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Edited Transcript of CVAL.MI earnings conference call or presentation 7-Nov-19 7:30am GMT

Nine Months 2019 Banca Piccolo Credito Valtellinese SpA Earnings Call

SONDRIO Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Banca Piccolo Credito Valtellinese SpA earnings conference call or presentation Thursday, November 7, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Luigi Lovaglio

Credito Valtellinese S.p.A. - GM, CEO, MD & Director

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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 Lisi

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

* Christian Carrese

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

* Irene Rossetto

MainFirst Bank AG, Research Division - VP

* Luigi Pedone

Equita SIM S.p.A., 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 Creval Consolidated Results as at September 30, 2019 Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Luigi Lovaglio, CEO. Please go ahead, sir.

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Luigi Lovaglio, Credito Valtellinese S.p.A. - GM, CEO, MD & Director [2]

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Good morning, everybody. My warm welcome to all of you, and many thanks for joining our Creval 9-months results presentation.

Let me start by saying that we are progressing with the implementation of our business plan, and I can say that we are fully on track. In Q3, we have been working all year to build up a more agile organization, to bring the senior team closer to the customers, to enhance our operational efficiency, deploying a strong cost discipline. At the same time, we have been working to ensure an efficient risk management capability. Some of these effects are already visible in the results of the quarter.

We reached a level of profitability significantly higher compared to the last year with a net profit after 9 months above EUR 33 million, with a contribution of almost EUR 1 million in the quarter. We reduced the level of costs both year-on-year and quarter-on-quarter. We reported a net operating income of EUR 39 million at the previous quarter level despite the increasing pressure on net interest income.

We improved all risk indicators. The commercial focus on retail resulted in savings growth and lending mix improvement, and we further reinforced our capital position with a fully loaded core Tier 1 ratio of 14.7%. We have high NPE coverage levels, above 59%, as you will see in the presentation, enabling us to step up the pace of NPL disposal planned in our business plan.

Let's move to some details. Net profit after 9 months reached EUR 33.4 million compared to EUR 11.4 million reported for the same period of previous year. In Q3, we report a EUR 9.9 million net profit, which is above both Q1 and the Q1 -- Q2 adjusted, which, as you remember, was positively affected by a combination of nonrecurring items.

Net operating income after 9 months reached EUR 136.5 million compared to EUR 85.5 million (sic) [EUR 85.8 million] a year ago. The growth was driven mainly by lower personnel costs. Q3 net operating income at the level of EUR 39.3 million continued the trend of gradual improvement on a comparable basis.

Operating income after 9 months remained stable year-over-year on a comparable basis despite deteriorating external environment. Q3 operating income reached EUR 153.8 million, up by 1% quarter-on-quarter, adjusting previous quarter results by gains on Nexi's disposal. We managed to deliver this growth in an environment of decreasing interest rate. I do believe that this is a good base for next quarters.

Net interest income in the third quarter reached EUR 84 million, decreasing in comparison to previous quarter. After 9 months, net interest income still is above to the level of the last year, adjusted by the net interest income connected to the NPE portfolio we sold. The net interest income level in Q3 is lower than we originally expected as our macro outlook didn't assume rate cuts in September.

At the same time, we were aware that in the quarter, we would be affected by the full impact of the special deposit campaign, which was conducted in the first half. The new market condition will put additional pressure to our Q4 net interest income. That's why we expect it to be lower compared to the level of this quarter. As a consequence, we estimated the full year net interest income to be 1.5%, 2% lower than we originally planned.

We believe that we'll be able to limit the impact of lower rates on our planned targets in the midterm. A part of the gap will be offset by the lower bond issuance costs, and some benefit will come from deposits clearing. However, some gap will still remain, which we plan to face with the acceleration in the lagging mix towards retail. That's why I was saying limited impact in the midterm plan target.

Gross portfolio dynamic reflects our strategic focus on this retail portfolio that continue to grow also during the quarter with 1.4% dynamic year-to-date. In corporate, we introduced the most selective approach, increasing discipline in risk-adjusted pricing. We are working in completing a more industrialized process, also covering the underwriting fees that will allow us to accelerate in building the portfolio.

We continue strategic change to our funding mix, increasing share of commercial funding, especially retail, with double-digit growth in deposits year-to-date. We are now focused on adopting selective approaches towards maturing deposits, especially in corporate segment. The goal is to optimize trade-offs between volumes and price.

For retail, particular attention is on opportunities to shift towards asset management products where customer profile allows it. As I mentioned last time, there is -- the asset management part is one of our priorities. The cost paid for increasing retail deposit was, in our opinion, an investment to facilitate growth in assets under management through the shift.

The total indirect funding increased by 2.6% (sic) [2.8%] year-to-date, of which 1.5% in asset under management in Q3. Securities portfolio decreased by 13.1% quarter-on-quarter following ongoing reduction strategy, while at the same time, ensuring strong liquidity position. Government bonds stood at EUR 4.8 billion following some disposal we conducted during the quarter.

We reported positive quarter dynamic in banking fees, which offset seasonal effects on assets under management fees. After 9 months, banking fees are almost at the same level of 2018. The dynamic of asset management-related fees affected by last year's special campaign dedicated to products with high upfront fees and also by the change in the structure of revenue's flows due to the last year's disposal of bancassurance business.

Operating cost in Q3 at EUR 106 million, down quarter-by-quarter by 3.8%, if, of course, we exclude banking system charge. The drop is driven by reduction, both in HR and non-HR costs. Cost optimization is our priority because this is one of our key enablers of the business plan execution.

Looking at the cost -- at HR costs, we were down by 1.6% in the quarter, reaching the level of EUR 200 million after 9 months, EUR 3 million higher than the previous year adjusted level, despite in 2018 are included provisions for variable part of remuneration and potential salaries rise connected with the national labor contract negotiation.

Non-HR costs down by 7% quarter-on-quarter and 9% after 9 months. The centralization of cost management, the introduction of a strong cost discipline is bringing first rewards. We were able to identify savings in a number of areas with strongest contribution coming, for the time being, from consulting costs.

The further decrease NPE, both on gross and net basis, in particular, the gross amount decreased by 1.2% during the Q3, and the net amount decreased by 2.1%. Gross NPE ratio decreased to 11.3% and net NPE ratio to 5%.

Cost of risk decreasing in the quarter, reflecting improvement in asset quality. Total coverage ratio further increased to 59.3% with NPL coverage reaching almost 83%. As you know, one of the key actions of our plan is to sell EUR 800 million portfolio of NPE. We intend to start soon the formal process of collecting offers for the sale.

During the quarter, we further strengthened our capital ratio. Core Tier 1 increased by 70 bps to 14.7%, increasing even further the large buffer versus SREP. The improvement is mainly driven by reduction in risk-weighted assets and reserve on securities portfolio fair value through OCI.

Concluding, in Q3, we laid the foundation to be on track with the implementation of our business plan, and some first tangible results are visible. In terms of profitability, we reported after 9 months the net profit of EUR 33 million, that is significantly higher than in the same period of previous year and even higher than the full year profit of 2018.

We reduced costs and improved our risk profile, giving them somehow evidence of our capability to leverage efficiently on the 2 key enablers of the plan execution, which are cost and risk. Plus in terms of commercial activity, the positive trend of retail lending goes into the direction of the improvement of asset mix. That is one of the crucial driver we set in the plan to enhance revenues.

We further strengthened our capital position, reaching fully loaded level of core Tier 1, 14.7%, one of the highest in the sector. Our branch network is motivated and is focusing on bringing new business.

Let me conclude by saying that I'm satisfied with the level and the quality of our results at this stage of our transformation, and I am confident about the delivery of our plan. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question from the English channel is from Irene Rossetto with MainFirst.

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Irene Rossetto, MainFirst Bank AG, Research Division - VP [2]

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Just a couple of questions. And the first is on how the network is responding to the new focus on the consumer credit products. We have seen an improvement of the mix, a good progression of the net retail loans. So just if you can give more color towards on this.

And then on -- there were a large capital gain attached to its data loan government bond portfolio. If you could disclose the amount and there is -- do you expect to record data sooner or later?

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Luigi Lovaglio, Credito Valtellinese S.p.A. - GM, CEO, MD & Director [3]

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So the network is reacting quite well. I think we are combining the 2 actions. One is, of course, the sales of consumer lending that we planned. And the region, we plan a split between more or less 60-40 between third parties and Creval. As you know, this will have a different impact because in the Creval side, in the Creval consumer loan, we are going to sell to keep our book. We'll have a positive impact in volumes and net interest income.

I think the reaction of the network that Irene mentioned is quite positive. It's visible in the daily trend of sales, and we are reaching some record levels for Creval. And I believe when we are going to present the results at the end of the year, we are confident to disclose also some trends because, as you know, the starting point was quite low, so it doesn't make sense to speak about percentage of growth. I can just say that, for example, the October results are showing a growth that is more than double digits, in some ways.

As far as the potential capital gain, the portfolio, I think, are quite significant. As you know, most of the portfolio of government bonds that we have are hard to collect. But despite that, I can say we can consider very positive the increasing level of potential capital gain we are reporting that is above EUR 100 million.

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Operator [4]

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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 [5]

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A couple of questions from me. So the first one is on the NII, if you can quantify the effect from tiering that you're expecting?

Then the second one is on NPL inflow, if you can tell us the default rate for the quarter? And then on capital, if you can update on the sensitivity to the valuation of the BTP/Bund spread?

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Luigi Lovaglio, Credito Valtellinese S.p.A. - GM, CEO, MD & Director [6]

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Okay. As I mentioned, we are going to enjoy some positive impact coming from the tiering, and I didn't mention, but also, I think, from the new condition with TLTRO. Globally, we account to have a benefit that can be estimated around 1% on the total net interest income. Sensitivity, I think, is unchanged because we already mentioned this data. So 100 bps in the changes in the spread can account for 15 bps of capital.

The inflow of nonperforming is decreasing. As you remember in our plan, we have a target that is 1.2% at the end of the plan, starting from a level that was above 2%. I have to say that this level is now history because we are quite well below this level. And I have to say, we are observing a gradual positive trend in decreasing the inflow of NPE. So our ratio that we set for the plan is something that we feel quite confident to be reached.

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Adele Palama, UBS Investment Bank, Research Division - Associate Director & Equity Research Analyst of Italian Banks [7]

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Okay. Sorry, as a follow-up to the last question. Do you expect a further sale of NPL on top of the EUR 800 million figure already planned?

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Luigi Lovaglio, Credito Valtellinese S.p.A. - GM, CEO, MD & Director [8]

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Normally, we used to have an approach in dealing with the results of a business plan that we have presented. We are focused to sell EUR 800 million because this was the amount of NPL portfolio we committed to sell as quick as possible. And during presentation of the plan, I was saying that our goal is to sell before end of -- or in 2020, let's put it this way.

Now I'm saying that we are about to start the process of gathering, formally, offers on the sale of this portfolio. So it means that we accelerated significantly compared to the original plan, and I think this is already an important step. Then we see how -- if this is not yet enough to become one of the bank with the lowest level of NPE, something will be done again. But we are quite confident that we will show very interesting and nice ratio on this area quite soon.

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Operator [9]

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Our next question is from Andrea Lisi with Equita.

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Andrea Lisi, Equita SIM S.p.A., Research Division - Research Analyst [10]

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Some question from my side. The first one regards what you have said previously about the potential capital gain you have made on the portfolio of government bonds of about EUR 200 million. But I want to say -- I want to ask you if you have room to sell further government bonds, especially those that are classified as held to collect. And in particular, another question is that given that now the interest rates are really low and their investment rates, obviously, are lower, do you think to review your strategy on the government bond portfolio?

The second question is on the asset management fees. We have seen that they are down quarter-on-quarter by minus 8%. You have just said that there is a seasonal effect. At the same time, we have seen increase in asset under management of 1.5% in the quarter. So I want to ask you if you can provide us more color on how do you see the evolution of the asset management fees in the next quarters?

And the last one is on cost. If you think that the cost base in terms of SG&A, that would have been EUR 30 million net of the contribution to the Deposit Guarantee Scheme. Can we consider that as a good guidance for the next quarters or you think that there is even more room to do better?

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Luigi Lovaglio, Credito Valtellinese S.p.A. - GM, CEO, MD & Director [11]

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I think we have enough flexibility if we decided to take advantage and have an opportunistic approach on the portfolio. Because as you remember, in our plan, we intend to have about more or less EUR 3.5 billion of portfolio government bonds at the end of the plan because we believe that this is a level that is a physiological one that we have to keep in order to have a safe liquidity buffer and position. So the current policy that we have for this kind of portfolio, combined with the maturing date of the portfolio as well, give us opportunities.

But as you mentioned, I think we have to be -- to have a sort of approach that is considering the trade-off between a capital gain that is quite easy to be achieved and the net interest income that is giving more sustainability to our results. So I think this balanced approach is the one that we are going to implement by managing and dealing with this kind of portfolio.

Asset management, as I mentioned, is our priority. The plan -- results are based on a significant improvement of this category of fees and commission. It's clear the volumes of the quarter benefit in some way also the change of the market prices. So I think not necessary, especially because we reduced also the level of mix, level of new inflow compared to the previous quarter due to some seasonality aspects and the fact that we were shifting some of the assets under management in bancassurance product, I think the mix in some way impacting also the fees.

It's clear that we have to be focused and to -- and we expect that the level of fees on assets under management will not decrease in the coming quarters. Then if these results will be immediately visible in the Q4 or will be visible in Q1, just is a matter of timing, but we plan an intensive action in giving a boost to the level of volumes we have of assets under management, involving in particular our private banking part of the business. We intend to increase the number of private bankers, so we intend to have another approach in terms of dealing with the customers. We intend also to leverage a bit better on the distribution, the coverage of the network. We are going to centralize the private bankers under one focal point by region. And I believe that all these actions will bring to a positive impact on the volumes and as a consequence of the level of fees on this -- of this category.

The cost base, I think this is the math I was already mentioning in the plan, and I'm even more convinced. If you consider the actions that we have in place to achieve our results in the business plan, I think if we rank this action according to the confidence we have and to the timing, the benefit that will be seen in the plan, the first one is risk, the second is cost, the third is revenue. So cost is a must. And I have to say that we are enjoying day by day additional -- identifying additional opportunity of savings. And in the math, 12 -- the level of each quarter is not higher than the previous one.

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Operator [12]

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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 [13]

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I have a couple of questions from my side. Could you please disclose the NPE write-offs in the quarter? And also, could you please give us some numbers on the inflows in asset management and insurance in the 9 months versus last year?

And could you please update us on the issuance of the senior bonds expected by year-end? And I have a final question on loan growth. Do you plan to hit the loan growth target to benefit from the [12%] during the plan?

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Luigi Lovaglio, Credito Valtellinese S.p.A. - GM, CEO, MD & Director [14]

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So the first is very tough. Okay. Let's start from the very tough. I think it was physiological. Yes, it's physiologically -- in the physiological level in the last 2 quarters, it could be something between EUR 15 million and EUR 20 million. I don't remember exactly, but this is almost the level.

General production in terms of asset management, year-on-year, is a bit lower and it's also a bit lower because the shifting we put also in asset management. Bancassurance in some way put some slowdown in the process of selling the products, but the trend that we are observing, especially also in October, make us quite confident about the level of this production.

About the senior bonds, I think we are ready. We are just considering which is the best time to go live. But of course, we intend to do it quite soon. So we will see the condition of the market and I think we will start.

As I was mentioning before, the goal is to offset in the midterm the negative impact that is coming from the pressure of interest -- net interest income due to the decrease of interest rate, at least let's put in this way, the scenario of interest rates trend different from what we planned. The main driver of -- that will help us in offsetting the residual gap we are going to have after benefiting of the tiering and after benefiting on the lower cost on the bond, as I mentioned, will be offset by increasing the retail lending. So by definition, the target is expected to be higher compared to what it was at the beginning.

And that's why I'm saying, in the midterm, we are going to offset because adding a network that just started to be focused on consumer lending is quite difficult that you can't ask the network suddenly to accelerate on something that is still difficult to be absorbed in the short term. So what I mean that we are going to change the target, particularly in consumer lending and also the proportion between in-house and with partners in order to offset the remaining gap before it's in our net interest income. So the volumes on loan should be slightly higher than what we planned.

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Operator [15]

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(Operator Instructions) The next question is from Christian Carrese with Intermonte.

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Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [16]

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A couple of clarification. On net interest income, I see the net interest spread going down quarter-on-quarter and minus 14 basis points year-to-date. I was wondering what do you expect in terms of future trend. I understand that there is some pressure on net interest income. If you can elaborate a little bit in terms of spreads, in particular, on asset yield, up in second quarter, down in the third quarter. So if you can give some color on that?

A second question is on asset quality. I understand that you are trying to accelerate the risking process. I saw coverage ratio on NPLs further increased in the quarter, while unlikely to pay coverage, slightly down, so you're planning to sell maybe NPLs. I was wondering what part of the EUR 860 million NPLs could be sold.

And finally, on just your thoughts on Mr. Enria's SSM statement on, let's say, M&A consolidation -- need for consolidation in the sector. We read today that SSM doesn't want to be seen as -- they want to stop consolidation processes. So more clarification on SREP maybe will give more visibility on the process for SREP decision and so on. What do you think could be the consolidation process in the Italian landscape?

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Luigi Lovaglio, Credito Valtellinese S.p.A. - GM, CEO, MD & Director [17]

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Okay. So just to elaborate a bit on net interest income. As I mentioned before, on liability costs, we expected to have in the third quarter a peak because this campaign started practically in February then continued to the second quarter and practically ended to the beginning of the third. Some tails, of course, were still in place.

As I mentioned, we are going to have a very, let's say, focused approach on the next maturing term deposit, particularly on corporate. We already decided not to renew some deposits that were very expensive, due also they have very strong position on liquidity. So we expect some marginal but positive effect on liability costs coming from this new policy in terms of term deposit price strategy.

The decrease on asset yield, I believe, are mainly connected to the fact that we have this change in every [driver] and probably some, in fact, are minor, impact, coming from the interest rate on nonperforming. But in some way, we're more positive in the second quarter. But we have 2 action on that in order to try to rebuild a growing trend in net interest income that is connected -- are connected, the first, as I mentioned, with the changing of the mix because we are accelerating on the retail lending; second, in a better optimization of the midterm financing, that case is going to expire because normally, we have a significant amount of installments that are going to expire. And we believe that, as you can see, in the trend of the volume of corporate, we are quite selective on that, and we aim to decrease further the impact of the cost of interest -- the negative impact of rates that are lower than what are according to our strategy.

As far as bad loans we can sell, as you correctly stated, it's clear that we are, in the short term, much more focused to sell the bad loans. And I think the coverage we reached on this portfolio is making us quite confident that we can be successful in the sale of this portfolio without visible impact on our P&L. And I think, as I mentioned last time, the shift of some provision from UTP to -- it was in the second quarter already visible from UTP to bad loans, was also connected with the different scenario we were about to implement, having in mind that our priority is to sell the bad loans. So with UTP unlikely to pay, we aim to have a more tactical approach, opportunistic, because, as you know, top 100 position accounts for more than 60% of the total exposure of UTP. And clearly, there, we are already working with the team in order to make some recover of position that probably in the past were not followed attention, we believe, is necessary to have on this kind of portfolio.

As far as major acquisition and direct, okay, we are confident because clearly, we have almost -- more than 600 bps above the direct level. So we are ready to wait what they will decide. But I personally believe that the consolidation is one of the key factors that can, in some way, affect the banking sector. But I believe as well that the regional banks with a strong franchise, with a geographical position in the best part of Italy that are performing quite well in the process of transformation, that are becoming more agile, more profitable, more efficient, are the kind of banks that can ensure in the future sustainability of the results, so the best kind of banks that can survive to such a difficult environment and such a level of pressure on net interest income.

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Operator [18]

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The next question is from Luigi Pedone with Equita.

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Luigi Pedone, Equita SIM S.p.A., Research Division - Analyst [19]

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Just a question from my side. It's about the funding strategy. So what are your plan in terms of bond issuance for the next quarter?

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Luigi Lovaglio, Credito Valtellinese S.p.A. - GM, CEO, MD & Director [20]

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As I was mentioning before, we are ready. So all the formalities are behind that. We are observing the market. And I believe quite soon, we could start the issuance. It's clear that it's just a matter of valuation in terms of weeks, which one is the best to start.

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Operator [21]

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Mr. Lovaglio, there are no more questions registered at this time.

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Luigi Lovaglio, Credito Valtellinese S.p.A. - GM, CEO, MD & Director [22]

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Okay. So thank you very much, and see you on the next presentation on February next year. Thank you very much.