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Edited Transcript of BPE.MI earnings conference call or presentation 8-Nov-19 8:30am GMT

Nine Months 2019 Bper Banca SpA Earnings Call

Modena Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Bper Banca SpA earnings conference call or presentation Friday, November 8, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alessandro Vandelli

BPER Banca S.p.A. - 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 - Associate Director & Equity Research Analyst of Italian Banks

* Andrea Vercellone

Exane BNP Paribas, Research Division - European Banks Analyst

* Domenico Santoro

HSBC, Research Division - 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

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Presentation

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Operator [1]

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Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the BPER Third Quarter 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. Please go ahead, sir.

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

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Okay. Good morning, ladies and gentlemen. Thank you all for joining this conference call today about our 9 months 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.

Before going into details about our 9 months results, let me briefly highlight a few key points, which help, in my opinion, to have a clear picture of the state of the (inaudible) after the period, full of important(inaudible) . Please go to the executive summary of the presentation on Page 5, which is already available on our website.

So far, 2019 has been a very busy and demanding year. We are close to the end of this 2019. I think we can be very proud of what we have been able to realize. In few words, we have successfully combined a growth strategy to the enlargement of the group perimeter, with a strong clear improvement in asset quality, and at the same time, confirming the solid capital position and a good level of profitability.

You all know the details of the deals that we closed at the end of July, so let me only express [my great appreciation] for having positively completed important activities for the growth of the group. As a result, Interbank and Arca Holding became part of the group's [scope of] consolidation starting from July 2019.

Now I'd like to focus on a few leading points that, in my opinion, represent a sort [of a feel of] our storytelling. With our 5 key words, the first one is growth. Our group has grown significantly in terms of total assets, reaching over EUR 80 billion of total assets and climbing to EUR 172 billion of total funding, mainly thanks to the change in the scope of consolidation. We are going to see some details in the next slide.

The second word is asset quality. Asset quality strongly improved. Gross NPE ratio now stands at 11.6%, down by more than 2 percentage points since the beginning of the year; by 8.3 percentage points since January 2018; and circa 12 percentage points since the peak of the crisis in [mid-2015] when we had an NPE gross ratio of 23.5%.

Default rate is at 1.6% annualized versus 1.9% in 2018 and versus the peak of about 7% in 2013. All these figures clearly show the strong step forward in asset quality of our group year after year.

Moreover, we have already started the activities for a new securitization of a portfolio of bad loans expected by the end of first half 2020, with the aim of reaching over 1 year in advance the target of the gross NPE ratio well below 9% set in the business plan for 2021.

The third word is capital. Our capital position is very strong, even after the completion of the (inaudible) and the derisking achievements. We have been able to manage capital in a very effective way, and we continue to be very solid with a (inaudible) migration fully phased as of the end of Q3 at 12.36%, up, respectively, by 3 bps versus Q2 and 41 bps versus December 2018.

Profitability is the fourth word. All in all, our profitability is resilient despite the difficult macroeconomic scenario and low negative interest rate levels, even on an extraordinary basis.

9 months 2019's paid net profit at EUR 522.9 million, which is not directly comparable to the same period of the last year because of the change in the scope of consolidation and some significant nonrecurring items, like in the third Q, [bad will] generated by the acquisition of Unipol Banca of EUR 353.8 million and higher loan loss provisions, also in line with expected acceleration of the derisking process.

In the first half '19, we have other negative nonrecurring items for a total of EUR 22.9 million. Having said this, I'd like to highlight the resiliency of revenues, in particular, the net commission, which show a very good performance, both year-on-year and Q-on-Q, and the decline of operating costs on a like-for-like basis as we are going to see later on.

The last word is business. We recorded a positive development of the commercial activity, especially in mortgages, showing an overall increase in the new production by 5.9% and over plus 40% in the residential mortgages segment. Toward the end, we are perfectly conscious that our job has not been finished yet. In fact, we are working on another bad loan securitization, for example. But our track record can make things happen, and our solid capital base and profitability expectations are a good starting point to think optimistically for the near future.

Now let's go quickly into the analysis of the 9 months, starting from the balance sheet. We can move on to Page 7. So first of all, balance sheet and the total funding, the consolidation of Unipol Banca and Arca Holding, significant change this -- the shape of our funding structure, in particular, concerning assets under management and assets under custody.

Total funding grew from EUR 94.7 billion in June '19 to EUR 172.1 billion in September '19, with Unipol Banca and Arca Holding contribution, respectively, of EUR 63 billion and $14.8 billion.

Let's turn to Page 8. So we have direct funding, and we can see more details about the breakdown of the direct funding, which comes at EUR 58.2 billion from EUR 51 billion in June '19, with the contribution of Unipol Banca of EUR 9 billion.

Customer funding now stands at EUR 55 billion, with a large portion of current accounts and [sight] deposits, which accounts for EUR 46.8 billion, mainly due to the conservative approach of customers to investments in the current difficult economic and financial environment.

The institutional funding dropped to EUR 3.2 billion, mainly due to the zeroing of the repos segment. In Q4, we're going to [have] maturities of EUR 0.5 billion of retail bonds, of which EUR 0.3 billion related to a Tier 2 bond issued by Unipol Banca, at a very high coupon. This will help our job in reducing cost of funding in the coming quarters.

On Page 9. Here, as I said before, we can see the significant contribution of Unipol Banca and Arca Holding to direct deposit, both in assets under custody and assets under management and, a lesser extent, to Bancassurance.

But it's worth mentioning that indirect funding in Bancassurance stock climbed close to EUR 114 billion. That's an important number, probably the highest after the 2 big group, Italian big groups, [in the back] (inaudible). And we can see details in the table on the slide.

But I'd like also to underline that on a like-for-like basis, we can appreciate a growth in all aggregates versus December '18: assets under custody, plus 11.4%; assets under management, plus 7.2%; and Bancassurance, 10.1%. Moreover, in the third Q 2019, positive net inflows, both in assets under management and life insurance segment, which represent notable results for the period.

Moving on to 10. Cost of -- gross and net customer loans are, respectively, at EUR 56 billion and EUR 52.5 billion. As you know, our strategy provides for particular focus on mortgages, and within that area -- the residential segment.

On this side, we recorded an increase by 1.5% on the-- of the stock of mortgages, also supported by good performances of mortgages new production, up by 5.9%, with a particularly strong increase of residential mortgages segment, up by 40.6% versus the same period of 2018 on a like-for-like basis.

In the third Q 2019, we accounted also the well-known bad loan disposal of circa EUR 1 billion of GBV to UnipolRec. The good quality of the performing loans book is still confirmed with very low bucket of high-risk exposures.

Let's turn to Page 11. This page can have a confirmation of the amazing job we have done on asset quality improvement. Gross NPE ratio fell down, respectively, by 2.1 percentage points versus June '19 and 8.3 percentage points versus January '18. It's worth remembering that we stood at 23.5% in mid-2015 . It is obvious that this is not the target we have in mind, and in fact, we are committed to accelerate further on derisking.

As I've said, we have already started the activities for a 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%, setting the business plan for 2021. We are confident to be able to deliver successfully as our track record clearly shows.

A brief look at the fourth Q '19. We have the consolidation of Unipol Banca and the bad loan disposal of about EUR 1 billion GBV to UnipolRec. In the end, the gross NPE stock decreased to EUR 6.5 billion, that means the ratio of 11.6%. NPE coverage decreased to 51.1% due to the different NPE mix, decrease of bad loans and increase of UtP and past due.

Moving on to Page 12. We can appreciate a significant improvement of the default rate, which stands at 1.6% annualized compared to 1.9% in 2018. We can also focus on the strong improvement of bad loans recovery rate, which comes at 6.1% annualized compared with -- to 5.3% in 2018.

This is a confirmation that our servicing platform, BPER Credit Management, is a very efficient machine, and it is doing an outstanding job and playing an important role within our overall NPE strategy.

Now we can move on Slide 13. The security portfolio went up versus June '19 by EUR 1.6 billion at EUR 18.8 billion, mainly due to the contribution of Unipol Banca, a consolidation of EUR 1.2 billion.

Italian government bonds are at $6.4 billion, EUR 1.1 billion from Unipol Banca, weighing 34.2% of the financial assets portfolio. We continue to follow our strategy to diversify the financial portfolio and not to be too concentrated on the Italian sovereign risk. Total bond and Italian govies portfolios duration are, respectively, 3.1 years and 4.3 years.

Now we can move to -- on to focus on those figures on Page 15. 9 months '19 stated net profits [to] that EUR 522.9 million compared to EUR 358.1 million in the same period of 2018. The 2 figures are not directly comparable mainly because the change in the scope of consolidation this quarter as well as some significant nonrecurring items in the 2 periods.

On a like-for-like basis, net profit in the 9 months is EUR 143.7 million, including higher loan loss provisions, were also in line with expected acceleration of the derisking process to be implemented through a new securitization of bad loans.

But what is worth noting is that core revenues, NII plus net commissions, on a like-for-like basis and net of accounting effects related to IFRS 9 and 16, but for a bank [under derisking process] as BPER [as] significant are substantially stable year-on-year. The decrease of NII of 1.1% is offset by the increase of 1.4% of commissions.

Moreover, operating costs declined by 1.2% year-on-year on a like-for-like basis. So overall, apart from extraordinary item, I think that this 9 months results showed some supportive trends, both on the revenue and cost side.

We can move on very quickly to Page 16, where we report the quarterly figures. Net profit of the third Q of EUR 422.4 million and 42 -- EUR 43.2 million on like-for-like basis. Also, in this quarterly view, we can recognize more or less the same trend on a like-for-like basis, [commenting] for the 9 months results: a resilient NII; good performance of net commissions; decreasing operating costs; and as we noted that the third quarter accounted high loss provisions (sic) [higher loan loss provisions], also in line with expected further acceleration of the derisking process.

We can move very quickly to the main trends related to the profit and loss, starting from the net interest income on the next page, 17.

Here, we can show a resilient NII in Q3, which came at EUR 259 million on a like-for-like basis and net of IFRS 9 and 15 effects, increasing compared to EUR 257.6 million in Q2 or plus 0.5% quarter-on-quarter. For a bank like BPER, under significant derisking process, the impact of accounting changes to IFRS 9 and 15 are particularly relevant. So for this reason, I think it's important to look at the [extraordinary] trend, which shows a remarkable resiliency. On a like-for-like basis, 9 month '19 NII decreased by 4.2% year-on-year, but only 1.1% year-on-year, if we exclude the IFRS 9 and 16 effects. Considering the current difficult macroeconomic scenario and low negative interest rate environment, I think it's now a negligible result.

Net commission on Page 18. We are very satisfied of the net commission trend. In the 9 months, our net commissions stood at EUR 656.1 million or EUR 585.2 million on a like-for-like basis, up by 1.4% year-on-year, mainly supported by positive overall performance of assets under management, plus 2.9% year-on-year, and Bancassurance at plus 19% year-on-year. These positive results are perfectly in line with our goal to improve our approach toward fees-oriented businesses, in which we are investing a lot in terms of resources.

On Page 19. In the 9 months '19, trading income were positive at EUR 77.2 million, $62.3 million on a like-for-like basis, which is not comparable with the third Q '18 for the presence of nonrecurring items. This is well explained by the [call] out in the slide, which you can read.

Trading contribution in Q3 is positive EUR 49.7 million, EUR 34.9 million on a like-for-like basis. The increase compared to EUR 5.4 million in the second Q of '19.

Moving forward on Page 20. Also, in the operating costs, the 9 month results showed a good performance. 9 months operating costs stood at EUR 1,071.8 billion, $998.9 million on a like-for-like basis, down by 1.2% year-on-year. The quarterly trend recorded a much more positive result. It was a drop by 8.2% quarter-on-quarter, particularly due to the usual seasonality and staff costs of the [third] quarter of the year.

Other administrative expenses and D&A, impacted by the accounting effects of IFRS 16 and not directly comparable on a year-on-year comparison.

On the pro forma, the needs met our IFRS 16 effect. And the like-for-like basis, administrative expenses, and [D&L] down respectively by 1% and 10.8% year-on-year.

These are an encouraging signals of improvement given the positive expectations we have on cost side, when all of the actions included in the business plan will be fully implemented.

On Page 21, we recorded in 9 months, higher loan loss provision at $161.1 million and EUR 143.3 million on a like-for-like basis. This was due mainly to higher loan loss provisions booked in the Q3, also in line with expected further acceleration of the derisking process related to a new securitization, we are working on. You know that the aim, as I said before, of reaching over 1 year in advance fixed target of a gross NPE ratio below 9% set in the business plans for 2021.

Consequently, cost of credit raised to 78 bps versus 47 in 2018.

About liquidity. On Page 23. The liquidity position is solid, thanks to the growth of the total eligible assets now at EUR 20.9 billion, increased by 11.7% versus the end of 2018, along with a bucket of unencumbered eligible assets of EUR 10.6 billion, and asset liquidity of EUR 2.2 billion made by deposits with the ECB. Both LCR and NSFR ratios stand well above 100%.

On Page 24, we were able to confirm our solid capital position, even after the completion of the strategic transaction.

CET1 fully phased is at 12.36%, up by 3 basis points compared with 12.33% in June '19 and up by 41 bps versus 11.95% at the end of 2018. In my opinion, this is a very important achievement confirming our ability in capital management and the focus of the group on capital solidity. There are moving -- many moving parts affecting the capital ratios in this quarter.

In summary, we were able to slightly increase our CET1 ratio versus the last quarter by 3 bps, with a mix effect of the following factors: related to [ordinary] activities, we have a positive contribution, in particular coming from retained earnings, including for quarter dividend, showing a good internal capital generation ability.

RWA reduction mainly driven by loan reduction in the large corporate segment and the disposal of EUR 1 billion of GBV, lower amount of deduction and other elements. And negative impact came from write-down related to shareholdings. Related to the strategic operations, we have positive impact from Banco di Sardegna minority acquisition, plus 56 basis points, more than offset by the acquisition of Unipol Banca, minus 94 bps, and Arca Holding incremental stake, minus 20 bps.

Now in conclusion, let me highlight briefly key messages on the Page 26. The main messages we can get from the 9 months results are solid capital. Once again I must underline the effectiveness of our capital management strategy, especially in light of the extraordinary deals, along with a very comfortable liquidity position. This is confirmed by the common equity Tier 1 fully phased at 12.36%.

Second, asset quality. Our current gross NPE ratio is at 11.6%, which can be considered a very good achievement, if we consider that it stood at 19.9%, just at the beginning of 2018.

As I said before, our target is to go well below 9%., and we are taking action to reach this level by the end of the first half 2020, over 1 year in advance of what is embedded in the business plan for 2021 through a new bad loan securitization.

Third, profitability. All of these achievements come with a good profitability trend, net profit and revenues are resilient and operating costs are showing signals of improvement. Starting from the situation and considering the expected benefits from the extraordinary deals and from the business plan actions, our group has the opportunity to reach a good and sustainable level of profitability going forward.

So overall, we have a satisfactory situation, a good starting point for the rest of the year and for challenges of 2020.

Now, thank you all for your time and attention. And we are going to start the Q&A session and to take your questions. Thank you, again.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Domenico Santoro with HSBC.

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Domenico Santoro, HSBC, Research Division - Analyst [2]

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I do have a number of questions. I might go one by one, if you don't mind. I'm looking at the NII, in particular, and the contribution from Unipol is a bit softer compared to the numbers that you gave in the last presentation. So I'm just wondering whether here is a different accounting or something happened that I'm missing.

And if you can also give us the expected evolution given the funding synergies that you envisaged in the plan, in particular, on the instruments that you mentioned in the call, that are going to expire going forward. If you can mention, please, the average cost of these instruments and the phase out over the next 2 years, please.

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

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Okay. Thank you very much Santoro for your question. Let's say, overall, we consider a very positive trend of the NII. Let me say that meaningful results on this line are in line with our expectation. What I can say is that probably try to understand the evolution of the NII for the next year, probably the third Q was the best way to understand what would be the next year trend. Let's say that in the last part of the year, we are -- we have subordinated loans of EUR 300 million. This is going to be a [supplier] . And the coupon of these subordinated loans is 6.07. So for this reason, we think there would be an impact also in the last part of the year, but especially in next year.

Analyzing the evolution of NII, let's say that we have some positive elements, starting from TLTRO and the TRIM. And we expect to have a positive impact around EUR 1 million [per month] coming from these elements. And so this is an important point for the NII in the coming years.

And at the same time, you know that we are working on the cost of funding. And in particular, we see room in the funding of Unipol Banca. So let's say, looking at the third Q, the level on NII, yes, it is probably to see a decline [in time] value because we have a reduction of the stock of nonperforming, but we think that this could be offset by the elements that I mentioned before. So the expectation is to confirm during 2019, the level of NII of the third Q.

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Domenico Santoro, HSBC, Research Division - Analyst [4]

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Nice. On the cost and side -- on the cost side, sorry, if I analyze the level of Q3, I don't know whether it's a problem of accounting, again. And I add back the EUR 55 million, EUR 50 million run rate of Arca, which was not included in your target for 2021, I get exactly the number that you gave us for 2021. So also, the question here is whether we should include in our model, a better evolution of costs. I know that you mentioned in the press release some seasonality in the fourth quarter because of the integration on top of the restructuring costs, so more visibility here would be appreciated.

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Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [5]

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Well, thank you. What I can say about the fourth Q 2019 is that there would be the cost of the redundancy plan, because as you know, we completed the negotiation of the Union. And that in our business bank, we set a range between EUR 180 million and EUR 200 million. And now we can say that probably the cost will be on the lower part of the range, it's probably a little bit under EUR 180 million. But we are waiting at the end of the year to have a full picture on the costs related to the redundancy plan.

And about the restructuring (inaudible) the integration of Unipol Banca, indeed, we have already booked some of these costs in the third Q. So our expectation is something around, probably EUR 15 million, so not a significant amount is -- in particular, related to the integration of the IT. And we are working on this because at the end of November, we are going to have the measure of Unipol Banca in BPER. And let's say, this is another important achievement because you know that to complete the acquisition at the beginning of the year to complete the integration by the end of 2019 is an important element.

Yes. About Arca. Arca in our business plan was not present, is something -- an add-on, let's say, on our revenue and cost. I think that also here, the third Q could be a noncore to understand the evolution. Taking into consideration that typically BPER has in the third Q, a reduction on cost -- on staff cost, this is a typical trend. But at the same time, thanks to the conclusion -- the completion of the negotiations with the union, the expectation is to see, starting from the last part of 2020, some reduction in the cost -- in the staff cost.

I don't know, Alessandro Simonazzi, if you want to add something about this.

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Alessandro Simonazzi, BPER Banca S.p.A. - Head of Planning & Control [6]

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For what concerns the guidance for the future, we expect something better than what we declared in the business plan in terms of cost savings for the future. And so this is why probably you find something better than what we said before. For what concerns redundancy plan, the expectation after having delivered the agreement to the Unions, is to confirm the synergies that we stated in the business plan. Probably, there will be a fine-tuning in terms of phasing, but anyway, we confirm the main figures that we included in the business plan.

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Domenico Santoro, HSBC, Research Division - Analyst [7]

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All right. On capital, instead, there was quite a move on risk weighted assets in the quarter. I understand that there is the balance sheet -- the beneficial effect from the security -- from the disposal of nonperforming. Can you comment whether there is something more related to Unipol, in particular?

And can you also highlight all the regulatory headwinds from now on that you might have visibility on including, of course, detailing also the EUR 300 million impact on capital that you gave in the business plan. And on top of this, whether there is also some anticipation that you might make on the Basel IV, please?

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

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Okay. First of all, let me express our expectation for the CET1 ratio at the end of the third Q and our expectation is to confirm at the end of the year a Common equity 1, around 12%. And let me say that there are probably some positive elements to take into consideration. The first one, we are working, and probably you saw yesterday, the press release on activity on the selling share of Banco de Sardinia. So we expect to complete the activity by the end of the year. And so here we -- there is probably an effect with -- that we estimate, around 10 basis points. But at the same time, we are waiting for TRIM by ECB. But at the same time, we think there is also the new model on the PD large and the EAD corporate. So the expectation is to have a balance between the 2 effects. But at the end, a positive impact on our CET1 ratio.

Obviously, we are waiting for this. We are a little bit optimistic for receiving the -- this communication by the ECB by the end of the year. So together, these 2 elements, plus the buffer that we have above 12% in the CET1 ratio at the end of September, means that we can manage the impact of the redundancy plan, and probably some other provisioning to move in time with the price of the disposal [to] securitization in the first half 2020.

So together, all these elements, we are pretty confident for the objective of 2019 end.

Speaking about the effect, probably, I would ask our CFO to go deeply in the different element of the moving capital in the third Q 2019.

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Roberto Ferrari, BPER Banca S.p.A. - CFO [9]

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On RWA reduction, actually, we had the positive effects from, as you said, the NPE disposal, but also from the composition of our [line] dividend because we had a decrease in the corporate side, the large corporate side, by around EUR 600 million. And then an increase in retail, mainly in residential mortgages by around EUR 100 million. So actually, it is the density that is lower and the composition and our risk-weighted asset [release].

In term of impact, actually, they are preliminary [unaudited] but the impact that we expect from all the new regulation before Basel IV is actually a reduction in terms of risk-weighted assets of around EUR 1.2 billion, and then increase in our shortfall of around EUR 280 million. So you see actually that they are in line with what we projected in our business plan, and they are absolutely manageable I would say.

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Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [10]

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The last point that what you add about 2020. There is also our expectation, we are working on this, the rollout IRB model on UniPol. We don't know exactly what will be the time line, but probably, there is the opportunity to have it by the end of [2023]. In a way, the expectation is to have a policy impact on CET1 ratio around 40 basis points coming from this alignment of Unipol Group. So, let's say, also 2020, there is some positive effect through this potential alignment.

So overall, I think 2019 and 2020 are absolutely under control, and we are absolutely satisfied for what we were able to do during the last year.

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Domenico Santoro, HSBC, Research Division - Analyst [11]

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Can I ask, also the last question, I promise, the rationale for what we read on the newspaper about the potential [new] investment from a private equity, in [Arca Assicurazioni], is more strategical or I mean related also to some potential capital release there?

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Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [12]

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Well, frankly speaking, it's too early to say something about Arca, that we want to analyze the opportunity together with [Popolare di Salerno]. And this is what I think it is absolutely correct and important. What I can say is that until now, probably we are able to exclude something, not to say what will be the [trend in] opportunity for us. What I can say that we are not ready to sell Arca for BPER is a strategic investment. And also, I think, is for Popolare di Salerno . And so we are absolutely committed to support Arca in the evolution and in all the opportunity overall. And for this reason, I hope to have the opportunity to complete our strategic analysis in the coming months. And to understand if there are some opportunity to support us in this process of growth.

Let's say, that it's correct to say that there are some private equity that express interest on Arca, let's say, it's positive because probably Arca is a good asset manager, and today, we are absolutely satisfied for the activity of Arca. But as I said before, we don't need any support on capital because, as I said before, we have embedded in our business, we are busy to have a good capital position. Yes, it is possible to have a buffer. But let's say, it's too early to say something more about the future of Arca. And as I said, is a strategic partner for BPER.

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Operator [13]

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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 [14]

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Two questions. The first one is on personnel costs. In particular, related to the personnel exits, which you have now agreed. Can you give us an idea, more or less, how many people you plan will exit in 2020. And for how many, it's 2021 or after?

The second question, you have more or less already answered it before, it's on capital. But I just would like to repeat the elements because there's a lot of moving parts on what's going to happen between now and the future. So you stated in the answer to the previous questions, that you expect extension of the IRB perimeter already in Q4 -- to the large corporate already in Q4. And that should take care of what you have included in the business plan presentation slide of the RWA decrease and the regulatory buffer, i.e., the shortfall increase. Is that correct? If that is the case there's nothing left that we should be worried from 2020 onwards. Or there's still something left out of that business plan presentation. You also stated TRIM is coming now, and Arca [saving] shares is coming now. So I just want to reconcile, after Q4, is there -- if there are any moving parts besides the IRB on Unipol Banca?

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Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [15]

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Well, first of all, about personnel, let me say, first of all, that when we confirm the target for the end of 2021 in terms of number of employees of the group because during the negotiations with the Unions, [we expect] clearly disappointed. So through the agreement and through the other activities that target will be achieved. So I ask you, Alessandro Simonazzi, to express if it's is possible, the 2 steps, one in 2020 and 1 -- the other in 2021.

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

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So like you say, it's not so simple because we have -- now we have to check the interest of our colleagues for the maneuver and it depends on who is joining them maneuver. And it's not so clear and so defined. In a way, let me say that comparing with the business plan, the expectation of the exit -- the estimate of the exit is lower by more or less 100 head count, just because these 100 head counts leaves the group -- left the group, thanks to (inaudible) during this year. And so the impact of the maneuver is still a bit lower and less expensive, just because we anticipated some exit via (inaudible) activity with the new laws of (inaudible).

The exit will be more or less 50 colleagues, some in Unipol Banca that were already -- were planned to -- planning to exit during 2020. There is another, more or less, [280, 3,000] people that are with -- not colleagues but external support, (inaudible) exit during 2020. And about 1,200 people that are staff cost, real staff cost of BPER, and the main exit will be in 2020.

What we expect is, let me say, EUR 10 million cost synergies, shifting from 2021 to 2022, due to the fact that people will leave with 1 quarter delay compared with the former evolution.

About the capital position. I hand over to Roberto Ferrari to go deeply in some elements, and then I would like, at the end, to express some other elements which will give you, I hope, the full picture of our trend.

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Roberto Ferrari, BPER Banca S.p.A. - CFO [17]

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Yes, Alessandro. In our business trend, we already embed the impact of TRIM and large corporate announcement of the new model that we should have by the end of this year, and we should have a small risk-weighted asset relief on that. And then we already embed the new definition of default impact, the rollout of [Solutos] and Sardaleasing. The full implementation of the EBA guidelines and the PMI supporting factor. So we already embed those impacts. And there shouldn't be other moving parts. As I said before, and as our CEO said before, we are also working for the rollout of the AIRB model to Unipol Banca, that should give us a 40 basis point benefit. So we don't expect other further moving parts, actually.

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

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Looking forward to 2022, and so Basel IV is probably too early for us to express number and figure about the impact. But let's say, some elements. First of all, on operating risk we are TSA. And probably, we understood that the highest impact is for banks with AMA model approved. So we think that is absolutely manageable by BPER. At the same time, the effect on credit risk, we saw in our analysis, the highest impact is on large corporate. So corporate with more than EUR 500 million of revenues and on the relationship with banks. So these are 2 segments that are not a focus of our business model. And also, for example, in this quarter, we reduced the exposure on large corporates for managing the impact of Unipol Banca in our balance sheet. And so let's say, nothing significant on P&L. So for this reason, I'm not worried about on Basel IV because, as I said, large corporates is important for BPER, but it is not the focus of our business model. And at the same time, banks and on operational risks, as I said before, today, we are TSA and the impact is manageable. (inaudible) for this reason, looking forward to 2022 to -- for our group, I think is absolutely manageable being part of Basel IV.

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

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Excuse me, the part on Basel IV is clear, I'll try -- I rephrase the question on capital, because to me, it wasn't clear the answer. I'll make it simple. Your guidance is somewhere around 12% at year-end, fully loaded core Tier 1, including already certain elements, which you had already factored in the business plan. In 2020 and 2021, how many positives or negatives are still to come. Just add them all together in basis points, excluding Unipol Banca IRB model.

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Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [20]

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So -- well, Roberto.

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Roberto Ferrari, BPER Banca S.p.A. - CFO [21]

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Okay. So what we said before, and we embed in our business plan. And we have a positive in term of risked weighted assets relief (inaudible) the new definition of [default] that should be in 2021. We have the -- and 2020, 2021. We have the rollout of [Cassa di Saluzzo] and Sardaleasing, that should be in 2021, where we should be also a relief in our risk weighted assets. And we have also the full implementation of EBA guidelines, where we have clearly a negative impact on risk-weighted assets that should be also that in 2021. Altogether, the impact, as I said, should be negative in terms of relief -- in terms of risk-weighted asset by around minus EUR 1.1 billion and should be an increase in shortfall by around EUR 300 million. That is the same number or very similar numbers as we had in the presentation of the business plan, at Page 48, where we had the regulatory buffer and increase of a shortfall of EUR 300 million and the decrease of risk-weighted assets of around EUR 1 billion.

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Operator [22]

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The next question is from (inaudible) with Goldman Sachs.

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Unidentified Analyst, [23]

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A lot of my questions have already been answered, so I'll ask just one. And it is on bad will. So you're showing a default rate for the 9 months, that is below the first semester. So my first question is, is it fair to assume that the derisking process -- the faster risking process has cost you about EUR 80 million of loan losses this quarter. And that, if I add this to the EUR 180 million for restructuring costs, you have about EUR 90 million of bad will left to "spend." Would that be again, used to increase the -- or accelerate the de-risking process?

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

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Okay. [Thomas], thank you very much for your question. So first of all, bad will has been higher than expected at the beginning. And so this is a positive element. And we see in the fourth quarter, we want to complete with the PPA in the fourth quarter. Let's say, in general, overall, we expect probably something more than something less in terms of value. And this is what we are working on, and we expect to see at the end, but I repeat, not a reduction, but probably something more.

Having said this, let's say that, yes, we have already started some provisions for the new disposal in 2020. But let's say that we have today, and I would like to spend some words about our idea on the disposal process. We have already a large portion of bad loans with a good level of coverage. Let me say, first of all, thinking about the last 2 securitization in 2018, in the main were [4Mori] and [Aqui], we -- the average price at that time, including the effect of mezzanine and junior notes, was more or less at 29%, this was the price of the 2 securitizations.

So let's say, now we are ready with the coverage that we had to pay today to sustain also a lower price and this [correct respect] a lower price because this is the third securitization on their loans, but we have today a coverage higher and we are ready to face also a reduction in the price.

So we think in the fourth quarter, it's possible to manage some other extra provision. But looking at the coverage that we have in the last portion of the portfolio, we think is, let's say, a last small parcel of coverage. And so we think that we can manage this, that I hope is the last massive disposal, in a very effective way. And there are all the elements for -- to complete this in a positive way in the first half 2020.

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Operator [25]

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The next question is from Adele Palama with UBS.

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Adele Palama, UBS Investment Bank, Research Division - Associate Director & Equity Research Analyst of Italian Banks [26]

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And -- one question from me. So can you give the NPL income in the quarter versus the previous quarter? And the NPL income loss from the EUR 1 billion in (inaudible).

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Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [27]

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You say the EUR 1 billion disposal completed in July?

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Adele Palama, UBS Investment Bank, Research Division - Associate Director & Equity Research Analyst of Italian Banks [28]

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Yes. [Until] disposal of (inaudible)?

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

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Yes. Yes. In July we completed the disposal of UnipolRec, we had more losses coming from the disposal because we had a substantial alignment in the coverage with the price. Let's say, something about this. Since the beginning of the year, we had in mind to accelerate the leasing. And so we take advantage of this opportunity in the negotiation with Unipol Group working on Unipol Banca acquisition. And so we take the opportunity to sell a portfolio that was difficult to use in [debt] securitization.

So in fact, this portfolio is in large part unsecured, more or less, 65%. And the other part, 35% secure. So the reason was to use in this deal, a portfolio, not suitable for securitization bad loans. And -- so this is now, we have a portfolio with something more secured and something that's unsecured. And we think it is good for a new securitization. But as I repeat, no loss in the deal concluded in July.

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Operator [30]

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The next question is from Hugo Cruz with KBW.

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

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So I just want to clarify a few things on capitals because the connection was a bit -- couldn't hear well. But I understood that after 2019, so 2019, you will be around 12%, and then all the other moving parts will be in 2021. Is that correct? That was my understanding. The ones that add up to EUR 1.1 billion of [lower RWAs] and an extra EUR [200] million of shortfall. That's all will be in 2021, right? So I want to clarify that.

And then going back to the NPL cleanup, to get to the below 9%. I understood -- and again, correct me if I'm wrong, that all the provisioning for that transaction will be booked in Q4 '19, correct? So if you assume that, then you get to a steady state, what kind of cost of risk, are you going for targeting 2020?

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Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [32]

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Okay. Hugo, thank you very much for your question. I will take the second one about the disposal and effect on our P&L in the Q4 and looking also forward to 2020. First of all, we are already in a good position in terms of coverage. This is the reason because we are ready to accelerate the disposal process. Because without these elements, probably, we can use all the period of the business plan [to] 2021. And but we have already selected a first part of the portfolio, let's say, between EUR 1.52 billion, with a good level of coverage. So our expectation is that probably, we need some fine-tuning in the last part of the year. But our expectation is absolutely to support this other provisioning, maintaining our capital in a 12% area.

And next year, we expect to have probably a cost of risk around 70 basis points for some other fine-tuning in the fourth Q, but let's say, not significant. Also consider that now our -- the bad loans portfolio is reducing quarter after quarter. And so we don't need any further coverage on a large part of portfolio. So for this reason, we are absolutely confident to manage this process, and we are proud to complete 1 year in advance, considering the target of our business plan, the process of disposal. So we have already our (inaudible). We have already selected the servicer. We have already selected the team. And so we are -- we had a [key confer] last week, and we are already working on these products. So I'm absolutely confident for the positive result of this securitization.

I hand over to Roberto for some other considerations.

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Roberto Ferrari, BPER Banca S.p.A. - CFO [33]

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Okay. In capital, we expect Unipol Banca in 2020, but for sure, we're not sure on that. It depends on the regulatory procedure. And then we have the other impact, the other moving parts, as you call it, in 20201. The other moving parts are [solutions that are (inaudible) rollout, there's full implementation of the EBA guidelines, the new definition of default and the PMI supporting factor. Altogether, with the Unipol Banca, the impact should be of around minus EUR 1.2 billion of risk-weighted assets and plus EUR 300 million of shortfall. Altogether, I would say, the impact should be between 4 -- negative for 40 and 50 basis points by 2021.

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Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [34]

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Okay. Just a follow-up on that. So you said that negative 50 -- or 40, 50 basis points is already net of the Unipol which was a positive 40 basis points?

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

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It is already net of the Unipol, that is positive 40 basis points. Yes. So I would say...

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Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [36]

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Okay. So if you didn't have the Unipol, it would be higher? The impacts will be something like 100 basis points?

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Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [37]

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Well, on -- about Unipol Banca, our expectation is to have a positive effect of 40 basis points.

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Roberto Ferrari, BPER Banca S.p.A. - CFO [38]

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Yes.

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Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [39]

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And probably after that...

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Roberto Ferrari, BPER Banca S.p.A. - CFO [40]

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After that, in 2020...

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Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [41]

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The other moving part is we will have negative for around 40...

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Roberto Ferrari, BPER Banca S.p.A. - CFO [42]

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50 basis points.

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Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [43]

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50 basis points.

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Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [44]

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Okay. Got it. So the net of the 2, you're more or less neutral, basically.

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Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [45]

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So at the end, if we want to sum, positive negative is 0. Because plus the 40 and less -- minus [40, 50]. And so for this reason, we want to confirm the target of 12.5% of common equity Tier 1 at the end of the business plan. Because all these elements -- and then there is the generation of common equity Tier 1 through our activity. So all in all, the target of 2021 would be 12.5%. But consider with a group with a low level of NPE ratio and to have, at the same time, 12.5%, I think is a good target.

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Operator [46]

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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 [47]

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I have a couple of questions from my side. Just a follow-up on capital. Does the optimal TRIM that you're expecting by year-end include all the exposure, i.e., retail, corporate and low default portfolios?

And then I have a clarification on asset quality. In light of the additional EUR 1 billion to EUR 2 billion NPE sales within the plan. I understand that the mark-to-market of such disposal will be spread between Q4 and Q1 2020. Is it correct? And then the last one, can you please discuss the dividend accrued in the 9 months, and would you continue to accrue dividends in Q4?

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

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Well, about the asset quality and disposal, let's say, first, the starting point at the end of September 2019, is really very good in terms of coverage. And so as I said, we need only, I mean, fine tuning and, let's say, is more to try to do our best to widen the amount of disposal because on a large part, we think to have already a level of coverage in line with the price on the market. But we want to have the -- if it's possible, if there will be the right market conditions, to have the opportunity to widen the portfolio for the securitization.

For this reason, I said some fine-tuning in the Q4 and Q1. But let's say, it's not a significant impact on P&L, let's say, it is a fine-tuning. And so we will see during the activity of the -- when we are working on the perimeter of the portfolio. So let's say, it's something that we are working on.

On the dividend, is already accrued in our capital position. So today, we reached already the target for 2019. And so in general, we don't think we have anything more for the Q4 and this is an important achievement, also from this point of view.

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Roberto Ferrari, BPER Banca S.p.A. - CFO [49]

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On the TRIM, it includes the corporate and the low default portfolio, it doesn't include clearly the retail portfolio.

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Operator [50]

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(Operator Instructions) Gentlemen, there are no more questions registered at this time.

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Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [51]

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Okay. So thank you. Thank you very much for your attention. Have a good day, and see you soon. Thank you very much.

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Operator [52]

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