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Edited Transcript of ISP.MI earnings conference call or presentation 4-Feb-20 2:00pm GMT

Full Year 2020 Intesa Sanpaolo SpA Earnings Call

Turin Feb 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Intesa Sanpaolo SpA earnings conference call or presentation Tuesday, February 4, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlo Messina

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

* Stefano Del Punta

Intesa Sanpaolo S.p.A. - Group CFO

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Conference Call Participants

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* 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

* Azzurra Guelfi

Citigroup Inc, Research Division - VP

* Benjie Creelan-Sandford

Jefferies LLC, Research Division - Equity Analyst & Bank Analyst

* Christian Carrese

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

* Delphine Lee

JP Morgan Chase & Co, Research Division - Analyst

* Domenico Santoro

HSBC, Research Division - Analyst

* Hugo Moniz Marques Da Cruz

Keefe, Bruyette & Woods Limited, Research Division - Analyst

* Ignacio Cerezo Olmos

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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the 2019 full year results, hosted today by Mr. Carlo Messina, Chief Executive Officer.

My name is Kyle, and I will be your coordinator for today's conference. (Operator Instructions) Today's conference call is being recorded. At this time, I would like to hand the call over to Mr. Carlo Messina. Sir, you may now begin.

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

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Good afternoon, ladies and gentlemen, and welcome to our 2019 results conference call. This is Carlo Messina, Chief Executive; and I'm here with me Stefano Del Punta, CFO; Marco Delfrate; and Andrea Tamagnini, Investor Relations officers.

Before diving into the detail, let me say that we are very proud that the bank continues to deliver strong results despite an external environment that has been less supportive than expected for revenues, and we continue to invest for sustainable growth.

Low interest rates, while penalizing net interest income are favorable for our Wealth Management business as is the declining sovereign spread. Our Wealth Management & Protection business is working at full speed to convert into assets under management part of the EUR 176 billion of assets under administration, and the EUR 70 billion of household site deposits collected in the past few years.

The first positive results were visible in Q3 and Q4, and the outlook is even more positive.

In 2019, we fully delivered on all our commitments, in particular, revenue growth with commissions in strong acceleration in the second semester and reaching a historical peak in Q4, one of the best quarters ever the past few years for assets under management net inflows. Continued cost reduction, we decreased the cost of risk with loan loss provision at the lowest level since 2007, increased in net income that is up to 24% when excluding the capital gains from NTV and interim booked in 2018. And so reaching EUR 4.2 billion driven by core operating performance.

We confirmed a payout ratio of 80%, resulting in cash dividends of EUR 3.4 billion, that likely means the highest dividend yield in the sector.

At the same time, we further strengthened our balance sheet. We reduced our NPL portfolio by EUR 6 billion, leading to the lowest NPL stock and NPL ratio since 2008 at no cost to our shareholders. And our capital positions continue to be rock-solid. Fully loaded common equity ratio increased to 14.1% and fully phased into 13%. Therefore, we commit to delivering a net income in 2020, above that in 2019, even when excluding the Nexi capital gain, and of course, well above 2019 when including the capital gain; and a payout ratio of 75% with a very high and sustainable dividend once again.

Furthermore, during 2019, customer financial assets, excluding repos, increased by EUR 70 billion, and we have also made multiple strategic moves, like the acquisition of RBM, specialized health insurance company, and the strategic partnership with Nexi, they will boost future sustainable growth, accelerate business plan execution and further enhance our very resilient and well-diversified business model.

Let's now go through the presentation. And at the end, I will be glad to take your questions.

Slide #1. Let's now look at the key highlights for 2019. The best net income since 2007. EUR 3.4 billion cash dividend equal to a dividend yield of 8.4%, with common equity Tier 1 ratio of 14.1%. 6% growth in operating margin and cost income down to 51.4%, among the best in Europe.

In Q4, we reduced the best-ever quarter for commissions, and quarterly growth in net interest income and insurance income, the lowest ever gross NPL inflow, coupled with a 13% decrease in loan loss provisions. We have deleveraged around EUR 34 billion of NPLs since the peak of September 2015, that means more than 50% reduction at no cost to shareholders. We have already achieved 83% of our 2021 business plan NPL deleveraging target. As always, I want to thank all Intesa Sanpaolo people for their hard work in helping achieve these excellent results.

Slide #2. I'm even very prouder of our results since they were achieved in a challenging operating environment. The eurozone and Italy experienced a slowdown in GDP growth. Three months Euribor was strongly negative in 2019 and even lower than in 2018.

And then 10-year BTB-Bund spread remained at around 250 basis points in the first semester, starting to decrease only in Q3.

Slide #3. Despite the challenging context, we fully delivered on all our commitments, revenue growth, cost reduction, decreasing cost of risk and net income growth. We also further strengthened our already solid capital position with a common equity ratio, up 50 basis points.

Slide #4. We have been able to achieve the best net income ever, excluding 2007, which was strongly affected by capital gains due to the merger. So delivering 6 consecutive years of growth.

Slide #5. As you can see from this slide, in 2019, we continue to improve across all key indicators.

Slide #6. In 2019, we delivered for the third consecutive year a cash dividend of EUR 3.5 billion, while further strengthening capital. And rewarding shareholders with high and sustainable dividend is and will remain a management priority and my personal priority.

Slide #7. These excellent results are powered by a combination of factors that ISP management has built over time, a top-performing delivery machine that focuses on business plan priorities and a business model that is both resilient and well diversified. We have proven our excellent risking capability. Thanks to the partnership with Prelios, ISP is now focusing its internal capabilities on proactive credit management, while leveraging a best-in-class external platform for late stages.

We have also strategic flexibility in managing costs. We will have 3,100 additionally voluntary exits by June 2021, and we have received 1,000 further applications.

We are a Wealth Management & Protection company with sound and strong financial market activities that we made stronger by focusing treasury or management of the liquidity portfolio, a Banca IMI on the integrated management of the other securities portfolio.

As a result, we are able to both take market opportunities and hedge the impact of volatility on our fee-based business. This is one of the reasons for the strong growth in profits from financial assets in 2019 and for the positive outlook for 2020.

Our Wealth Management machine is working at full speed to convert into assets under management, part of the EUR 176 billion of assets under administration and EUR 70 billion of household site deposits collected in the past few years, of which EUR 15.3 billion collected in 2019.

We strengthened the product offering, the commercial reach of our nonmotor insurance business, with revenues up 65% on a yearly basis.

Slide #8. During the past year, we also started building our future growth through multiple strategic actions. We further strengthened our position as a Wealth Management & Protection company by acquiring RBM, the independent leader in the Italian health insurance market, and by completing the setup of our Chinese Fideuram to fully capture the opportunity of Chinese fast-growing wealthy household market.

At the same time, we secured upside from scale-intensive businesses by partnering with leading players, Nexi in payment system and SisalPay for proximity banking.

Let me give you some detail of these 4 important actions. Slide #9. As announced in December, by July 2020, we will acquire 50% plus 1 share of RBM Assicurazione Salute, Italy's independent leader in health insurance, and we will progressively increase our stake to 100%.

At the same time, we will sign an agreement with Previmedical, an RBM sister company to give our customers access to the largest private medical network in Italy, counting on a network of over 100,000 medical facilities.

This deal is fully in line with our strategy with clear benefits for ISP. We will strengthen our domestic positioning in the high value-added and fast-growing health insurance sector, becoming the second largest player in the Italian market. So we are now the second largest player in the Italian market.

And we will enhance our offering through the inclusion of RBM collective health policies in our product portfolio for large corporates, SMEs and small businesses, and through the improvement of the health insurance offering to our retail customers.

Slide #10. During 2019, we also took concrete steps forward in Chinese fast-growing wealthy household market, strengthening an already material presence. For our Chinese Fideuram, we completed the organizational setup, put in place around 40 people and received our first license to distribute funds. And at the same time, we received authorization from the ECB and Bank of Italy to apply for a license to setup our securities business in China, which will provide our Chinese Fideuram with tailored products and services.

Slide #11. Also in December, we signed a strategic partnership with Nexi in payment systems, involving the transfer to next of the ISP-acquiring activities for EUR 1 billion cash consideration, with ISP retaining the client facing resources.

ISP purchase of 90.9% (sic) [9.9%]of Nexi capital that we consider a strategic stake, through which we can participate in the upside of fast-growing market. And then a long-term distribution agreement for Nexi products through ISP channels.

As a result, the deal will generate a net capital gain for ISP of around EUR 900 million in 2020 and a clear stake of roughly 10% in Nexi capital.

Slide #12. In 2019, we established a strategic partnership with SisalPay to create the first Italian proximity banking network, which is based on the creation of a NewCo, controlled by Banca 5 and SisalPay.

And thanks to this agreement, we expanded our product offering and increased our outreach to 13 million SisalPay retail and small business customers, and scaled up our network to over 50,000 points of sale, enabling us to accelerate our branch closure plan beyond our business plan targets.

Slide 13. Our sustainable performance allow us to create sustainable benefits for all our stakeholders. In 2019, employees received EUR 5.7 billion in salaries, and all our excess capacity of around 5,000 people is in the process of being reskilled.

The public sector received EUR 2.7 billion in taxes and household and businesses received more than EUR 58 billion in new medium- long-term lending.

Slide #14, our remarkable financial results allow us to contribute with impact to the society we belong to. ISP is strongly committed to its role as an engine for sustainable and inclusive growth to reduce inequalities and encourage social inclusion, preserve art and culture, invest in young people and promote employment, promote and develop a circular economy, drive innovation and support families. Regarding Europe's Green Deal, Intesa Sanpaolo is ready to contribute with EUR 50 billion.

Slide #15. In this slide, you can see just a few examples of our work to support Italian society. Let me comment just on a couple of recent developments. In January 2020, we launched 2 new funds for impact projects, 1 for working mothers and women entrepreneurs and 1 for people over the age of 50, who have lost their jobs or have difficulty accessing pensions.

So we are the engine of the Italian social economy. And in addition to our direct support to Italian society, the EUR 700 million in dividends that we paid out in 2019 to the banking foundations that make a part of ISP shareholding also provides support to social and cultural project.

In fact, these foundations alone contributed more than half of the total charitable funds donated by all Italian banking foundation.

Slide 16. As a result, we are the only Italian bank rated at the top of the main sustainability rankings, and we are very proud of these achievements.

Slide 17. In this slide, you can see the key highlights of our strong performance in 2019. Let me take you to Page 18 and give you some color on the P&L.

Despite a challenging environment in 2019, marked by lower economic growth, lower interest rates and the first semester with the BTB-Bund spread at around 250 basis point, we delivered growth in profitability, driven by an increase in revenues, a reduction in operating costs and lower loan loss provision.

Operating income was up 3% when excluding the positive impact in 2018 of the NTV stake disposal despite a decline in net interest income, mainly driven by strong NPL reduction.

Commissions were up slightly, with strong acceleration in the second semester and a good tailwind for 2020. Profits from financial assets were up 31%, confirming that our business model is naturally hedged because our financial market activities offset the impact of market volatility on our fee-based businesses.

We have continued to be very effective at managing costs, with personnel expenses down by 1.2% and administrative expense is down by 5%. Depreciation is up slightly as we keep investing for growth. Our loan loss provision decreased by 13%, gross income and net income were up 17% and 24% when excluding interim and NTV. Net income accounts to EUR 4.5 billion when excluding costs concerning the banking industry.

Slide #19. Our performance in Q4 was also very solid with the best-ever quarter for commissions. In comparison with the same quarter last year, net interest income is up around 1% and commission are up 8%. Profits on trading increased strongly. Operating income was up more than 9%. Operating margin was up 26%.

Loan loss provisions were down around 1%, despite the EUR 60 million one-off impact of the adoption of the new definition of default since November 2019, and the net income was up more than 45% when excluding the interim capital gain.

Slide #20. In this slide, you can see that on a quarterly basis, net interest income increased slightly despite the further reduction in interest rates, thanks to positive dynamics on commercial components. On a yearly basis, net interest income decreased, mainly due to the impact of accelerated NPL deleveraging on financial components, the effect of hedging and the reimbursement of an acquisition financing loan in September 2018.

Net interest income was also affected by EUR 30 billion growth in direct deposits, excluding repos. Debt in a low rate environment impacts net interest income in the short term, but boosts our Wealth Management engine for the coming quarters.

We will continue to work harder to improve the commercial component, while continuing to manage our revenues in an integrated manner and with the aim of delivering positive EVA strategy.

Despite the challenging environment, Slide 21, customer financial assets increased by EUR 69 billion in 2019, excluding repos. We are near the EUR 1 trillion mark. Assets under management increased by EUR 27 billion in 2019, and in the same period, family sight deposit increased by EUR 15.3 billion, out of which EUR 4.5 billion in Q4.

This so-called sleepy money collected so far, together with the EUR 176 billion in assets under administration will become the fuel of our Wealth Management engine. And we continue to see a shift in assets with more than EUR 5 billion of assets under management net inflow in Q4, one of the best quarter of the past few years.

Slide 22. Once again, in Q4, all our divisions made a positive contribution to group results. Around half of our gross income comes from the Wealth Management & Protection business, making ISP a clear European leader in Wealth Management. These sites alongside the continued excellent performance of our corporate and investment banking division.

Slide 23. Operating cost declined by 2%, while we continue to invest for growth in all key areas. Our cost base is already below EUR 9.3 billion against the business plan target of EUR 9.5 billion in 2021. It includes significant incentives for the results achieved in 2019 and to trigger growth, and does not yet include the full benefit from people who left the bank in the past few months.

The main sources of savings were head count reduction, real estate optimization, legal entities reduction and the decrease in other administrative costs.

We reduced head count by more than 3,100 on a yearly basis, with room for further cost reduction. And we have already agreed and fully provisioned 3,100 additional voluntary exit by June 2021, of which 850 at January 2020. On top of this, we have received 1,000 additional application to be reviewed.

Further branch reduction in the range of 1,000 branches on top of the 1,100 branches in business plan are expected in light of the Banca 5 network scale ups, thanks to the strategic partnership with SisalPay. ISP maintains high strategic flexibility in managing costs and remains a cost income leader in Europe with a 51% ratio.

Slide #24. As you can see in this slide, loan loss provisions declined to the lowest level since 2007. As a result, cost of risk is now down to 53 basis points, well on track to achieve our business plan target of 41 basis points by 2021.

The NPL coverage ratio increased well above 55% when excluding the effect of the new definition of default.

Slide 25, our masterpiece. Our NPL stock is declining sharply, reaching the lowest level since 2008, with the leverage around EUR 6 billion in the last year and EUR 1 billion in Q4. So EUR 1 billion in Q4, when excluding the impact from the adoption of the new definition of default. The gross NPL ratio has decreased by around 10 percentage points since the peak of September 2015 to 7.6%. And the net NPL ratio decreased by more than 6 percentage points, down to 3.6%, the lowest level since 2008.

As you know, ISP has been able to deliver this impressive deleveraging at no cost to shareholders.

Slide #26. In order to reach our targets for 2021, we need to deleverage around EUR 600 million gross NPL and around EUR 300 million net per quarter, over the next 8 quarter. This is more the management given that in the past 17 quarters, we organically deleveraged EUR 1.2 billion gross NPL and EUR 0.9 billion net per quarter with a coverage that was much lower. That is why we confirm our business plan targets, even considering the new definition of default.

Slide 27. Our proactive credit management contributed to the reduction in gross NPL inflows, down 76% versus 7 years ago. The increase of net NPL inflows depend on -- depends on fewer exits from the NPS status and is concentrated in unlikely to pay, where in the last 6 months, 200 of our best UTP specialists were focused on delivering the Prelios deal by supporting the portfolio selection and due diligence activities.

Let me also underline that this run rate will easily achieve our NPL plan targets, and that Q4 inflows were significantly lower than those in Q3, when excluding the impact of the new definition of default.

Slide 28. In 2019, we strengthened our already solid capital base, and we increased the buffer to 460 basis points versus regulatory requirements, well above our peers, after paying out EUR 3.4 billion in dividends.

We have one of the highest capital buffers in Europe, equivalent to EUR 13 billion that has been built entirely through internal capital generation, and while having paid EUR 17 billion in cash dividends over the past this year.

Our fully phased-in common equity ratio is at 13%. The decrease in Q4 common equity ratio is due to the change in regulatory treatment of Tier 2 instrument issued by our insurance subsidiary, and that should be also for other European players benefiting from Danish Compromise.

Slide 29. When it comes to capital strength, ISP continues to be a sector leader in Europe. And this clearly supports our generous dividend policy.

In addition, we continue to apply a deliberate strategy of low leverage with a leverage ratio of 6.7%, among the best in Europe.

Slide #30. We have a best-in-class risk profile in terms of the ratio of capital to financially liquid assets. So by this, I'm referring to net NPL, Level 2 and Level 3.

Slide number -- sorry, in the interest of time, I will spend just a few minutes to give you an update only on the projects related to our P&C insurance business. And I will leave to -- for you, the main business plan actions that are all up and running, thanks to the contribution of my people.

So if we can move to Slide 33. Just to give you some focus on property and casualty insurance, we recorded strong performance in 2019, with combined ratio at 76%, 12 -- 15 percentage points lower than the Italian market average, and the 65 increase -- 65% increase in non-motor business revenues, which is the focus of our growth strategy, with a strong acceleration in Q4, 43% increase versus Q3, 85% on a yearly basis. These results have been achieved through a strong focus on the non-motor offering with penetration of our client base above 10% and gross written premiums up 40% to more than EUR 550 million.

The introduction of around 220 property and casualty specialists in our branches and dedicated training with 30,000 employees, obtaining a license to sell property and casualty products for the Italian insurance -- from the Italian insurance authority and 12,000 web completed advanced training since 2018.

Let me remind you once again that the announced acquisition of RBM Assicurazione Salute will further strengthen our positioning in the fast-growing health insurance market.

So let's now turn to Slide 37. At this point, I would like to share a few consideration regarding the resilience and solidity of the Italian economy. Despite the flattening trend in Italian GDP growth over the past years, some key indicators are strong and will trigger a recovery.

In particular, unemployment fell below 10% and for the first time since 2012. And in November, the number of employed people reached the highest level since 1977, also thanks to the strong increase in employment of women. The growth of gross disposable income of household is exceeding GDP growth and therefore, accelerating the recovery.

This reflects the solid fundamentals of the country. In fact, Italian companies are more profitable and better capitalized than before 2008 crisis, and well positioned to benefit from the expected economic improvement.

In addition, let me say that the mix of persistent low interest rate, stable Italian sovereign spread below 200 basis points, GDP recovery at more than EUR 10 trillion of household wealth is a positive scenario for the Wealth Management & Protection company like ISP.

Slide 38. Just to give you my view on Italian real economy and especially in -- if you make a comparison with the other European country. Italian macroeconomic fundamentals are solid, especially when compared to other European countries. Still, the Italian spread is double that of Spain and Portugal. So we expect the Italian spread to decrease further from the current level and to reduce the gap versus those countries. The major reason of this gap is the political situation in our country. So I think the stability can only improve this, and with stability, Italian spread can easily go closer to the Spain level.

Slide #39. We have a positive outlook for 2020. We expect growth in operating income versus the past year, also thanks to loan growth and security portfolio contribution growth, while preserving adequate diversification and risk control. Switch from assets under administration is sleepy money to assets under management. And Q1 -- Q4 was one of the best quarters for asset under management net inflows of the past few years, strong growth in property and casualty insurance business at full speed and a further boost in the second semester from the acquisition of RBM, further growth in corporate banking commissions, robust performance in profits from financial assets and thanks also to the strengthening of financial market activities implemented in 2019 where we also enjoyed a good start to the year. So January has been a very good month.

This revenue increase, coupled with continued cost reduction that will benefit from the 2019 staff reduction and the additional reduction of branches will drive operating margin growth.

In addition, we expect a further decrease in cost of risk, thanks also to the lower NPL stock in the Prelios agreement that we work at full speed. As a result, we expect a substantial growth in net income, with the 2020 net income above 2019, even when excluding the Nexi capital gain.

Finally, the payout ratio for 2020 will be 75% as set up in our business plan, with another year of high and sustainable cash dividend distribution while preserving a rock-solid capital base. Obviously, with the Nexi capital gain, the net income in 2020 will be well above 2019.

Slide #40. To sum up, we have a very satisfied performance in 2019 and our delivery against the business plan targets are derisking. We have already achieved 83% of the full year NPL business plan deleveraging target. Cost reduction, operating costs are down 2%, while still investing for growth. And revenue growth, operating income is growing despite a challenging environment we strengthened our financial market activities to both capture market opportunities and to hedge the impact of volatility on our fee-based business. And we are working at full speed to convert into assets under management, both assets currently under administration and the so-called sleepy money collected in the past few years.

We also made new strategic moves that will support our future growth. We are a sector leader in Europe when it comes to capital strength, which further improved in 2019.

Last but not least, we have remunerated our shareholders with cash dividends of EUR 3.4 billion.

All in all, we delivered strong performance in 2019 while investing for sustainable growth, and we maintained a positive outlook for 2020, thanks to the contribution all of our people.

So thank you for your time and attention, and I'm now happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is coming from Azzurra Guelfi from Citi.

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

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A couple of questions on cost and dividend. I'm not forcing the revenue because they were the positive surprised this time.

If you look at cost, the outlook for 2020 is still a reduction. And would it still -- would it be mostly on the staff cost, given that you have head count reductions still coming? Or would have some impact also on the other admin? And if you can give some color on investments that are needed on compliance costs or IT. When you will look at the additional 1,000 people that have expressed interest? Are they previously provisioned or would it need additional provision for this? And on dividend, can you update us on the potential of an interim dividend for 2020?

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

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So on cost. Staff cost, by definition are the main sources of reduction due to the embedded reduction that we have already with the full impact of the exit in 2019. So more or less, 50% of the exit has been in the second part of the year. So we'll have full benefit in 2020. Then there is a portion of the new exit that will be -- in which we have already had exited at the beginning of January. So this will have full impact during 2020. And then we will have other exit during 2020. So net-net, staff costs initially, due to the reduction of people, will have a reduction during 2020.

Looking at administrative expenses. Our expectation is to manage in the right way in order also to have a reduction in these areas, continuing to invest for growth. There are significant investing capital -- investments in capital budget due to IT, digital compliance, but also due to the acceleration in the property and casualty business and also our growth in Chinese in order to reinforce our Chinese Fideuram. So there are a lot of combination of plus in terms of investments and reduction in terms of efficiency.

Net-net, our expectation is that we can have another year of good performance in terms of cost.

Due to dividend. So interim dividend is an item in which we need to change the bylaw. So that's the only point of attention that I have because I'm fully positive on this item. I need to prepare the right process within the governance of the bank. So working with the committee, with the Board of Directors, then asking for the authorization of the ECB, but I have a very positive view on the interim dividend. So we have just waited for the closure of the figures on 2019, and then we will start for the former process in terms of working for interim dividend.

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Azzurra Guelfi, Citigroup Inc, Research Division - VP [4]

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And on the extra people, would they have a cost? Sorry.

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Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [5]

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Sorry. Yes. On the extra exit, we will have a cost if we decide to accept this request that is in the order of EUR 50 million, EUR 50 million, EUR 60 million, not more than this.

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Operator [6]

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Our next question is coming from Delphine Lee from JPMorgan.

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Delphine Lee, JP Morgan Chase & Co, Research Division - Analyst [7]

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Just a few small quick questions, and then one on net interest income. Maybe just on my quick questions. Just wondering, the 10 basis points CET1 decrease, if you just can explain it, just very briefly. Secondly, on the P&L impact of the -- is there any P&L impact actually from the RBM acquisition? I assume it's all goodwill and goes directly through equity, but I just wanted to check.

Thirdly, just on the tax rate, which for 2019 has been maybe slightly lower than expected. If you could just provide an update of what you consider the normal run rate for 2020 and 2021?

And just on net interest income, would you mind just giving us for 2020, the amount of expiring bonds and issuances that you intend to make? And if you don't mind, on the expiring bonds, just an average, sort of, rate of how much they cost? Just trying to get a better feel of the outlook for NII, and particularly, on the spread component.

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Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [8]

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So moving from the -- starting from the reduction in common equity. As I told the major reason, with an impact of 15 basis points, is the change in the treatment of the Tier 2 instruments issued by insurance company.

Net of these, we had an improvement of common equity and not a reduction of common equity.

In any case, we remain in such a very good capital position. And also with this change in regulatory condition, there's no point of attention from our side.

In P&L, we will not have an impact coming from RBM, we had no impact. And for the first semester, we will have not an impact coming from the acquisition. And on the other side, we will have just a goodwill implication, but not so significant.

Tax rate. Our run rate could be in the range of 28%. So we think that this could be more or less a likely view on our future tax rate. On net interest income, if you allow me. So I will avoid the 100 questions on net interest income. I will give you colors on all the items on net interest income that we expect for 2020, so we can just give all of you our view on what we have in our budget for the net interest income.

So if you look at bond expiring, they are not so significant during the 2020. These are EUR 11 billion, out of which EUR 2 billion from retail. We expect a contribution in terms of reduction of cost of funding on a medium term. But the main benefit that we think to have during 2020 is a volume effect. So a growth in loan book and also growth in portfolios, so in government portfolio with a well-diversified proposition.

On the other side, on hedging. We do not expect a significant reduction during in 2020, and growth in revenues coming from portfolio is enough to compensate for further reduction on NPL.

So on derisking, that can have an impact on net interest income impacted will be, by definition, much lower than the one that we had in 2019.

So net-net, our expectation for net interest income is a growth of net interest income in 2020. I want just to remember you that looking at the spread impact, we will have also a benefit from tiring, that could be in a range of EUR 70 million during 2020, more or less, could be this -- the impact for this special item. So net-net, the combination of all these items bring us to have confidence that net interest income can grow on a yearly basis. So not looking on a quarterly basis, but on a yearly basis, our expectation is a growth in net interest income.

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Operator [9]

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Our next question is coming from Antonio Reale from Morgan Stanley. And I'll take our next question from Andrea Unzueta from Crédit Suisse.

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Andrea Unzueta, Crédit Suisse AG, Research Division - VP [10]

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If you go to Slide 11, you mentioned that the capital gains from Nexi might be partly allocated in a scenario in which you identify that, that can strengthen sustainable profitability. Could you walk us through what you are planning do with the gains? Is that increasing provisions? I don't know, if you can give us more color on what that could be.

And also, it'd be really helpful if you could walk us through the regulatory impact that we should expect, both on capital but also on the P&L. Is this reclassification of EUR 700 million of NPLs that we saw in the quarter, it? Or which should we expect more -- provision for more balance sheet changes?

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

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So no more provisions. So the impact is one-off in 2019. So we do not expect any increase in provisions.

The -- on capital future evolution, we still remain with 35 basis points on an EBA guidelines in the next 2 years. Then this is all what we expect to have looking at these items on our capital position in the next 2 years. So I don't see any kind of threats on capital, and absolutely not on P&L for new definitions on nonperforming loans.

Looking at the Nexi capital gain, we want to work during 2020 with a very relaxed approach. So I'm fully relaxed on 2020. I made a clear outlook to the market that we can generate, and we will generate a net income in 2020, well above 2019. And due to the payout ratio of 75%, my expectation is to be in a position to increase dividend in 2020 in comparison to 2019. So that's all my indication. Then I will maintain my freedom to work during 2020 and to allocate what I consider strategic in terms of sustainability of growth for my company.

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Operator [12]

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Our next question is coming from Christian Carrese from Intermonte.

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Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [13]

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The first question is on -- you clarified on net interest income. Just a clarification on govies portfolio, you increased the govies portfolio year-on-year, but the weight of Italian govies was much lower in the area of 45% at the end of this year. So I was wondering, if you are planning to go back to around 50% in terms of weight of Italian govies on total portfolio.

And on -- still on the revenues. One-off fees, I saw the mutual fund mix, a little bit down, the equity component in 2019. Do you see room to increase the weight of equity? And on real estate portfolio, do you see any room to see some write-backs in 2020? We saw, for example, in Milan, investments were higher -- in the real estate were higher than 2015 at the time of exposure, if you can give some color on that.

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

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So real estate market in Milan is clearly booming. So it's the area in which we have the -- probably the most important concentration of investors in Europe. So the greater Milan, it is defined by the majority of investor is an area in which we have a clear boom. I don't think that we will work to have some benefits looking at our figures. But at the end, in any case, the improvement of the condition in the market is only positive for the condition of the quality of our exposure and for the sustainability of our coverage in this sector.

If we look at fees. The mix is, for sure, also affected by insurance products. But in my view, we have room to increase also equity component.

Looking at the government portfolio. We, as you know, want to maintain a well-diversified portfolio. The mix -- until the 50% is in the availability of our managers in the Banca IMI department, the treasury department. So I have to tell you that I have no clear point on this. So until 50% -- they can move. What I want is to have an optimization in terms of revenue. So this is only what I want from this sector, especially before -- especially because we decided to to avoid -- to have the usual extra, extra liquidity that we used to have in the past and to reallocate a portion of this liquidity into the government portfolio, like all the international banks. So that's what we want our people, mainly in corporate investment banking division, do. But I have no kind of of target in terms of government -- Italian government portfolio, and they can reach also 50%.

Indeed, the reduction in this quarter is due to the increase in German bonds. So we increased the AAA contribution of our portfolio. But it is something that can change according to the view of our people in the business.

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Operator [15]

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Our next question is coming from Andrea Filtri from Mediobanca.

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Andrea Filtri, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [16]

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The first is on fees. Are you planning any repricing of fees for 2020? And if so, how much do you think this action could bring to the line?

On regulation, and following up from Andrea's question. Do you intend, if any, to adopt Article Article 104a or CRD IV which has been recently confirmed by President Mattarella? And finally, still on the government bonds angle, there is continued press around the Eurogroup working on a limitation for banks on government bond ownership with a multitude of different proposals admittedly. How do you approach this topic? And could this be the stick of a package with a bigger carrot, not yet clear? And on this side, could you guide us on the contribution from the securities portfolio going forward?

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Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [17]

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So the -- on government bond limitation, I have to tell you that I'm in favor of concentration limit. So that's, in my view, the right way to approach this problem from a risk-reward point of view. So looking also to a factor that is the concentration risk. That's the reason why we think that we will not exceed, in any case, 50%, but we are ready also to reduce this concentration, if needed. So the evidence of the management of the total portfolio in 2019 is that my people is in the condition to increase revenues. So both net interest income and trading income through a -- an increase of portfolio also in asset class, different from the Italian ones. So the majority of the revenue in 2019 derived from the international portfolio and not from the Italian portfolio.

Regulation Article 1(c) for default, we don't have a significant point on this. So I have to tell you that this is not a strong point from our side.

On fees -- repricing fees, our expectation is not to enter into a massive process of repricing. It is clear that during the year, you have a usual work on -- working on the right combination between the costs and the revenues that you received from your client. But there is no massive repricing process in costs during the year.

The speed of growth that we will have in terms of commission will arrive mainly from commissions in Wealth Management. The second contributor will be commissions in property and casualty insurance business. Third contributor would be global corporate business. These are the main areas in which we expect to have a very good growth of revenues during 2020.

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Operator [18]

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We will now take our next question coming from Domenico Santoro from HSBC.

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Domenico Santoro, HSBC, Research Division - Analyst [19]

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Just a clarification on the dividend side. You already kind of answered to my question. But if -- I mean, it's difficult to envisage any particular transformation, top-up on provision this year. So the risk -- the upside risk, of course, is that the dividend for 2020 will be way above the level of 2019. So I'm just wondering whether we should apply this 75% payout to a sort of an adjusted net profit? Or you confirm this apply to stated net profit? On the tier reserve -- tier reserve system? I was just wondering whether the pro rata for this quarter was already accrued in the NII?

And again, on provision, I was just wondering, whether you will confirm the EUR 1.8 billion provisioning level for 2020 -- 2021? This is probably the number which a consensus is a bit more cautious. Or there is any impact from calendar provisioning of the new definition of defaulted by EBA?

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Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [20]

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Excuse me, I didn't understand the last question. Sorry, because I lost you at the beginning of the phase. So I lost the last part of your question. So if you can repeat the third question, please.

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Domenico Santoro, HSBC, Research Division - Analyst [21]

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Sure, sure. I beg your pardon. It was just on provision. I was just wondering whether you will confirm the level for 2021, which was EUR 1.8 billion. This is probably the number on which a consensus is a bit more cautious? Or there is any change, which is calendar provisioning? Or EBA guideline that might change this number?

And then just a follow-up on the capital. I mean you're very close to the level that you set as a target for 2021. You don't expect any negative apart from the EBA guideline, if I understood correctly, which is 35 basis points. There might be some positive from DTA next year that you might want to comment on. Just wondering with this level of capital, which you -- of course, you're are very confident, if there is any initial talk about buyback of shares going into the end of the plan.

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Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [22]

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So dividends, you know that this may favorite item. We are talking about stated net income, so 75%, and you apply it on the stated net income. So that's the -- and the result will be the dividend that we will pay in 2020.

So that's the reason why I'm fully confident that my shareholders can be happy during 2020 also. Tiring a portion has been accrued in figures of last quarter, so it's close to EUR 50 million. Provisions for 2020, 2021, I can confirm you that our expectation is absolutely to easily reach 41 basis points in 2021.

And looking capital, the evolution of capital from my side is another happy problem, in the sense that we will have some negative impact from the EBA guidelines, but in the range that I described to the market. So we are well above the -- what we have considered in the business plan as a running rate in terms of our capital position. So I don't see any kind of issue on this point. And so we will manage easily this capital position during next years.

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Operator [23]

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We'll now take our next question from Hugo Cruz from KBW.

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Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [24]

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Just a quick question on a Tier 1. Do you have any -- can you quantify your plans to issue in the next 2 years?

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Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [25]

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On this point, I will leave the floor to Stefano Del Punta. So he can give you all the details on this point.

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Stefano Del Punta, Intesa Sanpaolo S.p.A. - Group CFO [26]

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Yes. Definitely, we have plans to issue. By the way, we are now fully appreciating or better appreciating the new guidelines from SRB on the subordination requirements. So we will issue additional Tier 1. We have a call coming in January of 2021, which is EUR 1.25 billion. And probably, we also have something to fill up the EUR 1.5 billion bucket. Most probably, we also issue already in 2020, the sub-senior note preferred so that we can optimize our subordination layers and also decrease significantly the amount of senior preferred bonds that we will issue in the next couple of years. So we expect more or less in the next 2 years to issue between EUR 5 billion and EUR 7 billion of senior note preferred, in addition to these additional Tier 1 that was saying before. So this is more or less the framework for subordinated issuances in the next 2 years.

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Operator [27]

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Our next question is coming from Benjie Creelan-Sandford from Jefferies.

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Benjie Creelan-Sandford, Jefferies LLC, Research Division - Equity Analyst & Bank Analyst [28]

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Just looking at Slide 73, going back to the trading side of the business, the average value at risk doubled year-on-year. And if we look -- I mean the investment banking profits are actually now over 30% of the group profit relative to less than 20% in 2018.

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Stefano Del Punta, Intesa Sanpaolo S.p.A. - Group CFO [29]

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Sorry, sorry, sorry. Excuse me, I lost you at the beginning of your question. Could you repeat and speak slowly because I need absolutely to be in a position to understand well what you are telling me.

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Benjie Creelan-Sandford, Jefferies LLC, Research Division - Equity Analyst & Bank Analyst [30]

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Sure, no problem. So looking at Slide 73 on Banca IMI, the average value at risk was a EUR 136 million in 2019, it was EUR 62 million in 2018. And the investment banking profits were obviously up very strongly year-over-year and represented 30% -- over 30% of the group profit. So I was just wondering from a strategic point of view, do we or should we expect greater capital allocation to the investment bank going forward? And from a risk management point of view, is there a limit to how high you would like that value at risk number to remain going forward?

And my second question, which was partly related to that as well, was that, if we look at the balance sheet, I mean, the total balance sheet grew over EUR 60 billion in the first 9 months of the year and then shrank by over EUR 30 billion in the fourth quarter. Could you just give us a little bit more detail behind the drivers of that? And should we expect a rebound in the size of the balance sheet in 2020?

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

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So in the dynamics of the balance sheet, you have a dynamic related to the repos. So the repos had a massive reduction during this year and especially this quarter. This is something related to the brand position. So that's the reason why you have this reduction. Now we are close to the minimum of the repos. So you should have also stability from this point of view. And also finance -- interbank financing toward banks is positive. Interbank financing was reduced, especially with the ECB. So that's the reason why you have such a reduction in the figures of the balance sheet.

Coming back on corporate investment banking division. That is, for sure, an area in which we had a positive performance during 2019. I can confirm you that -- so with a level of value at risk that is absolutely the one that we consider the right one for a company like us. I can confirm you that in this area, we will have a significant, very good contribution also in the next year. So we had a structural change in the dynamic of the Banca IMI performance due to the increase of government portfolio -- well diversified government portfolio because we decided to concentrate all the treasury activity into Banca IMI. And this has allowed us to have a much more engine, a much more ability for the Banca IMI people to work with the government portfolio.

Our expectation is that from a structural point of view, we can account on an increase in revenues in comparison with the past between EUR 300 million and EUR 400 million on a yearly basis. So this means that probably in 2020, the total figures from profit of tradings can be reduced. So this is our expectation. But we remain, in any case, good contributors to our results. The main driver of growth in 2020, in our expectation, can be net interest income. As I described before, the commissions, they will be a clear engine for growth. At this level of spread, we have more than EUR 50 billion that are workable by the people within the organization. And I can just remember you that in 2019, we had a net inflow of between EUR 7 billion and EUR 8 billion, just working in 6 months. So just considering the spread, the level at it is, we can easily double the number of net inflows coming from our asset under management areas. And at the same time, property and casualties will increase acceleration. So corporate SME banking is an important area for our group. But as it is in all the international group.

So Intesa Sanpaolo was underestimated because we used to have a portfolio of EUR 60 billion and an extra liquidity placed to ECB of EUR 60 billion, the unique case in Europe. Now we have EUR 20 billion placed with ECB, as it is normal. And the ability to increase portfolio for until the maximum of EUR 40 billion. We increased by EUR 20 billion, and it is usual that when you have an increase of such a dimension in portfolio, you have the ability to work and increase in revenues coming from these areas, but not working like a Goldman Sachs -- with the risk of Goldman Sachs company. We are a normal commercial banks working in terms of this activity with a very good team but in a normal way, in a normal range. So that's reality in Intesa Sanpaolo.

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Operator [32]

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Our next question is coming from Alberto Cordara from Bank of America.

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Alberto Vittorio Luigi Cordara, BofA Merrill Lynch, Research Division - Research Analyst [33]

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Well, a lot of my questions have been answered. But basically -- so I just wanted to ask your opinion because if I hear what you've been saying, essentially, things are moving in the right directions everywhere, in every single P&L line. Now it's difficult to believe that you're going to achieve the business spread target that you have of EUR 6 billion because this was predicated on a very different interest rate environment. But when I look at Bloomberg consensus, the Street is thinking that you're going to reach an average of 3.9, which is 35% below. Now in light of these numbers, to me it doesn't make any particular sense, it didn't make sense before, even more today. So I don't know if you feel to give us some idea. I mean, we've been talking about -- you've been confirming your cost of credit guidance, actually you may do better than the 41 bps. But to some level of approximation, what is the kind of earnings we can hope to achieve in 2021?

And then on a separate point, I mean, I ask you a question that I haven't heard. So it's relatively minor. But if you -- you said that you've been issuing Tier 2 on the -- in the insurance business. So if you can give us an update of the solvency ratio for your insurance division, and also the unrealized capital gains that you have in the insurance business?

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Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [34]

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So Alberto, you're here talking about 2021. So let me leave 2021 as the last part of our conversation. So first point is that the -- on the insurance business, we have a solvency ratio above 230%. So at the end, this Tier 2 instrument, that intra-group are not strategic fundamental to maintain a solvency ratio above 200%. That's reality. But due to our significant capital position, we do not need to make any kind of optimization within the insurance business activity. So they have solid solvency ratio, also the plan of increasing the property and casualty business will not affect this extra capital position of our insurance company. So I'm totally confident that this is, and will, remain a significant ratio for the company. They have more than EUR 7 billion of capital gain in the portfolio. So it's really a significant amount. So looking at the insurance business, this is a clear point of strength of Intesa Sanpaolo.

So coming back on the point of 2021. Because 2020 is clear, we will deliver a good performance in terms of operational -- operating income, in terms of net income due to core business. And again, in our view, net interest income will increase, commission increase, insurance will increase in a significant way. Profit from tradings can be reduced. Net-net, revenues will increase; cost will go down; cost of risk, down; and so net income will increase. That's our expectation for 2020.

Then we have the Nexi capital gain. That is something that we can use in a portion in order to accelerate sustainability for the future, and we would see what could be the best way of accelerating sustainability for the future.

So looking at 2021, that is -- we have 2 years before reaching the end of 2021. So it's -- this environment it is medium-long term due to the conditions in the market.

If you look at the cost side, we are in such a good position that this will be something that we'll deliver with a significant amount of extra performance. All the actions in this area are there, and also with a number of contingency plans that we can use in case need.

Looking at cost of risk. We are in a position that is absolutely comfortable in reaching the 41 basis points due to the massive reduction that we had in nonperforming loans or revenues. There are areas in which we can accelerate. There are area that are depending on market conditions. But at the end, if you -- if the implication of the consensus is the one that you told me, we have a significant possibility to give very good performance. And at the end, in terms of net income and in terms of dividends, in which, I can tell you that looking at 2021, also dividend in 2021, can be in excess of the dividends of 2019. So that's expectation. We will work during 2020. We will we will take condition of interest rates spread BTB-Bund, macro condition, and the real point would be the Wealth Management that, say, in our bank, and in Italy, is that the real transformational lever that we can consider for the future. And if stability can remain in terms of spread -- and my expectation is the spread can be below 100 basis points. That's my expectation. As I told, the only point is the stability in -- from a political point of view, we can try to work harder in order to give very good satisfaction to our shareholders.

Looking at the actions, so the plan is also made by a number of actions. We are well above the all -- the timing that we have considered in our original business plan.

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Operator [35]

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Our next question is coming from Ignacio Cerezo from UBS.

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Ignacio Cerezo Olmos, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst [36]

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It's just a couple of quick clarifications for me. The 41 basis points cost of risk in '21, that doesn't imply any additional NPL sales?

And the second one, if you can summarize the regulatory headwinds you're expecting in capital over the next 2 years, putting together EBA guidelines, calendar provision interim, anything before Basel IV?

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

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41 basis points are without NPL sales, but we do not need to have any kind of NPL sales in 2021. So I can confirm you that I don't see any kind of threats on this level of provisions for the future.

Looking at the regulatory headwinds, the -- our expectation is that we can have these 35 basis points of EBA guidelines in 2-year times and -- but no more than this, but that's our expectation.

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Operator [38]

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Our next question is coming from Christian Carrese from Intermonte.

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Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [39]

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Yes, just a follow-up on interim dividend. You said that you are going to work on potential change in by law, with maybe the AGM in April. So I was wondering, in that case, if it would be possible to pay an interim dividend already in November 2020?

And the second question is on loans. You said that you expect net interest income to go up in 2020. If you can just clarify because we saw loans quite flattish in the last few quarters, also at the system level, and I don't know if you can share with us also your thoughts on the coronavirus impact in the first quarter in terms of loans demand?

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Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [40]

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So first quarter, I don't know. I'm talking about on a yearly basis, sorry. But I would like to stress that I'm talking on a yearly basis because on quarter-by-quarter, it's really difficult to give any kind of guidance on an amount of loans that is reaching a level close to EUR 400 billion. So believe me, on a quarterly basis, not easy.

In any case, in this quarter, we had an increase -- a small increase in loan book -- commercial loan book. But the expectation is that during 2020, we can have an improvement in terms of the loan book that can give us an increase in terms of net interest income.

Looking at interim dividend, it will be mission impossible to go to this AGM. So for 2020, there is no possibility to have interim dividend.

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Operator [41]

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It appears that there are no further questions at this time. Mr. Messina, I would like to turn the conference back to you for any additional or closing remarks.

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Carlo Messina, Intesa Sanpaolo S.p.A. - MD, CEO, GM & Executive Director [42]

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So thank you very much for your question, and I can confirm you that we see a 2020 that could be in -- with very good positive results for Intesa Sanpaolo. Thank you very much.

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Operator [43]

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Ladies and gentlemen, that will conclude today's conference call. Thank you very much for your participation. You may now disconnect.