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Edited Transcript of BMPS.MI earnings conference call or presentation 7-Feb-20 11:00am GMT

Full Year 2019 Banca Monte dei Paschi di Siena SpA Earnings Call

Siena Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Banca Monte dei Paschi di Siena SpA earnings conference call or presentation Friday, February 7, 2020 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrea Rovellini

Banca Monte dei Paschi di Siena S.p.A. - CFO & Senior Deputy General Manager

* Marco Morelli

Banca Monte dei Paschi di Siena S.p.A. - CEO, GM & Director

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Conference Call Participants

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* Antonio Reale

Morgan Stanley, Research Division - Equity Analyst

* Corinne Beverley Cunningham

Autonomous Research LLP - Partner, Banks and Insurance Credit Research

* Giovanni Razzoli

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

* Hugo Moniz Marques Da Cruz

Keefe, Bruyette & Woods Limited, Research Division - Analyst

* Jean-Francois Neuez

Goldman Sachs Group Inc., Research Division - Executive Director

* Riccardo Rovere

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

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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 MPS Group Full Year 2019 Results Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Marco Morelli, Chief Executive Officer and General Manager of MPS. Please go ahead, sir.

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Marco Morelli, Banca Monte dei Paschi di Siena S.p.A. - CEO, GM & Director [2]

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Good morning, everybody, and thanks for attending our year-end '19 results. As usual, we will try to shed light on what we did during the year and especially in the last quarter. But I would also like to sort of put 2019 in the context of the journey and the work done in the last 3 years, considering the tenure of the current Board, as everybody knows gets to an end with the AGM at the beginning of next trade, April, which will approve the 2019 number.

I think 2019 is another step forward in the consolidation of the commercial presence of the bank. I think our people did a great job to demonstrate that in a deteriorated macro environment and in spite of a very stringent commitment, and I'll dwell upon that in a minute, stringent commitments of our 2017 restructuring plan agreed upon with the European Union, Monte dei Paschi was able to be in the market, grow assets, both in terms of new flows of credit to our key client base, households and small business, in particular; consolidate and increase the level of commercial deposits and assets under management altogether; and go ahead at a faster pace on the key mantra of our turning around of the business, i.e., the quality of our credit stock, the cost of credit, the leverage of our NPL stock and last but not least, being able to fund our business in the market in a more effective way than last year and the years before.

Page 3 of the presentation is pretty much a summary of what I just briefly sketched out. Last year, when we did present year-end numbers, our message was we will be trying to do better in 2019 vis-à-vis of our operations. Pre-provision profit for 2019 is EUR 934 million, which is basically in line with the year before. And net operating result is 3% -- 3.3% above 2018. That's at GBP 323 million (sic) [EUR 323 million]. Same for the pretax profit, which, this year, is EUR 53 million compared to a negative of EUR 109 million year-end 2018.

The net profit, as you might expect, in the light of what we communicated to the market in the context of the revision of our credit rating by Moody's back a few weeks ago, the net profit is EUR 1 billion negative, in the light of the fact that we posted a EUR 1.2 billion negative adjustment on the DTA. And again, we'll get into that in a while.

Cost of risk and the credit environment in general did perform better than expected. We are 2 years ahead of plan in terms of gross NPE and net NPE, which is now 12.4% and 6.8%, respectively. Our cost of risk is slightly below year-end 2018. And again, we did project an outlook in this respect for 2020, which is pretty much in line with the 60 basis point area. But more relevant, in my humble opinion, are all the key indicators, namely default rate, danger rate and cure rate, the number of which -- numbers of which you can easily detect from Slide 3.

Capital and liquidity, again, our key reference points in the last 3 years because everybody -- everything we do, everything we try to sort of put in motion from a commercial standpoint are a function of our capital base and ability to look after our liquidity indicators. I think numbers are pretty clear and are better than last year.

Page 4 is pretty much what I was just referring to. I think it is fair to say that in order to sort of gauge, assess and evaluate what Monte dei Paschi did this year, and the same applies, and I've been trying to convey this message since the very beginning of 2017, everybody should be looked at in the context of our starting line, our [T0] year-end 2016 the, very beginning of 2017.

I openly stated 3 years ago, and I actually sort of repeated the same message a number of times, the commercial recovery of group Monte dei Paschi in the light of the starting line, year-end 2016, would have been a very, very long journey. It would have required an extra effort from our people. And it would have taken years, especially in a macro environment, in a regulatory environment that, from the beginning of 2017, did not provide any sign of a real recovery. To the contrary, every kind of projections and forecasts were actually revised downward.

Page 4 is the factual summary of what thousands of employees of Monte dei Paschi did in the last 3 calendar years. Starting from, as I said, capital and liquidity, getting then to the NPE stock reduction and the cost of credit, i.e., the management of the credit quality of our book.

We did recover from the beginning of 2017 billions of commercial funding and deposits. And don't forget so that everybody possibly appreciates where we did stand in December, in November and December 2016. That year show an outflow of commercial deposits of close to EUR 29 billion. Lending, again, we did have an aggregate of EUR 30 billion of new flows in the last 3 years. And that inspired also a great -- in my humble opinion again, a great effort from our network, in spite of the fact that we cut our branches 30%. And we were actually forced to cut our staff of 3,600 people, well above, as we will be seeing, the average in the Italian market. That translated into a U-turn in our operating results.

And in spite of the fact that we had stringent commitments, we had less room to maneuver, to compete at a sort of level playing field, we cut our operating costs close to 13%, 12.7% in the last 3 years. And we had close to 1 billion operate -- negative operating items, nonoperating items, so below the operating line.

I think if you factor all of that into the context of -- again, when we started, where we end up today, everybody is in a position to make a fair and factual assessment. As far as I'm concerned, I think the people in Monte dei Paschi did an excellent job in making sure the bank was back in place, was a credible counterparty for all those concerned, stakeholders in general, regulators, clients, so on and so forth.

Banca -- we then now move to a more detailed analysis of the key targets we met and the key items. So Page 5 is basically the representation of how our core Tier 1 ratio and total capital moved in the last calendar year, with reference to the level of 2018. We are well above 2020 SREP overall requirements. And again, the fact that we had to deduct EUR 1.2 billion of DTA has no impact on our capital ratio, has no impact on our funding and credit. Our funding ability and our credit rating, as witnessed by the fact that the revision of the rating by Moody's came after we disclosed the EBITDA impact, and as we will be seeing, has no impact whatsoever on the ability of the bank to use close to EUR 3 billion DTA in aggregate against future taxable income.

Page 6, the evolution on the NPE stock reduction, I think numbers speak for themselves. We dwell upon, a number of times, on how the bank did perform. When we started, year-end 2016, we had EUR 45.8 billion of gross nonperforming loan, which, in turn, resulted in a 34.5% of total stock. We closed the year at 12.4%. I think fair to say this is a notional performance by your kind of measure. We will continue, and I anticipate 1 questions have been asked a number of times, the bank will continue to explore any possible route to further reduce the level of gross NPEs. And this, coupled with the target, which will be now after the work we have done on the risking, on cost reduction and on credit, credit quality in general, coupled with, I was saying, focus on the commercial growth and consolidation of our top line, but we'll see that as well later.

I think numbers for the growth in current accounts and time deposits parse out the fact that our network was very, very efficient in spite of strong and healthy competition. What is relevant is that we did increase, in absolute terms, this number of billions, reducing the average cost of commercial funding to 15 basis point in -- as of November '19; whereas, we did have 37 basis points in August 2017. Therefore, repossession of commercial deposits with a strong reduction of the costs related to it.

Page 8, growth of customer loan. I think the right-hand side of Page 8, PD, average PD on new lending is well below the level we did have in the last 2 years. Same for the default rate.

Page 9 is the evolution and the trajectory of our -- of one of the relevant size, possibly, of our cost reduction exercise. We did have 30% less in branches. This was, as you all know, one of the key commitments in the restructuring plan, 30% less versus 15% average of the Italian banking system. And the head count reduction of 14% versus 2.3% of the Italian banking system. That, coupled with the unwinding of our foreign network, i.e., the Belgium bank, the French bank and 3 key subsidiaries, again, part of the closure and runoff imposed by the restructuring plan had an impact on our volumes in terms of loans and direct funding and funding in general, which is outlined the right side of Page 9.

Page 10 is pretty much the detailed analysis of our P&L in 2019 versus '18 and '17. You heard some of the numbers I've already referred to in the last few minutes. And again, those are the numbers. I think I wouldn't comment any further. We are open for questions, but everybody can come up with or form an opinion on how the management of Monte, Monte in general, did perform in 2019 versus previous years.

Page 11, an analogy of our liquidity evolution. I think 2 key messages here. Number one, we are reducing and reimbursing our GGB exposure, EUR 4 billion reimbursed in January 2020, additional reimbursement in a few weeks. That will have a positive impact, which will quantify a positive impact in our NII in the current year.

And the other key message is demonstrating to the market that Monte dei Paschi was able to go back to the institutional funding market in a progressively more effective way. In this respect, we went out with a Tier 2 issue in July last year, an additional EUR 400 million of Tier 2 a few weeks ago at a much lower coupon. And that actually resulted in fully -- in being fully compliant with another commitment we did have, i.e., a placement of EUR 1.45 billion of Tier 2, plus covered bonds and the latest EUR 750 million of senior, which, actually, as you might have seen, have been placed at a much lower cost than the one we recorded in mid-2018.

Page 12 is a sort of condensed picture of what we did in terms of innovation and sustainability. I wouldn't elaborate much because there are things that we did discuss a number of times and we will be focusing on in the next few months. I think Officina MPS is now a brand in itself. It was a very successful venture. We are attracting a lot of people, and a huge number of start-ups that did approach Monte dei Paschi are now working with us on things that are priority topics and top of our list vis-à-vis of improving our commercial effort.

Page 13, and then I'll pass to Andrea Rovellini for a drill down on every single P&L and balance sheet line. Page 13 is a summary of and an update on how do we stand vis-à-vis of commitments set by DG Comp. I think it's pretty self-explanatory.

There is one point here, which I would like to draw your attention upon: disposal of real estate. We were planning to sort of close our bid process yesterday and announce something today. In the light of the fact that we had very strong interest from 2 parties, which submitted very important binding bids, we decided to go for another round of discussion with bidders with the aim of finalizing the selection in the next few days, so by the end of next week. And by the way, what we have received so far is a valuation of our real estate portfolio, which is well above our book value. More to come, as I said, in the next few days.

The rest, in Page 13 is -- are things everybody is aware of. Numbers, I went through that already quickly.

One last point, 2019 results in terms of operating margin, gross operating margin and net profit because of the DTA, actually resulted in not meeting the formal targets imposed by the plan 3 years ago, a plan, which, as you all know, we are not in a position to revisit and readdress like all other banks have been doing in the last 12, 18 months. We are bound and forced to work and travel with numbers, which are now 3 years old.

That means that by year-end 2021, we need to go for an additional cost-cutting of EUR 100 million. I think in the light of the numbers we managed to achieve from 2017 onwards, which I referred to earlier, this is something which the bank will be doing with, in my opinion, no impact on our ability to perform from a commercial standpoint, again, in the light of the track record that we managed to achieve.

I now move to a detailed analysis on numbers to Andrea Rovellini.

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Andrea Rovellini, Banca Monte dei Paschi di Siena S.p.A. - CFO & Senior Deputy General Manager [3]

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Okay. Thank you, Marco. In order to analyze the main trend for the different composition of our profit and loss, we can go directly to Page 16. That represents the main factor that influenced the decrease of our net interest income that was a double-digit year-on-year and for which we can say that around 50% of this kind of decrease is fully explained for the management action that was implemented in '18, '19 in order to be compliant with the restructuring plan. So we have the effect of the derisking, so the disposal of the likely to pay that we complete in the last 2 years is having a negative impact year-on-year that is around EUR 50 million.

Then we have the unwinding of our foreign network. So with the disposal of Monte Paschi Belgio, the reduction of the activity of Monte Paschi Banque and the closing of the foreign branches, with an additional pressure that is year-on-year around EUR 15 million.

Then -- so for us, it is important to underline also the cost -- additional cost for the access to the institutional market for the funding, around EUR 30 million.

And then the fact that in order to prepare the reimbursement of the GGB, we had to maintain a liquidity position above our target. This is a temporary cost that can be evaluated in around EUR 20 million in the second part of '19 that can continue in the first quarter for this year.

Without considering this kind of management action, we can say that the pressure on the interest margin is quite half of the total, and the pressure was mainly driven, Page 17, from the fact that the competition, the new structure of the interest rates makes as a reduction in terms of the total amount of the markup that we can have on the asset side. And we maintain a more or less stable, the total amount of the cost of funding.

Different trend, Page 18, for the fee and commission. Here, you can see the trend, the quarterly trend year-on-year. We -- in this case, we are presenting growth, limited but stable growth, in the last quarter and also ago if we compare the total results for the last quarter in comparison with the last quarter '18.

We have a good trend for the traditional banking fees quarter-on-quarter. And we can say a stable amount of the -- all fees that we can have from the web management product. This is as a result of the increasing productivity of our network. That was one of the goal that we defined at the beginning of this year and continue to with the target to improve the profitability of our network.

If we want to complete the trend of our revenues, Page 19, we have the very strong results in the last quarter, EUR 136 million are mainly composed by the valuation of the financial assets arising from the restructuring of Sorgenia and Tirreno Power. And this is linked to the disposal activity that was completed by the year-end last year. And this is a real, you could say, capital gain linked to the better quality of our loan book.

The trend of the operating cost was already mentioned. We can say that year-on-year, we have 6.5% less in the quarter in terms of the total amount of cost. We have seasonality in terms of trend of the other administrative expenses, but the year-on-year decrease of the operating cost is in line with the reduction of the employees and the target action we reached in the year in terms of number of branches.

If we switch to the cost of credit and the level of the coverage, we can say that we closed the year with 68 basis points. If we accounted the release of provision or the increase of devaluation of coming from Sorgenia, the total cost of risk for the year is around 50 basis points. And it is important also to underline that the decrease in terms of level of coverage that we suffer in the year is mainly linked to the fact that we disposed around EUR 2 billion of bad loans without specific collateral, so no guarantee at the year-end. And now, I would say, it is true that we have less coverage, but we can say that the quality of our nonperforming is higher than the quality we had in the past. Just to give you an idea, we have 80% of the net book value of the bad loans that is now composed by a secured credit line.

The good trend in terms of asset quality is also well shown in Page 22. We have the total figure in terms of default rate, 1.4%, after having 2.1% in 2018. For the first time, we have a cure rate above the danger rate, and we are also seeing an increase in the total amount of the recovery of the bad loans, 7.3%, including also the good benefit coming from the last disposal in this area.

If we want to complete the analysis of the P&L, we can go directly to Page 24, when we explain exactly what are the different component for the write-down of our DTA. So we have 2 negative component in the year, so the effect of the Italian budget law. So the help for the economic growth that was reintroduced and for which we have a decrease of our taxable income in the future, so less probability to be able to recover losses; this is an impact on the DTA that was around EUR 0.6 billion. And then the remaining part is linked to the revision of our estimating of profitable income for the future. Here, we are, we can say, in continuity with what we complete we did last year. And the main reason are the very different macroeconomic environment in which we are working.

In the slide, you can see also the differences within the assumption that we made in 2017 when we defined the restructuring plan. In terms of trend of the interest rates, you know that we are on an asset side position. So we have good results with an increase of the interest rates in the 2 -- last year, '18 and '19, we have to readjust the total amount of the future taxable income for this different environment.

What it is important to underline is that write-down of DTA doesn't have any kind of impact in terms of capital ratio. And also, the level of the DTA that are not recorded on our balance sheet increased from EUR 1.8 billion to EUR 3 billion, so with the reassessment that is possible in the future with a normal trend of the taxable income. I can switch the level and the trend of the amount of our level of intermediation with the commercial activity. And we can also analyze the trend of the capital structure, Page 28. So we have -- we are maintaining capital structure in line with the last results at September.

Page 29, you can see also the trend of the risk-weighted assets. And I can anticipate that at this level, so EUR 58.6 billion is already accounting a EUR 1 billion increase in terms of risk weight of the EUR 4 billion that we anticipated as a possible result for the TRIM, the new model on the defaulted assets and the update of the time series that we -- some months ago, we expected to be complete in 2020. But we are now anticipating EUR 1 billion of the EUR 4 billion that was announced.

Page 30, we have the results of all the progress that we complete in managing the Italian Govies portfolio. And the main figure that I want to underline is the fact that now the credit spread sensitivity is EUR 1.5 million per basis point of the spread specific bond, a level that is completely different from the level that we had 3 years ago.

I now can pass -- excuse me, another thing that it is possible to underline even if it is in the details of our presentation, Page 38, we don't have any kind of differences in terms of legal risk and provision for the litigation in the last quarter. So we are maintaining our position in terms of Petitum and also the total amount of the expected provision that we could have on this kind of litigation.

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Marco Morelli, Banca Monte dei Paschi di Siena S.p.A. - CEO, GM & Director [4]

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Back to me. A few wrap up comments before we get into the Q&A.

Well, I think, again, everything can be done in a better way. Each of us can possibly achieve better results. In abstract, it's very true. And this is what we are focused. Every single day, we get to the office, and we try to do our best for Monte dei Paschi. Having said that, the 3 years period witnessed the fact that on the key topics, on the key sort of negative points of reference, the bank has stood, at the end of 2016, we did what has to be done and possibly, we did better than expectations and targets imposed.

Solid capital ratios and liquidity; huge reduction of our NPE and everything which is related to credit; and the trajectory of our commercial assets and liability in terms of commercial funding actually bears out that we are, as I repeatedly said during the last few quarters, we are on the right track. It will take time. I said 3 years ago that it would have been a very, very long journey and I stress that because we do -- we are back in the pack. We are able to compete, we are able to serve our clients in a much better way, but we started well, well behind others 3 years ago.

Outlook for 2020, I think pressure on NII will continue. We do have a very stringent policy in terms of new flows and pricing on new flows. We have less room to maneuver compared to a few of our largest competitors. But in the light of what we discussed and in the light that we are going to have a clear saving in our NII from commission paid on GGB, we will try to be more effective in terms of closing the gap vis-à-vis of NII.

On asset management, wealth management and traditional fee, we do see a positive ongoing trend, which is what we had in Q3 and Q4. Cost of risk, guidance is 60 basis points area, as we did say. So all things being equal, without factoring in any extraordinary potential item on whatever signs and coming from whichever directions, we do see net operating results in line with year-end 2019 with no impact on capital ratio and liquidity.

Let me close with one remark. I think, to me, the very result that we did achieve in the last 3 years, namely in 2018 and 2019, is the fact that we managed to restore credibility of the Monte dei Paschi people, we managed to give dignity back to the people working in Monte dei Paschi. And I think this is the basis upon which we can build, from now onwards, a more stringent type for the -- on our commercial activity.

Thank you very much, and we are open for questions.

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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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I have 3 questions. The first one is a question on the NII and on the impact of the potential derisking actions. First of all, I haven't seen in the presentation the amount of interest revenues generated by nonperforming, but you have disclosed that in 2019, the derisking cost-ed you EUR 50 million of lower NII. And if I'm not mistaken, you had EUR 150 million or so generated by NPLs as of the 9 months. So can you help us understand how to model the possible impact of the disposals roughly?

I mean, if you were to sell NPLs, the impact on the NII would be lower. If you were to sell UTP, it would be probably larger. So if you can give us an idea of what is the potential impact of any kind of derisking action, larger, smaller, on the NII, because my point is that, clearly, you have done a massive derisking action and the cost-cutting so far since you are in charge, but the impact on the NII, also because market trends are quite challenging, has been substantial. So I don't see actually the net benefit in terms of also reduction in the cost of risk from such a material derisking process that you implemented so far.

The other 2 questions are really, very quick. I was wondering whether in 2020, we may assume that, all else being equal, so leaving aside any kind of extraordinary action, whatever, the bank can restore the profitability in terms of bottom line. Because if I'm not mistaken, as part of the plan, you still have some hundreds of millions of euros of restructuring costs related to the additional full-time equivalent reduction as a part of the business plan. That's my second question.

And the third one, Andrea, you mentioned that you already incorporated EUR 1 billion of risk-weighted asset inflation this quarter out of the EUR 4 billion that you do expect by the first half of 2020. Is my understanding correct? And is it correct to assume that the capital ratios will bottom in the first half because of this regulatory-driven inflation of risk-weighted assets?

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Andrea Rovellini, Banca Monte dei Paschi di Siena S.p.A. - CFO & Senior Deputy General Manager [3]

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Okay, I can -- Andrea Rovellini speaking. We can start from your first question, that is the potential impacts of huge derisking activity in terms of a reduction of our nonperforming loans. As you mentioned it, in '19, we had a negative contribution in terms of net interest income for the derisking. That was around EUR 50 million. At the moment, the contribution, the net contribution of the possible disposal amount of nonperforming, that is not the 100% of our nonperforming because we have some credit line that are not transferable without maintaining at the same level of possible recovery in terms of collateral, is around EUR 60 million, EUR 70 million per year. And this is the margin. So this is the differences within the level of the interest that we receive, the level of the provision on the interest on the likely to pay and also, an average cost of funding in order to finance this kind of position. This is an impact that we could have if we succeed in reaching this kind of potential derisking on the net interest income.

But on the other side, we could have also higher potential improvement in terms of cost of risk. Because in this side, we can say that between 25% and 30% of our cost of risk is linked to the stock of the nonperforming that we have at the beginning of the year.

So the net effect of the increasing in terms of -- so the decrease of the net interest fee income and less cost of credit makes, in any case, so positive the -- a possible activity in this -- of this kind of dimension.

It is also very important to underline that there is -- there could be also an indirect positive effect in terms of a reduction of the wholesale funding because of the increasing of the -- so the evaluation in terms of credit risk of the company, having less nonperforming loans ratio.

The last -- so one -- moving to the other question you made. So the -- we have a -- you mentioned the EUR 100 million of additional cost-cutting to be complete in the next year in order to be compliant -- in the next 2 years in order to be compliant with the commitment. We can say that at the moment, so without considering any specific additional action, we have around -- reached 30% of this expected cut, of course. And now, after having started the project, in order to reach this kind of possible target, we have to define the other action.

The main action that we can imagine are in order to manage the total amount of the workforce, and this is something that we can start because, as you know, we have an open plan in order to manage the early retirement. And we can work, in this sense, with more intensity in the next 18 months.

You say that EUR 1 billion of the EUR 4 billion of increasing of the risk-weighted assets that we expected is already accounted in the '19 figure. Yes, we have anticipated 25% of the potential increase coming from the TRIM and the new models on the defaulted assets that will be complete during this year.

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Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [4]

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Just a clarification on the cost. If I'm not mistaken, the business plan '17, '21, there was some extraordinary items still to be booked in '20 or '21 related to cost -- staff cost reduction. But maybe I'm mistaken.

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Andrea Rovellini, Banca Monte dei Paschi di Siena S.p.A. - CFO & Senior Deputy General Manager [5]

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Yes. In our plan, we have the level, so the benefit for the early retirement plan. But at the moment, also working with the other, I would say, actions. So the natural turnover of our workforce makes us in a better position in terms of total amount of employees. So this is an area that we can maintain as an advantage in order to reach the additional cost-cutting for the next -- in 2021. So it is true. There is already a plan already accounted. But in this area, we are performing better than expectation.

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Operator [6]

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The next question is from Antonio Reale with Morgan Stanley.

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Antonio Reale, Morgan Stanley, Research Division - Equity Analyst [7]

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Two questions for me, please. The first one is also an update on the NPL transfer, please. From your understanding, as an observer, I mean, you will have heard and read newspapers on negotiations between the mass and the DG Comp. What do you think are the main issues that need to be overcome for a deal to go ahead? Is it the transfer price? Is it the minority shareholders' treatment? The deal structure? Any color you can share there would be extremely helpful.

And the second question is on capital requirements. I mean, with the change in the -- at the SSM, we've seen perhaps a new rhetoric when it comes to -- when it comes from the ECB to provide capital relief for those banks that have a strong commitment to deliver on the derisking restructuring plan. Can you share perhaps your conversations with the regulator and whether or not you expect a reduction in Pillar 2R or Pillar 2G? I think the last time I checked, Pillar 2G was 1.3%. Do you have any updates on where you stand today?

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Marco Morelli, Banca Monte dei Paschi di Siena S.p.A. - CEO, GM & Director [8]

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Okay, Marco Morelli here. Start from -- I tackle then your second question. I think in principle, I would expect that if there is "less risk", in our portfolio, i.e., if the effort on derisking is going to continue, possibly at a faster pace with a more massive kind of move, I would expect that regulator -- or the regulator will actually look at our P2G and P2R in a different way. But so far, my inclination, our inclination is to sort of discuss this kind of issue when we do have something, which is potentially tabled with regulators. And when, in a way, all the ducks are in a row rather than talking about potential things in general.

And then your first question, I think there is a discussion -- there is an ongoing discussion between the Italian Treasury and the European Commission. It's something which is run and that with -- by the treasury. So in this respect, I think it is fair to say that the bank is basically awaiting for some kind of formal sign and formal indication in order to sort of evaluate what kind of NPL transaction can be done different from our ongoing plan.

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Operator [9]

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The next question is from Jean Neuez with Goldman Sachs.

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Jean-Francois Neuez, Goldman Sachs Group Inc., Research Division - Executive Director [10]

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Thank you for the answer on the NPL transfer potential as per what the press was saying. Just wanted to understand maybe slightly better what would be -- what you, as CEO of the bank, would like to see happening in this? What's your wish? And what are you advocating in this process, if anything?

And the second point, just a super minor point but which has its importance because it's very volatile. What do you expect the tax rate to be this year and next? Just that the -- or otherwise, maybe the absolute amount of tax you extend -- you expect to pay in the next 2, 3 years per year, if that's possible to ask?

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Marco Morelli, Banca Monte dei Paschi di Siena S.p.A. - CEO, GM & Director [11]

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Sorry, Jean, but I could barely hear you. So let me try to rephrase. Your first question, what would you like to hear as the CEO of the bank? What would you like to sort of achieve going forward? And apologies, but I totally missed your second one.

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Jean-Francois Neuez, Goldman Sachs Group Inc., Research Division - Executive Director [12]

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My second question is just if you could give some guidance on tax rate for this year and next because it's very complicated from the outside for Italian banks.

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Marco Morelli, Banca Monte dei Paschi di Siena S.p.A. - CEO, GM & Director [13]

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Okay. No, no, fair question. So I will leave Andrea to deal with the second one. What would I like to see? I'm -- when 3 -- back 3 years ago, I think my vision was a very simple and sort of basic vision, i.e., we need to make sure that the bank is back in the market. We need to comply with a number of stringent commitments, and we need to reduce, as fast as possible, the stock of NPE to make the bank credible vis-à-vis of our stakeholders in terms of ability to deal with a very key topic that time.

I think the more we went on, the more I've been trying to be factual, i.e., these are the numbers. This is what we did. This is what we didn't manage to achieve as we expected. And this is what we are trying to do.

Now going forward, I think I would like to sort of see to what extent we can deal with the NPE once and for all, i.e., make sure we quickly get to the stage where we are in a position to sort of tick the box on the NPE reduction. Number two, I would like to see Monte dei Paschi in a position to invest more, to sort of invest more on everything, which is the so-called new banking frontier, but also invest more on the re-skilling of people, because one very issue of our banking system, in my opinion, is the fact that you need to invest a lot of money on people, no matter what the age is, in order to make sure that they can work in a different way, they can interact with clients in a different way, and they can, therefore, be at pace with the new environment, which is the new regulatory environment, the new commercial environment.

Then there is an issue, which I do raise every time we talk about strategy, which is to what extent the business model of a bank like Monte is a "sustainable" business model going forward, i.e., you project the business model of a bank like Monte and peers of Monte 3 years, 4 years, 5 years from now. Is it a sustainable business model? Can you generate a return on tangible equity measured as you please, which is "sustainable" and in excess of the cost of equity? Can you invest the amount of money you are forced and bound to invest in order to be up to speed with what the market requires? This is my aspiration. My aspiration is to make sure that whatever happens, Monte dei Paschi is in a position to at least play within this new environment.

Then question number two, after this one is how can you possibly do that, considering the state aid environment you're in, the restructuring plan you negotiated 3 years ago, which is, in my opinion, out of date now because all the macro assumptions and the operating assumptions made 3 years ago are not any more actual. And again, every other financial institution either revised the business plan or did a new plan and presented a new plan altogether. So it's pretty clear. I think in a very nutshell, because that -- an answer to this kind of question would require possibly an hour. But if you want, we can deal with that in a separate way.

Andrea, on the tax rate?

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Andrea Rovellini, Banca Monte dei Paschi di Siena S.p.A. - CFO & Senior Deputy General Manager [14]

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Tax rate for the future, it's quite difficult to identify a percentage because we have the possibility to go ahead with the reassessment of the DTA that was -- that decreased in terms of accounting amount this year. So at the moment, we are quite conservative in terms of estimate of the taxable income for the future.

If we are able to maintain this kind of trajectory, we could have between EUR 100 million and EUR 150 million per year of reassessment of the DTA. So the taxes will be recovered in -- also on an accounting point of view, and then we will have the benefit from the reintroduction of the help of economic growth that could be evaluated in around EUR 30 million, EUR 40 million of less taxes that we could pay for each year in the future. But in any case, so the final result, that will be positive in terms of contribution to the net profit.

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Operator [15]

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The next question is from Corinne Cunningham with Autonomous.

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Corinne Beverley Cunningham, Autonomous Research LLP - Partner, Banks and Insurance Credit Research [16]

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A couple of technical questions, please. First of all, could you give us some background as to why the liquidity coverage ratio dropped quite so much in the quarter and what the target LCR is that you're looking to achieve?

And the second one, could you tell us what the average risk weights are on your NPE portfolio and maybe split that into the average risk weight on your NPLs and the average risk weight on your UTPs?

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Andrea Rovellini, Banca Monte dei Paschi di Siena S.p.A. - CFO & Senior Deputy General Manager [17]

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First question is the trend of the coverage, as we say, briefly analyzing Page 21 of the presentation. We said that the decrease of the coverage was linked to the fact that we disposed an important amount, so around EUR 1 billion of bad loans at the end of last year, bad loans, that was quite fully covered, so with a coverage that was around 90% because we are speaking about the position without a specific guarantee.

Without this kind of position, the percentage of the bad loans with a specific guarantee, so a real estate collateral, for instance, increased a lot, so we can say that the quality of the bad loans improved. And we have now 80% of the bad loans in terms of net book value that are covered by a collateral.

We maintain stable the level of the coverage for the likely to pay this year and with the expected trend in terms of the further rate recovery and cure rate that we can expect under the 60 basis points of cost of credit for this year. We can say that our goal is to maintain, more or less, the same level of -- in terms of coverage.

You say that the -- you asked also after in terms of the risk weight -- the average risk weight for our nonperforming loans. The risk weight is around 35% on the gross amount. So these are the density of our nonperforming.

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Corinne Beverley Cunningham, Autonomous Research LLP - Partner, Banks and Insurance Credit Research [18]

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My question was actually also about the liquidity coverage ratio, so the LCR that went to 150% from over 200%.

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Andrea Rovellini, Banca Monte dei Paschi di Siena S.p.A. - CFO & Senior Deputy General Manager [19]

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Yes. We -- our goal is to maintain this level above 150%. And we could have some volatility in terms of this kind of ratio but is linked to the fact that we had to -- in the last period, we had to increase our liquidity position in order to manage the reimbursement of the GGB. But the area, our target is between 150% and 200% in terms of target in terms of risk appetite for this level.

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Operator [20]

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The next question is from Riccardo Rovere with Mediobanca.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [21]

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Three, 4 questions, if I may. The first one is on risk cost. If I understand correctly, what you stated before, this year, you had 68 basis points risk cost, and you stated around 25% of that is somehow related to the portfolio that has to be, one way or the other, deconsolidated, if I understand it correctly or, let's say, related to derisking actions. So it's like saying that the underlying risk cost of the bank in the current market condition in Italy could be in the region of 50 basis points, so let's say, 3/4 of the -- roughly of the 68 basis points. Is that a fair assumption?

Secondly, wanted to ask you with regard to the headwinds, the EUR 4 billion headwinds on RWA, you clearly stated EUR 1 billion is already included. Could you be -- but you stated that the residual is TRIM and a revision of risk weights on defaulted exposures. Could you be -- could you give us an idea of what TRIM only would be? Because maybe, hopefully, the bad loans or most of the bad loans might eventually go away at some point.

And then I really don't understand a couple of things. First of all, on the risk weights of the current bad loans, when you stated the 35%, is this only NPLs or this included all the other categories?

And on taxes, when you mentioned you might have the possibility of reassessing DTAs, this is really something I don't understand given that you have just eliminated EUR 1.2 billion of DTAs, meaning that the probability test might have indicated you -- should have indicated you that you cannot recover it. So I really don't understand how can you start again reassessing everything when you've just canceled EUR 1.2 billion.

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Andrea Rovellini, Banca Monte dei Paschi di Siena S.p.A. - CFO & Senior Deputy General Manager [22]

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So starting from the cost of credit. Yes, we have, I said, 25% of the cost of credit linked to the nonperforming and the other part linked to the new default and the new position that moves from performing to nonperforming. That could represent the cost of credit that we are expecting with the existing macroeconomic scenario in terms of the growth of the GDP.

So usually, we have between 25% and so 1/4 and 1/3 of the cost of credit linked to the existing nonperformer -- the other nonperforming loans. So the other part is linked to the trend of the new deterioration of the credit, together with our capability of recovery.

You asked some indication about the -- our EUR 3 billion remaining in terms of increasing risk-weighted assets for the TRIM. They're adjusting -- so the update of the historical series and the other factor that the new models on the defaulted assets. Our very, we could say, rough estimate, say that EUR 2 billion of the next EUR 3 billion comes directly from the TRIM activity.

Then risk weight on the nonperforming, so the 35% is on the total amount of the nonperforming loans. So included bad loans and unlikely to pay.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [23]

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Very clear. And on the DTAs and the reassessment of DTAs, (inaudible)?

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Andrea Rovellini, Banca Monte dei Paschi di Siena S.p.A. - CFO & Senior Deputy General Manager [24]

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Excuse me, on DTA, yes, so we adjusted the total amount of the DTA accounted on our balance sheet in the last year. And this is for the 2 main reasons that we say we analyze: so reduction of our projection in terms of taxable income for the future; and then the effect of the Italian budget law.

If we are able to maintain our path of growth in line with the expected trend in terms of taxable income for the next year, and I say that now our forecasts are quite conservative because we adopt a scenario of a negative interest rate for the next 2 years and a very limited growth in terms of Italian GDP, so if we are able to maintain this kind of trend, we can restart the reassessment of the huge amount of DTA that, at the moment, are out of our balance sheet. And we can say that we could have between EUR 150 million to EUR 100 million per year.

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Marco Morelli, Banca Monte dei Paschi di Siena S.p.A. - CEO, GM & Director [25]

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Marco Morelli again. And before the next question, I want to dwell upon, again, the -- what we stated earlier in terms of the additional EUR 100 million of cost cutting linked to the fact that we did not meet formal targets on operating margins of the old restructuring plan. I think this is something which we made explicit. As you might remember, a year ago, when it was clear that the macro environment was such that would not allow the bank to reach the target, the original target of gross operating margin envisaged in the plan. Therefore, every kind of work on the additional cost-cutting has been done and has been put in motion since then. This is not new in terms of the management of the bank and in terms of what was openly stated back a year ago. Next?

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Operator [26]

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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 [27]

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Going back to this big NPL plan, I know you cannot say much, but the press has indicated, as far as I can tell, that the plan could be finalized or announced by the end of this month. Do you think that this a reasonable assumption?

And also, you have an AGM coming up. If the plan is announced beforehand, do you expect or should we expect to see management continuity after the AGM and after the plan is announced and a new business plan built by the current management team or not?

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Marco Morelli, Banca Monte dei Paschi di Siena S.p.A. - CEO, GM & Director [28]

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Okay. Marco Morelli here. On AMCO, announcement by year-end, again, has been months now. The person, the party who should tackle this issue is the Ministry of Finance. We are not involved in the negotiation with DG Comp and with the European Commission. So as I stress every single time, we like to be factual. So when there is something which is finalized, we do explicit this and go through it. Otherwise, we are awaiting the final outcome of this discussion.

As far as management continuity is concerned, I would make the following comments. As far as I'm concerned, because when you have the overall Board, which is going through a renewal process, the list will be drawn by the Minister of Finance. I think since the very beginning, since 2017, my position was very clear. If the shareholder wants to change the management, he is free to do so every single time he deem it useful. I have been serving as CEO with 3 different governments, 3 different cabinets, 3 different ministers of finance. And every single time there was a change, I basically -- not basically, I mean, I openly stated that my mandate was available. I think now is time to draw the line for all parties involved for the simple reasons that there is a natural end to our term and to our mandate. And therefore, I will express my view of what the bank did in the last 3 years and what my position is to my counterparty, which is the Italian treasury, and the Italian treasury will then express its views in terms of what the new Board will look like.

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Operator [29]

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

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Marco Morelli, Banca Monte dei Paschi di Siena S.p.A. - CEO, GM & Director [30]

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Okay. Thank you very much, and we'll talk soon. Thank you.

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Operator [31]

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