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Edited Transcript of BAMI.MI earnings conference call or presentation 6-Nov-19 5:30pm GMT

Q3 2019 Banco Bpm SpA Earnings Call

VERONA Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco Bpm SpA earnings conference call or presentation Wednesday, November 6, 2019 at 5:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Giuseppe Castagna

Banco BPM Società per Azioni - CEO & Director

* Roberto Giancarlo Peronaglio

Banco BPM Società per Azioni - Head of IR

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Conference Call Participants

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* Adele Palama

UBS Investment Bank, Research Division - Associate Director & Equity Research Analyst of Italian Banks

* Andrea Vercellone

Exane BNP Paribas, Research Division - European Banks Analyst

* Azzurra Guelfi

Citigroup Inc, Research Division - VP

* Christian Carrese

Intermonte SIM S.p.A., Research Division - Research Analyst

* Domenico Santoro

HSBC, Research Division - Analyst

* Giovanni Razzoli

Equita SIM S.p.A., Research Division - Financial Analyst

* Hugo Moniz Marques Da Cruz

Keefe, Bruyette & Woods Limited, Research Division - Analyst

* Noemi Peruch

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst

* Thomas Dewasmes

Goldman Sachs Group Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM 9 Months 2019 Results Conference Call. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Roberto Peronaglio, IR Manager. Please go ahead, sir.

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Roberto Giancarlo Peronaglio, Banco BPM Società per Azioni - Head of IR [2]

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Sure. Good evening, everybody, and thank you for attending the conference on the results of the quarter of Banco BPM. Let me, before leaving the floor to our Chief Executive Officer, Mr. Castagna, I remind you that the question-and-answer section are reserved only for the financial analysts, and you can find the presentation on our website, in the Investor Relations section.

Thank you, and I leave the word to Mr. Castagna.

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [3]

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Good evening, everybody, also on my side. Thank you for being with us for the Q3 presentation. I would say, starting from Page 5, a quite solid performance in all 9 months and especially in this Q3, confirming good achievements in business operation and in the reduction of the risk profile of the bank. Operating profitability is going up 7%, thanks especially to lowering cost -- operating cost, and with a good performance in revenues, driven from commission rather than NII. Customer volumes are still growing, both in loans and in deposits. We are up 1.7% in deposits in the quarter and 7.3% since the beginning of the year, and 1% in the quarter for core performance loans and 4% since the beginning of the year. The risk profile is still [bettering].

Gross NPE and net NPE are going down to 9.4% and 5.6%. As you know, we are going down organically without doing any massive transaction. The coverage is going basically up, especially in UTP coverage is growing 150 basis point to 37%. Meanwhile, Texas ratio is going down 60% to 58.1%.

On Page 7 -- 6, sorry, again on the balance sheet side, the loan-to-deposit ratio is bettering. The share of deposit, as I mentioned before, is growing to 82% from 80%. The liquidity position is even better to up to 170% for LCR, [and] higher than 100% for NSFR. A very good, I would say, an excellent performance on the govies portfolio, which [mixed NAV] . We already talked about that in the second quarter. The third quarter is even better with reserve in fair value for more than EUR 250 million and unrealized gains in amortizing cost up to EUR 860 million, which, of course, don't go neither into profit and loss nor in the Common Equity Tier 1, but would represent an equivalent of 140 basis point in terms of potential incremental Common Equity Tier 1.

The capital position, therefore, is good. We are growing in terms of Common Equity Tier 1 to 12.1% from 11.9% and stable at 13.8% in Common Equity Tier 1 phased in. This is notwithstanding a [margin of] conservatism, which I will talk later on when we will comment on common equity, which account for almost 40 basis point already included into this number.

We would like also to present what normally is already in the balance sheet under IAS scheme, the comprehensive profitability, which shows the creation of value, not only in terms of profit and loss, but also including the different issue, which are not directly accounting to the profit and loss. Likewise, for instance, the fair value are in the govies. If we consider the comprehensive profitability in the 9 months, we are up to EUR 970 million of results, of which again EUR 686 million are the profit and loss results and EUR 271 million, the difference on other income. All these, again, without considering the unrealized gains on the govies, which I mentioned is more than EUR 800 million.

A quick look to the quarterly performance, both the stated one and adjusted basically, there is not a major difference between the two, rather than the extraordinary gain of EUR 336 million in Q2 related to the Agos transaction, the disposal of the NPL platform. As far as the other numbers are concerned, you can see that we went down 2.9% in NII, 2% in commission, a much better net financial results due to the good performance in the -- especially from the finance. And total income, which amount exactly the same number, 0.2% more than the Q2.

Operating costs went down 3.6% on the stated figure and 1.1% on the adjusted, with profit from operation up 2.4% in the P&L adjusted. LLP provision went up to EUR 208 million, with a pretax profit of EUR 168 million and net income of EUR 96.2 million, which in the stated version is EUR 93.3 million. The total profitability for the entire 9 months is up to EUR 686 million in the stated account and EUR 387 million as far as the adjusted P&L is concerned.

Let's remember that in Q3, likewise in Q1, we have also the systemic charge with the extraordinary contribution to SSM under the guarantee scheme. The results of this quarter can allow us to confirm the expected adjusted EPS of -- in the region of EUR 0.30 per share.

Let's go to the different items. Net interest income, as I was mentioning before, is down 2.8%. As you can see, the difference comes basically all from the Euribor reduction of the Euribor which accounts for EUR 50 million negative. Spread effects is EUR 3 million negative, meanwhile, the calendar 1 day more and the volume effects accounts for EUR 7 million positive. Then we have EUR 3 million deconsolidation for the ProFamily captive business, EUR 4.5 million related to the derisking and EUR 4 million positive from the financial activities.

You can see the spread on the lower part of the slide, which is down, the asset spread from 1.87 to 1.85. The customer spread is down 9 basis point, mostly due to the reduction of 7 basis point of the Euribor from 0.32 to 0.39. Of course, the global results, especially if you see the previous year figure, 2018, is very much impacted by the reduction, by the derisking that we had during last year, like-for-like, we have EUR 210 million less of NII contribution from PPA, IFRS 9 and UTP deconsolidation.

Let's have a look to the new portfolio, which is, I think, quite encouraging. We are able to maintain the pace of the first 2 quarter with EUR 5 billion [per] quarter, we are up to EUR 15.3 million (sic) [EUR 15.3 billion] of new production, 3.1% more than last year. Let me remember that last year, we had some giant transaction, likewise Atlante during the Q3, which didn't happen this year. And let me also stress that this is coming for our bank both from household growth and corporate, almost 3% each. It's quite interesting to have a look to the right side of the slide, in which we try to give you the sense of the increase of the rates we are [having] on new production. So the production is done normally at 17 basis point higher for large and mid corporates related to last year, and 4 basis points higher for small corporate. This is not because small corporates pay less or accept less increase in spread, but because we started with the new pricing project, which started before 6 months ago for mid and larger corporates, only 2 months ago for small business.

We are quite confident that we can reach a better figure quite soon, both for corporates and small corporate. Let me say that this increase in all-in rates comes also considering notwithstanding the reduction of -- average reduction of 2 basis point of Euribor.

Again, the volume of the balance sheet up 4% for loans and almost 7% for deposit. You have a different distribution for different mortgages and [current] accounts and another loans. Everything is growing mostly at the same pace. I have to say that, of course, in terms of total spread, what we are achieving is much better with the corporates rather than households. As you know, in residential mortgage, the competition is quite tight.

Let's go to the funding side of the balance sheet. We have experienced, during these 9 months, many issue on the wholesale market of every type of instrument, from senior, to AT1 to Tier 2, which was the recent transaction we did beginning of October. Likewise, we did another senior transaction end of October. So we have completely replaced the EUR 1.7 billion already matured in 2019 with the global issuing of EUR 2.4 billion during these first 10 months.

The average rates and spreads, you can see on the lower right side of the slide, that we are succeeding in having spreads much lower and rates much lower than the one who are maturing. As you can see, the average rates for the EUR 1.7 billion, average was EUR 3.8 billion, 13.8%. Meanwhile, the new senior issue were an average of 2.1%, and likewise for the spread. The cake of the bond funding composition is quite, I would say, evenly split between covered bonds, senior, with a good tranche also now of subordinated, up to 18%.

Subordinated are now up to EUR 3.1 billion, EUR 1.5 billion are not included in own fund phase-in, but represent MREL-eligible funding, so they are still working in terms of MREL. And of course, this figure still exclude the EUR 350 million issue that we had on Q2 in October.

Let's go to commission on Page 13. Net fees and commission up vis-à-vis the first quarter, down 2% vis-à-vis the second quarter. As you know, there is a seasonality in the third quarter for August. But notwithstanding that, you can see on the right side of the slide, a new presentation that we have done, especially to show that the investment product fees is growing quarter-by-quarter, also in Q3 vis-à-vis Q1 and Q2, plus 7% versus Q1, plus 1% versus Q2, and we are still growing also during this quarter.

The distribution between running and upfront shows that the margin, which is more increasing, comes from running fees. Another way of shows this increase in investment product is on Page 14. You can see that Q3 '19 on Q3 '18, we had EUR 300 million of higher production, which is again the best quarter in the first quarter of '19 with solid recovery in upfront fees up to [17%] of the total net fees and commission production, with an average profitability of 2.1%.

I have to say that, as we announced also in Q1, after the new approach in 2018 of the change in the advisory by portfolio rather than advisory by product, we finally eventually reached a good pace of performance, which from nowadays, I think, can only show better results from our network, also because the increase in current account and deposit give us an enormous reserve of potential conversion into asset under management from current accounts.

You can see on Page 15 that up to now we have grown only EUR 2 billion from the beginning of the year, but I am sure that this can be the real trend that is going up during the next few quarters.

Net financial results. Again, a very satisfactory result of EUR 41 million during Q3. Again, EUR 225 million of contribution to the capital position from reserve on govies on fair value, on securities on fair value. Meanwhile, as I mentioned before, is not included nor in P&L, neither in the capital position, EUR 860 million of equivalent unrealized gains of 140 basis point in Common Equity Tier 1.

Another slide on Page 17 about the composition of our debt securities portfolio is Italian govies are down to EUR 19.3 billion, 56% of the total debt securities, which amounted to EUR 34 billion. As you can see on the left -- down left side, fair value is EUR 12.6 billion, 37%. Amortized cost is EUR 18 billion, representing 52% of the govies -- of the securities. Very sound, again, liquidity position, EUR 21 million of unencumbered eligible asset, 95% of which represented by high-quality govies.

I would skip Page 18, I can only mention that the duration of govies at fair value is very short, is 2.4 years. Meanwhile, we have a duration of 4 years as far as the amortizing cost govies are concerned.

Let's go to the cost side. Total operating costs were down 3% compared to first quarter, 3.6% compared to second quarter, 1.1% excluding one-off, basically, in all the 3 different components of operating cost. Staff cost is going down, 2.4% since the first quarter; 0.6% in the second quarter, administrative cost down 5% and 2.8% respectively, and depreciation and amortization also down 2% and 19% since the first and second quarter.

Let's examine also this reduction in operating cost with a more long view. We go back -- if we go back to the first 9 months of 2017, which was the first year of the business plan, and in the first 9 months of 2018 compare it to today, we have a reduction of more than EUR 207 million, which annualized means something in the region of EUR 270 million. If we compare the annualized results, forecasted results of 2019 with the starting point of the business plan, as you can see, the savings are account to EUR 420 million. This comes through, of course, a much bigger evolution of the reduction of the headcount, which were down 3,120 [a] person. As you know, only 2/3 of this out of the exit scheme, the retail network evolution also was down 700 range.

Let's pass to asset quality. Here, we have the reduction, both gross and net in the NPE stock. We have also the comparison with the equivalent data of 2018, September '18, of course then we had the massive AE transaction but -- which, of course, is 43% down. But also if you consider the reduction from the first quarter, from December '18, we have a reduction of 11.4% gross and the same amount net, and 2% gross and 4% net, Q3 on Q2. So there is a progressive reduction, which would bring us to a safe figure in this ratio without spending more than we are able to recover with our workout activity. NPE ratios went down to 9.4% gross and 5.6% net, down 0.3% from the previous quarter.

As you know, the bad loan ratio are still at a very low level, 3% gross and 1.4% net, and all our effort of course, are much more dedicated to the UTP reduction rather than this remaining bad loans. And this also explained why we increased the coverage of UTP up to 37% for 35.5%.

On Page 22, another very good news is consistent good pace in reduction of net flows to NPE in the region, 9 months on 9 months of 13%, 5% quarter-on-quarter, but especially the transition from UTP to bad loans is down both year-on-year and quarter-on-quarter more than 30%. Cost of credit, again, is EUR 280 million, in line with our guidance of 69 basis points during this first 9 months and especially due to the increase of the coverage of UTP.

Another slides on Page 23, on UTP. This is mostly to see the pace that we had since the merger in UTP coverage, even though our effort as you know were much more dedicated to bad loans, we increased 10 full point since the beginning of 2017, in terms of coverage of UTP, which is now up to 37%. The analysis of the UTP portfolio is EUR 6.9 billion, EUR 2.6 billion are the coverage; net EUR 4.4 billion, of which only EUR 1.3 billion are unsecured. I have to say that the portion unsecured and not under restructuring, so not linked to ongoing position, which are currently on a restructuring plan normally paying installments and interest is only EUR 0.4 billion. The coverage for unsecured 52%, for secured 28%.

On the upper side of the slide, you can also see how we were able to offset the inflows since the beginning, since 2017, which you see in the red box -- in the red histogram, with the major volume year-by-year workout in UTP. In the first year, we had $1.4 billion of inflows and $1.7 billion of workout. In the second, $1.4 billion and $1.6 billion of workout. This year, in the first 9 months, we're having $700 million of inflows, $800 million of workout.

The capital position, rightly enough, we reached after 11 quarters, since the merger, finally, not anymore a pro forma position, but a stated one. As you know, we were, quarter-by-quarter, incurring the transaction that we were closing during the quarter, but which would have had effect on capital in the next quarters. Nowadays, we are on a normal situation. And we can see that the final figure are quite satisfying. We have 13.8% of phasing capital ratio and 12.1% fully loaded capital ratios.

Let me spend some minutes to explain this 40 basis point of negative impact on the marginal conservatism, which is related to the time series updated. This is something that, frankly speaking, we didn't expect, comes after the request that we made to ECB for the update of the model for AIRB. We were quite confident that being under review of the model since our application that was done in August, as I mentioned during the Q2 conference call, we would haven't been asked to update the old historical series, having done the work, of course, for the new model. As a matter of fact, ECB asked us to update also the old historical series. We were not in the position to update the historical series by this quarter as it was asked by ECB. So we decided to apply the very conservative margin of [conservatives] in order to give more room for the exercise that will be completed by this quarter. And of course, will be any impact which will be offset at the end of the validation, most probably by the first half of 2020. So it's a real consistent marginal conservatives, which we hope can be -- can increase the buffer for further potential headwind.

Let me remember that this year, we passed from a stated Common Equity Tier 1 at 10% in December '18 to 12.1% this year -- this month -- sorry, this quarter, notwithstanding 70 basis point of headwind that we had to bear due to the different stream this margin of conservatism, and, IFRS 16. So this is also for showing the ability of the bank to face this potential regulatory request with capital generation and also with organic generation. [It's already] mentioned that this year, stated, we performed up to now in 9 months an organic capital generation of 2.7%, 1.2% out of the capital management action, 1.5% through capital generation -- organical capital generation.

So we are really happy with these results. We feel confident that we can confirm that 12% is now the result of what we wanted to reach and we succeeded basically some months ago the expected results.

Final slide. I would say that with this quarter, we have really reached and confirmed the positive trend in investment properties. We have cost still under the strict control. We are continuing our organic derisking process. We are [quite to] a normalized cost of risk. We have had an excellent performance in reserves and unrealized gains in debt securities. And we are strengthening. We're able to strengthen even more our capital position, creating some potential buffer also for 2020.

Let me confirm, as I already mentioned, in Q2 that we confirm our adjusted EPS estimation of EUR 0.30 for full year 2019. And I can also say that we are on track for a possible dividend distribution for 2019.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Giovanni Razzoli with Equita.

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Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [2]

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3, 4 questions on my side. The first one is a question related to the -- your thoughts about the business plan presentation. In the context of the plan, and it would be nice to know what is the time frame for the plan presentation, if it's year-end or first half, or when you are about to present the plan? But in the context of the plan, do you think that is the reduction of the southern exposure a priority for the bank, also in the context of the recent statement that we have seen just also today about the banking union the reduction of the exposure to the BTP? So what are your thoughts there? And related to this, you are sitting on about -- you disclosed 140 basis points of extra capital related to the gains on the BTP. I was wondering how can you leverage on this amount? And do you intend to leverage on this amount to fund an acceleration of the restructuring, for example, in the cost cutting. And again, related to this, I would like to share with us what are your thoughts about the shareholder remuneration? Do you have a preference to dividend distribution or buyback? I ask you this because, in my view, it is -- there is a material difference in terms of the method that you give to the market, because buyback gives you flexibility on the capital, but flexibility, in my view, does not give you a straightforward message that you're really confident about your capital position and risk profile. You have a 12.1% Tier 1 ratio. Now you rank number third in terms of asset quality with the 9.4% NPE ratio. So I was wondering whether -- what are your preference between dividend and buyback? And why you are still relatively shy in terms of saying possible dividend distribution, while most of your peers are already committing to a much larger payout ratio? And then finally, sorry for the long questions. You mentioned you have added a marginal conservativism to your CET1, and you say that the regulatory headwind amount to 70 basis points, including TRIM, IFRS 16 and this margin of conservativism. I had reconciled the different moving parts and to my understanding, this margin of conservativism amounts to 40 basis points of CET1. I was wondering whether my calculation is correct? Sorry for the long list of questions.

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [3]

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Okay. Thank you. I would say more questions for the business plan rather than Q3, but I will try to do my best to give some answer. Business plan presentation, as I mentioned also in Q2, was -- we were working on it. We are still working on it. Frankly speaking, this scenario changed a lot during the last months, both in terms of liquidity, in terms of political and economic situation, in terms of interest rates. So we are still trying to do our best to present something that is reasonable and is feasible with the current situation. This would bring, in my opinion, to deliver the business plan during Q1 next year.

Second question, the govies. Of course, this is very much linked to the business plan strategy, of course, whatever will be done in terms of a potential major reduction of cost or reduction of -- further reduction -- accelerated reduction of NPE rather than other measures that we have to adopt, have a good reserve fostered by this quite solid govies position. So we know that we have ammunition in order to prepare a very good and satisfactory, I hope, business plan. Of course, we don't have to forget that the liquidity position, the NIR situation is under [street] . We have negative interest rates, which up to now are giving some total for the near future to the banking system. And of course, whatever the share of NII we will then -- will be done both by interest from customer and also from investment in securities. So the trade-off is always -- is not that evident that in doing one thing, you are doing to adjust forever the contribution for the bank and the potentiality to have a sustainable profitability for next years. So let us finish our homework, and we will be -- we will try to be the clearest possible when we will present the business plan. Dividend distribution, I told that I had a sort of soft approach to this issue. During the Q2, I only mentioned the possibility of a dividend distribution. This time, we wanted to write down the possibility of a dividend distribution. I mean the consequence of this would be that we want to pay a dividend this year. Of course, we are the only bank, which comes from the merger. We wanted before announcing officially something that has to be, of course, decided also by the Board and by the AGS. Of course, we wanted to have all the possible situation, which does not endanger our bank.

Nowadays, we are confident that we have reached the right capital structure. We are also reinforcing our strategy, as you know, with the mission of AT1. And so I think that it's quite evident the willingness of the bank in terms of dividends. Last one, the, MoC yes, you were right. If you want, I can give you the difference -- the split of the 70 basis points, was 12 basis points IFRS 16, 20 basis points down on TRIM and 40 basis points on this MoC.

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Operator [4]

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The next question is from Azzurra Guelfi with Citi.

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Azzurra Guelfi, Citigroup Inc, Research Division - VP [5]

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A couple of questions. One on the coverage of UTP and this has been continue to increase over the last quarter. [Does that] result also probably impact the work out of the banks. But I just wanted to know if there's been any change in the way of managing the UTP from your side? The other one is on the NII. The, the effect of the disposal should have been like now crystallized on the NII. So what would be your expectation? Is this the bottom of the NII going forward, assuming the rate doesn't move forward? And if possible, can you give us the average yield on your government portfolio?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [6]

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I'm not sure I understood the coverage on UTP question. Again, is increasing 150 basis points. This comes before, as you know, we have already done basically all the homework. We are still, of course, opportunistic on bad loans, which basically is almost all composed by leasing activities, which we'll be [tying] in any case to dispose. But on UTP, we are very much concentrated on increase this level because also with work out we have to try to reach some potential opportunity for reducing at the same pace we are doing right now. I remember, we have reduced -- in the last 3 years, we have reduced more than EUR 4.4 billion, basically without losing money, and this is our goal to still increase the coverage in order to reach potential opportunity as when they happen on the market.

On NII, this comes together with the question of Mr. Razzoli. Of course, if we think about the same govies portfolio, would be very much the same apart from the reduction of the Euribor. You consider that the average Euribor for the Q3 was 34 basis points. Nowadays, we are already at 39, if I'm not wrong. So there is anyway an effect still on the portfolio. But of course, the vast majority for a forecast on next year will be depending on the portion of govies that we'll decide to keep or sell on the market.

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Azzurra Guelfi, Citigroup Inc, Research Division - VP [7]

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And can you give us the average yield of the government portfolio?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [8]

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No. I am not in the position right now to give the number, but we can elaborate.

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Operator [9]

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The next question is from Christian Carrese with Intermonte.

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Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [10]

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I have 3 questions. The first one is on net interest income. I would like to understand your approach on TLTRO III and the tiering. Have you done already some calculation on what you want to take-up and the impact in 2020 from tiering. And still on net interest income. Also, I would like to understand the commercial policy because I see a slight slowdown in terms of loans growth. Are you trying to increase the customer spread rather than volumes? Or you still feel that you can grow higher than the sector average? The second question is on commission. A good quarter. No big seasonality. We saw EUR 6 billion -- EUR almost 6 billion inflows in terms of [net] deposits year-to-date. What are your thoughts there? So what do you think will be the possibility to switch into assets under management in 2020, if you can elaborate a little bit more on clientèle risk appetite? If it's improving in the current low interest rate environment? The third question is on capital. Just a clarification on Slide 24. The add-on impact imposed by ECB. What kind of impact -- when they will be removed, what could be the impact? Maybe I missed during the conference call, the positive impact on capital. And there are other actions, I think some participation that could be non-core participation that could be sold in the next couple of years. And also, there is the ProFamily noncaptive business that should be finalized by year-end. So I would like to understand what is the capital ratio that you want to have? I mean, is it just 12% or maybe more between 12.5% and 13% going forward?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [11]

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Thank you, Mr. Carrese. So TLTRO and tiering. This is another, basically, new decision because we had our funding strategy done without TLTRO, as you know, because we mentioned that many times in the previous meeting. Now what is, we are reconsidering everything I read that those other bankers are considering due to the more interest in rates, but moreover on the 3 years maturity of the TLTRO, which, of course, account very much in terms of NSFR to reconsider also our potential strategy on borrowing money. Of course, it's not yet decided. It will be done through the business plan. Consider that, if I'm not wrong, the contribution of TLTRO is about EUR 5 million for -- per EUR 1 billion, so it's quite easy to understand how much it accounts for our numbers, [having] EUR 21 billion right now. The tiering is quite new and interesting also for us because we were not depositing in ECB just because it was too expensive. Nowadays that we have almost EUR 5 billion of room to deposit at 0. We will exploit this opportunity, which should give us something in the region of EUR 20 million of contribution in NII. Of course, also this will depend on how we will be able to manage this enormous amount of liquidity that is still coming into the banking system and also in our bank because, of course, if we are able to stay with the EUR 5 billion position, of course, the EUR 20 million will be all in our NII. If we still will increase this number, this will erode step by step the EUR 20 million. So all our activity will be devoted to have the right growth or reduction, especially from corporates and institutional investor in liquidity in order to try to offset the disadvantages and to keep full advantage from the tiering.

Commercial spread, yes, I mentioned before. I made this slide just to show you that the new loans are luckily enough already experiencing quite a good increase in the total rates. Why we have a reduction in the average spread? Because, of course, the loans maturing comes from 3, 4, 5 years ago and are still at [5-year] higher spread. But the new loans production is much higher and will be still higher in the future vis-à-vis last year.

Commission is, I would say, the name of the game for us. We -- I think everybody, starting from us, but also the market, I think, undervalued the restructuring process in which we were involved during these 3 years with, as I mentioned before, this new portfolio advisory approach. Nowadays, our people understood what to do. Luckily enough, the performance of the bank are quite good in terms of return of this investment. So we have a lot of room for switching into further asset under management. And this will be the key driver also for the business plan.

Last -- first of all, let me precise, which is not an add-on, has not been imposed by anybody. It's just a request that we were not able to perform just because we didn't expect that the request would have been done, having already the new model request in place. Of course, we will -- we are running the calculation for the old model in parallel. I hope by next quarter to give with some, hopefully, gaining on this 40 basis points the right number, but still will be a number related to the past, not to the future. So I think that the overall situation will come out clearly by the final AIRB validation from ECB, which should come in the first half of 2020. Let's say that is a good margin that we have taken apart in order to offset any potential downside.

Again, Common Equity Tier 1. We are not worried at all about Common Equity Tier 1 growth. We know that we can grow organically in order to increase from 12% to 13%, even without any capital management action. But as you know and will be indicated in the business plan, we have plenty of financial participation, which we want to dispose also for the threshold. As you know, we have still a threshold, which is higher than what we want to be in terms of financial sector holdings, DTA and so on. So the more we can free up, the more capital we can free up. And we, again -- I think we have something in the region of EUR 200 million to optimize in order to bring further capital.

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Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [12]

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We've limited the impact on profits, I presume?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [13]

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Without the impact on profitability. I am talking about the remaining ProFamily activity, the (inaudible) sale, [mass or] things that, frankly speaking, don't give so much contribution to our profit and loss.

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Operator [14]

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The next question is from Andrea Vercellone with Exane.

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Andrea Vercellone, Exane BNP Paribas, Research Division - European Banks Analyst [15]

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Apologizes, I had to leave the call for 5 minutes. So apologies if some of the questions have already been asked. The first question is on capital, on the EUR 2 billion voluntary add on. And specifically, your calculations in order to add this add-on are based on taking into account PD and LGD series up to what year? Is it 2018? Is it H1 2019? Is it 2017? i.e., is everything captured until now? Or you will have to re-update it again? And also related to this, in the model put in to the ECB for validation, have you already taken into account of the EBA guidelines requirements? Or that is still to be done in future years?

Also on capital. Can you make some comments on operational risk in Q4? You have stated in the past that there could be a negative impact. So that's it on capital.

Then fee income. Last year, in Q4, it was a very strong quarter. However, it benefited from very strong contribution from structured finance or that's what you had said at that time. Shall we expect something in line? Or it would be prudent to say it will be lower because it was a really extraordinary quarter on that front?

On bonds -- sorry, senior bonds maturing on the funding side in 2020, 2021. Can you give us the average cost, something that compares to what you put on Page 12. And finally, on the unrealized gains of EUR 860 million on bonds at amortized cost, are these gross or net of taxes? And you said before that they are a good buffer for potential restructuring and so on, but is it quite simple to unlock them or -- if you want to or not?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [16]

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Okay. Let me remind, again, just to stress, that it's not an add-on, but it's something, I would say, self-inflicted. It take in account, generally speaking, because, again, we didn't have the possibility to run the figure with the, I would say, current AIRB model because we were already on the new one. And we made a conservative estimation of this EUR 2 billion considering both 2017 and 2018. Of course, including whatever we could have included, but this is already in the application for the new model, so the EBA guidelines, as I mentioned also before, in part were already included in the previous validation that we obtained in 2018. And of course, the one that we knew afterwards are included in the new request for validation. I did not...

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Andrea Vercellone, Exane BNP Paribas, Research Division - European Banks Analyst [17]

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Excuse me for interrupting. So basically, that's it on this front in terms of regulatory wins. Everything we know, it's either in this buffer or any way in the model that you've put in for validation. Is that correct?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [18]

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I would say that if you remind, we had also some buffer from the previous validation because there were some add-on imposed. So I would say that for the new one, now we have 2 buffer, one was the previous add-on, the second one is the current that we put on the balance sheet this quarter. Is that clear?

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Andrea Vercellone, Exane BNP Paribas, Research Division - European Banks Analyst [19]

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Not really, in the sense that what we all want to know is shall we factor in certain additional negative components for the future or not?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [20]

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Sorry, Mr. Vercellone, I am not, of course, the regulator. Otherwise, I would have out self-imposed the validation, not to the MoC. So for the time being, I can only self impose the MoC. Of course, hopefully, as you can -- have experienced during these 3 years, we were always delivering and performing also in the different step with the procedure that we had with ECB. So at the best of our capability, there shouldn't be any other things. But of course, I have to wait for the validation because I am not the one that has to decide the numbers. Of course, we have done, we think, a good job, which is still better if we consider this further buffer, let's say.

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Andrea Vercellone, Exane BNP Paribas, Research Division - European Banks Analyst [21]

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And on the operational risk, is there still something coming in Q4?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [22]

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I don't think so. Again, we are running month by month. If you are mentioning -- I don't know if you have mentioned to some particular situation or the famous diamond case. If it's for diamonds, we still are running. We are now up to more than 9,000 transaction with client fully in line with our provision. So we don't forecast any other things. I don't think we will have any other potential backfire from that.

Commission for Q4 will be, I would say, of a different nature from last year, but not very different probably from the results because last year we had, as you rightly remember, the contabilization of a big tranche of such a finance transaction, all in Q4. This year, maybe will be a bit less, but we are recovering a lot in terms of assets under management. If you have a look to the slide on Page 14, last year, in Q4, we had EUR 2.5 billion of placement of investment product. I really hope that we can be almost EUR 1 billion better than that for year, end of Q4.

What else? Senior bond maturing. We have 2 kind of bond. The tranche subordinated would be 5.5% and the senior 2.5%, but are both covered -- or swapped, of course. So most probably, we can have better price. Last, unrealized gains are considered gross. As you can remember, in terms of capital, the gross for us is equal to the net because of the DTA. So doesn't make a lot of difference.

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Operator [23]

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The next question is from Domenico Santoro with HSBC.

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Domenico Santoro, HSBC, Research Division - Analyst [24]

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Also a couple of follow-ups from my side. Again, on the capital, I understand that you have a lot of positive reserve here. And you might decide in the plan whether to auction at some of them. Also, of course, calibrating the impact on the P&L when it comes to OTP and the sovereign. A bit beyond next year, I was wondering whether you have any message on Basel IV, instead, and the operational risk that kicks in first?

And the second is on the new definition of defaulted loans. I was just wondering whether you have any idea on how the MP perimeter might change? And whether this is going to kick in, in the fourth quarter, please? And then I had a very similar question to one of the colleague on the buyback of shares. But actually, it was answered before. I mean your stock is, of course, trading at a very low valuation. And from what I have understood from the calls, for example, of the Spanish banks, there is -- the regulator is more open to consider buyback of shares. And we had also read of more Austrian bank that has been approved a buyback of shares recently. So I'm just wondering whether there is any discussion with the regulator on this, you might be inclined to do that because, of course, you are far away to be considered a stock, I mean, for income funds? So the buyback of shares, it might help significantly the valuation at this point.

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [25]

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Thank you, Mr. Santoro. No. Frankly speaking, we don't have a big -- material, rather than big, foreseen amount of headwind for both 2020 and 2021. 2022, of course, there will be the EBA guidelines. Most of them, we think, we have already applied in the exercise we tried to explain before. There will be, of course, something on the AMA, but starting from 2022. I think we can -- we will be more precise also in the presentation on the business plan. Let's just consider, please, that I don't know if, frankly speaking, this exercise of announcing the headwind is quite consistent. For instance, if you go back to the past, the potential impact or whatever came, Basel III and so on, was considered much higher that has been as a matter of fact. I would say, especially with us, we were running the bank with massive derisking with a lot of headwind that came from a different validation. And frankly speaking, we are still here growing in Common Equity Tier 1. Just to make an example, the impact of IFRS 9 was calculated to be, what basis points? 42 basis points in 2016, ended up to be 20 basis points. So everything is just an estimation, which do not consider that the bank is a moving company, in which, of course, we try to better our capital absorption to make move in order to offset potential headwind. And again, I think our story of these 3 years can show that we were very much able to offset all of these. But frankly speaking, for the next 2 years, I think we'll be much better than in the past because, again, since this quarter finally, we don't have any pro forma. We know that we are running with our capital generation and producing enough capital, also considering, of course, especially also, especially for the future, the possibility of paying dividends. What was the last one? Buyback. Sorry. I mean, we are working on everything. This year is a lot of years that we don't give satisfaction in terms of payment back to our shareholders. So let's, first of all, give us the possibility to understand the amount, and then we will consider what is better to do, also considering the amount that will be available for paying back shareholders. I'm not yet in a position to tell you.

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Domenico Santoro, HSBC, Research Division - Analyst [26]

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All right. About the new definition of defaulted loans, please?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [27]

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Yes. Also, this comes basically starting from January 2022. We will make the application, I think, first quarter 2021. We have really preliminary estimation, which range -- in the range of tens of basis points. But still, of course, we are not working on that. We don't think -- right now, we don't think it's possible to give you some number. But it's yet to come in the next 2 years, and we will do the application by time.

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Domenico Santoro, HSBC, Research Division - Analyst [28]

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The 10 basis points is applicable on the loan loss provision, correct?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [29]

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I mean so, it could be some -- capital requirement, of course.

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Operator [30]

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The next question is from Hugo Cruz with KBW.

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Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [31]

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So let me see. I have a few questions. Some of them might have been answered, so apologies for that. But have you accrued any dividend so far for 2019 in the CET1 ratios? Also on CET1 ratio, there was 40 basis points of margin of conservatism. That's on a phased-in approach. Is the number different on a fully loaded basis? And then two, do you have an approximate date for the business plan presentation? That's it.

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [32]

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No. The first question is no because, as you know, we don't have to ask for the capitalization of the Q3 profitability because it's not audited -- fully audited. So we have basically all the contribution that we can have in the second part of the year is available for potential distribution. Yes, the MoC is calculated -- basically is phase-in, but the fully loaded is not much different, few basis points. And again, the business plan presentation, we have not yet data. But we think in the first quarter will be the right time.

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Operator [33]

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The next question is from Adele Palama with UBS.

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Adele Palama, UBS Investment Bank, Research Division - Associate Director & Equity Research Analyst of Italian Banks [34]

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I have 2 questions. So can you give us a bit of color on the declining trend of the contribution from the equity accounting investment? And then the second question is on the asset quality. I was wondering if you're planning to factor sale of NPLs? And if you are planning to do it, what is the price that you expect? And then if you can give us the default ratio for the quarter?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [35]

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Sorry, could you repeat the question, the last question, please?

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Adele Palama, UBS Investment Bank, Research Division - Associate Director & Equity Research Analyst of Italian Banks [36]

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Yes, if you can give us the default ratio for this quarter on the NPLs?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [37]

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Sorry. I didn't get the first one. Was on diamond? No.

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Adele Palama, UBS Investment Bank, Research Division - Associate Director & Equity Research Analyst of Italian Banks [38]

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No, no. The first one is on the contribution from the equity accounting investment, basically a line of the P&L, there's a declining trend. If you can give us a bit of color on that.

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [39]

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Global amount for equity participation up to 30th of September is EUR 97 million, of which in the third quarter EUR 28 million. Okay.

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Adele Palama, UBS Investment Bank, Research Division - Associate Director & Equity Research Analyst of Italian Banks [40]

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Yes, but there is a declining trend quarter-on-quarter. If you can give us a bit of color on that? Like from EUR 33 million goes to EUR 28 million.

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [41]

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Yes. In the fourth quarter, it should be a bit up. I have to say that the major difference comes only from one of our stake holdings, which is in the consumer finance, where Agos decided to have a different accounting policy on some aspect. So basically, they are making the same money over last year, but deciding to account in a different way and giving us a [slowly] lower distribution rather than last year.

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Operator [42]

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The next question is from Noemi Peruch...

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [43]

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No, no. Sorry. I was still to answer. I'm collecting data, sorry, just a minute.

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Operator [44]

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Okay.

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [45]

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Okay. The default rate, I have the data for the full 9 months, is 1.2%, going down from 1.4% as at June. So of course, the quarter is much lower. For acute disposal, if I understood the question, we don't have any specific project yet. We are, as I mentioned before, working more on UTP. We are also looking around to understand if some of the transaction made by some competitor is [replicable] or not. And of course, we will be able to decide better what to do once the -- will be much clearer the situation of our transaction in UTP, which I don't believe can be done the same ways as bad loans in the terms of massive disposal.

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Adele Palama, UBS Investment Bank, Research Division - Associate Director & Equity Research Analyst of Italian Banks [46]

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And sorry, as a follow-up, the default rate that you gave us, is that gross or a net basis?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [47]

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It's gross.

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Operator [48]

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The next question is from Noemi Peruch with Mediobanca.

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Noemi Peruch, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst [49]

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I have 3 questions from my side. The first one is on asset quality. Could you disclose the size of the NPE write-offs in the quarter? And the second one is a follow-up on capital. Can you please clarify whether the TRIM impact you took in Q2 is included already the review of the loan default portfolio and also the retail portfolio? And finally, what is the contribution to NII from the non-captive business of ProFamily? And in which line should we find the related PPA contribution?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [50]

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What do you intend exactly for NPE write-off? Again, there was no material position write-off. But of course, we have a continuous write-off procedure, which, of course, where we don't see possibility to either recovery or we prefer to amount -- to close the provision on some of our dossier. We prefer to do that. But I am trying to give you the number -- the increase of number, so you can make your calculation. Just a minute. The loan default portfolio -- yes, the loan default portfolio is included into the TRIM because it's still the larger portfolio, which was all under the TRIM review. And sorry, the third one?

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Noemi Peruch, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst [51]

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The third one is the contribution to NII from the non-captive business of ProFamily? And also in which line can we find the PPA contribution? And as a follow-up on capital, was also the retail portfolio included in the TRIM impact you took in Q2?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [52]

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So the retail portfolio is also included into the TRIM. As far as your last question is concerned, I thought we mentioned the lower contribution from ProFamily, on Page 9, is EUR 3.2 million in the quarter. So it's part of the negative difference in NII, is the first figure we mentioned on Page 9.

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Noemi Peruch, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst [53]

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Sorry, again, I was talking about the non-captive business of ProFamily?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [54]

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Captive. The non-captive? This is the captive. What we lost already, then we have the captive. So when you check it -- if there is some other question, I will come back with this. I think it's something like...

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Operator [55]

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The next question is from Thomas Dewasmes with Goldman Sachs.

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Thomas Dewasmes, Goldman Sachs Group Inc., Research Division - Associate [56]

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Thank you for the details on the bond maturing in the next 2 years. Would you mind giving us what you plan to issue? And if possible, by type of instruments?

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [57]

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We have a forecast of basically issuing the same amount which are maturing. Of course, we are considering potentially to also fill some market in the different years. But the vast majority will be senior and, of course, only MREL issuing.

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Operator [58]

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The next question is from Giovanni Razzoli...

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [59]

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Sorry, can I go back 1 minute to do a question on Mediobanca. We found the contribution from non-captive is 9 months, EUR 2.7 million.

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Operator [60]

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The next question is from Giovanni Razzoli with Equita.

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Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [61]

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Sorry, I don't want to open a discussion on whether it's better to pay a dividend or a buyback. But as far as I'm concerned, on Slide #25, you have mentioned a possible dividend distribution, which is quite straightforward vis-à-vis the buyback. And then, in my view, if you deem that your stock is undervalued, you can pay back money to shareholders via buyback and it is up to shareholders to decide whether the stock is undervalued or not. And more importantly, the buyback is a flexible measure, which, in my view, implies that you are not fully confident about the [stock], the dividend is more straightforward. So I strongly believe that if it's a possible dividend distribution in light of the progresses that you have made on capital, profitability and NPE ratio, it should be a dividend distribution, not a buyback.

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [62]

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Basically, I think is what I answered also to some other question. Of course, we have the obligation to do the best we can for shareholders. So we are considering the best option. Again, it's the first year. I'm already very happy to give you this announcement and, of course, leave me still the remaining time in order to give you some more detail.

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Operator [63]

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Gentlemen, there are no more questions registered at this time.

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Giuseppe Castagna, Banco BPM Società per Azioni - CEO & Director [64]

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Okay. Thank you very much for your attention. Good night.

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Operator [65]

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Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephone.