U.S. Markets closed

Edited Transcript of ISP.MI earnings conference call or presentation 31-Jul-19 1:00pm GMT

Q2 2019 Intesa Sanpaolo SpA Earnings Call

Turin Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Intesa Sanpaolo SpA earnings conference call or presentation Wednesday, July 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Carlo Messina

Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director

* Stefano Del Punta

Intesa Sanpaolo S.p.A. - Group CFO

================================================================================

Conference Call Participants

================================================================================

* Adrian Cighi

RBC Capital Markets, LLC, Research Division - Equity Analyst

* Alberto Vittorio Luigi Cordara

BofA Merrill Lynch, Research Division - Research Analyst

* Andrea Filtri

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

* Andrea Unzueta

Crédit Suisse AG, Research Division - VP

* Andrea Vercellone

Exane BNP Paribas, Research Division - European Banks Analyst

* Anna Adamo

Autonomous Research LLP - Partner of Italian Banks & Asset Managers

* Antonio Reale

Morgan Stanley, Research Division - Equity Analyst

* Azzurra Guelfi

Citigroup Inc, Research Division - VP

* Benjie Creelan-Sandford

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Domenico Santoro

Autonomous Research LLP - Former Partner, Italian and Greek Banks

* Giovanni Razzoli

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

* Ignacio Cerezo Olmos

UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon and welcome to the conference call of Intesa Sanpaolo for the presentation of the 2019 half year results, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Cleena and I'll be your coordinator for today's conference. (Operator Instructions) Today's conference call is being recorded. At this time, I'd like to hand the call over to Mr. Carlo Messina. Sir, you may begin.

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [2]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and welcome to our first half results conference call. This is Carlo Messina, Chief Executive. And I'm here with Stefano Del Punta, CFO; Marco Delfrate; and Andrea Tamagnini, Investor Relations Officers.

Before diving into the details, let me highlight that we are very proud of the bank's performance in the first half of the year. ISP continues to deliver strong results despite an external environment that has been less supportive for revenues than expected, but we see signs of improvement in June and July.

Net income in the first half reached around EUR 2.3 billion driven by our core operating performance including a solid increase in commissions in Q2. While increasing profitability in the first 6 months, we have also further strengthened our balance sheet, improving our already solid capital position and speeding up NPL deleveraging and increasing NPL coverage.

During this semester, we have also triggered new actions that will accelerate business plan execution and that will further enhance our very resilient and well-diversified business model; our high strategic flexibility in managing costs; and our distinctive de-risking capabilities. For all these reasons, we are firmly on track to deliver in 2019 net income higher than the EUR 4 billion booked last year. And we confirm a payout ratio of 80% for this year with a very good cash dividend once again. Let's now go through the presentation and at the end I will be glad to take your questions.

Slide #2 -- oh, sorry, Slide #1. The results we will discuss in a few minutes are remarkable as they were achieved in a challenging operating environment for revenues. The eurozone and Italy had a slowdown in GDP growth with Italian GDP flat after a slight decrease in the second half of 2018. The 10-year BTP-Bund spread remained at around 250 basis points during the first half of the year. However, in July it dropped below 200 basis points for the first time since April 2018.

Slide #2, let's now look the key highlights of the first half. The best first half net income since 2008. Strong acceleration in operating income and operating margin in Q2 with commissions up 5.5% versus the previous quarter. Cost/income down to 49.3%, among the best in Europe, with a 3.2% yearly decrease in operating costs. The lowest ever half yearly NPL inflow coupled with a 22% decrease in loan loss provisions. Including the Prelios agreement we have deleveraged around EUR 33 billion of NPL since the peak of September 2019 and EUR 8 billion in the past 12 months at no cost to our shareholders.

Our common equity ratio is at a rock solid 13.9% despite the negative impact of 20 basis points since March last year due to the sovereign bond spread and around 20 basis points from TRIM and IFRS 16 impact registered in the first quarter. So I'm very proud of these results and as always I want to thank all Intesa Sanpaolo people for their hard work in helping achieve them.

Slide #3. Let me bring your attention once again to the pillars of our top-performing delivery machine, which is accelerating the execution of the business plan through important actions. We have distinctive de-risking capabilities. The strategic partnership with Prelios will allow ISP to focus its internal capabilities on proactive credit management in the early stage, mainly the Pulse project, while leveraging a best-in-class external platform for late stages and dispose a UTP portfolio of EUR 3 billion gross exposure with a valuation in line with book value at no cost to shareholders. So through this agreement we will reinforce our ability to manage the proactive credit management of our portfolio loans.

Second point, we enjoy strategic flexibility managing costs. As proof of this, on top of the 9,000 exits already agreed at the end of 2017, we will have 1,600 additional exits related to a new agreement signed at the end of May, and we received 1,000 further application for voluntary exit to be evaluated. Also the partnership with SisalPay will expand the Banca 5 network to more than 5,000 outlets allowing a potential reduction of up to 1,000 additional branches on top of the business plan target.

We are a wealth management and protection company, with sound and strong financial market activities, so related to revenue growth in our business plan, we decided to strengthen our financial market activities to both capture market opportunities and to hedge the impact volatility on our fee-based business.

To succeed in this, ISP deployed an internal reorganization to focus the treasury under management of the liquidity portfolio and Banca IMI on the management of other securities portfolio. This is one of the reason why in this semester profits from financial assets increased by almost 40% when excluding the NTV positive impact booked in the first quarter of last year. So also the dimension and the volume on -- of securities portfolio increased on average between EUR 15 billion and EUR 20 billion. This will remain more or less the amount of portfolio for the next years for Intesa Sanpaolo. So they will have a lot of room to work on other revenues coming from securities portfolio, both net interest income and profits from trading.

Our Wealth Management machine, following the recovery of the markets in June and July, is now working at full speed to convert into assets under management part of the EUR 170 billion of assets under administration and the EUR 60 billion of household sight deposits collected in the last years out of which EUR 8 billion in the first half. As already highlighted, our sustainable profitability is also the results of a very strong capital and liquidity position.

Slide #4. Let's now deep-dive into our results. First half net income was our best since 2008, thanks to solid operating performance. And we ended the second half of the year as a stronger bank and firmly on track to deliver a 2019 net income that is higher than in 2018.

Slide #5. During the first 6 months, we continue to prove across all key indicators. In particular, net income was 4% higher than last year when we had the positive impact of the NTV sale. The annualized cost of risk is down to 47 basis points.

NPL stock and NPL ratio reached the lowest level since 2009 and our capital position improved significantly in Q2 at about 460 basis points above regulatory requirements.

Slide #6. Shareholders are not the only ones benefiting from our strong performance. During the first semester, employees received EUR 2.8 billion in salaries and all our excess capacity of around 5,000 people is in the process of being reskilled of which around 2,200 are already redeployed to priority projects. The public sector received EUR 1.4 billion in taxes. Households and businesses received EUR 26 billion in new medium/long-term lending of which over EUR 21 billion in Italy. In addition, over the same period, we helped 10,000 companies to get back on track. Besides supporting the real economy, we are also delivering in social economy.

And on the next slide I give you a sense -- I will give you a sense of what Intesa Sanpaolo does to support Italian society and promote culture. Slide #7. As set out in our business plan, Intesa Sanpaolo is committed to becoming a global reference for social and cultural responsibility. In this slide, you can see just a few example of our work to support Italian society and let me comment on the most recent developments. Our EUR 5 billion circular economy credit plafond has evaluated around 150 projects out of which 40 have been finances for EUR 540 million. Our partnership regeneration, a global project to reduce youth unemployment is already delivering during the first semester, and around 90 companies committed to the program and around 240 students were interviewed.

So we are the engine of the Italian social economy, and in addition to our direct support to Italian society, the dividends that we pay now to the banking foundations that make a part of (inaudible) also provide support to social and cultural projects. In fact, these foundations contributed more than half of the total charitable funds donated by all Italian banking foundations.

Slide #8. As result of these efforts, ISP has been included in the main sustainability indexes and rankings.

On Slide #9, you can see the key highlights of our strong performance in the first semester, but let me take you to Page 10 and give you some color on the P&L.

Slide 10. The first 6 months of the years were very strong despite a challenging environment for revenues marked by low economic growth, low market interest rates and a persistent high sovereign spread. In the first half, we delivered growth and profitability driven by reductions in operating costs and loan loss provisions. Operating income was down just 1% when excluding NTV due to a decline in net interest income driven in part by the strong NPL reduction and in commission affected by less supportive market conditions.

Profits from financial assets were up nearly 40% when excluding NTV, confirming that our business model is naturally hedged because our financial market activities offset the impact of market volatility on our fee-based business. This result was boosted following an internal reorganization to optimize the securities portfolio management leveraging on Banca IMI and focusing the treasury on liquidity and treasury management activities without increasing group total [BAR] limits.

We have continued to be very effective at managing costs with personnel expenses down by 3% and administrative expenses down by 6%. Depreciation is up slightly as we keep investing for growth. Our loan loss provisions increased by 22% on an annual basis. Gross income was up 10% when excluding NTV. And net income comes to EUR 2.5 billion when excluding costs concerning the banking industry.

Slide #11, talking about quarter. Q2 has been very strong with the best second quarter net income since 2008. And on a quarterly basis, operating income was up 7%, with commissions up 5.5%. Operating margin was up double-digits and loan loss provision increased on a quarterly basis, but were down 20% on a yearly basis. And net income was up 16%, more than EUR 1.2 billion, or EUR 1.3 billion when excluding costs concerning the industry.

Slide #12, net interest income. So the slight increase in net interest income versus Q1 was driven by positive dynamics of spread despite the prolonged low interest rate environment and by financial components. On a yearly basis, net interest income decreased largely due to the impact of accelerated NPL; deleveraging of financial components; effects of hedging and the reimbursement of an acquisition financing loan in September 2018. Net interest income was also affected by strong growth in direct deposits of around EUR 16 billion in the first semester excluding repos that in a low interest rate environment impacts the net interest income in the short term, but boosts our wealth management engine for the coming quarters.

We will continue to work hard to further boost the commercial component, while continuing to manage our revenues in an integrated manner with a positive pre-tax and EBA strategy. During the remainder of the year, net interest income will also fully benefit from our decision not to replace any of the senior subordinated bonds aspired, or booked back in the first half, also thanks to the EUR 8 billion increase in retail clients current accounts.

Slide #13. Despite the challenging environment, assets under management increased by more than EUR 13 billion in the first half, and family sight deposit increased by EUR 8 billion over the past 6 months and by nearly EUR 5 billion on a quarterly basis. So the so-called sleepy money collected in the past years together with the EUR 170 billion of assets under administration will be the fuel of our wealth management engine in the coming quarters. And we have seen the first signs of a switch into assets under management in June and July.

Overall, customer financial assets increased by more than EUR 27 billion in the first semester; EUR 35 billion excluding repos to around EUR 940 billion. The recent market improvement is starting to support the wealth management business again. June has been by far the best month of the year for net inflow, the positive trend has continued in July.

Slide #14. Once again in this quarter, all our divisions made a positive contribution to group results. Close to half of our gross income comes from the wealth management and protection business, making ISP a clear European leader in wealth management, even considering the excellent performance of our corporate and investment banking divisions.

Slide #15. We continue to be very effective at managing costs and we are extremely proud of the strong reduction achieved in the first 6 months. Operating costs were down by more than 3% on a yearly basis, while we continue to invest for growth in key areas such as training at key digital and property and casualty and wealth management and in incentives to trigger growth. The main sources of savings were workforce reduction, optimization of real estate, reduction of legal entities and reduction of other administrative expenses.

We reduced the headcount by 3,500 on a yearly basis, with room for further cost reduction. We have already agreed with unions and fully provisioned for over 4,700 additional exit by June 2021, out of which around 1,200 already exited at the beginning of July and around 1,600 additional exit related to the new agreement signed in May. On top of this, we have received around 1,000 additional application for voluntary exits to be reviewed.

Also further, branch reductions on top of those embedded in the business plan are expected in line of the Banca 5 network scale-up, thanks to the strategic partnership with SisalPay. We believe that ISP can operate at the same level of commercial effectiveness and customer satisfaction even with around 1,000 fewer branches. All of these underlines how ISP maintains high strategic flexibility in managing costs.

Slide #16. We are very proud to have a best-in-class cost/income ratio. This chart illustrates our leading position in Europe. We have a cost/income ratio that is 13.2 percentage points lower than the peer average, but within the best-in-class.

Slide #17. As you can see in this slide, loan loss provision declined to lowest half yearly level since 2008 coupled with the lowest ever half yearly NPL inflow. As a result, the annualized cost of risk is down to 47 basis points, well on track to meet and possibly exceed our business plan targets of 41 basis points by 2021. The NPL coverage ratio increased to 56% including the Prelios agreement, up 2.6 percentage point versus the same period last year, a level that will facilitate future deleveraging and will keep the cost of risk low.

Slide #18. Our NPL stock is declining sharply, reaching the lowest level since 2009. The gross NPL ratio including the Prelios agreement has decreased by around 12 percentage points since the peak of September 2015 to 7.7% and the net NPL ratio decreased by more than 6 percentage point down to 3.6%, the lowest level since 2009. As you know, ISP has been able to deliver this impressive deleveraging at no cost to shareholders.

And in order to our -- Slide 19, and in order to reach our targets for 2021, we need to deleverage around EUR 500 million gross NPL and around EUR 200 million net NPL per quarter over the next 10 quarters. It is more than manageable given that in the past 15 quarters we deleveraged EUR 1.3 billion gross NPL and EUR 1 billion net NPL per quarter with a coverage that was much lower.

Slide #20. We recorded the lowest ever first half gross NPL; inflow down 77% versus 7 years ago and now 19% on a yearly basis. Net inflows are at historical low thanks to our proactive credit management and to the solidity of the Italian corporate sector, which is much, much stronger than in 2008. The strategic partnership with Prelios, so following a very successful launch of the partnership with Intrum, today we announced that ISP signed an agreement with Prelios to form a strategic partnership with respect to unlikely to pay loans based on 3 pillars; a 10-year agreement for the servicing of a UTP loan portfolio with a gross book value of EUR 6.7 billion; the disposal of a UTP portfolio of around EUR 3 billion gross and the valuation at EUR 2 billion in line with book value at no cost to shareholders. And the vast majority of fees to Prelios are linked to performers and a significant portion depends on loans returning to performing status.

So I'm proud to say that this is the largest UTP transaction in the Italian market and the benchmark on how to manage this asset class with a highly specialized strategic partner.

Slide #22. The agreement with Prelios has a strong industrial rationale and a clear benefit for ISP. We will improve the UTP loan management by leveraging the real estate know-how of Prelios and the support of its sectorial expert, further accelerating the digitalization of the UTP management process through dedicated investments in IT tools and leveraging Prelios network of specialized investor.

Then we further accelerate NPS deleveraging and we are now far ahead of schedule in delivering our 2021 target which we expect to achieve 1 year in advance. We will redeploy a few hundred experienced people from UTP management to manage even more effective the early delinquency portfolio and speed up the starting of the past team that already has 250 people and is planned to grow to 1,000 by 2021. This agreement also benefits the real economy because many struggling companies will get the contract because they can access traditional specialize -- additional specialized investors and profit from the solution jointly deployed by Intesa Sanpaolo and the partner, and deal with Prelios which has strong incentives to return the loans back to performing status.

Capital. Slide #23. In Q2, we strengthened our already solid capital base and we maintain a significant (inaudible) of 460 basis points versus the regulatory requirement well above our peers after having already accrued around EUR 1.8 billion for dividends in the first 6 months of the year.

Slide #24. ISP continues to be a sector leader in Europe and this clearly support our generous dividend policy.

Slide #25. We have a best-in-class risk profile in terms of the ratio of capital to financial and liquid asset and by this I'm referring to net NPL level 2 and level 3 and we are really a champion in this area.

Slide #26. I would like just to share some consideration -- a few consideration regarding the Italian economy. So despite a slowdown in the last months of 2018, Italian GDP recovered slightly in the first half of the year and is projected to recover further in the second half in line with the eurozone trend. Some key indicator has supportive anticipating the recovery and are really very important for our acceleration in recovery in wealth management and net inflows coming from wealth management because unemployment fell below 10% in May for the first time since early 2012.

Gross disposable income also increased around 1% in Q1 after decreasing in the second half of 2018. Consumer confidence rebounded in July due to more optimistic expectations of the economy and its level is [exceptionally] 13% higher than in 2010. The trade surplus continues to be strong. Recovery in residential real estate transaction is ongoing since 2015.

The recovery is based on solid fundamentals of the country. In fact, Italian companies are more profitable and better capitalized than before the 2008 crisis and well-positioned overall to benefit from the expected economic recovery. The wealth of Italian households stands above EUR 10 trillion out of which more than EUR 4 trillion are financial assets and the amount of debt held by Italian families remains very low. The Italian government holds more than EUR 1 trillion in assets, with around EUR 600 billion in financial assets and around EUR 300 billion in real estate assets. As already stated, in 2019 we expect further growth in net income with a payout ratio of 80% as set out in our business plan and we are confirming this target as really easily achievable.

Slide #28. To sum up, we are very satisfied with our performance in the first half and our delivery against the business plan target. De-risking, we have already achieved around 80% of the 4-year business plan deleveraging target and we increased coverage in just 18 months. The strategic partnership with Prelios will allow us to redeploy a few hundred experienced people from UTP management when even more executive management of the early stages. Implication is reduction of cost of risk in the next years and those in comparison with the business plan.

Cost reduction. Operating costs are down by more than 3% with cost/income down to 49.3%, while still investing for growth. We demonstrated once again our flexibility managing cost with recent agreements for further headcount exits and with the SisalPay partnership which will allow a further reduction of branches. Remember for us deduction of branches is the key drivers of reduction of cost. So another possible acceleration in terms of cost reduction in the next years.

Revenue growth. Operating income increased by almost 7% on a quarterly base despite the challenging environment and we strengthened our financial market activities to both capture market opportunities and to hedge the impact of volatility of fee-based business. And we are working at full speed to convert into asset under management part of the EUR 170 billion of assets under administration and the EUR 60 billion of household sight deposit, the so-called sleeping money collected in the past few years of which EUR 8 billion in the first half of this year.

So let me summarize. Wealth management can continue to grow in accelerating the speed and in terms of revenues from securities portfolio, we are now in a position to say that structurally we are increasing the contribution from this portfolio on an yearly basis by minimum EUR 300 million per year.

We are a sector leader in Europe when it comes to capital strength which further improved in Q2. We are firmly on track to deliver a higher net income versus 2018, and a very generous cash dividend. All in all, we deliver strong performance in the first semester and maintain a positive outlook for 2019.

ISP and myself personally are very proud of these results and as always I want to thank all Intesa Sanpaolo people for their hard work in helping achieve them. Thank you for your time and attention. And I'm now happy to answer your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We will now take our first question from Andrea Unzueta from Credit Suisse.

--------------------------------------------------------------------------------

Andrea Unzueta, Crédit Suisse AG, Research Division - VP [2]

--------------------------------------------------------------------------------

The first one is on NII. Given the rate outlook considering I guess you have a negative impact from the UTP portfolio that you're selling and that your loan book is declining and how do you expect that line to progress going forward? The second one is on costs. If you could quantify the additional cost savings that you have been suggesting in the call? And the third question is on the SPV with Prelios and just to -- I understand that you're retaining 70% of -- 75% of the risk in fact which allows you to deconsolidate the NPLs, but I would appreciate if you could give us more color on what is the risk weighting of the SPV? What sort of impact we should expect from a capital point of view? And also how would you be assessing the SPV going forward?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [3]

--------------------------------------------------------------------------------

Sorry. On net interest income I will give you all my expectation line by line. So with this question I can also answer to a number of questions that all your other analysts can have on our net interest income that is really the area of big interest from your side. And so I want to give you starting from Slide 12 so you can move volume spread, hedging financial components and I can make a disclosure within financial components of impact of the UTP transaction. So you can have all the information and with this answer I can close on the net interest income. So on volumes, our expectation is to have an increase in the second part of the year. So contribution for volume in the second part of the year will increase. We have already completed transaction at the end of June, this would be accounted in beginning of July, so we are starting to increase volumes and second part of the year we'll benefit in terms of volumes.

On spread side, we have a negative impact coming from such significant deposits increase that we had. I'm really surprise that a lot of analyst cannot understand what is the significant impact for a bank like us to have such an increase, EUR 16 billion in a semester of increase in deposits with a negative (inaudible) by definition a reduction of net interest income. But it is only a short-term negative because this means that you're increasing the value of a company, especially if you are a wealth management company in a situation of market that is coming back to net inflows, to conversion from deposits, so sleeping money into wealth management.

So this area of increasing deposits can give us further negative if we deposits will increase can give us benefit if we are able to convert into asset under management, but in any case from my side is positive and not negative. Also it will have a negative impact on net interest income. Looking at medium-term cost of funding, we had the benefit and we will have a further benefit in the next quarters because we will have the full impact of the not replacing EUR 8 billion of medium-term funding that we had expiring in the first semester of 2019, so positive on spread. On our capital, we had a positive -- slight positive in this semester and our expectation is to continue to have positive implication coming from markup. So net-net spread can increase and can increase in a significant way.

On hedging, we will continue to have a negative impact, not significant, but any case negative. On financial components, there are 2 areas. One is portfolio, securities portfolio will continue to give us positive because we will maintain such dimension of portfolio that is as I told you we've been increasing comparison with last year of on average EUR 15 billion and well-diversified because it is not concentrated in Italian government bonds, but we increased all the different asset classes. And the evidence is that in the profit for tradings, we made profit with 25% Italian government bond; 25% Spanish; 25% core Europe; and 20% USA government bonds, just to give you the idea, well-diversified increase dimension of volume of portfolio. This will bring positive and increasing positive in the dynamics of net interest margin.

On the NPL, we will have a negative coming from the unlikely to pay transaction with Prelios, the good range between EUR 15 million and EUR 25 million in this semester. That is our best expectation on the different items that make the composition on net interest income. So again, let me make this comment because a lot of you are talking about as negative the dynamic of our net interest income. I'm really satisfied of the progression of net interest income, especially because our deposit are increasing in such a significant way that for me is medium and long-term value for Intesa Sanpaolo.

On -- moving on cost, we have really a massive potential in further reduction of cost because we can accept the 1,000 voluntary exit that's coming from our people. This will bring a limited amount of integration charges in a range of EUR 50 million, EUR 60 million, but at the end, we will have a positive capital gain from the transaction of SisalPay that more than compensate this -- the integration charges. So we are today in a condition to have -- can account on 2,600 people that can leave the organization in excess of what we have considered the original business plan and with the possibility and the real plan that we want to accelerate reduction of branches. Reduction of branches, as I told, is the key drivers for us of reduction of cost because we are able to reduce cost, all the administrative costs related with the reduction of branches, so the IT and all the other main costs that are related with branches in a short time -- in a short time. So that's an important driver of reduction of cost from our side. So I'm not in a position to make a quantification of possible further benefit as we can have, but it is for sure significant.

On UTP-Prelios, on the capital side, our expectation is to have a slight positive within the end of 2019 so we can have a benefit in terms of reduction of risk-weighted asset related to reduction of unlikely to pay net -- the subscription that we'll make on the senior tranches, and in the next 2 years will depend on the possibility to include extra recoveries that we expect in the historical series for the loss given default, but in any case our expectation is we can have a minimum -- sorry, maximum negative impact of 10 basis points next year, but if we accelerate recoveries, our expectation is that this impact can become positive. And we will check next year, so for the time being I'm not in a position to give you more disclosure on this point, but by definition is a win-win transaction for Intesa Sanpaolo.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

The next question comes from Adrian Cighi from RBC.

--------------------------------------------------------------------------------

Adrian Cighi, RBC Capital Markets, LLC, Research Division - Equity Analyst [5]

--------------------------------------------------------------------------------

Two questions please. One follow-up on NII and one on the asset management side. The rate environment is clearly getting more challenging now. Can you remind us what effectively lead to a 10 basis points decline in Euribor is and how fast we could expect to see this? And on the asset management side, you mentioned that June was a very good month for inflows and we can see this from the monthly statistics from the fund association. In fact, Intesa is the only organization that has seen inflows of a size. What do you think explains this sort of out-performance in the month? Is there something you're doing on the pricing side? Or is this just a different incentive you're setting up for the people in the branches? Any color on that would be very helpful.

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [6]

--------------------------------------------------------------------------------

So looking at the sensitivity related to Euribor, it is clear that we can have a reduction in terms of markdown that will be a negative. We will decide how to manage with our client-base, but at the same time, I have to tell you that the increase in volume that we've made on our securities portfolio is in such a dimension that 10 basis point is not a worry at all on the dynamic on our net interest income. Looking at the asset under management area, there is a strong correlation between the spread BTP-Bund and the amount of wealth management that you can collect, that you can convert from an asset class into an asset class.

So it is typically the dynamic of the spread that is the main driver that can allow acceleration in net inflows of asset under management. Because we had such a significant decrease in spread in this 1.5 months, that's the reason why we are looking for acceleration in this area. And my expectation is that looking at the negative environment -- negative interest rate environment, you can have some negative, slight negative on net interest income, but at the end, it is such positive -- such positive dimension, the increase that you can have in asset under management, that net-net we will have a significant boost to our profitability. And this is also the evidence of the past year same which we had strong increase in fee and commissions.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

The next question comes from Andrea Vercellone from Exane.

--------------------------------------------------------------------------------

Andrea Vercellone, Exane BNP Paribas, Research Division - European Banks Analyst [8]

--------------------------------------------------------------------------------

Four questions. The first one is on trading. Given the spreads have tightened much further in July, would it be fair to assume that you have taken further advantage of this better environment also in July and not just in Q2 in light of the new organization that -- of the treasury that you have just highlighted? The second point is also on the Prelios agreement, on the SPV. Is it correct to assume that the mezzanine and junior tranches will be sold at par or not? Because obviously that changes the price that you'll be getting for the loans if they're not. And the third question is if you can give us an idea of the change in valuation reserves quarter-to-date?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [9]

--------------------------------------------------------------------------------

So starting from the change in valuation reserve, we had a positive impact of 10 basis points on this coming from this impact on our common equity tier I ratio. Looking at mezzanine junior, we are really in a situation which we will not have any kind of impact coming from the kinds of prices of the placement of the mezzanine and junior tranches. We will retain maximum 5%. And that's also -- for us it is not significant. Then my expectation is that they can be in a position to book at par, but in any case, it is not an issue that can have an impact on ourselves. On trading, absolutely we are continue to deliver very good performance. So that's reality. It is not only of actual spread, but is volatility because increasing the size of portfolio in the availability of Banca IMI, we are really giving them possibility to put their ability in order to increase revenues on securities portfolio. So July has been another very good month for Intesa Sanpaolo

--------------------------------------------------------------------------------

Andrea Vercellone, Exane BNP Paribas, Research Division - European Banks Analyst [10]

--------------------------------------------------------------------------------

Sorry, all clear. Just on the valuation reserve, my question was if you can give us an update on the further change in the month of July as opposed to the Q2 if you have that?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [11]

--------------------------------------------------------------------------------

I would prefer to maintain as a reserve for the next quarter results, but it is positive. And we hope that this can remain at this level. So I don't want to give figures, but it is for sure a good impact for us.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

The next question comes from Azzurra Guelfi from Citigroup.

--------------------------------------------------------------------------------

Azzurra Guelfi, Citigroup Inc, Research Division - VP [13]

--------------------------------------------------------------------------------

Couple of question on the Prelios deal and one on MREL. When I look at Prelios, I understand the dynamics of lower NII, but we also will see potentially an improvement on the loan loss provision. Can you give us some indication of what do you expect this benefit to be and how quickly they can be realized? Also a little bit of color on which loans you have transferred because clearly the unlikely to pay are quite complex and varied asset class because there is like restructure loans and the one that are closer to restructuring at the end or the one that's just become (inaudible). So which kind of loan have you transferred and which one is that are -- if you can give us some color in the servicing agreement with Prelios? And the other question is on MREL. You have strong liquidity position, but MREL is something that the bank will have to face as well. Do you have any idea if you have any replacement cost for bond that it is going to affect your NII in 2020?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [14]

--------------------------------------------------------------------------------

Sorry, Azzurra. I lost the question on servicing. Could you repeat please?

--------------------------------------------------------------------------------

Azzurra Guelfi, Citigroup Inc, Research Division - VP [15]

--------------------------------------------------------------------------------

Yes. The loans that you are giving to the service -- in the agreement for the services, the EUR 6.7 billion, which kind of loans are they? Have they just started their restructuring phase? Or they are in an advanced restructuring that has been unsuccessful? Just try to understand what could be the benefit for your cost of risk and the success in terms of the cost.

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [16]

--------------------------------------------------------------------------------

Okay. Okay. So our expectation is obviously to have from the EUR 3 billion a significant benefit on cost of risk in the future. So that's for sure. So that's an area in which we are in a position to say that also this year we can have a benefit because all the provisions related to this area will not be more part of Intesa Sanpaolo starting from the beginning of March. (technical difficulty)

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

(Operator Instructions) Ladies and gentlemen, please stand by. We're just experiencing momentary interruption for today's conference call. Please go ahead.

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [18]

--------------------------------------------------------------------------------

So I will start again with the answer to the Azzurra's questions. So related to the benefit that we can have on this transaction, there are 2 components. One is provisions. On the area of the tranche that we reduced that is the EUR 3 billion, we will have for sure significant benefit in terms of lower provisions for the next semesters in the future, so that's positive by definition. Also on the other portion, the area of servicing, our expectation is that the combination of Intesa Sanpaolo and Prelios can accelerate the coming back in bonus of a significant portion of portfolio. And also all the structure of fee and commissions of the deal is prepared in order to allow better performance in comparison to the performance of ISP because Prelios will receive a significant components of fee and commission variable, so related to delivery of coming back in bonus. This means that we will be in a position to reduce the future provisions that we will have starting from the end of 2019. So this is another very important enabler for the reduction of provision in 2020 and 2021.

So the reason why the 2 transaction, one the Prelios and the other one with SisalPay are very important to move on 2 areas that are different from revenues, but that are under the control or management that are provisions because we will have lower volume and acceleration recovery and reduction of branches that is completely under our control. Looking at MREL, we do not see any significant threats for 2020, so no impact that we can consider for the future that would be significant.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

The next question comes from Domenico Santoro from HSBC.

--------------------------------------------------------------------------------

Domenico Santoro, Autonomous Research LLP - Former Partner, Italian and Greek Banks [20]

--------------------------------------------------------------------------------

Just a follow-up to this question of the colleague on the loan loss provision. I mean we all know what are the impact of lower interest rates of NII, you've been very clear, but of course there are some significant potential impact also on loan loss provision. You said before that you expect loan loss provision potentially to be below the level of 41 basis points. I mean this is a environment of negative rate, so we're just wondering what's the -- what -- the way you look at loan loss provision going forward, if you can share with us some number or a guidance for the next years. Everybody is focused on NII, but there is here a second side of the coin. And also on the NP, if you can share with us the impacts from the new definition of NP EBA, whether this is going to kick in, in the third or in the fourth quarter?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [21]

--------------------------------------------------------------------------------

So looking at provisions, there is one point in this analysis of possible reduction of cost of risk that is related to volume. So nonperforming loans volumes that we had originally in our business plan will be much, much more lower in reality because after the deal with Intrum and this one with this -- with Prelios we will over-perform the stock of nonperforming loans that we will have at the end of the business plan. So this will bring by definition lower cost of risk in comparison to the original business plan.

Also the inflows are much better than our original expectation, so that's one side. Then there is another point that we will have to wait for the first months of the delivery of (inaudible) event because if we will receive an acceleration in terms of coming back of -- from unlikely to pay into performing loans that is our expectation, we will have possibility also to have other further reduction in terms of cost of risk. So I'm not ready to give figures, but from a qualitative point of view that's for sure that we're in a mood of exceeding the reduction of cost of risk in the next 2 years and it will be not difficult for us to reduce this. Looking at NPE and EBA guidelines, sorry, could you repeat your question because -- sorry, got it. What would be the impact for us in the new definitions from EBA? Our expectation is to have it in the fourth quarter and could be an amount more or less EUR 500 million. So not significant expectation of significant impact for us.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

We'll now take the next question from Andrea Filtri from Mediobanca.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I wanted to ask what is the contribution from the bond portfolio to NII in Q2. And if looking at another potential cycle of QE, if I understood correctly that you are thinking of a rerun of the dynamics of the previous one where the NII pressure is more than compensated by growth in fees or if now that spreads are already tighter, the switch of client funds into a UM should be more complex and just to know what has been the contribution from upfront fees in the Q2 print? Finally, you've already elaborated in part to this question, but the CET1 is up strongly in the quarter. If I calculate correctly, it's 10 basis point from earnings; 10 basis points from risk-weighted assets. You have said the 10 basis points is from valuation reserves. I just wondered what the remaining 10 basis points were from.

And in your press release you have explained that you have opened -- started the adoption of the Danish Compromise. When should we expect the validation of this request? And finally just a simple quick one on tax rate. Taxes are particularly low in the quarter. Is it because of the strong trading result? Or should there be a structural change?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [24]

--------------------------------------------------------------------------------

On -- starting from capital, the impact that we had positive is something that I have already disclosed in the conference call on the first quarter, but probably no one of you has considered as reliable my indication that was a rebound in risk-weighted asset related to market risk because we had peak of volatility in the historical series that entering the new quarter could have been reduced. So that the main part of risk-weighted asset reduction is driven by a reduction in market risk, risk-weighted assets that more or less remain at this level. So it is something structural in the coming back deposit peak, so a negative in the first quarter, now a recovery in the second quarter, then positive contribution on retained income and reduction of spread BTP-Bund.

On Danish Compromise, our expectation is to have some answer from the regulators in the next 2 months and we would see what can happen. Looking at the contribution of portfolio, the contribution of portfolio increased in this quarter by EUR 20 million in comparison with the other quarters. There has been obviously a change in the kind of securities because Banca IMI as I told you is now the leading managers of our portfolio, is moving portfolio, and they're realizing profit and putting also areas in which they are delivering our net interest margin. I have to tell you that from my side there is really a very low -- it is not so significant to talk about net interest income related to securities portfolio because the target that I gave to my people is revenue targets related to the volume of portfolio. So probably it is much better to concentrate on volume because if volume remains at this level on a structural basis we will have EUR 300 million more in comparison with the past.

Then I'm not in a position to allocate this EUR 300 million between net interest income and profit from trading, but by definition increasing EUR 50 billion, they had the possibility to move a significant portion in excess and then also having responsibility on securities, they were originally under the responsibility of the treasury department with different personnel. They had possibility to had -- to have another contribution from portfolio maintaining the same VaR -- group VaR limit.

So difficult to say what would be the implication on single line. On the total revenue, so net interest income and profit from trading, my expectation is that they will continue to deliver very good performance also in the future. On assets under management, the amount of upfront fee in this quarter is slightly in increasing comparison with the first quarter because we had entry fee that were superior to the first quarter because we had EUR 600 million of net inflows in comparison with negative inflows of the first quarter. But we are talking in any case of not significant amount.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

The next question comes from Giovanni Razzoli from Equita.

--------------------------------------------------------------------------------

Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [26]

--------------------------------------------------------------------------------

A couple of questions from my side. The first one, is it fair to assume that you have kept your EUR 30 billion of excess liquidity in ECB flat compared with last year? And if this is not the case, can you update us with the actual amount?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [27]

--------------------------------------------------------------------------------

Sorry, I didn't understand your questions because the line is not so good. So could you repeat and speak slowly please?

--------------------------------------------------------------------------------

Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [28]

--------------------------------------------------------------------------------

Yes, sure. Can you hear me now? Hello?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [29]

--------------------------------------------------------------------------------

Yes, yes. Absolutely, now yes. Yes.

--------------------------------------------------------------------------------

Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [30]

--------------------------------------------------------------------------------

Okay. I was just -- my first question was if you can update us on the amount of excess liquidity that you currently held in the ECB, that it was -- if I'm not mistaken was around EUR 30 billion as of June of last year. And then a couple of clarifications on your comments. As part of the Sisal deal, is it fair to assume that you are booking EUR 50 million capital gains that you mentioned? This is -- this is clarification. And the second question, is there any kind of impact in terms of additional extraordinary contribution to the Fondo Interbancario di Tutela dei Depositi for the Carige deal?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [31]

--------------------------------------------------------------------------------

So looking at the Carige deal, if there would be an intervention from the [Interbanc] fund we will not have any kind of impact because on a voluntary scheme we made all the devaluation of the intervention and on the Interbanc fund we will not have to devaluate the amount of intervention of the Interbanc fund. And that's our expectation. On the SisalPay, we can make an accrual of a capital gain related to the SisalPay transaction and our intention is if we reach an agreement with trade unions on this extra 1,000 voluntary exit and in any case it's people is asking us to leave the organization, so my expectation is that there could be a possibility to make an agreement, but we have great respect of trade unions and so we wait for the agreement. We can have a charge of between EUR 50 million and EUR 60 million of extraordinary integration charges and then it is possible to cover with this capital gain related to the Sisal transaction.

Looking at excess liquidity, excess liquidity is more or less the same level, probably close to EUR 40 billion than to EUR 30 billion. But excess liquidity deposit with ECB, then we have a lot of excess liquidity accessible for the (inaudible).

--------------------------------------------------------------------------------

Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [32]

--------------------------------------------------------------------------------

Okay. Yes, that's it.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

The next question comes from Alberto Cordara from Bank of America.

--------------------------------------------------------------------------------

Alberto Vittorio Luigi Cordara, BofA Merrill Lynch, Research Division - Research Analyst [34]

--------------------------------------------------------------------------------

So I just wanted to get back to some of the points that have been discussed. The first one is in terms of recurrence of revenues, now the way I look at you and comparing yourself to other banks, it seems to me that you have one of the lowest percentage of NII coming from treasuries and from hedging of all Italian banks and the European banks. And also in terms of weight of placing fees on the total amount of fees, you are certainly well below the Italian average. So this is from data that you released last year.

Yet when I look at yourself, I saw that other Italian banks are now telling us that they need to reduce the amount of BTPs that they own. They do have clearly much higher weight on regulatory capital in the one on Intesa, but the question to you is, is it a risk also for you that you may be called to take down your BTP exposure because I noticed that you increased a bit the amount of BTP that you own in the past 3 quarters. You are still well, well below the historic maximum that was EUR 65 billion, now you are EUR 34 billion, so it is basically half of that. But I just wanted to make clear if there is some pressure also on you to reduce this concentration risk?

Then the other issue is I think it is very interesting the point that you made about the liquidity. So liquidity is a blessing, but at the same time this strong increase in deposits is the whole thing you rely. Now I just want to see it from a positive standpoint, the positive standpoint is when this liquidity will be finally used, you have a positive double whammy effect, both on net interest income and fees. The issue that I have here is whether this liquidity has mainly come to you in the shape of current accounts? So I think that you have been very successful in pushing people out of little bonds and into asset management, but maybe it is more difficult to get people out of current accounts. So the question for you is I am right in saying that? Which are your strategies to push people out? And then how long will it take to successfully redeploy this liquidity?

And I must apologize, I have a third question. The third question is I think in the presentation you mentioned quite high number of people starting to exit the bank, which is basically an issue that is common to all banks these days, everybody in this structure. The only problem is that the cost of restructuring is pretty high and is going towards capital. So what are you going to do to face these restructuring cost that will be very sizable? If I understand correctly, the amount of people that are leaving the organization are in the order of the ones that you gave us. And then finally a very, very final point is can you tell us about your guidance for the earnings of the year? Are they going to be still higher than the previous year or not?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [35]

--------------------------------------------------------------------------------

Sorry Alberto, I didn't understand the last question.

--------------------------------------------------------------------------------

Alberto Vittorio Luigi Cordara, BofA Merrill Lynch, Research Division - Research Analyst [36]

--------------------------------------------------------------------------------

No, the last question is I think you gave a guidance in previous quarters that you were -- that you are confident to make a higher earnings in 2019 that in 2018. I just wanted to double-check with you if this is still the case.

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [37]

--------------------------------------------------------------------------------

So on net income, I'm now pretty sure to deliver a net income in 2019 that will exceed 2018. So that's for sure. There's no doubt that we will deliver a net income exceeding the one of 2018 and no doubt that we will pay 80% of this net income as dividend to our shareholders. So coming to the other areas that you have considered, so starting from net interest income, the -- we decided to increase the size of the portfolios because we were in such a situation due to the liquidity that it could have been crazy to maintain such an exposure to the ECB without any kind of yield. On the other side, we started at the end of last year we did reorganization in order to have the merger of Banca IMI with Intesa Sanpaolo and so making this reorganization of portfolios between the treasury department with specialization of liquidity and Banca IMI with specialization of securities portfolio.

Having said that, the increase in securities portfolio has been completed. The amount of Italian government bond is absolutely in line with all the expectation of the regulators, the risk appetite framework of the group. So we have no kind of need to make a reduction because we are still well below the level that we can reach in terms of Italian [government] bonds. But at the end, as I told some minutes ago that diversification of portfolio, it is important also for the people that in Banca IMI in order to better exploit profit from portfolio. And so the point on portfolio is that we have no need to reduce government -- Italian government bonds and at the same time my expectation is that we can deliver again very good performance, and in July we are still delivering very good performance.

On liquidity, that's for sure a significant point on coming from our clients to put money within our account. But there is also a portion of this money that is coming from private banking clients. So the -- probably more or less 50% of this amount is coming from new money coming from private banking clients. So the kind of timing in which it is possible to move from an asset class into another it is in the hands of my people and in the attitudes of the clients. But I have to tell you that my expectation is that a significant portion of this can be converted into asset under management for the -- especially for the private banking client.

For the personal affluent there could be more solution related to insurance product that can be considered in order to move the money into wealth management products. We are just looking to these reduction of spread or stabilization of spread. And at the end, if you look at the trend of future interest rate it will be for sure in reduction. It will be the perfect environment in order to work with our clients in reaching this money into wealth management product, insurance for the personal affluent and asset under management for the private banking clients. Looking at the restructuring costs, we have all the business plans, all the exit of people, reorganization of branches has already all the restructuring charges already in our figures. What we can add is only this amount of EUR 50 million-EUR 60 million. And we are still making the final calculation that will allow us to accept this 1,000 further exit of people. But the 1,600 that were already agreed are at 0 cost in terms of restructuring charges.

So I have to tell you that we are in a unique position in comparison with all the other peers. Then also the reduction of branches is something that -- I don't want to tell you that it is business as usual for us. But at the end, we have such technology in order to reduce branches that the cost is so limited and the benefit are so significant that we are really working in order to accelerate and increase the number of branches that can be reduced during the next 2 years.

--------------------------------------------------------------------------------

Alberto Vittorio Luigi Cordara, BofA Merrill Lynch, Research Division - Research Analyst [38]

--------------------------------------------------------------------------------

Oh, this is by the end of the year, no? So it's very interesting.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

The next question comes from Ignacio Cerezo from UBS.

--------------------------------------------------------------------------------

Ignacio Cerezo Olmos, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst [40]

--------------------------------------------------------------------------------

A couple of quick ones from me. If you can share with us the funding plan of the bank in the second half of '19 and 2020? And if you can give us a number in terms of unrealized capital gains which are left on the government-owned portfolio?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [41]

--------------------------------------------------------------------------------

On unrealized, I don't want to give you because I prefer to give the realized quarter-by-quarter, and to surprise what you called local little bit and I called very important results because it is now strategic related to the connection of the securities portfolio, and it is structural net income that we will have year-on-year, but believe me, it is something that will allow us to have very good performance in the corporate investment banking division that are delivering very good results. So on funding plan, we -- I can leave the floor to Stefano Del Punta, but it is again business as usual, but Stefano, if you want to elaborate on this point.

--------------------------------------------------------------------------------

Stefano Del Punta, Intesa Sanpaolo S.p.A. - Group CFO [42]

--------------------------------------------------------------------------------

Yes, I mean we have a lot of liquidity as our CEO said, so I mean, really we don't need to go much on the market, certainly not on senior note (inaudible), so we are okay with our subordination requirement. We expect to be okay, we will see by the year-end. So we will be in the market, but don't expect us to reach much.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

The next question comes from Benjie Creelan-Sandford from Jefferies.

--------------------------------------------------------------------------------

Benjie Creelan-Sandford, Nomura Securities Co. Ltd., Research Division - Research Analyst [44]

--------------------------------------------------------------------------------

First of all, I just wanted to ask on costs, just beyond the cost savings, the original business plan that envisage about a EUR 600 million uplift by 2021 from investment. I was just wondering if you could update us on how much of that investment has been completed to date? The second question is just follow-up on NPLs and asset quality. I mean the growth inflows were a bit higher in 2Q than they have been in the previous 2 quarters, I was just wondering if there was any more color in terms of the trends there? And then the final question, it would be a shame not to ask about net interest income, but…

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [45]

--------------------------------------------------------------------------------

Sorry, excuse me, I lost the second question. Sorry, but the line is not good, so I please you to speak very slow because otherwise it is difficult to understand. So first question was on cost and it was clear, but the second question was on?

--------------------------------------------------------------------------------

Benjie Creelan-Sandford, Nomura Securities Co. Ltd., Research Division - Research Analyst [46]

--------------------------------------------------------------------------------

The second question was just on NPL because growth inflows in the second quarter were higher than they have been for the previous 2 quarters, so I just wondered whether there's anything specific there. Or anything that you could comment in terms of the inflow trends in terms of NPLs? And then the final question was just a quick one on net interest income. Just putting together all the previous guidance that you've given, should we still expect net interest income to be higher year-on-year in 2019? Or does that guidance no longer apply?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [47]

--------------------------------------------------------------------------------

So on cost, it is clear that we are reducing cost, but continuing to have a capital budget that is in the range of EUR 1 billion per year. So we are continuing to invest in a significant way, mainly on IT, digital and control function within the group and also to accelerate the engine for growth for the group. So what we are -- and our estimate is to continue to have a capital budget more or less in this range also in 2020, 2021. So when I talk about reduction of cost, I'm talking about reduction of administrative expenses related mainly to reduction of branches, legal entity and the reduction of people that as embedded a significant reduction of administrative expenses. And if you consider that also in terms of square meters that we have reduced, we have reduced in 18 months 15% of the square meters of the total amount of square meters that we have in the group.

And reducing another 500 branches we can reduce another 10% square meters that we use in the group. So just to give you that the sensitivity of what could be the dimension of the reduction of the cost that we can achieve without touching the amount of capital budget and investments that we are continuing to deliver. So the net-net I think that we are really in such a position to continue to invest on sustainability of results on the future of the company, but at the same time making the real efficiency that we need in order to improve profitabilities. On nonperforming loans in the second quarter, it is usual to have some seasonality, not significant, but in any case some seasonality. Then again in 2021, our target is 41 basis points in terms of cost of risk. In this semester, we are 47. So it is true that -- I'm pretty sure and I'm now giving clear indication that we will exceed this cost of risk for 2021, but I have no intention to exceed in the first semester of 2019 especially because the kind of profitability that I'm delivering is absolutely in line with my guidance with the outlook of delivering net income in 2019 that is in excess of 2018.

So if you have EUR 50 million of provisions that can be considered as something that you can put in such a very good quarter I'm not absolutely surprised, then seasonality is there, you have to consider that we have million of clients, thousand and thousands of corporate clients, so difficult to say EUR 20 million, EUR 30 million of provision, or [100] inflows more or less. So at the end what is very important is the trend and the clear significant reduction in terms of stock and on semester basis on -- also on -- in comparison with last year, so I have to tell you that I'm pretty confident on the results and I do not see any kind of threats, but all the positive for the environment related on quality of credit and provisions for Intesa Sanpaolo.

On net interest income, again, net interest income, I know that this is something very important for you and for all the investors in the market. But there are something that is called commercial interest margin and there are something that is financial interest margin. And financial interest margin is made of such a significant component, especially if you give targets to your people that are only revenues and not net interest margin and profit on securities portfolio, that is difficult to say that you can have a specific dynamic maintaining EUR 20 million or EUR 30 million increase or reduction. For me it is clear that on commercial I'm managing this organization in order to increase net interest income also on a year-on-year basis.

On financial interest margin I'm managing this organization in order to increase the total amount of revenues. What I can tell you for sure is that in the second semester the total amount of net interest income can be in excess in comparison to the total amount of net interest income the first semester. Then on yearly basis, let's wait for the next quarter because it is difficult for me to give you this guidance. But it is also related of the kind of management that I'm doing with the people within corporate investment banking division. So their incentive scheme is related to revenues, not to net interest income, so that's the clear point. And now a significant portion of this financial yield of financial assets is in the end of corporate investment banking division.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

The next question comes from Antonio Reale from Morgan Stanley.

--------------------------------------------------------------------------------

Antonio Reale, Morgan Stanley, Research Division - Equity Analyst [49]

--------------------------------------------------------------------------------

I've got 2 quick questions on my side. One on the dividend strategy, to some extent a provocative question on that. And the second question is on margin and your strategy in terms of growing the loan book. So on the dividend strategy, you've been quite clear and firm in your strategy with respect to remunerating shareholders. My question is aimed at understanding under what circumstances you will consider doing share buybacks instead of paying dividends given the level of valuations and the flexibility you will get when it comes to managing your capital base? And also linked to that, if you could share your thinking and any feedback conversations you've had with the regulator, that would be very, very useful. Second question is you talked about positive trends in the markup in the quarter. Can you just remind us of your strategy in terms of pursuing market share gains targets in certain products versus margin preservation across products such as mortgages, corporates and personal loans?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [50]

--------------------------------------------------------------------------------

So the increase in markup is mainly coming from the pricing and not from the attitude of increasing market shares. So we have such a significant market share and share wallet with the strategic clients that our target is not market share, but it is EBA revenues and the quality of credit. So -- but working with our client, we were in a position to make a good re-pricing and so positive on markup. Looking at dividend strategy, I have to tell you that it is really not easy to receive the approval to make share buyback from the regulators, that's my expectation, my impression and so I will continue to work with a strong commitment to increase in a sustainable way the net income of the organization in order to pay in any case a significant dividend because if you consider our strong capital position and already embedded EUR 1.8 billion of dividend. Also this amount is already accrued, is something that probably best-in-class in comparison with the other peers in the market.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

The next question comes from Anna Adamo from Autonomous Research.

--------------------------------------------------------------------------------

Anna Adamo, Autonomous Research LLP - Partner of Italian Banks & Asset Managers [52]

--------------------------------------------------------------------------------

I have only one question. What is your plan for repaying TLTRO II? And do you have any interest in taking up TLTRO III in September?

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [53]

--------------------------------------------------------------------------------

So on TLTRO II, so from a liquidity point of view we have 0 need to have TLTRO. So because we have remained with a significant positive net single funding ratio position also repaying all the TLTRO II, so just to make it clear that the evidence of our strength in terms of liquidity. So if we repay all the EUR 60 billion of TLTRO II, we remain with a positive net stable funding ratio that is unique in the landscape in the market comparison with other European peers. Then coming back to pricing and to cost of funding and profitability, for sure we can have some positivity and some interest in continuing to have access to the TLTRO market. So it is likely that we can take also TLTRO III, we will see the conditions, but it is mainly a decision driven by pricing and profitability because looking at liquidity we have 0 need on -- working on TLTRO.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

As there are no further question signals, I'll now turn the call back to Mr. Messina for any additional or closing remarks.

--------------------------------------------------------------------------------

Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [55]

--------------------------------------------------------------------------------

So, thank you very much and hope to see you in London. Bye.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

That will conclude today's call. Thank you for participation. You may now disconnect.