Banca Monte dei Paschi di Siena S.p.A. (BMPS) Earnings Call Transcript

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the MPS Group Second Quarter 2020 Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Guido Bastianini, CEO and General Manager of the MPS Group. Please go ahead, sir.

Good afternoon, everybody, and thank you for attending our Q2 results. Before I go through the figures, I would like to draw your attention to a few key takeaways for these difficult times that have severely impacted our professional and personal life, tested underlying resilience of the bank and the effort made to support the customers, colleagues and the community where we operate. And the way our colleagues have managed this challenging situation and the way the banks posted its support to the economy. Therefore, to alleviate the impacts of COVID is a real priority for Monte Paschi di Siena. The quarter that I'm about to comment even if impacted by the effects of COVID with commercial activities lowered down until the end of May, started showing signs of recovery in June as branches returned to their full operational capacity. The other important element in Q2 was the approval by the new Board of Directors, which I thank for the extraordinary support received since I joined the bank or the project with AMCO related to the partial demerger of the compendium, consisting mainly of EUR 8 billion gross NPE, EUR 4 billion net. If approved by the ECB, this deal with the bank to complete its derisking project, reaching a gross NPE ratio of about 4%. So Page 2, a snapshot of key results. Pre-provision profit of EUR 186 million, slightly better than Q1, with resilient revenues supported by positive contribution for dividends and trading. Net interest income continues to be affected by the pressure on lending rates and fees and fees and commissions are impacted by the reduced activity during the 3 months lockdown. Costs are down, despite some extraordinary charges imposed by the COVID emergency. In assessing loan loss provisions, we took into account an adverse macro scenario and booked additional costs for EUR 107 million, which [ adopted ] to EUR 190 million booked in Q1. Without this component, the ordinary cost of credit is 53 bps, 89, considering the COIVD-related component. The net result of the quarter is negative EUR 845 million, including EUR 384 million of nonoperating costs, mainly related to contribution to systemic funds, provision for legal claims and 4 contractual agreements and restructuring costs related to the deal with AMCO. Also the write-down of record EBITDA for EUR 476 million made to take into account the effects of the new post-COVID macroeconomic scenario on full future taxable income. The gross NPE ratio stands at 11.8% or 10.4% according to the European banking authority definition. Considering the so-called AMCO deal, the pro forma NPE ratio is below 4%. Capital and liquidity position, all indicators are above regulatory requirements. Transition to CET1 at 13.4%, fully loaded CET1 at 11.4%. Liquidity coverage ratio well above 150% and a stable funding ratio well above 100%. Slide 3. In the second quarter, the support offered to our customers aboard offering to clients, biggest mall help to manage the crisis. It's crucial to have the businesses and jobs to support recovery. Proprietary machine is on track to manage the applications for moratoria and new granted loans were received by our customers. We have worked on processes, products, IT systems and compliance procedures, and we created a dedicated tax cost. Some figures regarding moratorium. We received and accepted over 100,000 applications from performing customers for an exposure of around EUR 16 billion. Here, we have the split between corporate and household. Application for a moratorium were submitted by 1/3 of the corporate loan book and by 14% of the retail portfolio. In terms of risk, there is no significant difference compared to the overall portfolio distribution. On top of these applications from performing customers, we also received the moratorium requests on the nonperforming portfolio for about 3,000 customers for an exposure of around EUR 0.9 billion. Regarding new guaranteed loans, we accepted the request for EUR 3.2 billion of new guaranteed loans. EUR 1.1 billion are related to loan up to EUR 30,000, 100% guaranteed and EUR 1.4 billion to loans covered by a 90% guarantee. There are -- these are significant numbers in a difficult context, which testifies the organizational efforts made by the bank in recent months to always be closer to our clients. On Page 4, some numbers on our commercial performance. The lookdown impacted business for most of the quarter, but starting from the end of May and beginning of June with the networks return to full operation, we are seeing new flows growing months after months, reflecting the bank's strong franchise. In the first 6 months of the year, wealth management gross flows were EUR 5.4 billion, stable year-on-year, despite the 3-month lockdown. New mortgage closed at EUR 4.7 billion in the first half, plus 33% year-on-year, sustained also by financial relief measures. July cost figures confirm the positive trend. Slide 5. During lockdown, thanks to its entire digital model, EBA was an important diversification factor for the group. Our online bank experienced no operational or commercial discontinuity whatsoever. In fact, it benefited from the greater propensity of customers for online business. All indicators of EBA recorded double-digit year-on-year growth. New customers, 18%, less than 15% of growth, new funding 3x the results for the entire 2019, just to give you some figures. The bank, having consolidated its breakeven point last year, is now showing why there is sustainable economic result and is continuing at full capacity with innovation. Slide 6 regarding funding and liquidity. Positive quarterly trend for current accounts and time deposits increased by EUR 1.5 billion from March and by EUR 4.6 billion from the end of 2019, confirming once again the value of the bank's franchise, counterbalancing capacity at EUR 25 billion and all liquidity indicators well above requirements. We benefited from the extraordinary monetary policy measures announced by the ECB. In March, we expected to renew TLTROs, which then expire in June for EUR 5 billion. And in June, we took up 17 TLTRO III, bringing the total amount of TL III (sic) [ TLTRO III ] to EUR 21 billion against a maximum available amount of about EUR 27 million. Slide 7. The gross NPL ratio is 11.8%, stable versus March. As mentioned, we had an important risk operation under AMCO, which is -- which is perfected, will lower our gross NPE ratio in the area of 4%, some of the best values in the Italian banking landscape and below the 5% threshold indicated by the European Banking Authority guidelines. As we will see later on, default rate is 1.2% versus 1.1% in the previous quarter. And UTP danger rate is 11.1% versus 15.7%, benefiting also from the moratorium and guarantee schemes. I wish to underline that the COVID emergency enhanced our proactive approach in the management of the credit portfolio. The new difficult environment led to a review of credit strategies and credit standards in order to better support clients who are struggling to meet their commitments. At the same time, we have further improved our early warning detection system to be able to catch any deterioration sign better and sooner and promptly manage the [indiscernible] with clients. As mentioned at the end of June, the Board of Directors approved the partial nonproportional demerger of a compendium, consisting mainly of EUR 8 billion gross NPEs, EUR 4 billion on the asset side and financial debt and EUR 1.1 billion equity on the liability side. This transaction has a strong strategic rationale for Monte Paschi di Siena. [indiscernible] complete our derisking plan and recover profitability, thanks to the reduced cost of credit and cost of funding. The [indiscernible] received the green light from DG Comp regarding compatibility with state aid rules. It is now under scrutiny by the ECB, talks with the ECB are in progress, and at the moment, we have no news to share. We expect an answer from the ECB by December, compatible with the tentative timetable, which provides for the extraordinary shareholder meeting to be held in September and beginning of October, at least 50 days after the ECB approval and the merger to take place by the end of the year. Slide 9. Capital ratios decreased slightly from Q1, with a negative impact from quarterly results, partially offset by the so-called IFRS 9 transitional rules. And by the SME supporting factor, with leased RWA to be reduced by about EUR 1.4 billion. Transitional CET1 at 15.4% versus a SREP requirement of 8.8% and total capital at 16%. In case of approval of the deal with AMCO, the impact on capital ratios is estimated in minus 130, 140 bps. We do expect a progressive realignment of the pro forma capital ratios to the level expected without the AMCO transaction, mainly thanks to the recovery of profitability coming from lower provisions and the potential reduction in the cost of funding. Moreover, our capital plan is now under review and could include the potential issuance of subordinated debt instruments in the coming years. I'll start at Slide 1 -- 11 that shows the chart with all the P&L figures since I already highlighted the remaining topics. Slide 12. Net interest income trend continues to be affected by the persistent pressure on lending rates, down by 4 bps Q-on-Q and by 18 bps year-on-year. At the same time, we see a slightly reduced cost of funding due to lower average interest rates and to the recomposition of funding towards less [indiscernible] site deposits. And here, please note that the evolution of the net interest income was strongly impacted by all the initiatives implemented in 2019 related to the restructuring plan and its commitments, strong reduction of UTP, disposal of Monte Paschi Belgio and the issuance of [ T2 entry ] instruments that explain part of the annual net interest income decrease. Slide 15 (sic) [ Slide 13 ] . The sharp slowdown of the network activity due to the cost breakdown led to a negative quarterly figures on fees and commissions on both wealth management traditional banking fees. But as already seen, signs of recovery have been [indiscernible] from June. Thanks to this recovery and to the strong placement flows recorded in the first 2 months of the year, first half wealth management fees are almost stable year-on-year. Slide 14. Financial revenues, a good contribution from dividends and profit on investments, thanks to the more than doubled contribution from AXA and the EUR 9 million dividend from Bankit Italy. Positive results also from trading and from the govies portfolio. Slide 15, operating costs. The bank's strong commitment to cost control continues to give results. Operating costs are down by 7% on an annual basis and by 2.1% Q-on-Q, mainly thanks to the extensive users networking, it seems [indiscernible] down, which more than offset the increased costs related to the implementation of security measures in compliance with anti-COVID regulation. Further reductions of the cost of personnel are expected from the year-end, as we just reached an agreement with the unions for the exit of 500 people to the Solidarity Fund. Slide 16. As already done in Q1, we factored into our model for the valuation of performing loans and nonperforming loans, subject to collective evaluation and new involvement macro scenario, which led us to book additional adjustment for EUR 107 million on top of EUR 193 million, which we had already reported in Q1. The result is an overall cost of credit, which stands at almost 90 bps, but which net of these additional adjustments will be 53 bps. In the following slide, all the details of this [ number ]. Slide 18. You can find an overview of the asset quality migration market. Then to Slide 19, nonoperating cost for about EUR 384 million, mainly related to provisions for risks and charges connected to legal claims and contractual agreements and the restructuring costs for the AMCO deal. The tax line is negatively impacted by the already mentioned, the write-down of recorded DTAs due to the impact of the worse macro scenario on future taxable income. As far as balance sheet figures are concerned, the main elements are in Slide 20. Customer loans are slightly up quarter-on-quarter, essentially thanks to new mortgages, also sustained by the government's financial release measures. In Slide 21, the key messages already discussed are related to the increase of commercial funding and a strong liquidity position. Then Slide 22. As for the [ indirect funding ], strong wealth management flows from June with net inflows of EUR 0.6 billion in the quarter. Stock of assets under management increased by EUR 3.3 billion, also sustained by the positive market effect with the financial market recovering from the COVID shock in March. Asset under custody mostly increased for the [indiscernible] securities deposited by large corporate customer, which had been temporarily moved last quarter. Then in Slide 23, you can have some details on capital structure whose main elements have been already discussed. On Slide 24. The Italian Govies portfolio is slightly down compared to Q1, mainly on the trading component related to capital services activity as primary dealer of the Italian government bonds. Marginal composition of the banking portfolio with a positive contribution to P&L of about EUR 24 million. And finally, I would like to close with one last remark. I had only recently joined the Monte Paschi di Siena, but in these few months, I appreciated the efforts made by all the bank's employees to support the customers in this difficult period and the capability of a quick commercial recovery immediately after the end of the lockdown. Many thanks to all of them. And thank you for your attention. Now we are open to questions. Thank you.

[Operator Instructions] The first question comes from Giovanni Razzoli of Equita SIM.

Can you hear me? So 3 questions on my side. The first question is on the common equity. P&L ratio pro forma for the transaction with AMCO. Based on my calculations, the common equity Tier 1 pro forma should be at around 9.8%. I was wondering whether this calculation is correct. And I also seen, to my surprise, that in the presentation, you still expect to -- faster from EUR 3.5 billion of risk-weighted asset inflation [indiscernible] related to the new models on default, which should trim by another 60 basis points a bit, CET1. So I ask whether this calculation is correct as well or my understanding is correct. And then you have mentioned also that you just reached an agreement for 500 [ each ] voluntary exit. I was wondering whether we have the cost of this measure in this quarter. And if so, what is the amount and the impact on the CET1? Because at the end of the day, my question is, I struggle to see how you can -- what is your room of maneuver in managing the bank in such a difficult environment and much low common equity Tier 1 in both absolute and relative basis. And also, I struggle to see the M&A angle in your bank, even if the asset quality has improved dramatically when the capital position has weakened that much. So this is my question. The second question related to the transaction with AMCO. I would like to know if you can share with us what could be the benefit in terms of bottom line, all else being equal, from the consolidation of such a large NPL portfolio. So what would be the loss in terms of NII, if any? And the reduction in cost of risk so we have a better base in terms of net-net profit? And the last question. I've seen that you have taken some additional provision for contractual risks on commercial claims, not to mention -- I'm not asking you the details of this, but just in general, what business are these risks referring to?

Mr. Razzoli, first of all, some data is related to CET1 [ post IDRA ]. According to our estimates, our calculation, the transitional CET1 should be 11.5% roughly and fully loaded 9.70%. This is our calculation. Regarding...

9.17 or 9.70? Sorry.

9.70. 9.70%. And instead, the question related to the agreement with unions. This estimates a charge in the quarter -- in the last quarter of the year, around EUR 80 million.

And sorry, on the CET1. So from this 9.7%, we should strip out another 60 basis points because of the risk-weighted asset inflation regardless of IDRA?

In the previous figures, they always included.

So it's 9.7% including the risk-weighted asset inflation?

Yes, yes, yes, yes.

The next question is from Riccardo Rovere of Mediobanca.

Just a couple of questions on how to really see the slide on the focus on legal risk? What I -- just correct me if I understood it wrongly. You say there are EUR 5.2 billion of total claims. This -- at the end of June. Then you mentioned EUR 1 billion of threatened litigation. Is that included in the EUR 5.2 billion or should we add it, EUR 5.2 billion?

You should add it.

We should add it. And what should I do with the EUR 3.8 billion received from Fondazione MPS? Should I add it to the EUR 5.2 billion, too?

Yes, yes. You should add EUR 5.2 billion plus EUR 1 billion, plus EUR 3.8 billion.

And EUR 3.8 billion. Okay. And just to go back one second to the previous question from Giovanni on the 9.7%. The AMCO transaction based on the -- on your previous disclosure should cost you, if I remember correctly, 160 basis points. So geographically, starting from 11.4%, you should land in the 9.8% region. And -- but then you say 9.7%, including EUR 3 billion, if I'm not mistaken, of RWA inflation related to TRIM. What is the second factor here? Because theoretically, the impact from TRIM should bring it lower than 9.8% just summing up for the current ratio within [ auto bank ]. What is offsetting the EUR 3 billion on TRIM?

I don't understand very well your question in the sense that the figures that I gave you before are all included, all the movement related to either our operations.

No, no, that's fine. That's fine. No, no. The 9.7% includes IDRA and that is clear. But the other -- before Giovanni was mentioning EUR 3 billion of RWA inflation, if I understood it correctly. And you were saying that the 9.7% was including the RWA inflation. I might have understood it wrong, yes, but just to be -- just to be sure.

I confirm you that the 9.70% is at the end of the year, all included.

The next question comes from Corinne Cunningham of Autonomous.

I had a question about -- you mentioned issuance of sub-debt. Is that your expectation that you could do a Tier 1? Because I think you actually -- would you meet your Tier 2 requirements, is that what you're referring to? And if it's the case, how would you address the fact that your available distributable items are currently negative?