terms of potential buyers of assets or of loans. We are continuing to work in terms of this kind of altitude. But we are in a sense, looking also at potential medium term because the majority of our exposure in terms of cross-border are with top the top player in Russia and expiring starting from 2025, 2026 and 2027. So I have to tell you that it is difficult to say that we can lose in terms of potential cash flow to this company that is probably one of the best company in terms of potential cash flows not only with Europe but also in Asia, with India and with all the other counterparties that we will have the opportunity to buy the products that this company is producing. So I have to tell you that our effort is to reduce -- In our local bank, we made a complete evaluation of the equity value of the participation. So we hope to be in a position to compete. But in any case, the potential to lose further money is the only related with some reinforcement of sanctioning framework that can prevent us to have a reimbursement of our credit, on the different installments of our credit, but I do not consider this really likely. On Euribor, I will ask Stefano Del Punta to give you all the details.

Certainly, up to 0, so to speak, there's no repricing of deposits, obviously. The model, the theoretical model say has probably above 0, you can figure out the repricing of deposits on average of about 10% of the increase over Euribor. But I have to say that the -- my personal experience, I am pretty old now and being a treasurer for a long time before being a CFO is that in order to reprice the -- for deposit to be repriced with any sense for clients, to attract clients or maybe to take clients out of [indiscernible], the interest rate that you will need to pay on deposit must be material, okay? So no one is moving EUR 10,000 from one bank to the next bank for an interest rate that is less than, I don't know, 1%. So practically speaking, I think that repricing of deposit will remain minimal, until interest rates become meaningful in terms of what and the actual money that -- I'm talking about retail of course. On corporate side, it's quite different. So there theoretically, you can figure out 10% of increase in Euribor. But I think that it's going to be much less than that until the Euribor gets to say 1%.

The next question comes to the line of the line of Delphine Lee from JPMorgan.

My first question is just -- sorry to follow up again on interest rate sensitivity. If you don't mind, I'm sorry, if you have already commented on the set, why is the sensitivity now lower by EUR 200 million to EUR 1.4 billion, 400 basis points increase. Just wondering why that is? And the second question around the IFRS 9 provisions. I don't think you've taken any increase for Stage 1, Stage 2 in the quarter. So if you don't mind us sharing your macro assumptions and probabilities for the different scenarios and especially the severe ones.

So on the macro assumptions on our scenarios, I will give you what I consider the likely evolution in terms of Italian GDP and the other parameters that we can consider. Then I will ask Stefano Del Punta to elaborate more on net interest income. The GDP assumption that we are considering today especially looking at what we receive today as the trend of GDP is that in Italy, we can have a GDP exceeding 3% -- GDP growth exceeding 3% in 2022. So we think that this level could be a level has been based on only the first semester growth but also the tourism reason growth we are seeing in our country. And until September, we will have a lot of tourism giving momentum to the GDP growth. Then in the last quarter of this year, the situation is that we can turn into a slowdown. And at the end, it is likely that we can have more than 3% GDP growth in 2022. For 2023, our expectation today is that the GDP can be between -- growth to be between 1 and 1.5 -- 1.6. So these are the range between 1 and 1.6, depending on the exit point on 2022. So we think that we -- this can be considered a conservative assumption in terms of GDP growth for Italy. And then also in 2024 -- in 2025, we can have about 1% GDP growth in our country, close to 1.5% more than 1%. That's our view on the GDP evolution in the country in the next years. For Euribor, we think that there could be an increase also in the second part of the year. We will see if it is another 50 basis points in the second part of the year. And then also in 2023, there could be further increase in Euribor but not exceeding 1.5%, 2% in the medium term. So that's more or less our expectation in terms of the macro assumption. With this assumption, we will have a significant growth in terms of net interest income, we will [ defend ] the commissions, we will have a potential slight increase in cost of risk. We will have an increase in net NPL ratio about at a level that we maintain as within the best performer in Europe in terms of NPL ratio. With the net income generation, that will be really in a significant acceleration compared with 2022. And in any case, we will confirm the 2025 with potential of exceeding our net income expectation for the original business plan. So then I will give the floor to Stefano.

Yes. On the sensitivity of the reduction, unfortunately, the line it is quite difficult. But my understanding of the question was about the reasons for the decrease of the 100 basis point sensitivity of net interest margin from 1.6 to 1.4. But the reason is, as I said, in the previous answer that part of that has been already cashed in. So if our sensitivity in March was X, and now we have a higher net interest margin is because interest rates have already moved. So the short-term interest rate did not move yet because ECB only increased the deposit rate in July, at the end of July, but of course, over the rest of the curve up to 1 year, et cetera, has already been moved before. So part of that facility we have been [ cashing ]. And this is why our net interest margin in the second quarter net of the reduction of the NPA effect is almost 150 basis points above the one that we registered in the first quarter. Then there is a slight impact on the 100 basis point sensitivity, which is [ more ] substantial due to the fact that we have repaid EUR 17 billion of TLTRO in June, this was short-term TLTRO that would have expired anyway before December. So we decided to repay it. But of course, on the formula, on the theoretical formula of, I think, in part immediate increase of 100 basis point [indiscernible]. In actual terms, there is no impact because, as I said, this curve never moves suddenly and overnight 100 basis points up on that. But most of the decrease is because we have cashed in a part of this facility we had in March.

And the last question comes from the line of Giovanni Razzoli from Deutsche Bank.

Can you hear me now?

Yes.

And sorry for this question, may I know you as it's probably there [ probably ] you got already thousands of questions on NII. But in order to conclude, clearly, the scenario has improved compared with the last 10 years. It seems to me that you do have in your -- and mid-single-digit growth for NII in 2023. I know that you don't want to give guidance. You have been quite annoyed in the past in -- for this kind of question, but I was wondering whether my understanding is more or less correct.

So, as you said, we prefer not to give any kind of guidance, especially on 2023, which probably we will be in a position in November to give more figure also because we will be at the end of the budget process. So it is something that is bottom-up approach also not only top-down approach. But believe me I think that the growth in terms of net interest income would be really massive during 2023. So I want to give you single digit, double digit or other figures, but I can be really positive on the dynamics of the net interest income in 2020 is the evidence that also with the people in the field is that potential is really massive. And that's the reason why I think that also not only the mathematical sensitivity is important but also looking what was the situation, the number years ago of our net interest income. So today, the market share of Intesa Sanpaolo is so significant that we are in a position to work with our clients, trying to give them the majority of the benefits coming from the market situation, especially in wealth management products but the amount of the volume of retail deposits and lot of loans that can be repriced is so significant that our expectation is to have really a significant growth in terms of net interest income.

There are no questions, and I would like to hand the conference over back to your speaker today, Mr. Messina for closing remarks.

Yes. Thank you. So I think that in this presentation and the question-and-answer session we tested all your point of attention on the outlook, what would be the next phase of a number of items related to net interest income, fee and commission cost of risk. These areas are the same in which all the people of Intesa Sanpaolo are today focused in understanding how it is possible to extract the maximum value or to mitigate potential difficult situation on the can rise. But I can confirm you that we are not upgrading our outlook. I do not consider the safe part of the story to make an upgrade imported by quarter of the outlook. But I'm pretty confident and total confidence that we can deliver very good results for 2022, and we will pay sustainable dividends, both in terms of cash interim and in terms of buyback. So thank you very much.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.