UniCredit S.p.A. (UCG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Before I hand you over to Mr. Jake Polo, Investor Relations. A reminder that today is being recorded. The conference is being recorded. I apologize. Sir, you may begin.

Good morning, and welcome to UniCredit's Second Quarter 2020 Results. Our CEO, Andre cell, will take you through the presentation. This will be followed by an analyst Q&A session with Andrea and with our CFO, Stefano Porro. As ever, please limit yourself to 2 questions. With that, I'll hand over to Andre.

Good morning, and thank you all for joining us. Following an outstanding first quarter, I am pleased to present another record performance propelled by our core contributing to the strongest first half in UniCredit history. These results demonstrate the strength of our business, the magnitude of our profitable organic growth and the impact of our continued transformation. Unlocked, built the foundation unlimited is leveraging them, accelerating our trajectory and ensuring we are future ready. This quarter, we achieved significant quality market share gains across all our regions while accelerating our transformation agenda, further improving efficiency and structural profitability. It is proof our model is winning, is enabling profitable organic growth while improving our operating leverage unlike any other bank. None of this would be possible without our people. Their commitment, their care and ownership are what makes UniCredit so special, leading in every market where we are present. To each of them, my thank you. Today's results marked the 22nd record quarter, the best second quarter and the best first half in Unicredit history. They confirm the unlimited step change across both acceleration and transformation, delivering exceptional core revenue profitable growth further improving operating leverage and reaching new highs across GAAP, NOP, net profit and return on tangible equity. All in spite of the negative one-offs related to Commerce Bank offer and the acceleration of our Russia compression. Because of this performance, the continued strengthening of our business and well-established lines of defense, we are upgrading our ambition again. We now expect 2026 net profit to reach circa EUR 11.5 billion, excluding integration cost and to be well above EUR 11 billion, including them. This is in spite of negative circa EUR 140 million extraordinary impact from Banca Projeto and rubber in Romania, our net profit expectation would benefit should these not occur. Our year-end CET1 ratio is also expected to improve to circa 15%, and putting our capital on a stronger trajectory to absorb the impact of Commerce Bank full consolidation. Our 2028, 2030 ambition will benefit from the 2026 base effect and momentum. It will be further improved by the full consolidation of Commerce Bank and the value that applying our blueprint will deliver. Slide 3. Over 20 quarters, Unlock built a record of profitability, efficiency and distribution excellence but set a new benchmark for banking. We unified as one simplifying and streamlining. We trusted and empowered our people while harnessing scale and we build clients of defense to protect our future, all while continuing to invest. Now with Unlimited, we are elevating our sustainable trajectory going beyond the limits of legacy banking, gaining quality market share by growing revenue without sacrificing margin or asset quality and resetting the efficiency frontier leveraging new tools. Unlimited is a new blueprint for the future, combining the strength of a traditional bank, the agility of the fintech and the dynamism of a technology company. Slide 4. A step change in acceleration. This marks the second consecutive quarter of significant organic market share gains across all regions. These gains were targeted by client segment and product accelerating growth, improving business mix and strengthening the structural profitability of our franchise. This acceleration starts with investment in our people, factories, technologies and channels. Training hours per employee increased by 22% and while 2,600 new colleagues joined the group in the first 6 months of the year, 84% higher directly into the business. We continue to invest and innovate across our product factories, expanding our offering while capturing a greater share of the value chain. At the same time, we advanced our fully integrated omnichannel model combining the strengths of our people with digital and AI-enabled capabilities. Initiatives such as Body in Italy and Prime in CEE demonstrate this evolution. Investment in technology and AI are enhancing productivity and client experience translating directly into stronger commercial momentum. Customer loans, deposits and total financial assets all increased by 8%, driving higher revenue per client, core revenue growth of 5% and overall underlying revenue growth of 10%. This is a virtuous circle of unlimited. We invest to become more productive and gain profitable market share which, together with improving efficiency turns into sustainable net profit growth at high return on tangible equity. Slide 5. Unlimited transformation. This is also the second consecutive quarter of a significant step-up in our AI assisted transformation, enabling us to accelerate operational redesign and related efficiency gains. These gains have allowed us to hire talent invest in technology and AI and reduce cost simultaneously. Our transformation starts with our people's commitment to improving in search of excellence, embracing change and simplification and leveraging technology and AI. We continue to redesign and simplify our organization since 2020. We have reduced organizational layers by 45%. We now operate a single AI platform that enables scalable solution across the group while continuing to deploy AI against bottom-up business cases that deliver sustainable results. This translate into both cash and operational excellence with nonbusiness costs down 5%, enabling us to fund investment and enhanced productivity and client experience. This is what resetting the efficiency frontier looks like, not a one-off undifferentiated cost cut, but a structural targeted and self-reinforcing transformation. Slide 6. Unlocked comprised a series of major transformation projects to modernize our core technology and operations. For example, evolving our IT infrastructure and cybersecurity accelerating our move to the cloud, centralizing our trading and trade finance engines and revamping our security service platform, all while using an advanced near-shoring model to bring our 13 banks operation and technology closer together, optimizing processes and costs. Unlimited goes further, rethinking again our operating model with AI and new technology as key enablers. We're deploying targeted AI to completely redesign our key processes, including KYC, onboarding, corporate lending, investment and transaction monitoring. In payments, we are exploring new rails actively contributing to the digital Euro pilot and to the launch of a Euro stable can through Kavalis. And in tokenization, we are building future-ready investment solution for our clients, enabling greater automation, scalability and efficiency across the investment cycle. Throughout, we measured our investments by outcomes, not by inputs. Every euro we spend must enhance growth or efficiency and stand the test of time that may well increase the pricing of a necessary technology and AI. By transforming and accelerating at the same time, we are building a bank that is truly future-ready. Slide 7. Our Q2 record performance is a clear beat of both expectation and last year across all operating lines. It's true strength is even more fully apparent once you adjust for: one, the negative trading one-off and temporary RWA impact linked to our increased position and related protection in Commerce Bank. Two, Russia more accelerated compression, three, the more even quarterly distribution of our provisions. And four, last year, large positive one-off linked to life insurance internalization in Italy. Adjusted revenues grew 13% in the quarter, with strong core revenue contribution up 7% as we gained profitable market share across all countries. Costs continued the gradual decline, further improving our best-in-class operating leverage. Adjusted GAAP and NOP were up by more than 20% in the quarter and more than 15% in the half, accelerating. Adjusted net profit grew more than 20% to EUR 3.1 billion in the quarter and EUR 6.3 billion in the half, maintaining best-in-class return on tangible equity of, respectively, EUR 23 million and 24%. Finally, adjusted EPS, DPS and tangible book value per share were up, respectively, 28%, 16% and against 16%. This confirms the strength of our underlying business, the momentum of our transformation and the discipline of our execution. Slide 8. Overall, revenues were up 7% in the quarter and 5% in the half. Adjusted revenues were up 13% in the quarter and 10% in the half, accelerating driven by our targeted market share gains without compromising margins not asset quality. Net interest income was up 2% sequentially, down 1% in the half, slightly up excluding the impact of Russia compression. Fees and net insurance grew 14% in the quarter and 11% in the half, with a weighted net revenues increasing to 39%. This was the result of a strong commercial dynamic with both loans and deposits up 8%, maintaining an NII ROAC of circa 20%. We expect NII to accelerate in the second half. Equity investment, net of hedging costs further strengthened our performance increasing by EUR 900 million in the half, more than offsetting Russia compression. Overall, our revenue base is growing faster and becoming higher quality and more diversified. Slide 9. Overall, net revenues were up in the quarter and 4% in the half. Adjusted net revenues were up 14% in the quarter and 10% in the half. Cost of risk remains structurally low at 17 basis points and within our 2026 ambition of 15 to 20 basis points. We used circa EUR 70 million of our overlays mainly to absorb an update to the IFRS 9 macroeconomic scenario, given the change in conditions. Our overlay stock is now at EUR 1.6 billion. Adjusted net revenues on RWA stand at a top-tier 8.7%, up 0.4% in the quarter. Asset quality improved further quarter-on-quarter. Net NPE ratio was down to 1.4%. Coverage improved to 45.9%, default rate reached a low of 0.8%. Slide 10. Efficiency continues to be a defining strength. Costs were down again despite inflation and continued investment, 2% excluding new perimeter, 1%, including at all. Non-business costs fell 5% with most savings reinvested into technology and AI and the front line to boost revenues. Our cost income ratio remained best in class, improving both in the quarter and in the half. The result is a record gap of EUR 8.8 billion with contribution from both sides of the jaws, increasingly driven by our AI rollout. Slide 11. Our quarterly organic capital generation of 85 basis points more than covered the quarterly distribution accrual. Our CET1 ratio increased to 14.3%. And 1.5%, excluding the 19 basis points impact from the increased Comergebank position, which we expect to reverse by year-end and 15% pro forma for the Danish compromise. These beats, our expectation and puts our capital on a stronger trajectory to absorb the impact of Commerce Bank full consolidation. Italy, delivered exceptional strong organic growth without sacrificing margin no risk and is well positioned to leverage market disruption from consolidation. We are growing market share in our targeted client segments and products well above expectation, and we'll provide you an update of our 3-year target in this regard later this year. The acceleration step change is visible. The number of our SME client is up 4% and wealth clients 9%, while our client penetration continues to improve. As a result, revenue grew 3%, propelled by core revenues up 5%. Net interest income was up 2% sequentially and driven by quality loan growth of 8% and continued commercial discipline with NII ROAC at 23%. Our corporate lending market share increased by 1 percentage point in the half with improving margin as we rebalance our mix. We continue to increase market share in our targeted retail products with discipline. Cost of risk decreased 2 basis points to 24 basis points, reflecting the continued quality of the loan book and disciplined underwriting standards. Fees and net insurance were up 14% and and reached 47% of net revenues, up 5 percentage points in the half with strong delivery across the board. Investment fees grew 8%, reflecting the increasing relevance of our offering with total financial assets up 9%. The strong commercial performance was supported by investment in the franchise, including the hiring of 800 new colleagues, 90% of which client facing and business role but will support continued acceleration in the future. The step change for transformation is also increasingly visible, supporting this growth while continuing to reduce cost. Costs were down 1%, driven by nonbusiness costs down 5% while continuing to invest. Cost income improved to 32.5% remaining best-in-class. Net revenue to RWAs at 10.4%, confirmed strong capital discipline alongside growth. AI impact is becoming increasingly tangible, both in terms of commercial productivity and in terms of operational efficiency. GenAI is supporting by the adviser to provide faster, more consistent and higher quality client interaction. Credit processes are now being automated through AI, reducing time to yes and improving efficiency and client experience. The combination of acceleration and continued transformation translated into GAP growth of 5% and ROC of 31%, maintaining Italy's position as the most profitable banking franchise in the country. Slide 13. Germany is delivering strong organic growth while demonstrating that sustained investment, disciplined execution and transformation translate into best-in-class efficiency and profitability. The acceleration step is visible. We continue to strengthen our position in targeted segment, adding more than 3,500 new private and affluent clients and reinforcing our position as the best bank for trade finance. This commercial momentum translated into revenue growth of 3%, propelled by core revenue growth of $8 billion. Net interest income increased 5% driven by quality loan growth of 3% with NII ROC and 19%. Cost of risk increased 9 basis points to 22 basis points, reflecting a more normalized provisioning profile while asset quality remained strong. Fees and net insurance were up 13% and and now accounts 36% of net revenue, up 4 percentage points in the half with strong delivery across the board. Investment fees grew 16% and reflecting the increasing relevance of our offering with TFAs up 3%. The strong commercial performance is supported by continued investment in the franchise. Germany remains a top employer. Hiring was up 24% as we continue to invest in client-facing capability and future growth. The step change for transformation is also increasingly visible. Supporting this growth while continuing to reduce costs. Costs were down 5% in Germany, driven by nonbusiness costs down 9% while continuing to invest. Cost income improved by 3 percentage points to 35.3%, further strengthening our position as the most efficient bank in the country. Net revenue to RWAs stood at 8.1%, confirming strong capital discipline alongside growth. AI impact is becoming increasingly tangible. The rollout of advanced fraud prevention solution and other AI-enabled initiatives is helping us enhance client experience, improve effectiveness and further simplify our operating model. The combination of acceleration and continued transformation translated into GAAP growth of 8% and ROC of 23%, confirming HCB as the most profitable and efficient bank in the country. Slide 14. Astra continued to strengthen its market position. The step change from acceleration is visible. We continue to acquire target clients across key segments with more than 1,000 new SMEs. This commercial momentum translated into core revenue growth of 4% with overall revenue flat. Net interest income increased 2% supported by quality loan growth of 6% with NII ROC improving to 16%. In corporate, we gained 43 basis points of market share over the last 12 months, further strengthening an already leading franchise. Cost of risk remained negative 12 basis points, still benefiting from releases. Fees and net insurance were up 8%, reaching 31% of net revenues with particularly strong performance in investment fees up 14%, with total financial sets up 9%, reflecting deeper client engagement and growing penetration. The strong commercial performance was supported by continued investment in the franchise. We hired around 200 colleagues in the front line and continue to strengthen capability across both business and transformation. The step change from transformation is also increasingly visible, supporting growth and investment while reducing costs. Costs were down 3% and driven by a 4% decrease in nonbusiness costs while continuing to invest. Net revenue to RWAs stood at 6.8%, confirming strong capital discipline alongside growth. AI impact is also becoming increasingly visible. More than 360 AI agents are now supporting multiple activity across the franchise helping improve response time, productivity and client experience. The combination of acceleration and continued transformation translated into a GAAP growth of 2% and ROC of 27%. Slide 15. CEE continues to benefit from its leading position across the region, a strong primary client base and high digital engagement while remaining well positioned to capture further growth opportunities. The step change in acceleration is visible. We continue to strengthen client relationships across the region, growing affluent clients by 19% and and standing as the best bank for SMEs in the region. This strong commercial momentum translated into 6% core revenue growth, 5% for overall revenue. Net interest income increased 5%, supported by strong quality loan growth, up 11% with NII ROAC at 23%. Cost of risk increased 24 basis points to 13 basis points, normalizing from past exceptionally low levels due to significant write-backs. Overall, asset quality and underlying cost of risk remained stable. Fees and net insurance were up 9%, reaching 31% of net revenues, up 2 percentage points in the half with strong contribution from investment fees, up 22%. Together with 19% total financial asset increase, this reflects the continued development of our affluent and wealth franchises in the region. The strong commercial performance was supported by continued investment in the franchise, hiring around 1,000 colleagues, mostly in the front line. The step change in transformation is also increasingly visible, supporting growth while reducing costs. Costs were down 1%, a first for base, supported by non-business FTE decreases of 6% as we continue to reinvest and invest in technology. Cost income improved to 33% confirming operational excellence. Net revenue to RWAs at 8.1% demonstrated strong capital discipline while supporting double-digit balance sheet growth. AI and new technologies continue to be key enablers of transformation. We've now over 75% of clients digitally active. We're leveraging AI solution to improve commercial effectiveness, simplify processes and further enhance client experience. The combination of acceleration and continued transformation translated into GAAP growth of 8% and ROC over 27%, confirming CE's position as fas a profitable growth engine. Slide 16. Client Solution remains a core pillar of our capital-light growth, powering the quality and resilience of our top line. Client Solutions generated EUR 6.5 billion revenues, up 7% and EUR 4.7 billion of Visa net insurance, up 14% and Growth is broad-based across all product factories with visible benefits from internalization, including double-digit fee growth in Italy, in Germany and in Brazil. Corporate Solutions revenues reached EUR 3.1 billion with a 28% ROAC, leveraging strong trying activity in advisory and financing with fees up 26%. We maintain our role of trade finance powerhouse with top-tier position in every country we operate in and best trade finance provider in Western Europe, Germany. Client risk management fees were up 15% with receptive market condition for hedging products. Individual Solutions delivered strong growth with revenues up 18%. Insurance revenues were up 32%, driven by internalization and strong commercial activity. We're #1 in Italy in unit-linked with a market share of over 40%. Investment grew around 13% with 1 market funds above EUR 41 billion, up more than 80%. Payment Solution remains solid with fees up 3%, driven by transactional payment services across all geographies. Slide 17. The messages are clear. First, 22 consecutive record quarters marked an undeniable track record and delivered sector leadership across all critical KPIs. Second, we have significant lines of defense to protect our future. Third, unlimited step change is underway, leading to upgraded ambitions. We now expect full year 2016 net profit at circa 11.5 billion, excluding integration costs and well above EUR 11 billion, including them. 2028 and 2030 net profit ambition are upgraded to well above $15 billion and well above $15 billion without diluting expected return on tangible equity. Year-end CET1 ratio should land at circa 15%, full consolidation of Commerce Bank and the connected 2025 share buyback cancellation. In the 13% area, pro forma for both much better than initially expected. As such, UniCredit 2026 distribution are also confirmed. Slide 18. We have significant inorganic optionality with opportunity across all our 13 countries, some of which we have captured initially through high-return financial equity investments and new and now through the potential Commerce Bank value-creating acquisition. Including the tender shares we have reached 47% of shares and 49.65% of voting rights, given that the treasury shares have no voting rights. Potentially moving Commerce Bank from an attractive financial investment to a strategic transaction, but we expect to generate substantial value and further accelerate our unlimited EPS and DPS trajectories. It will improve UniCredit strength, diversification and client franchise in Germany and CEE as recognized by rating agencies. We believe Commerce Bank has under-invested in recent years to deliver in the short term. It is now time to reverse this trend and prioritize overall transformation, substantially investing in talent, in technology and in AI initiatives to transform the bank. We are upgrading our premerger value creation potential from EUR 800 million to EUR 1.2 billion by 2030 by anticipating part of the post-merger synergies which we are for now at least, reducing to EUR 800 million. Considering only premerger value creation, our capital has been deployed at an overall ROC of 15%, well above the return of our share buyback. Our 2026 dividend and share buyback are confirmed while the trajectory for net profit, EPS, DPS and distribution beyond 2026 shall improve. We now expect regulatory approval potentially as early as fourth quarter 2026. And shortly thereafter, intend to take the necessary step to exercise control and became executing Commerce Bank unlocked. We're seeking constructive engagement with the German government, the workforce representative and banks converting bodies and stakeholders. A case offer in Poland is not currently foreseen. Slide 19. Beyond this strategic fit, the attractiveness of Commerce Bank lies in the value creation achieved by applying the unlocked blueprint, which we intend to roll out as quickly and decisively as possible. This starts with putting Germany and its Mittelstand truly back at the center, leveraging a stronger product offering, greater sales and increased investment capacity. At the same time, the connection between Germany, Poland and the rest of Europe should be further strengthened and digital data and AI capabilities across the franchise accelerated. The value creation opportunity is substantial. We see $350 million of revenue initiative potential upgraded versus our initial assumption notwithstanding international lending and treasury asset optimization but shall both reduce risk and release capital. $1.4 billion of potential targeted efficiency are confirmed. Importantly, this is not about cost cutting for its own sake. It is about reallocating resources, improving capital efficiency and reinvesting to build a stronger franchise for clients, employees and shareholders. While technology and AI will be a key enabler, it is Commerce Bank employees that will accelerate transformation, simplify the operating model and enhance the client journey as we have experienced across our group. There is a clear opportunity to create a stronger commerce bank, a stronger Unicredit and a stronger pan-European banking group for Europe. Slide 20. Beyond the financial impact, a strategic transaction would create a stronger, more diversified and better positioned European French franchise. With a broader client base, enhanced geographic diversification and greater exposure to the client segment and product in which we always intended to grow. Germany would become the leading contributor of the group earnings alongside Italy with a great balance between Italy, Germany and Austrian CEE. The client portfolio would also strengthen. We've increased exposure to SMEs, affluent and private clients and further reinforce our position in Germany through a highly complementary franchise. We are entering this phase from a position of strength. UniCredit has invested more than EUR 5 billion in the last 5 years and built EUR 1.6 billion of overlays. We see an investment of EUR 2.2 billion in Commerce Bank to accelerate value creation and make the franchise future ready and would expect EUR 500 million of additional upfront coverage on the Commerce Bank loan book to protect it. Greater group diversification and an increased balance across geography, client segment and revenue streams may support further rating upgrades and related funding benefit. Slide 21. The UniCredit year-end CET1 ratio pro forma for the impact of the transaction is expected to remain in the 13% area from day one. Indeed, the initial capital impact of the transaction is now expected to be around 200 basis points, net of a cancellation of a 2025 share buyback as assuming consolidation by year-end. Capital impact would reduce significantly if consolidation occurs later as initially expected. Considering only premerger value creation, our capital has been deployed at the ROC of 15% overall, well above the return from our share buyback. UniCredit 2026 distribution remain unaffected. UniCredit distribution for '27, '28, '29, 2030 are expected to improve through Commerce Bank contribution beyond the net more positive trajectory of unlimited stand-alone. We're deploying capital at attractive returns, maintaining a strong capital position and improving our earnings growth and distribution act. Slide 22. We always envisaged HBB and Commerce Bank operating in parallel for 2 to 3 years, aligning the 2 banks industrially and culturally before considering any merger. We believe this is the most effective path to unlocking value for all stakeholders while laying the foundation for long-term success. Importantly, most of the values created premerger as we are upgrading our premerger value creation from EUR 0.8 billion to 1.2 billion by 2030, while reducing for now at least the additional merger synergies to EUR 800 million. At the same time, we would see investment being brought forward increasing from EUR 1.7 billion to EUR 2.2 billion upfront, accelerating the transformation of the franchise and EUR 500 million of additional upfront coverage of the Commerce Bank loan book. This reflects our intention to prioritize investment and long-term value creation over short-term results and distributions. That would be more upfront investing, creating more value over time and accelerating delivery of a future-ready bank. Slide 23. Commerce Bank further enhances what is an already compelling stand-alone equity story. Even before considering Commerce Bank, our stand-alone trajectory is exceptionally strong, combining double-digit per share growth at High Rotor and industry-leading distribution. Importantly, the reported '26, '28 growth rates understate the strengths of the underlying trajectory as they still absorb the impact of an accelerated Russia compression. The figures shown today are direction and reflect only what is visible today before a potential merger. As we continue to execute Commercebanknlock, we expect the trajectory to strengthen further beyond 2028 and towards 2030. The transaction is expected to increase our '26, 28 net profit CAGR by 6 percentage points and EPS and DPS CAGR by around 4 percentage points, reaching 17% and 18%, respectively. In short, Commerce Bank is reinforcing an already compelling stand-alone story, further improving profitable per share growth and distribution for our shareholders. Slide 24. Before questions, let me leave you with 5 key messages. First, unlimited confirms a step change, marking our 22nd record quarter and the best second quarter and first half in our history. We continue to deliver at pace, accelerating and securing targeted profitable market share gain in every country as promised. Second, this is coupled with unmatched transformation-led efficiency, resulting in lower cost and unique operating leverage, all while investing, again, as promised. Third, we're delivering exceptional operating leverage, record GAP, NOP, net profit and return on tangible equity, along with an improved capital trajectory. Fourth, we are upgrading our 2026 net profit at high return on tangible equity and capital trajectory, translating this into better prospects for '27, '30. And finally, we now have an even more compelling stand-alone profitable growth and distribution story, which may be boosted by the disciplined deployment of capital in commencement. Let me now open the line for your questions.

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

First question on the Danish compromise. Santander said they expect the approval of the Danish compromise in August. You have been waiting for a year for this approval now. When do you expect it by? And does not having it yet limit your strategic options. Second question, do you see your CET1 ratio as a hurdle to participate in the ongoing Italian consolidation wave? And how should we read today's call for an AGM?

Okay. So Danish compromise first. We always said that the Danish compromise would be -- we expected it in the third quarter. Some other thought it could be earlier. We always say third quarter will remain third quarter. If I had to take a guess, it's probably September, but our expectation has not changed and we are rather confident that we're going to get it. Does that limit our options? No. I think it just reinforces our capital, and it recognize that we are conglomerate and but we have internal insurance. Obviously, in the future, it gives us more flexibility around insurance assets. But that is not a limitation at the moment. Is our CET1 -- is CET1 hurdle to participate in Italian M&A? No, I think that the hurdle is that at the moment, we're observers. At the moment, we are gaining a disproportionate amount of market share organically, targeted specifically in the client segment that we want to grow into. And that trajectory, we think, will be significantly accelerated by the fact that all other banks may be involved in M&A and not easy M&A. So anything that we would ever do, as you know, would need to beat that hurdle. The hurdle for Italy at the moment given how the team is performing is very high. So if there is a hurdle, it's not capital, it's how the performance, who can beat the performance of it imminately, not an easy one. How should we read today's call for AGM? So I think that today's call for AGM is linked to 2 things: one, to have the possibility not the obligation to have the possibility if we choose to convert the physically settled TRS on Commerce Bank, to settle it in shares at a similar exchange ratio as the 1 of the rest of the offer. So it will -- it would align that percentage to the average tender shares, which we think is good and which we think also strengthen our capital. But it is an option because, a, we haven't decided whether we will convert the TRS yet, and we haven't decided if we confirm it whether we will convert it for shares of our cash. It is flexibility, giving us more capital flexibility going forward. The second thing, it would allow us to tap the U.S. market with AT1, as AT1 in the U.S. have a different structure and require underlying shares potential to settle. And therefore, we aligned to some other European banks with an ability to tap the U.S. market and get benefit from that.

The next question is from Noemi Peruch of Morgan Stanley.

I have 1 comment bank and 1 on 27 Capita. So on Commerce Bank, you reached 46 before. DR, which will allow you to pursue control quickly. I would like to understand whether the German government showed interest in -- do thus far. And I know it is premature, but I'm going to ask it anyway. Is there a scenario in which you could fast forward the integration of Commerce Bank? Second question, on 2027. I would just wanted to understand how you would approach capital return in light of the EUR 2.2 billion investment and EUR 0.5 billion additional coverage. Will the entirety of this $2.7 billion goes through P&L? And will you pay 80% on the stated net profit over you exclude one-offs?

Okay. So I think that the German government has signaled quite clearly in the media, very interest to talk. It is the right time, I guess. As indicated by them, the market has spoken, and now we have a period, which I could call up limbo between having closed the offer and potentially receiving authorization, which is anywhere between, I don't know, 4, 5 months or more than that? . So in this period, it makes a total sense to align with the other stakeholder, German government and workers' council alike. I think for now, we haven't said that as lip service. We do believe that combination needs to be done in the right way. And the difference between having a successful merger and in successful merger is how you actually execute it. We think that having 2 banks that are aligned, principal value culture model, technology, et cetera, mix merger a lot softer, a lot more effective. And therefore, we are convinced that we will need 2 or 3 years, keeping the bank separate between -- before doing anything. And to be clear, even if we had a higher stake, we wouldn't be merging earlier. Obviously, this is all predicated on expectations. We do not have control of Commerce Bank yet and we can comment only on what we see from the outside. We will update those views when -- if and when we are on the inside. So this is the first one. 2027 distribution. So I think for us, we need to distinguish distribution for UniCredit and distribution for Commerce Bank. And obviously, this is under the assumption that we indeed take control of Commercebank. Distribution for UniCredit, we do not see any change. So meaning to take your words, '26, we already said we will -- we have confirmed distributions for '26. I'm talking about UniCredit. And we may actually improve our interim dividends given the strength of the business. We will give you more detail on that. but the totals and the 80% payout remains confirmed. For '27, '28, '29, '30, we expect better distribution, gradually better distribution if Commerce Bank is part of the perimeter, given that we have deployed capital at better return than if we had done the share buyback, and therefore, we think on a per share basis, we are going to have a positive impact. And the concept of 80% payout, 50% dividend, 30% share buyback is confirmed. With respect of Commerce Bank. I would take a slightly different point of view to be transparent as part of the CBK unlocked. It may well be -- well, we envisage a need to bring forward investment, accelerating the transformation of a franchise and the delivery of the Future Ready bank. Outside in, that means investment for about EUR 2.2 billion. This would be at the level of Commerce Bank, this would be shared among all shareholders and may impact short-term profit and distribution, including in '26. This would be reflecting our view that investment and long-term value creation should be prioritized over short-term returns and distribution. But this, at this point, is hypothetical. We don't have control yet. We don't know when we are going to consolidate, but it is obvious that if we start making the investments that are needed that affects net profit that mechanically affects distributions. We will see when we are there, what the real impact is. I think these were your 2 questions. Yes. Let's move to the next.

The next question is from Antonio Reale of Bank of America.

It's Antonio from Bank of America. Just 2 questions for me, please. The first 1 is on NII. If I look at the growth in NII this quarter, it looked like it was driven almost exclusively by volumes and seems to imply some margin pressure. Now I wonder why that was the case also conscious that Russia was flat this quarter. So can you maybe talk through your moving parts in NII? And can we expect a sequential pickup in NII from here, given also the move in Euribor. I think you've added another $7 billion or so to your structural hedge this quarter. So interested to hear your thoughts there on NII. My second question is, I think, straight and simple and it's to do with your 2025 fiscal year buyback, the EUR 4.75 billion you've accrued. Shall we definitely rule this out and assume that this is no longer happening. And if that's the case, why haven't you added it back to your CET1 ratio?

So I'm sorry, on the full year 2025, when you say should we definitely move it out, definitely is if we get control of Commerce Bank and we consolidate, in that case, definitely move it out. We don't have authorization yet. There's still things that can happen. And that's why for the time being, not having confirmation -- we're not moving it out and in your words. And I would add another thing, moving it out upfront and then taking -- and then spending it later would create really a lot of swing on our capital trajectory, but I don't think would be helpful. So primarily, we don't have closure. Therefore, the share buyback for the moment remains suspended until such time that we have closure. If the closure is positive, then it gets canceled. If it's not, it gets reinstated to be very, very clear. And so this is where we own that. On NII, I think Stefan is going to take you through. But I would say, in Italy, margins are up. In other countries, there has been a declining margin market-wise because of the growth rates that are -- that I think are market related, and we have followed not to lose track and the rest is delta compression. As we have said in the presentation, we think NII will become a much greater contributor to the group in the second half of the year because of the underlying rates dynamic and because certain other dynamics on margins are stabilizing, especially in places like the CE and Germany. But let me pass it to Stefano.

So let's start from -- also first half because you mentioned Russia. We have grown the net interest income 2% quarter-on-quarter, 0.4, when we are looking the year-on-year. The effect on the first half the revenue for Russia is EUR 70 million down, so otherwise, the increase first half and first half would have been higher. In relation to the client spread, so asset side of the equation, if you look at the first half, the client spread are flat. -- so around 138 basis points. As allied by Andrea, we are up year-on-year in Italy and in Germany, while due to the market trend, we are done in Austria and in Central Eastern Europe. But in Central and Eastern Europe, as you have seen the growth rate of the lending is very, very strong. In relation to deposit side, deposit pass-through is flat, so we are at 30%. We are flat in Italy and Germany, slightly up in Austria, slightly in Central and East Europe. Expectations for let's say, the clients price for the group, you can assume a flattish trend. Deposit pass-through flattish for 2026 can be 1 point up in '27, '28, nothing more than that. We are expecting to keep on growing on the lending probably a normalized rate when you're looking to second half '26. But in relation to '27 and '28, we are confirming growth higher than nominal GDP trend in the countries. You mentioned sequential pickup. Yes, do expect a sequential pickup in the trend of our net interest income structural hedge contribution and rate assumption. So the rate assumption is 2.3% year able for this year as an average, around 2.6% for '27 and '28. Taking this into consideration the contribution from the structural hedge is expected around EUR 400 million this year, positive, the cumulated contribution until 2028 is EUR 1.3 billion cumulated. So that's a positive effect on net interest income, EUR 2.4 billion accumulated until 2030.

The next question is from Delphine Lee of JPMorgan.

We just wanted to have a follow-up, first of all, on Commerce Bank, a follow-up to what you said earlier. So in terms of next steps to increase the take further or just under 50% and then you are now considering the TRS converting potentially in shares. Just to check, I mean, are we talking about potentially like up to 13% additional stake that you would get from that? And I mean, would you consider also in the discussion with the German government to potentially acquire part of their stake, the in percent stake? Or is there no discussion? Or do you think this is completely premature and won't happen for another 2, 3 years? And at what level would you consider that merger and for combination because in theory, you could get that at 75% of the AGM, which is 60% stake roughly. And then just on the synergies, what gives you the confidence that you can generate already EUR 800 million by the end of '28. I mean, the time line is quite short. So if you don't mind just elaborating a little bit on what are these kind of easy wins that you think you can achieve? And then just 1 comment on the capital. So it's clear you're at 13% on a pro forma basis. apically can you get the order re-reduction that you've talked about, I mean, in or not. I think it was EUR 30 billion, EUR 33 billion. So how quickly could we get that and to generate more capital for the group?

Thank you, Delfine. Let's start with one. First of all, let's be very clear, maybe I I wasn't, answer to Andreas' question on BGM and on the TRS is only related to the physically settled thereabout. When we state that we have reached or when people state that we have reached either circa EUR 47 million or circa EUR 50 million -- that includes that 3.2%, okay? Because it is physically settled. We can take ownership of it whenever we want, okay? So it's only that 3.2%, and it is already included in the stakes that we have in the presentation. We are only saying 1 thing that because it's physically settled, the timing of settling of executing on the TRS is to our choice. So we have optionality on timing. And we have optionality on whether to do it for cash or assuming that AGM approves it for shares. So timing and cash of shares allow us to maximize our capital flexibility, if you want to call it this way and not affect in any way the or form any distribution, not have any concern of any reason. At the moment, that is what it is. Secondly, -- you ask about the government stake. I think you said it, in my opinion, it is too premature. Our -- what we're seeking is a face-to-face engagement where a lot of the misunderstanding and in our view, misleading information can be cleared up and where we will, in my view, demonstrate that we agree a lot, a lot more than we disagree. To find a cohesive way of going forward, and we would be delighted to keep them as a shareholder or if they state as shareholders, it would be obviously who would not. So for the time being, way too premature. What level of shareholding would you consider for the merger? Look, I think the reason -- I mean, if you look at sorry to go back to my experience in the future. But when you do a lot of M&A, M&A fails for 2 reasons. One, you are dragged into paying too much and then you're pushed of doing the wrong thing to try and demonstrate that what you have paid was worth it. We don't want to do that. We haven't done that. The second thing is not be thoughtful in the way you're going to integrate to companies that have different culture, different business models, et cetera. If you're trying to integrate to companies before you have aligned them, you will have an enormity of disruption, which is why we say 2 to 3 years. That's what we see from the outside. It's not that they are right or they are wrong or we are right or we are wrong, we're just misaligned, and it will take time. That does not mean that 2 or 3 years, we will not generate value. In fact, we're telling you we will generate EUR 1.2 billion of value while we're doing that while we are realigning. Value creation moving parts, okay? The value creation moving parts and why EUR 800 million so quickly. If you look at the composition of our value creation on Commerce Bank, a lot of it is executable very quickly. Point number one, we have a substantially lower price point on all of our procurement. And people don't look at that a lot but we have a lower, lower price point, and that affects technology. It affects a number of significant purchases that the bank does with all of our providers expanding that group price point to Commerce Bank will have substantially cost effect. That's why we say that a significant amount of our value creation. If I recall correctly, 40%, 50% is non-FTE related. That's 1 of the levels. The second thing that we can generate very, very quickly is the moment we were to be able to plug our factories into Commercebank. That's why this transaction is a lot more about revenue synergies and other things. We can crystallize those very, very quickly. And we know how quickly because just by partnering constructively with Alpha, you can ask them how quickly they have crystallized those revenues on their side and some of the growth you're seeing in our factories on our side is linked to that. Now consider Commerce Bank as part of the group, we would crystallize it both sides. So that's another big chunk that is easy, it's not disruptive and can be done really, really quickly. Then there is another point which has to do with the setup of the international network. And let me be clear on that. We keep on winning powerhouse trade finance of a year across Europe. We won it in Germany, more than 1 year. So we know what we're talking about. And we have absolutely no intention to create any disruption to the German corporates that we're trying to serve, quite the opposite. Some of them will realize that our trade finance engine is a lot more advanced and can provide a lot of support. But centralizing the trade finance engine, centralizing the trading platforms in 1 place. and renouncing to lending in geographies and with clients that we don't know as well as the European ones that we focus on, can be done very quickly and is outside of Germany and outside of Poland and in fact, will determine some potential either hiring or redeployment of people in Germany as we centralize those engines into Germany rather than having them spread externally. Another point is Commerce bank like us, has relied or is relying increasingly heavily on near-shoring in Poland, in Czech Republic. We believe we have one of the most advanced nearshoring models, fully technology and AI enables we got pretty several time on that. Synergies on those are very quick to execute. We are not in Germany, and they are very quick to execute. So as you can see, there is a lot of things that we can do quite quickly, and I probably didn't list them all that are completely unrelated to merging. They are related to aligning to getting organized to -- and that's why I think we will speak a much clearer language between the 2 sides once we talk to each other. And then the last point that you had, the EUR 33 billion RWA reduction in CBK. I think overall, 2 years, it depends on a number of things, but the great thing about PPA and repricing is that you get everything repriced to market upfront and you don't lose when you sell them. And we believe that there are significant assets in treasury around asset-backed security, international government exposure, including the Italian one and lending in the U.S., in Latin America to real estate projects and other, I don't know, data centers, et cetera, that can be disposed relatively quickly. But we will not have a real -- a complete understanding on that until if and when we get in there. But given our experience in other places and what we think is in there 2 years and we will try to front load as fast as we can.

The next question comes from [indiscernible] BNP Paribas.