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Edited Transcript of BPE.MI earnings conference call or presentation 5-Feb-20 5:30pm GMT

Full Year 2019 Bper Banca SpA Earnings Call

Modena Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Bper Banca SpA earnings conference call or presentation Wednesday, February 5, 2020 at 5:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alessandro Vandelli

BPER Banca S.p.A. - GM, MD & Director

* Alessandro Simonazzi

BPER Banca S.p.A. - Head of Planning & Control

* Roberto Ferrari

BPER Banca S.p.A. - CFO

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Conference Call Participants

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* Adele Palama

UBS Investment Bank, Research Division - 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

* 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 evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the BPER Full Year 2019 Consolidated Results Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Alessandro Vandelli, CEO of BPER Group. Please go ahead, sir.

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [2]

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Okay. Thank you. Good evening, ladies and gentlemen, and still thank you all for joining this conference call today about our 2019 results. This is Alessandro Vandelli, CEO, and I'm here with Roberto Ferrari, CFO; Alessandro Simonazzi, Head of Planning and Control; and Gilberto Borghi, Investor Relations Manager. As you all know, 2019 was a very important year for our group because we delivered a large number of strategic deals, which helped us to grow new business lines through the enlargement of (inaudible) Unipol Banca and Arca Holding to improve our asset quality, to simplify our governance model and rationalize the structure of the group.

Finally, to lay the foundations for future cost reduction and an improved important generational turnover. And we have been able to do all these things concerning a solid capital position and the group level profitability.

Please go to the executive summary on Page 5 of the presentation, which is already available on our website. First of all, I would like to emphasize that all the strategic operations scheduled for 2019 were completed. It's not necessary to cap all the actions we finalized during 2019, but I'd like to focus only on Q4 actions just to complete the picture. In October, we signed the agreement with the trade unions provided for in the 2019-2021 business plan. At the end of November, Unipol Banca was merged by incorporation into the parent company BPER Banca. And in December, we concluded the public exchange offer on Banco di Sardegna saving shares with a percentage of success of over 80%. It is just worth remembering that Unipol Banca and Arca Holding became part of the BPER Group's scope of consolidation starting from the 1st July, 2019. In my opinion, looking back to 2019, there are 5 important topics to underline.

First, the strong profitability. All in all, our profitability is very positive, also supported by contribution of Unipol Banca and Arca Holding. Despite a difficult macroeconomic scenario and the low negative interest rate levels. Net profit was about EUR 380 million, the second best result in the history of the group after the 2018 one. This result was affected by change in the scope of consolidation and the presence of some nonrecurring items. In particular, in the second half of the year, we can underline: one-off cost of EUR 136 million, gross of the tax effect relating to the redundancy plan, confirming the group's head count targets set by the business plan; one-off expenses relating to the strategic operations for EUR 21.1 million; higher loan loss provisions, with an increase of over EUR 150 million compared to the first half, also in line with the expected further acceleration of the derisking process. Moreover, we recorded impairments on properties and equity investments for a total amount of EUR 34.1 million. These components were substantially balanced by the accounting of the badwill generated by the acquisition of Unipol Banca equal to EUR 343.4 million, after the conclusion of the purchase price allocation process. We will go through details in a few minutes.

Second topic. Increased dividend and is strongly related to the profitability and solid capital position. We have proposed a cash dividend of EUR 0.14 per share for 2019 versus EUR 0.13 for 2018. Therefore, the amount of cash dividends distributed will increase by 16.5% confirming the trend of constant growth of shareholder remuneration over time.

Please move on the next Page 6. The third point is solid capital. Our capital position is very strong, even after the completion of the extraordinary deals and with derisking process. We have been able to manage capital in a very effective way, and we continue to be very solid with a common equity 1 ratio fully phased at 12.01% at the end of 2019 versus 12.36% in September and 11.95% at the end of 2018. The 4 topics gained good news from asset quality standpoint. Our gross NPE ratio declined further to 11.1% compared with 11.6% in September and 13.8% at the end of 2018. We were able to more than half the ratio since the peak of the crisis in mid-2016 when we had an NPA gross ratio of 23.5%. And just to note that group has been even lower at 10.8% on a pro forma basis, net of the new definition of default applied in Q4. It's worth highlighting also that the NPE ratio net declined by 1 percentage point year-on-year to 5.8%. The 2019 default rate stands at the low level of 1.7% versus 1.9% in 2018. All these figures clearly show the strong step forward in asset quality of our group year after year, and more has to come. As you know, we have already started the activities for new securitization of a portfolio of bad loans expected by the end of the first half 2020, with the aim of reaching, over 1 year in advance, the target of a gross NPE ratio below 9% set in the business plan for 2021.

Last point on business, we recorded a strong increase of customer volumes mainly due to the change in the scope of consolidation, with the inclusion of Unipol Banca and Arca Holding in the perimeter of the group. Having said that, our total funding reached a very important size of EUR 175.5 billion, including EUR 6.8 billion of Bancassurance business. Assets under management and assets under custody. Along with life insurance segment, a very significant size of over EUR 117 billion becoming even more supportive than in the past for the commissions growth.

Net loans to customers are at EUR 52 billion. We can show a positive development in the origination of residential mortgages and customer credit up, respectively, by 19.9% and 6.1% versus 2018. So looking back to all that we were able to realize during 2019 and a very positive result obtained, we can be optimistic for the future plan.

Now let's go very quickly into the analysis of the 2019 results, starting from the balance sheet. We can move on to Page 7 -- 8, sorry. The consolidation of Unipol Banca and Arca Holding has significantly changed the shape of our assets and liabilities. So any comparison versus 2018 is not useful. Anyway, I'll try to give some color about the main trends.

Total funding reached EUR 175.5 billion in 2019, with the contribution of Arca Holding of EUR 17.1 billion. With the consolidation of Unipol Banca and Arca Holding in the group, volumes, especially in direct deposits and Bancassurance has become very significant. This will be one of the main drivers for commission growth in the future. Just to note that from Q4 onwards, assets under management include the stock of pension funds of about EUR 3.8 billion.

Let's turn to Page 9. Here, you can see more details about the breakdown of the direct funding, which comes at EUR 58.1 billion, substantially flat compared to September. Customer funding is down by 0.7% versus September in the presence of an increase of the short-term funding by 1.9% in the decrease both of CDs and bonds. The institutional funding increased by 8.4% versus September 19 to EUR 3.4 billion due to a slight increase of both of bonds and repos. In 2020 and 2021, we will have only EUR 0.9 billion of institutional bonds maturities, of which EUR 750 million is a covered bond this year.

On Page 10, here, as I said before, we can see the significant contribution of Unipol Banca and Arca Holding consolidation to indirect deposit and bancassurance. 2019 volumes climbed over EUR 117 billion. That's an important number, probably the highest after (inaudible) credit. And you can see the pace in the table on the slide. I'd like you also to underline that we can appreciate the increase of the life insurance segment by 5.5% versus September '19, which represents a notable result for our business.

Moving on to Page 11. Stocks. Our gross and net customer loans are, respectively, at EUR 55.3 billion and EUR 52 billion. As you know, our strategy provides for a particular focus on mortgages and within that area of residential segment, which recorded an increase of the origination by 19.9% compared to 2018. Also, the introduction of consumer credit that is a strategic segment for our group is positive, up by 6.1% versus 2018. The group's quality of the performing loans book is confirmed with a very low bucket of high-risk exposure, 3.6% of the performing book and the further increase of lower-risk components.

Gross NPE stock decreased by 14.1% since December '18 and 6% versus September '19 as a clear demonstration of our effort to improve further the asset quality of our loan book.

Let's turn to Page 12. This page comes as a confirmation of the good job that was done on asset quality improvement. Gross NPE ratio fell to 11.1%, down by 0.5 percentage points versus September '19 and by 2.7% versus December '18 and 8.8 percentage points versus January '18. It's worth remembering that we stood at 23.5% in mid-2016. It is obvious that this is not the final target we had in mind. And in fact, we are committed to accelerate further on derisking. As I said before, we already started the activity for a new securitization of very bad loan portfolio expected by the end of the first half 2020 with the aim of reaching, over 1 year in advance, the target for the gross NPE ratio well below 9%, set in the business plan for 2021. We are confident to be able to successfully deliver as our track record clearly shows. It's worth noting that also the net NPE ratio decreased to 5.8% in 2019, 1 percentage point lower than the value of December '18. NPE coverage is almost flat versus September at 51%.

Moving on to Page 13, we can appreciate a significant improvement of the default rate, which stands at 1.7% compared to 1.9% in 2018 and 4.2% in 2016. It would have been even lower, considering the new definition of default. This is a clear evidence of the effectiveness of the credit strategies and policies adopted by the group in the last year. We can also focus on the strong improvement of the bad loans recovery rate, which comes at 6.3% compared to 5.3% in 2018. This is a confirmation that our servicing platform BPER Credit Management is very efficient. It is doing an excellent job and playing an important role within our overall evolving NPE strategy.

Page 14. The securities portfolio reported only a slight increase of EUR 0.2 billion versus September, Italian government bonds are at EUR 6.4 billion, weighing 33.5% of the financial assets portfolio. We continue to follow our strategy to diversify the financial portfolio and not to be too concentrated on Italian sovereign risk. Total bond and Italian govies portfolio duration are, respectively, 3.0 years and 4.3 years.

Now we can move on to profit and loss figures Page 16. 2019 net profits came at EUR 379.6 million compared to EUR 402 million in 2018, which including nonrecurring gains relies on debt securities. But obviously, the 2 outcomes are not directly comparable, mainly because of the change in the scope of consolidation in the second half 2019 and -- as well as some significant nonrecurring items in 2 periods. Commenting the 2018 results, it's worth highlighting that in particular, in the second half, we registered: nonrecurring charge relating to the redundancy plan provided for in the business plan of EUR 136 million gross of the tax effect, confirming the group's head count targets set by the business plan; extraordinary costs relating to strategic operations included in -- concluded in 2019 for EUR 21.1 million; higher loan loss provisions with an increase of over EUR 150 million compared to the first half, EUR 301 million in the second half of 2019 compared to EUR 148 million in the first, also in line with the stated acceleration of the derisking process; impairments on properties and equity investments for a total amount of EUR 34.1 million. These components were substantially balanced by the accounting of the EUR 343.4 million of the badwill generated by the acquisition of Unipol Banca after the conclusion of the purchase price allocation process. Our capacity to be remunerative and generate capital allows us to propose an increased dividend distribution of EUR 0.14 compared to EUR 0.13 in 2018.

We can move on very quickly to Page 17. I'd like to advise you that while going to the case of the profit and loss figures, we must remember that the comparison between annual 2019 and 2018 data is not homogeneous. So my comments will be focused, when necessary, on the quarter-on-quarter trends because only the Q4 and Q3 results can be comparable. About net interest income. Here, as usual, we focus on the ordinary NII net of IFRS 9 and 16 effect which comes resilient in Q4 at EUR 299.5 million compared with EUR 304.7 million in Q3, minus 1.7% quarter-on-quarter. The reason why we look at the ordinary NII should be well known for our group, which is facing an important balancing process, the impact of IFRS 9 and the 16 accounting change are particularly reannounced. Given the current difficult macroeconomic scenario and the low negative interest rate environment, I think this can be considered a positive result overall.

On Page 18, we are very satisfied with the net commissions trend. Q4 net commissions reached EUR 275.9 million compared to the EUR 268.3 million in Q3, showing a remarkable growth of 2.8% quarter-on-quarter. We recorded a very positive trend in bancassurance commissions, which was an increase of more than 50% quarter-on-quarter. We also recorded growth in credit cards, collections and payments, plus 4.7%, and loans and guarantees, plus 2.4%. This positive result is perfectly in line with our goal to improve our approach to our fee-oriented businesses in which we are investing a lot in terms of resources. As I said before, large indirect deposits in bancassurance volumes are reported for our commissions.

On Page 19, in Q4, trading income was positive for EUR 36.8 million, down compared to EUR 49.7 million in Q3. As you can see in the right half of this slide. I think that we demonstrated also in this sector, a positive profitability trend.

Moving to Page 20. Operating costs in Q4 are impacted by significant nonrecurring charges, as you can see in the call out in the right box of the slide. In fact, in Q4, we accounted the EUR 136 million related to the redundancy plan provided for in the business plan and nonrecurring expenses related to the strategic operation for EUR 21.1 million. In addition to that, we have accounted impairments on properties for EUR 26.9 million. The cost of the redundancy plan was lower than expected, mainly due to a couple of factors. First, about 170 employees left the job in advance already this year. They were excluded by the redundancy plan with lower costs and budget (inaudible). And second, a large number of employees utilized the so-called quota [change to] decree (inaudible) on the plan. The agreement with union about the redundancy plan confirmed the group's head count targets set in the business plan and allow us to stress positive expectations on cost reduction in 2020 and 2021.

On Page 21, in Q4 '19, we recorded loan loss provisions of EUR 139.5 million. Cost of credit rose to 86 basis points versus 47 basis points in 2018. The increase of loan loss provisions in the second half compared with the first half is in line with expected further acceleration of the derisking process related to the new securitization we are working on. This is expected by the end of the first half '20 with the aim of reaching the target of a gross NPE ratio below 9%.

So now Page 23 about liquidity. Our liquidity position is very solid, and net liquidity position is EUR 11.4 billion. Our total eligible assets are at EUR 20.9 billion, along with the bucket of unencumbered eligible assets of EUR 10.4 billion and that's a liquidity of EUR 1.1 billion made by deposits with the ECB. Both LCR and NSFR ratios stand well above 100%.

On Page 24, you can appreciate that we were able to confirm our solid capital position with CET1 ratios fully phased at 12.01%, even after the completion of all the strategic operations. It includes, as we have already seen, nonrecurring charge related to the redundancy plan and the strategic operation, the high level of provisions and impairments on properties and equity investments. The main effect in the last quarter, as you can see in the slide, where, on the negative side, 41 bps for the Q4 loss and 4 bps for other advancements. And on the positive side, 10 basis points related to the public exchange offer on Banco di Sardegna savings shares. Being able to confirm our capital ratio at this level also in this year affected by many strategic transactions and impacted by one-off charge that will release the benefits in the future is a very important achievement, confirming our ability in capital management and the focus of the group on capital solidity.

Now in conclusion, let me highlight briefly key messages on Page 26. The main takeaways from 2019 results, in my view, are: we delivered what we promised. 2019 was a challenging year, and we are proud of the results we reached. We'll start 2020 with a solid capital position after having completed all the strategic operations. We also charged for the redundancy plan and the upcoming provision for the bad loan securitization. Our objective is to maintain a well above 12% common equity 1 ratio fully loaded target for this year. Our past record in improving asset quality is very clear. As I said before, our target is to grow below 9%, and we are taking actions to reach this level by the end of the first half 2020. This is over 1 year in advance of what is embedded in the business plan for 2021, through a new bad loan securitization. In addition to all those achievements, net profit is very positive, and revenues are resilient. Operating costs are expected to benefit from what we did in 2019. Starting from this point, our group has the opportunity to reach a good and sustainable level of profitability going forward and to face the challenges of 2020.

Now thank you all for your time and attention, and we are ready to start to -- the Q&A session and to take your questions. Thank you. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Azzurra Guelfi with Citi.

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Azzurra Guelfi, Citigroup Inc, Research Division - VP [2]

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I have 2 questions. One is on NII and one is on asset quality. Can you give us some indication on the main drivers of the NII for 2020? And what's also your approach when it comes to the government bond and funding? The second question is on the NPLs. You said that you will try to accelerate the NPL disposal and bring the target forward, which is clearly an effort on the derisking. Could it mean that if NPLs and the potential impact on capital and coverage still 1 of the key data points that could be considered in the case of M&A?

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [3]

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Okay. Azzurra, thank you. Thank you very much. First of all on NII. Well, obviously, the change in the perimeter of consolidation is not simple to express clearly the trend of NII. I think the best way is to see the last quarter of this year. And what we're thinking is that it's possible during 2020 to have an increase in NII. Obviously, there is still a high pressure on it. And on the negative side, I think that intermittent values and also [there is] on asset would be a negative element. But on the other side, we think we have room to reduce cost of funding, to increase volume after a year where our focus was the combination of Unipol Banca and BPER. And also to work on some area where we expect to increase our presence like the consumer credit. The combination of these elements we think that it's possible to see, starting from the Q4 2019, an increase in next year. Well, about the asset quality. First of all, let me say that thinking about where we were some years ago this year to look at this level, this target well below 9% is, in my view, an important first result of our action. Obviously, it's not the final target. And yes, I think that in the analysis of (inaudible) combination, the asset quality is still crucial. At the same time, also to understand if there is the right coverage because we know in overview, we look at the same time equity, common equity 1, coverage at the NPE. These are the 3 elements that we definitely take into consideration to understand that if a combination or an M&A like we did in the last year with Unipol Banca is positive or not for our group. And we'll see what will -- could happen in the coming year. Thank you, Azzurra.

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Operator [4]

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The next question is from Giovanni Razzoli with Equita Group.

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Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [5]

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Couple of questions on my side. On the NII, if you can please share with us what could be the impact of the tiering in 2020? You have not mentioned this as a part of the positive elements of the NII. But I think it's more or less included somewhere there. So this is my first question. The second question related to the stock of NPE. If you can please share with us what was the inflation in terms of euro million related to the new definition of default? And I've seen that despite this change in the accounting principle, regulatory principle, the stock of NPE was down by EUR 390 million every quarter-on-quarter in terms of gross stock of NPE, which is a very good achievement, especially there was, if I'm not mistaken, a decrease in the UTP on a quarter-on-quarter basis. If you can share with us what were the main trends behind these performance, the bank bonds, the disposal? And also what was the amount of cancellations or the recognition of the loans that you have recorded? The final question is on the full-time equivalent reduction, the cost associated with it. You booked EUR 135 million of one-off as a part of the agreement with the trade union, which involves, if I'm not mistaken, 1,290 full time equivalent. First of all, I would like to know the phasing of the exits of the resources to have an idea of the trend in the staff cost in 2020? And then secondly, I was wondering whether this EUR 135 million cover the full 1,300 reduction in the full time equivalent? Or if there is some other provisions already accrued because the cost seems to me a little bit low, and it's surprisingly low. So I was wondering whether there is already something that you have booked.

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [6]

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Thank you very much, Giovanni. We'll take your last questions first of all about the redundancy plan. Yes, I confirm that EUR 136 million is in our estimate, the full amount of the cost and I confirm -- I fully confirm the target in terms of number of organic for BPER group in our business plan. Yes, I tried to explain during my presentation that the positive effect was first of all because we have some exits during 2019, and we had some cost related to this in 2019 cost of the staff. But at the same quota (inaudible) decree was crucial to reduce the administrative cost between EUR 180 million and EUR 200 million in our business plan to this level of EUR 135 million of this (inaudible) EUR 50 million. We are working on the phasing of the reduction of our staff. A large part will be in 2020. We expect it to have an effect when we complete the exit of the employees, a positive effect of around EUR 80 million. I hand over to Roberto for the effect of tiering. And now I try to recap the other questions you have asked.

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Roberto Ferrari, BPER Banca S.p.A. - CFO [7]

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Giovanni, through tiering actually, we should have a benefit of EUR 14 million, EUR 15 million compared to 2019. And thanks to tiering, actually, we would like to keep -- to have a stable contribution of the financial portfolio and the treasury to the net interest income.

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [8]

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Okay. About the trend of the UTP, yes, we have started, in the last part of the year, a strategy of UTP disposal. So we completed, during the last part of the year, disposal for 120 UTP. Also this first quarter of 2020, we are working on other disposal. I think it is crucial for another reduction in the NPE gross ratio to work not only on bad loans but also on UTP. I would like to express that after the securitization on which we are working now, I think that we completed the massive disposal of bad loans. We expect to be able to complete the new securitization of bad loans, I hope, around EUR 1.2 billion or something more. After that, the amount of bad loans we have another reduction. And I think that the strategy will change with a lower amount of portfolio, single portfolio and single loans. And we have to work on UTP, and we started during this year. The impact of the new definition of default was around EUR 150 million. This effect, obviously -- this one-off effect during 2019, obviously, the NPE gross ratio was lower without this level of new definition of default, and it was 10.8%. I think we take all your questions.

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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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Just a follow-up on net interest income. I was wondering, I see that there is some pressure in terms of asset spread. So if you can elaborate a little bit on the new production, particularly on the mortgages compared to the back book, what kind of spread you are getting from the new production? And a clarification on tiering. Roberto, you said the EUR 14 million, EUR 15 million additional positive contribution in 2020. But in the fourth quarter, you already booked part of the tiering effect or not. And on -- still on the contribution of the financial portfolio, I see that you have a very few maturities in the next 3 years as far as the Italian govies. I was wondering, you said that you are expecting some -- a stable contribution from financial portfolio. Are you planning to increase the exposure to Italian govies? Or do you feel that this is the right size? And last 2 questions. One, on the impairments, I saw some write-offs on real estate, if you can elaborate a little bit. And what kind of approach you have on your real estate assets? Are you planning to put at fair value? It's just a specific write-off from some assets? And finally, on common equity Tier 1 ratio, 12% is a good level to do some disposal. I don't know, I saw that at the end of the day the loan loss provision was expected for the fourth quarter to speed up maybe the process to sell some NPL was lower than expected. So I was wondering do you feel that you will be able to do EUR 1.2 billion securitization without any additional provision. And in terms of capital, do you see any headwinds in 2020, '21?

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [11]

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Okay. Thank you very much. So probably, I take the last part on our capital position, then I have to -- Roberto better to go into the detail in our strategy on the securities portfolio. Well, so we try to take advantage of the extraordinary deal and during the second half 2019 to increase the coverage of the perimeter of our disposal. So if you look at the coverage of bad loans, there was an increase in the last Q of roughly 3 percentage points from 40 -- 63% to 66%. We think that the level of coverage today is in line with the expected prices of the portfolio. I would like also to express that we are extremely confident on our capital position. Because we expect a good trend in 2020, not only for our capital generation but also because we hope to have some positive effect starting from the alignment of the internal model to import bank portfolio. Obviously, we have to work with the ECB on this point, but we hope to have, by the end of the year, this significant element that in terms of the basis points of Common Equity Tier 1 is well above the 50 basis points. If I remember correctly, it's probably around 50 basis points. So we are absolutely confident to have a very strong capital position and to manage effectively all the action on the project on asset quality. On real estate assets, yes, there were some specifically light quarter in the last year, so we tried to work on some specific real estate in our portfolio. What I want to express that we are working on real estate project and I hope, by the end of the fourth Q to complete all the analysis and probably would be a new division in our group, something like the BPER credit management that work on the revenue side, I think that we are working to have something similar also on the real estate because we think that we have some opportunities on this area. Speaking about the securities portfolio and, in particular, on government bonds, as expressed many times that our view is that it is important to maintain a well-diversified portfolio without any significant concentration on the Italian government bonds. So this is the decision and I believe, really sometime was not simple to maintain this position and not to take advantage when the spread was wide in the last part of 2018. Anyway, Roberto please go ahead on this point.

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Roberto Ferrari, BPER Banca S.p.A. - CFO [12]

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Christian, yes, on tiering, actually, the EUR 14 million benefit is a delta compared to 2019. And we already consider that in 2019, in the last 2 months, we benefited from the tiering because it was already applied. So EUR 14 million is the incremental contribution to net interest income, thanks to the tiering. What I was saying before is that considering this benefit, our aim is to keep a stable contribution from the financial portfolio and from the treasury compared to the one that we had in 2019. The strategy that we have in the portfolio, we marginally increased the size by EUR 250 million early this year, and margin increased the duration. The division was 2.9% at the end of last year. Now we are close to 3.10%, so actually there was a small increase in the duration of the portfolio. But the total size, the increase of the total size was very marginal.

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [13]

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I would like Alessandro Simonazzi to explain -- to go into details of the NII, in particular, on the spread of mortgages and other elements, liquid (inaudible).

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Alessandro Simonazzi, BPER Banca S.p.A. - Head of Planning & Control [14]

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(inaudible) but what constraints it [expires] in the mortgages. The liquidation and its effect are around minus EUR 36 million impact on NII that will be probably, in our estimates, completely countered -- replaced by the positive effect on the expiring short-term deposits expiring during the year and bonds expiring during the year. So the benefit from the commercial deposits will counterbalance the effects of the replacement of mortgages expired during the year. So what concerns the average rate, it's about 1.5, 1.6 on fixed rate and around 1 or 1.1 on floating rate, the new reduction of 2020.

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Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [15]

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And the back book that you described?

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Alessandro Simonazzi, BPER Banca S.p.A. - Head of Planning & Control [16]

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The back book is firing -- is 2% on fixed rate and -- no, 2% on average on fixed and floating rate.

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Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [17]

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Okay. Just a follow-up, so just a clarification on Unipol Banca, the validation of the internal model, do you expect the validation by the end of this year or next year?

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [18]

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Well, crossed fingers. I think that we'll achieve more by the end of this year. Speaking with ECB, they expressed that this was one of the activities of this year. So for this reason, I think that we are working to prepare all the elements for a good presentation of our internal model, the impact of the alignment. And I can repeat that we understand that it's possible to have by the end of 2020. This is an important element. And as we previously did, the impact is between 50 to 60 basis points on CET1 ratio.

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Operator [19]

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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 [20]

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Only one quick question left on commission income, Q4, in the EUR 276 million, was there any contribution from performance fee linked to Arca or not?

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [21]

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Okay. Thank you. What I know about Arca, I think the amount of performance fees is very, very low, so there is no significant performance fees in the amount of EUR 275 million of commissioning figures. And there is also a very small but significant commission for our group on Optima, it is not important for the site, is very low the amount, but it's also important for the -- especially that we change all the line of our Optima theme. And for the first time, we beat the target. And so there was a very small amount of performance fee. But my understanding in the balance sheet of Arca, LGR, the performance fees are not significant.

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Operator [22]

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The next question is from Adele Palama with UBS.

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Adele Palama, UBS Investment Bank, Research Division - Equity Research Analyst of Italian Banks [23]

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A couple of questions from me. So with -- I was wondering if you had the impact -- any net impact on the calendar provisioning? And then apologies if this question has been asked already. But can you please recap all the headwind and tailwind on the capital in 2021 and the issue of a preliminary impact on Basel IV? And then can you please give us a guidance on the tax rate for 2021?

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [24]

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Okay. Thank you, and thank you very much. So starting from your last question what I can say about the tax rate, is that our expectation for next year is to have a tax rate around 10%. So this year was roughly 5% and next year around the 10%. About the calendar provisioning, yes, we try to work on some preliminary estimate. But at this stage, I would like go on to state some more qualitative valuation because the recent Unipol Banca Incorporation, the disposal that we are working on for the Basel portfolio in the first half, the first disposal of UTP. So all these elements are -- have an impact on the level of calendar provisioning. That said, this -- in the horizon of the business plan, we understood that it is absolutely manageable and not so significant. Also in consideration that we expect to have a good capital generation during 2020 and 2021. So let's say, it's a preliminary estimate. And so we do like only to work furthermore after all the deals and operations that we are completing during this first part of 2020. I don't remember there were any other questions about the calendar provisioning tax rate and probably, please...

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Adele Palama, UBS Investment Bank, Research Division - Equity Research Analyst of Italian Banks [25]

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Yes, and headwinds and tailwinds on capital in 2021? And then if there is an impact to Basel IV?

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [26]

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Okay. Capital on capital. First of all, I would like to express, first of all, what we expect to see during 2020 and 2021, those are the last 2 years of our business plan. On 2020, we expect a positive effect coming from the TRIM if we complete -- if the process of TRIM will be completed. Because on one side, we have a positive effect coming from the validation of pretty large and the corporate. On the other side, there would be this set of premium. But overall, we expect a positive effect on Common Equity 1. On the same time, as I said before, also only for extension of the perimeter IV has another positive effect. So the combination of these 2 elements means around 80 basis points of Common Equity 1. This is for the 2020. For 2021, for BPER, probably, there is only the SME supporting factor, and we expect some benefits on this side but limited around 20 basis point. More difficult is to express the level of impact in 2022, but what we can see is focusing on credit. We see that there would be a good balance between benefit and -- coming from the new definition of default and also the EBA guidelines. So there is a balance between the 2 assets. And we expect also another positive effect coming from the expansion of IV on another company of (inaudible) or having said this, so we think that the effect of 2022 of the new regulation are manageable. I would like also explain one reason, the impact in the risk -- credit risk are mainly focused on large corporate and financial institution. And this is an area where we have a very low amount and penetration. At the same time, looking at the operational risk also here, we are not validated. And so we understood that the high-impact is for the banks with a validation model for the operational risk. For these reasons, we think that IV -- the effect of Basel IV are absolutely manageable.

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Operator [27]

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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 [28]

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So I have several questions. First of all, on capital, I just want to confirm I understood correctly. That the TRIM and Unipol extension, if both happen in 2020, would be a positive effect of 80 basis points? Second, cost of risk, obviously, Q4 worse, then Q3 elevated. Do you have a view on -- and assuming you've done kind of these one-off adjustments, do you have a view on the cost of risk for 2020? And if that's at a normalized level? Third, do you expect to share any more in Tier 1s? And fourth, with Arca, I don't know if you've finished your strategic review, if you could share any conclusions from that? And if you are to keep the business, the current stake, will you be able to update the business plan targets for the inclusion of Arca?

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [29]

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Thank you, Hugo. I will take your first 2 questions. And first, I confirm the 80 basis points is expected from TRIM with the validation of the [pretty] large and the corporate. And the alignment of Unipol in -- model -- in internal model for the portfolio of Unipol Banca. Cost of risk, obviously, the second half 2019 was impacted by our strategy to increase the coverage, looking to the disposal in the first half 2020, but we expect a normalization during 2020. And we expect to see a cost of risk around 60, 70 basis points. This is the range that we expect. Roberto something about our plan on additional Tier 1.

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Roberto Ferrari, BPER Banca S.p.A. - CFO [30]

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We see actually that the market is very effective and spreads have gone down considerably. At the moment, we are not planning an additional Tier 1, but never say never. So in the future, we will see how the market will react.

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [31]

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Well, Mark, it's a -- first of all, we are satisfied for the trend in 2019. And also the positive impact on our balance sheet. The company closed the year with net profit more than EUR 40 million. And okay, this year, we have the full impact because last year was only 6 months in the perimeter of the group. So let's say, we have no hurry for take a decision on Arca, considering the positive trend. We know that there are some opportunity, but our focus is to maintain the value of Arca. If in the future, there will be some opportunities, we could consider together with Popolare di Sondrio, is the partner in Arca Asia but I would be -- we take time to understand what is the best for the future of the company because the company is performing well. Our customer base are satisfied for the standard of Arca and there won't be -- frankly speaking, there is no decision on Arca at this moment.

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Operator [32]

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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 [33]

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I have a couple of ones from my side. Could you please give us some color on the back book and the front book on corporate loans as well? And have you repriced or do you intend to reprice fees on current accounts for 2020? And if so, what impact do you expect on fees? And can you please disclose the size of the PPAs related to first-time adoption of IFRS 9, your accounting on your Common Equity? And as follow-up on calendar provisioning, have you already discussed with the regulator, the potential application of calendar provisioning on the NPE stock for 2020? And finally, could you please repeat your cost of risk guidance for 2020? I'm not sure I got it.

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [34]

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Thank you. First of all, I take your last question about the cost of risk. We expect for 2020, a cost of risk around 60, 70 basis points. About the calendar provisioning, the answer is no. We have no discussion about the application of calendar provisioning in 2020. Having said this, as I said before, we are working, in particular, to add the other business with better credit and strategic policies to manage these new regulation. It was the best activity on our portfolio. I don't know if you haven't looking into my colleagues about the other elements -- about the back book and the front book of our loan portfolio. And the potential repricing, negative repricing during 2020. I can give you a flavor about the corporate side. On the corporate side, the core corporate side, we expect that we are now -- we are coming out of 2019 with a yield of 1.6 and the expectation for the next year is to end the year. So this is the snapshot at the end of the year. And for the end of 2020, we expect the same rate to go down by around 5, 10 basis point, 5.55 or around 1.55. And this is the goal on the corporate side that we want to increase volumes counterbalancing the effects of the reduction of the yield. So what concerns mortgages and the expectation of replacements. I gave you the answer from [personal] view.

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Roberto Ferrari, BPER Banca S.p.A. - CFO [35]

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Yes, on the IFRS 9 impact, and actually, it is embedded in our fully loaded Common Equity Tier 1. And it explains the difference between the fully loaded and the phasing. So actually, it is fully embedded in the Common Equity Tier 1.

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Operator [36]

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The next question is from Domenico Santoro with HSBC.

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Domenico Santoro, HSBC, Research Division - Analyst [37]

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Yes, Domenico, HSBC. Actually all the questions have been answered. I just wonder whether you could actually give us an indication in absolute term for cost for 2020 because there is much volatility here. And of course, there is also the impact from consolidation of the entities that you just acquired. So that will be very helpful for the benefit of our model. But on capital, given the slightly changed guidance that you're giving right now, I'm just wondering if the 12.5% is still a sort of a guidance for 2020 or in terms of core Tier 1 or there is an update in terms of capital as well. And then you mentioned UTP disposal, if I'm not wrong, in the fourth quarter. Just wondering whether this has been executed at book value or there is anything to plug in terms of losses or whatever.

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [38]

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Well, thank you. Thank you very much, and Domenico, yes, it's not simple during -- looking back to 2019 to understand that the level of cost for the coming years. What I can say that our target is to reach overall. So staff cost, the industry cost and impairment, depreciation, roughly around EUR 1.6 billion. This year a very challenging target, but we -- this is what we have in mind for this year. So some benefits can (inaudible) of Unipol Banca, branch closure already completed during 2019. So we'll start closing the 13 in 2020 and also there is something coming from staff cost. Speaking about the CET1 ratio, we have in mind to be well above 12.5%. And so it is absolutely the base of 2020. So we expect to be able -- if we have what we mentioned before about the alignment of Unipol Banca to internal model, it is possible, absolutely, to have something more of this level.

At this stage, I would say the same for 2021. It depends also, if it will be possible to have the alignment of self delivery to internal model that we plan for the 2021, but it's too early to say if also this positive effect will be on the balance sheet of 2021. I think this is all UTP. Well, let's say, we are particularly satisfied for what we were able to complete during the last part of the year. Because we have no impact on profit and loss. And because we have some profit recovered because this unlikely to pay we are in the perimeter of disposal. So in this perimeter, we have not only bad loans, but also some UTP and we -- our experience is that the coverage was in line and sometimes lower than the price on the market. And so we completely -- as I said before, the EUR 120 million of disposal in this first quarter, probably would be something like this because our target is to complete roughly EUR 300 million of disposal. And we think that this target is -- will be achievable. So together with disposal of bad loans through the securitization, there is also this activity on the UTP.

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Domenico Santoro, HSBC, Research Division - Analyst [39]

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Just to understand on the capital. I understand all the moving parts. But would you confirm what you basically hinted in the last call, that impact from all these moving parts should be beneficial for risk-weighted assets by your own EUR 2.5 billion, more or less, cumulatively? And hit instead to capital to equity is going to be around EUR 300 million. This is the moving parts that we should consider?

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [40]

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What I can say in 2020, the benefit on RWA coming from the TRIM and the Unipol alignment to internal model is in excess of EUR 2 billion of saving in RWA. In 2021, if there will be the SME supporting factor, we estimate roughly another EUR 0.5 billion. So together, these elements is more than EUR 2.5 billion of reduction of RWA.

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Domenico Santoro, HSBC, Research Division - Analyst [41]

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And the EUR 400 -- sorry, EUR 300 million hit to capital instead is it confirmed in 2021 the one to equity?

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [42]

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The shortfall?

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Roberto Ferrari, BPER Banca S.p.A. - CFO [43]

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Yes, we say that we should have an expected loss -- a shortfall of EUR 288 million, but we start 2020 with a surplus of EUR 315 million. So actually, the shortfall should be compensated by the surplus that we have now.

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Domenico Santoro, HSBC, Research Division - Analyst [44]

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So there will be no impact there to equity?

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Roberto Ferrari, BPER Banca S.p.A. - CFO [45]

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No, not from that.

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Operator [46]

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(Operator Instructions) 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 [47]

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A very quick one. Would you be in a position to give us an idea what you think is the underlying risk cost in 2019? And do you think with the default rate of 1.7%, and with the coverage ratio of roughly 40%, let's say, 40%, 45% without using exactly 51%. Could you agree with the fact that your underline just because of that your cost of credit is actually in the region of EUR 400 million or slightly higher? So let's say, EUR 100 million per quarter. And the more you sell, and actually, the cost of risk is not going to go down because you have less to work out and less to recover. Is it a wrong way of seeing things?

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [48]

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Well, first of all, about the default rate, as you -- so for 2019, the 1.7%, including, obviously, the impact of the new definition of default without it, the level was around 1.4%, 1.3%. Let's say, first of all, for our group that in 2016, had a default rate of 4.2% is a very important achievement, thanks to all the activities on managing the credit risk. So internal policies and strategies on risk. This is the first important point. Obviously, we take advantage when we have, like this year, some extraordinary positive items like the bad will of the size of more than EUR 300 million. And we have to work on our strategy to decline, to reduce the weight of non-performing loans as we have in mind to grow, as I said many times in the presentation, below 9%. And so we take all the advantages during this year.

Now what I can say is to go below 9%, we have a level of coverage in line with this target. Said this if you think that we were ready to [implement] a reduction from 23.5% and to the target of this year, let's say, around 8.5%. Now we want to go home with the activity of de-risking because we know that probably, we have to go to manage another reduction. But we think that together with the level of our coverage in the other provisioning that's possible to have not 5 percentage points less in 1 year, but it drives a reduction in our portfolio. So this year -- now we expect to see this year probably roughly, as I said before, 0.6%, 0.7% of cost of risk. And this means something around EUR 70 million, EUR 75 million per quarter. And this is our signature, this strategy we think that is possible for this year, another year of a strong reduction. Then after this target, it is possible to see another reduction. But for this year, I think we see the level is achievable and probably is the level that granted to be at the -- a good level of profitability.

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Operator [49]

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

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Alessandro Vandelli, BPER Banca S.p.A. - GM, MD & Director [50]

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Okay. So no final remarks. Thank you very much (inaudible) and we'll see you soon. Thank you.

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Operator [51]

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