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Edited Transcript of UBI.MI earnings conference call or presentation 2-Aug-19 2:00pm GMT

Q2 2019 Unione di Banche Italiane SpA Earnings Call

Bergamo Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Unione di Banche Italiane SpA earnings conference call or presentation Friday, August 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Victor Massiah

Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board

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Conference Call Participants

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* Alberto Vittorio Luigi Cordara

BofA Merrill Lynch, Research Division - Research Analyst

* 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

* Carlo Tommaselli

MainFirst Bank AG, Research Division - Analyst

* Christian Carrese

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

* Domenico Santoro

HSBC, Research Division - Analyst

* Giovanni Razzoli

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

* Hugo Moniz Marques Da Cruz

Keefe, Bruyette & Woods Limited, Research Division - Analyst

* Ignacio Cerezo Olmos

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

* Riccardo Rovere

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

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the UBI Banca Group Consolidated results as of June 30, 2019 conference call. (Operator Instructions)

 

At this time, I would like to turn the conference over to Mr. Victor Massiah, Chief Executive Officer of UBI Banca. Please go ahead, sir.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [2]

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Thank you, Madame. Thank you, everybody, to be here on a Friday afternoon. I'm going to go through a very quick presentation then obviously I will take all the questions. We think that we are presenting very solid results.

 

First of all, in terms of solid balance sheet indicators, we have significant growth in CET1 ratio. We will explain how much and why; significantly lower NPEs through a mix of different things, not only just the sale but also higher results from internal workout, successful disposals which had been done without impact on the capital; improved default rate, lower taxes ratio, et cetera. We have also a higher coverage across all categories of NPEs; quite solid institutional funding plan carried out successfully; growth in deposits from customer base; growth in indirect funding.

 

Even if the results are complex to understand, we think we are presenting strong economic results is understood through the different components. We have the growth in operating income, thanks to the resilience in NII. And I was just pointing, the NII has been resilient, notwithstanding the decrease in loans thanks to the repricing actions taken.

 

The customer spread has been at the highest level since the beginning of 2018. Fee and commission income at the highest quarterly level ever achieved and a further contraction in operating expenses and all that notwithstanding an important increase in technology investments that we'll exploit later.

 

Obviously, the final results are affected by higher cost risk due to sale of EUR 900 million of bad loans, factoring already included in the semester results and leasing to be completed gradually within year-end but whose economic impact has been absorbed during this quarter, which impacted us a minus EUR 75 million net in the first half, minus EUR 70 million in the second quarter. This impact, according to internal policies, is not considered nonrecurring. So if we could consider this nonrecurring as a matter of fact as it is, we would have seen a growth in both normalized and stated net profit.

 

Going in detail. First half profit net nonrecurring items of EUR 183 million, lower than EUR 222 million. But if we could add up EUR 75 million of the negative impact, this would have been EUR 258 million, which definitely is higher than EUR 222 million. The first half stated EUR 130 million versus EUR 208 million. But in this case, we should add both the EUR 75 million and EUR 42.6 million of the union agreement, which again will make the profitability go up instead of down.

 

Profit on net nonrecurring items in the second quarter had been EUR 58.5 million compared with EUR 124.9 million. And again, if you add up the EUR 70 million, which are part of the component of the EUR 75 million that are part of the second quarter, you would have EUR 128 million, which is higher than the EUR 124 million, which we consider a very good quarter, first quarter.

 

So the second quarter, netted by the impact of the sale, has been even better than the first quarter, notwithstanding that the contribution of trading has been significantly lower, as we will see later.

 

Let's go to the -- Page 4, the CET1 ratio. CET1 ratio fully loaded has gone up to 12%; and total capital up to 15.05%. Phased-in 12.05% and 15.10%. So the phased-in now is, as a matter of fact, pretty consistent with the loaded -- fully loaded.

 

Analyzing why the impact of fully loaded has been a positive one and notwithstanding the sale, is that the volumes of performing loan and NPEs plus partial disposal have been as a mix, had given a positive contribution of 18. The valuation reserves on -- particularly on the Italian Govies has been an up of 13 basis points. Net profit has been a plus 6. And an operating risk calculation has been 16 basis points due to the fact that it is exiting out of the historical series, the 15-year historical series. And actually, that was we had -- with one, a private equity fund that was a heavy -- had a heavy impact 10 years ago. Altogether, this drives to 12.

 

Let me also add that we are having the negative impact in terms of profit and loss of the leasing, but we still don't have the positive one of risk-weighted asset liberation in terms of exactly restricted assets that we will have in the second part of the year and the complete finalization and execution of the leasing sale.

 

So actually, as you see, it's an up 12 with a (inaudible) by the sale and the positive part of it, which is not still with us.

 

In terms of operating income, Page 5. We're going up 3.3%; and quarter-on-quarter, up 1.6%. The resilient core revenues are flat since we have a EUR 7 million one-off item, which is very much tight with the unfortunately have [acre] in the market region and we wanted to respect a certain party with the territory and this isn't a why but it's a one-off, as a matter of fact. And minus EUR 4 million on the IFRS 16. If you add up together these 2, as you can understand, is substantially flat.

 

Operating expenses are down 2.6%, but with plus EUR 18 million of systemic charges, which means that, actually, the investment must be the much higher on new technologies that we are starting to invest in. Net interest income on Page 6. We have commented the 2 one-off, but I would like to tie this performance with the level of business with customers where have you seen, as you're seeing, since the end of the second quarter, we see a declining component of EUR 7 million. Why? Because we are having a much lower contribution by the component of the lending activity. We have almost EUR 3 billion of average lending activity that are locked. And notwithstanding this, we're having a substantially flat NII. This means that we are resilient with the price strategy. And this is exactly what is presented on Page 7.

 

Look at the stock and look at the trend. The upper part is the stock. The stock is obviously influenced by the important rebound on the market lending. As you can see, in the fourth quarter, it was at this minimum of 235, it's going up 239. And in the fourth -- in the second quarter, 243. At the same time, the funding activity is seeing a rebound in terms of cost, the 62 in the fourth quarter up to 66. But this is consistent, if I may, with the fact that the spread of 10 years BTP-BUND was 139 and 176 in the first semester of the previous year 2018. And today has been, on average, 257, 262. So it's consistent with the fact that the cost of funding goes up. And not just going up, not that much at all, given the radical business spread.

 

While on the other side, the markup part of this one is going up at a higher speed. That's why we had the minimum at 172 in the third quarter last year, that [achieved] 172 in the fourth quarter, now it's 177. The reason why of the trend is obvious, we are still presenting the new originations versus the reimbursement exactly as we did in the previous quarter presentation. As you can see, we are sticking with the higher level of basis points of the new originations, 237 compared to the 196 of the reimbursement. So a good trend.

 

On Page 8, you may see how we are increasing on all the different components, direct and indirect funding. Let me say that we have been delivering quite a successful set of new issuing to increase our institutional funding position that, this is our opinion, was one of the drivers to change a more [decent look] on our senior debt rating to stable from negative, as we had communicated 2 days ago.

So if we're looking at the bottom on Page 8. Direct funding from ordinary customer up, strong customer loyalty. Direct funding from institutional customers up, access to institutional markets, even in difficult market conditions. Look at the spread in the first page. Indirect funding, up, sales of commercial network. All 3 components.

 

Net fee commission on Page 9. Net fee and commission income at the peak of historical trends this has ever achieved. And if I may stress the point again, this has been made to look at the bottom part -- the bottom right part of the slide, with a lower contribution of actual fees and performance fee. So quite a solid result on net fees, net commission standard fees and well distributed anyway among the different components.

 

On Page 10, we show how we are diversifying our financial assets in the proprietary portfolio. And the component of Italian Govies in terms of percentage point is lower. It's been slightly increasing because of performance along the March to June. But at the same time, let me tell you also that in July, using exactly this performance component, we've been reducing a little bit more this composition.

 

Operating costs, on Page 11, down. As you may see, if we could, in a way, isolate the systemic charges, the yellow component on the top part of the chart, which increased by 42 to 60 because of the very important investments that we will continue to make on the new innovative technologies to update our system, we would have seen a minus 4 percentage in terms of cost as a combination of the minus 3.9% on staff and minus 4.8% on administrative expenses. So altogether, at minus 2.6% it is still a very good result, including an increase of 40% of investment -- of expenses on new technologies, which actually are a sign of even higher level of investments.

 

Total operating cost, as I was saying, decreased by 4%, and that's it. Page 12. Operating cost down to EUR 587 million, minus 2.3% quarter-on-quarter, notwithstanding again high systemic charges. I don't want to bore you again because it is very clear, we just wanted to stress.

 

Page 13. Gross inflows from performing down to EUR 416 million in first half of 2019, below pre-crisis level. So we're sticking with the very good results of new defaults. If you think that first half of 2017 was EUR 716 million and first half of 2018 was EUR 704 million, it's quite a significant decrease in terms of new defaults, which is very, very encouraging in terms of how we manage the stock.

 

On this side, let me say that, first of all, from the peak, we've been decreasing by 83.2%. The very -- the real [hill] in 2012 the second half was EUR 2.4 billion, from this peak, it's minus 83.2%. But also in terms of annualized default rate, it's very important to say that we have already achieved this a couple of years ahead of schedule, which was our final default rate target in the old industrial plan.

 

Let me also say that the next half of year results will be influenced by the new DoD. So maybe with definition of default, this will lead for us, but we're expecting not a big influence. And actually we see, from the first application of July, that it's very good discipline. We are very happy to be among the few that are immediately using this DoD. By the way, be aware way that not everybody is adopting the DoD at the same time. So for next quarter results, be aware that comparisons could be misled by the fact that some adopters have not adopted. We are adopting it, and honestly happy to adopt because it's driving additional discipline.

 

Page 14. Gross NPEs versus total gross loans. You may see that we -- you probably remember that we were promising to cross the double digit to single digits before the end of the year. Actually we're crossing already at half year. This is much ahead of what was the business plan target was originally forecasting this growth during year 2020. It's already -- if we perform -- the pro forma for the leasing sale, 9.23%, and I'm expecting now we are obviously must be aggressive and be ambitious to cross the line before the end of the year, by definition, which will bring us a very good position to start the industrial plan.

 

The other thing that I would like to stress with you is on the bottom left of Page 14, which is the distribution of the vintage. After this additional transaction and the workout that we've been doing during this first half, as you may see, the vintage over 7 years, it was 14% has been halved, almost half to 8%, 5 to 7 from 14% to 12%. So as a matter of fact, we have 80% (sic) [8%] of our NPEs was simply [intention] lower than 5 years, which I think, again, is quite a good distribution.

 

Recurring rate may seem to be a little bit decreasing on the total, but actually it's not. What's happening is that, as you may see, the bad loans, which are mostly driven by the cash-in are actually increasing from 5.2% to 6.5%, while the decrease -- the partial decrease of the cash-in from 8.9% to 8.3% is more than compensated by the important increase of back to performing. Altogether, they are 15.1%, which is, again, in my opinion, is a very good result.

 

Higher net impairment losses uphold coverage. We have, as you may see, an important increase in coverage. It's due in part to, again, the workout, the transformation to performing. In my opinion, very good management that we are doing internally that confirm our strategy of sticking to -- with our own platform. But at the same time, obviously it's also a part of the sale that we made -- we've been making, which again demonstrates that since we didn't have an impact on the capital ratio is -- was specified earlier in the account coverage that could have been appeared lower was depending, in particular, by a mix of component. And then if we sell to the market at a price that shows that we will have an impact on capital, I think it demonstrates again, that our mix is much more supported by securities and higher quality NPEs that obviously allow us to have a certain coverage policy.

 

In terms of the taxes ratio on Page 16, we have additional good news because we were only in June above 100%. So today, we are apparently at 70.9%, (sic) [71.9%] but we should do the pro forma for leasing disposal, 67.9%. It's still to be improved, obviously, but quite satisfying time -- objective and target hit as since the announced public -- old industrial plan, and we were supposed to be 98% and 87% in 2019 and 2020.  We are much, much farther away and the security and the beating the target on the quality of credit.

 

Last but not least, the business outlook. Second half of the year will be influenced by further [accommodative]interest rate policies recently announced by the Central European Bank. UBI will continue with the strategy of rigorous discipline of loan pricing to safeguard overall margin. What do we mean by that? It will depend on to where net interest rates go negative further. It's obvious that if they go a few basis points, we are fighting as much as we can to compensate with a very disciplined approach to the lending activity. If they go much farther, it's obvious that there is a limit to the possibility of compensation.

 

We have not yet seen that huge impact on the market. So in July, still we don't see any particular, let's say, strong impact. However, this is a declaration through the end of the year so we must be very conservative.

 

The good performance by fee and commission income is expected to continue. We don't see, under current market conditions, a reason why not. The strategy to diversify financial assets that we, the banking group -- book has confirmed, no news. Cost, don't forget, we benefit, amongst other things, from the departure of approximate 300 staff, which took place in implementation of the March 2019 trade union agreement and also from continuous control over administrative costs.

 

The Group, last but not least, will continue to reduce its nonperforming exposures by means of internal management of credit recovery, the key factor in its NPL strategy, and it will complete the disposal of UBI Leasing bad loans position. This, obviously, to achieve also the risk-weighted asset benefit by hopefully the end of the year. I would like to say that this first part means we stick, since we are doing very well with our strategy, to manage internal workout.

 

The last one, any further selective disposal will be considered only if they are efficient from a capital viewpoint, consistent with those recently concluded. Means very simply, this is not strategy A -- plan A, but if somebody comes with a price that is decent and is consistent with our comments and with no impact to the capital, obviously, we are not fundamentalists. But again, strategy plan is internal workout.

 

Thank you for your attention, and I'm ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Mr. Andrea Vercellone of Exane.

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Andrea Vercellone, Exane BNP Paribas, Research Division - European Banks Analyst [2]

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Sorry, 3 questions on my side. And thanks for the information on the vintages since you are the only bank that provides it and it's quite useful. So the 3 questions are, first one on the new definition of default, which you have indicated will be applied from Q3. You have said not very meaningful impact. Can you give us an indication as to what does it mean, i.e. by how much your NPEs are going to go up? Second question is on the outsourcing agreements that you have indicated. Can you give us an indication of the cost savings that you expect from this for next year? And final question is on your outlook. You used to have a sentence saying you expect normalized net income for 2019 to be higher than in 2018. You now dropped it even though you're only EUR 120 million or so away from it in just 2 quarters. Is that still a target? Or I don't quite understand why you need it to be dropped essentially. If you could elaborate a little bit on that.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [3]

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Andrea, I'm smiling because honestly we didn't think about that this weekend, so maybe it's even a big mistake but we just didn't think about that. So no reason. As you said, there is not that much missing from a normalized point of view. But no, we had no reason to drop. Honestly, we were so focused on the messages, maybe we didn't care enough this part. And thank you for raising this point. No reason to drop.

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Andrea Vercellone, Exane BNP Paribas, Research Division - European Banks Analyst [4]

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So your guidance is still, on a normalized basis, your net income (inaudible)?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [5]

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On the normalized one, the only caveat I can make is the following, Andrea. You know that given our internal policy, we do not normalize the sales of assets. So if we -- if, and it's a big if, we do additional sales from a rule of normalizing, we do not normalize. So give me just this exception, if it is. But if I may, the common sense, normalize, yes. Am I clear enough? Yes. Yes.

 

On the outsourcing agreement, I'm sorry, I cannot be clear on that because we are having, in these days, an interaction with unions. And so we want to stick to full discipline with respect with the unions, as we usually say, we do. So no. But I apologize about that. As soon as we have finalized also this part, we will communicate what you're asking for. In terms of DoD, listen, allow me to give you a range. If we have normally 1% default, new normal, we could have 1.2%, 1.3%, this type of things. But also, don't forget that this is also with a much lower coverage because these are small accidents.

 

The new definition of default means that if I'm out for EUR 100, if I'm a big one, this is a DoD. So DoD is a 0.2%, 0.3% more. But at the same time, it's not the same proportion in terms of cost of risk. So we all have to get used to that, but not big deal if you have discipline. Let me say, it is a deal if you don't have discipline.

 

The -- I'm not ready to make a judgment in a month. But our first sensation is that, believe it or not, we are happy. Even if it's a new rule, it's a new regulation, but we are happy because we're seeing that most customers in this country are becoming more disciplined after this rule. And ourselves, the [net] was becoming more visible. So obviously, we are getting a first, as I say, after 1 month, 2x, good feedback on that.

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Operator [6]

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The next question is from Azzurra Guelfi of Citi.

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Azzurra Guelfi, Citigroup Inc, Research Division - VP [7]

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A couple of questions from me. One is on the NII. Clearly, you are defending very well your asset spread. I just wanted to have a couple of clarifications. How much of reimbursement flows we can expect going forward? With the run rate around this EUR 3 billion, more or less, sales could be assumed in the coming quarter? And the other one is with the interest rate...

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [8]

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Azzurra, Azzurra. I apologize directly, but you are referring to which reimbursement, sorry?

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Azzurra Guelfi, Citigroup Inc, Research Division - VP [9]

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Today, flows in -- that you are showing in slide -- sorry, Slide 7, the EUR 3.4 billion, EUR 3.5 billion in the new production...

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [10]

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Excuse me. Excuse me. Yes. Yes. Sorry, thank you. Okay. This is the first question? Yes.

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Azzurra Guelfi, Citigroup Inc, Research Division - VP [11]

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So it's been quite stable. And so I don't know if it has been lagging in the last few years has been less pronounced, if this can drop? And on the asset side, with the fact that interest rates are, say, lower for longer and the outlook is not very encouraging for the Euribor. Do you expect that you can keep up the improving your markup on the lending?

 

The second question is on the NPLs. After the disposal that you have pending, you will have an amount of UTP quite similar to the amount of the [finance]. And I hear you clearly that you say that you want to work them out internally. But can you give us some indication about the quality of this UTP? Like, how much are closer to (inaudible) stage versus the one that instead are newer UTP? Or like if there is anything that you can give us color on?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [12]

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Sure. Sure. Regarding the NII outflows. You're right in the sense that not in a single quarter, but the trend of the reimbursement will shrink a little bit quarter-after-quarter. This is the trend. So you are -- actually, it's a very good point you are making.

 

Second, regarding the markup. Yes, we are sticking with the discipline on that. We are accepting, again, the fact that we're having a decrease in the lending activity that is higher than most of our competitors. But till now, we are in this situation of a markup that we want to raise. Then we want to raise -- to reraise independently from any competitive condition. Now we are not some magic. But till now, we made the promise to raise and we've been delivering. So we want to stick to that. Obviously, on your question regarding the -- excuse me, Azzurra, the second question, could you remind that to me? The second question on...

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

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Yes. UTP if you can give some color...

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [14]

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You quality of UTP.

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

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Yes.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [16]

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Yes. The quality of UTP.

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Azzurra Guelfi, Citigroup Inc, Research Division - VP [17]

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Because of your coverage is different versus peers.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [18]

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Yes, it's true. But again, it's true also that we have, as we're always saying, it's a hammer, exactly as you are saying is a hammer that we are lower. We are demonstrating market-by-market transaction that on the NPLs, we had good reasons to have. And it's been demonstrated by the market. I agree, we don't have the same proof for UTP. The only thing I can say is that we received both an inspection on the corporate end of retail; and the inspection does not cover only the NPLs, but obviously also they are likely to pay and the performing.

 

And as you may have seen, we have not been exiting from these inspections with such a radical change in our [components] and coverage. So I wanted to say that before saying that, no, we think that the quality of UTP, and most important, the classification of our UTP is correct because it's also true that, in my opinion, we should have a very -- keep a very attentive eye on the level of UTPs going -- NPLs and the level of UTPs going back to performing. And we published what has been the important bounce back from UTP to back to performing in this half. So honestly, we're happy also with the UTP.

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Operator [19]

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The next question comes from Christian Carrese of Intermonte.

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Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [20]

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First of all, congratulations for the results, both in terms of operating income and capital. Maybe capital is the main surprise of the quarter. Assuming you said that the risk-weighted assets reduction coming from the disposal, the NPL, EUR 900 million NPLs will be seen in the second half of the year. So actually, the common equity fully loaded should be a little bit higher than the 12% you show in the slide, in the results.

And then you referred also to some capital management action that could improve further the capital position, maybe, for example, the Bancassurance, we know you are discussing these options. So is it correct to -- because if I'm not mistaken, you were guiding for a common equity run below 12% by the end of the year due to delay in DTA and so on. So now you are in a much better position.

 

So first of all, if you can tell us if there are -- there is any regulatory headwind by the end of the year? Secondly, assuming a common equity Tier 1 between 12% and 13%, what will be your priority? Increase assets growth or maybe doing some additional derisking? And for in this case, can you tell us how many NPEs are still under the standardized model? The second question is on commission, very good results and maybe the turnaround of the network. You did the commercial policy, you started to do last year, you started to give some fruits. I was wondering if this kind of level of commission is -- how can I say it, recurring? So we can expect similar trend for the rest of the year? Or maybe there could be some seasonality, some reduction in the coming quarters.

 

And finally on TLTRO, I saw the negative contribution from the Interbank channel. So if you can tell us what are your thoughts on new TLTRO, maybe not going to get some money in the first auction? I'm sorry, can you elaborate a little bit on that?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [21]

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On the 12% and the headwinds and tailwinds, one of the tailwinds is, obviously, the liberation of risk-weighted assets but there are also regulatory headwinds. And altogether, I think that we will float around 12% for the end of the year. Be aware that the reason why I cannot be 100% assertive is that we don't have to forget that the spread -- the Italian spread has a role in the computation of this ratio. And really, I'm not as good as to be able to make a forecast on this one. This is a component of volatility that we cannot control. So it is a --

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Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [22]

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Actually, quarter-to-date, the reserves should have improved or not?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [23]

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It's true, but there's still 5 months. So since when I say something I -- if I can, if I'm able to do, I like at least to respect if not to beat it. As for today, actually, we are around 12%, a little bit plus, a little bit minus, and then we'll see.

 

On the -- you asked if, if, if. If we're able through maybe the insurance agreement to go up, then what would we do? First of all, the insurance agreement is still, we have to decide for a make or for a buy, will depend from the difficult testing currently in place, we will see. However, I want to play your game. What if we have more? It's not derisking. It's not increasing. Is the right definition is the following: either, a, RORC, a return on capital on the lending activity that pays the capital, we'll go up; either, return on capital and the lending activity that is lower than the cost of capital, we go down. Very simple.

 

This is exactly the meaning of the discipline in price that we have written on our outlook. Is it or is it not paying the capital? Because as we are saying from this 1 year, we're a little bit tired to be in a situation where we have some components of delay and yet we do not pay the capital. Q1 are understandable on part of the mix, but not too much, so it will depend on the markup.

 

On the third one, fees. As we are saying in the outlook, again, we feel reasonably confident to stick it to this level, given current market condition. For TLTRO, I must imagine you're talking about TLTRO3. We are still thinking a lot about September. And the only thing I should say that we are not sure at all to use September. It's not improbable to wait and see as the behavior of the others, see if there is, if I'm not wrong, 7 different opportunities quarter-after-quarter.  We will use maybe other opportunities, I don't know. It will depend. We would -- but what I can say, we could have lived without that part for sure.

 

You are -- we are not publishing a Net Stable Funding Ratio, we are just saying that it's above 100. But if you trust me, we are already entering here in a window where, in our case, EUR 10 billion of the total EUR 12.5 billion of TLTRO2, I'm not anymore waiting 100. But I'd be waiting 50% because of the time horizon, which is below 12. This has not hit significantly at all the liquidity -- excuse me, the necessary funding ratio, notwithstanding that the pondering of the 50% is out and the lending activity is not out. This is notwithstanding, we stick here to [start] very solid level of Net Stable Funding Ratio. So that means that we are not dependent at all about this TLTRO. Then, of course, we see competition. We see, it's, again, theory obviously, but if we can, we don't.

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Operator [24]

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The next question is from Giovanni Razzoli of Equita.

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Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [25]

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A couple of questions on my side. The first one is on the evolution of the default rate in the second quarter. You are publishing a 1% before placing the first time, it was 0.78% in the Q1, which implies that there has been a little bit of increase in the second quarter, which could be related to the statistical impact of a decrease in volumes. Is my understanding correct? Or are you actually experiencing some minor deterioration of the risk profile of your loan book?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [26]

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Excuse me, excuse me.

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Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [27]

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Please inquire if -- it's up to you to.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [28]

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No. No, please, Razzoli, go ahead with your second. I wait, of course.

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Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [29]

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Okay. It's very much a part -- the EUR 1 billion NPL disposals, can you share with us what will be the contribution in terms of NII that you may give up? I think it could be in the region of EUR 10 million, EUR 15 million, is the figure that you can share with us. And the third and last question. Clearly, on the market there is a reality now about the clearing, the possible removal of the negative rates on excess liquidity. Can you share with us what is the excess liquidity we have in SEB that based on my calculation should be something between EUR 4 million and EUR 5 million in net beneficiaries of this model?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [30]

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Regarding the last one, it's very easy. We are floating along 5 to 7 overnight. So it's up to you.

 

 

 

 

Second, on the EUR 1 billion, I'm going from the last to the first, on EUR 1 billion NPLs, assuming we're on the NPLs, there is no give up at all of NII known. On the first one, the full rate is a contribution, if you want, of both in the sense that, yes, there is -- you're talking about the first and second quarter, that's correct?

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Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [31]

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Yes. Yes.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [32]

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Perfect. So first and second quarter, we had both some additional decrease in the lending activity in the denominator but also something in June. Very curious, everything happened at the same time and not just one, so quite distributed. But at the same time, nothing that is driving to a different guideline in the second part of the year because in July, it's already down. So honestly, for different reason, I would agree with you with the statistics of the story. And nothing really changing the [factor.]

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Operator [33]

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The next question comes from Riccardo Rovere of Mediobanca.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [34]

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A couple of questions, if I may. The first one is on loans. They declined by roughly EUR 3 billion, if I'm not mistaken, quarter-on-quarter. So...

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [35]

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No, no. The semester -- no, year-on-year, Riccardo, not quarter-on-quarter. It's first semester -- it's first semester average versus the first semester of the previous year average.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [36]

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Okay. Now in the data -- in the data released for the end of June, how the loan book related to the NPL disposal, it's been treated -- it's been reclassified somewhere else in the assets held for sale or something like that, but it's still included in the loan book.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [37]

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Now it's still included because that's why we had to do the pro forma. It's still included and it will go out when we finalize, and we say this, within the end of the year.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [38]

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Okay. Okay. Okay. And correct me if I'm wrong. In this quarter, there has not been any material NPL sale. In the press release, you mentioned EUR 142 million, but I'm not sure. But is this the same -- this refers to second quarter or the first half?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [39]

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There was -- excuse me, the -- don't forget that we made a component of 2 sales. One was Factor and one was Leasing. The Factor has been also finalized. So it's out there. It's 150. And the Leasing is still to finalize. It's 700-something. So these are the 2 components. And that's why you have 150 out and yield is 740, whatever, in.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [40]

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Okay. Okay. And lastly, with regard to the impact on operational risk from the model change that you mentioned, is that something sustainable? This is not something that could be reversed at any time, right?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [41]

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No. This was related -- what was the name of the [founder]?

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Unidentified Company Representative, [42]

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[BD growth].

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [43]

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[BD growth]. That was a BD growth accident. It was very heavy on us, but it -- now it's too old to remain in the surfaces and stated in the regulation. It was 10 points and -- excuse me, 10 years. And this is gone.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [44]

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Okay. Okay. Okay. And lastly, we read a lot on the potential Bancassurance rationalization. Is this -- are you planning to say something ahead of the updated business plan? Or it's something that you eventually might disclose at the time of the business plan?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [45]

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We are most probably doing it together with the business plan again because we are saying that it's a part of the business plan. It's not irrelevant to understand if it's going to be a make or buy, as you all understand. So it will be part of the business plan. Then if for whatever reason there is a finalization of the agreement, that is too far away from the industrial plan, of course because of just some company regulation, because of regulation, we will deliver some messages to the market. But if it fits together with that, we would, in a way should be flattering, we will deliver the 2 things together.

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Operator [46]

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The next question is from Antonio Reale of Morgan Stanley.

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Antonio Reale, Morgan Stanley, Research Division - Equity Analyst [47]

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Two questions from me, one on NII and the second one on fees. On NII and the interest rate, so clearly, how do you think about -- I mean how do you manage a bank like yours in an environment where interest rates are trending lower? What mitigating factors do you have? I'm just really thinking about how you -- how your strategy is looking forward? Are you thinking about moving up the risk of the fair margins? Does the corporate cycle support that or a higher contribution from recoveries? Just getting your thoughts there will be very useful. And the second question is on fees. You've done very well. You've booked record high commissions. I also understand some of the improvement is due to an increase in the cost of certain banking products you offer to your clients such as current accounts, credit card, unsecured loans. Is there any more you can do here? And what's been the impact on the client base?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [48]

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On the fee one, it's not that we had additional particular maneuvers before the end of the year, so we will just go on the momentum that we have on this part. And don't forget that until now, and I hope we will continue, we are also gaining market shares in the asset management and in the insurance part of the story. So there is a very good momentum on the wealth management in general terms, also in terms of gaining market shares.

 

On the NII. No, we are not thinking at all of piggybacking on the financial proprietary assets to support the NII. We are managing it just with the focus of diversify and not particularly to increase, and actually by this, trying to mean that the -- a relative strong contributor, which is the Italian Govy will go and not -- so no, we are not expecting a help from that part on the NII. While -- as I was saying before, we will stick to a very, very strong discipline on the lending activity. It is -- we are paid because we have a decreasing lending volumes at this time, but we're also showing that with EUR 3 billion of average lending activity, we are doing more or less the same NII and using a little bit less of capital. And we hope everybody look at these figures in the competitive arena.

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Operator [49]

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The next question is from Hugo Cruz of KBW.

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Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [50]

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I'm sorry if this was asked before, but I had to miss part of the call. But on your guidance on CET1 capital, you talked about headwinds and tailwinds, are you including the IRB adoption this year still? And can you refresh our -- your guidance on the benefit from that? And then do you have any -- your latest thoughts on issue in AT1, please?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [51]

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Sure. On the CET1, we have some -- had some benefits in the first part of the year, but we had also some additional regulational weight on that. But this was done on the first one. So this is already including everything. We only communicate -- and by -- in general terms, as you can see, literally in the first statement in our communication, we always publish CET1 without any hypothesis. It's a [bio] CET1, and I want to stress it very, very strongly. No hypothesis at all, no DTA, no future solution of CET contribution.

 

Then there was the second part of our communication where we are saying that there would be -- we said that there would be some, excuse me, headwind due to the fact that there are some additional negative things coming from regulation, an example, 3 in these kind of things. But at the same time, there will be also some positive one coming, as an example, by the liberation of the risk-weighted asset due to the sale of the leasing. On the leasing part -- on the leasing sale, we had the negative in terms negative contribution of profit and loss, but we still don't have the good one that is the positive one, which is the risk-weighted asset liberation that are available only when we effectively deliver, finalize the transaction. So altogether, our guideline was to be around 12, more or less and where the volatility is driven mostly by the Italian [strip] going up or down.

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Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [52]

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But correct me if I'm wrong, but I think you still have a possibility to have a higher -- a lower risk weighting on the 2 banks that's required?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [53]

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We already got it, Hugo.

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Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [54]

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Okay. My fault.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [55]

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Thank you. No problem.

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Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [56]

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Okay. And then the AT1?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [57]

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AT1. AT1, today's AT1 price is too high. When the market will decide that, thanks to the fact that we have the highest CET1 that we are dropping and accelerating the decrease of our NPEs that then we deserve a better price. We could think about that. Be aware that I think I may say that we have no -- nobody asked me anything about the NOL. But on the NOL, we are already in line with what it should be. So it's not that we have a need. Actually, again, since we observed that having an AT1, having a good platform, a lower Tier 2, obviously, influences in a very good way the total cost of distribution. Finally, we could be ready for that, but not at the current price.

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Operator [58]

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The next question is from Anna Adamo of Autonomous Research.

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Anna Adamo, Autonomous Research LLP - Partner of Italian Banks & Asset Managers [59]

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I have 3 questions, please. The first one is on NII. Can you tell us what's the sensitivity of NII to minus 10 basis point shift in the LIBOR? Then I wanted to ask about MREL...

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [60]

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10, you said, Anna? Thank you. 10 basis points. Yes, please?

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Anna Adamo, Autonomous Research LLP - Partner of Italian Banks & Asset Managers [61]

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And I wanted to ask about MREL. You have EUR 6 billion of retail bonds on your balance sheet. And I understand that retail bonds are permitted on MREL. But it could be seen as an impediment to the resolution. So are you planning to replace retail bonds over time with institutional bonds? Lastly, can you give us a guidance on the tax rate for 2019 and 2020? And I've seen that there was a release of DTAs in Q2.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [62]

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On the NII, 10 basis points are consistent with EUR 20 million, EUR 25 million of decrease in NII. So 10 bps minus 20 minus, 25 million on the NII.

 

On the retail bond, yes, we have, if I may say, only 6. We had 25 just a couple of years ago, retail bond. And they are not ashamed to have it because they have perfectly adopted end use on the bail-in situation because we must be disciplined on that. If we want to have retail bonds release in bail-in, they must be in the MREL, as they are. However, be aware that our institutional funding aspiring in 2020 is very low. So if and only if there would be some additional changes in the regulation, ready to substitute to the institutional because it's very low level of expiring institutional bonds in 2020.

 

Tax rate, tax rate would be in the area of 30%, more or less.

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Anna Adamo, Autonomous Research LLP - Partner of Italian Banks & Asset Managers [63]

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And for 2020?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [64]

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More or less the same. Then it will depend, of course why -- I would like to also make clear one thing. If and only if we had any special transaction allowing us to raise a special profit, obviously, this accelerated the usage of the DTA that has been postponed. So in that case, we will have a much lower one. But on a regular base, it's 30. Then don't forget that if we have a one-off, very good profit for whatever special transaction, we liberate good DTAs. It would obviously significantly decrease the 30%.

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Operator [65]

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Our next question is from Domenico Santoro of HSBC.

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Domenico Santoro, HSBC, Research Division - Analyst [66]

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Domenico, HSBC. Just a couple of questions. Maybe I'll go one by one. First of all, I heard your comment on the NII before, which is reasonable in my view. So my question -- the first question is assuming that your balance sheet doesn't change but there are a couple of minus and a couple of plus. First of all, rate cut before the end of the year, minus 20. So let's imagine that the market rate will follow with a positive rate of the ECB. There is QE, so additional pressure on the [southern hit], but then also a couple of plus, which is, first of all, a tiering reserve system. Actually, I -- you said before that your accessories are 5 to 7, but I read on the presentation at Page 30, that is EUR 9.7 billion. And let's assume also that you take the same TLTRO and given that presumably, you probably will reach some lending target, you will get the deposit rate. We will go even further down. So potentially, you might get also positive impact in terms of contribution from the TLTRO. So assuming all of these minus, plus, is it reasonable to imagine that your NII in the second part of the year will go down in absolute terms? Or 2020, down vis-a-vis 2019?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [67]

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Well, as we said before, if you are exploiting [NI] purchases of 25, if I got that right. How much you said that you want to go down?

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Domenico Santoro, HSBC, Research Division - Analyst [68]

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20.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [69]

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20. Yes. This means that we start given the sensitivity in the area of EUR 40 million, EUR 45 million of minus that this is to compensate with other components. Then it's also true that if we -- I see your point that if it were a EUR 10 billion in ECB, that immediately grow from minus EUR 40 million to 0, that's true, it's another 40-plus. So it will be tight, will be something that is difficult to foresee. But I see our gymnastics, you're right. If we get from minus EUR 40 million to 0, yes. Obviously, it's a very good compensation to that. That's true.

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Domenico Santoro, HSBC, Research Division - Analyst [70]

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But in absolute terms, I mean, if your balance sheet doesn't change because, of course, you might change it, is it possible to see the NII to trend down from these levels? Ex one-off, of course.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [71]

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If it will be -- the point is that how is lending activity going right after. Is it the TLTRO3 influencing again and an additional more price? Yes, go down. No, sorry. Because whatever discipline we do is too much. That's why we don't like an addition TLTRO. If it's not driving to any same behavior, then as I was -- given the calculation we made before, we could even go even. But again, I actually say what we are doing. But I cannot make a strong statement because it will become a lot on our competitors' behavior in the market.

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Domenico Santoro, HSBC, Research Division - Analyst [72]

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All right. This is fair enough. If the rates remain negative for longer, is it possible to imagine in Italy a situation where you start to charge your corporate clients to keep money liquidity on your current account? I know that it's more difficult for retail. Just for corporate, like it's happening in Spain?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [73]

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Well, let's say that we, in a way, are checking if everything is fine with our IT system to be able to charge, which doesn't mean that we will charge. But the process is in place. Be aware anyway that when we do our investment plan, we are doing our investment plan on a discipline to have a full-time horizon on negative rates. So we have to do something for the -- at least for the discipline of the investment plan to counterbalance this continuous headwind. However, it's possible to run a profitable bank, even with that, then we see when we will finalize our investment plan. That is not completely impossible even if this could surprise you.

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Domenico Santoro, HSBC, Research Division - Analyst [74]

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All right. Now moving to provision instead. I see that there is a sort of top-up to cost in the second quarter. But of course, ex- the top, your loan loss provision might be very low because, of course, quality trends -- credit quality trends are very positive at the moment in Italy. So the question is, how much further down they might go, loan loss provision? Because in a scenario of lower and more negative rates for longer, of course, also this -- I mean, the lower end of your P&L, it might benefit from that. Can you give us any idea?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [75]

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Well, today, we have an annualized normal. It's growing test communication. We have been saying that the normalized cost in the first half of risk has been in the area of 65. Of course, 65 is not something we consider low. It's something we consider medium to high. So yes, we must go lower than that on the normalized one, for sure. We have to. And the point is that this is huge liquidity at negative rates and reasonable even if slow growth go. It's a very ideal scenario to decrease the cost of risk. But it would be different if trade wars, whatever type of the net behavior could drive to no growth, which should be completely different.

 

Anyway, what we know is that, again, I'm stressing the point that it doesn't matter what happen. We have, today, more than 80% of our nonperforming -- -- excuse, [of our performing] lending activity that is an area of low risk. And it was in the area of 58 before the crisis. So by definition, we have a much, much more stronger -- strongest mix of performing loans. That's for sure. So no tsunami anyway. And on the opposite, given the current situation, a possibility to a slow but continuous decrease of the cost of risk.

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Domenico Santoro, HSBC, Research Division - Analyst [76]

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Okay. And then on Basel IV, I mean, we have all seen a report from the EBA, which was quite scary, to be honest. Can you give us a sense of what could be a risk-weighted asset inflation and in particular on the operational risk that kicks in the first -- in 2022, please?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [77]

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There's still discussions on that to be aware exactly because the comment you made on the scenario was not the only comment that was made in the market. But at the same time, let me stress the point that if you look at the risk-weighted asset density that we do have in this market, in the European market, it's one of the highest of the European market, notwithstanding the fact that we have been one of the lowest risk bank. No derivatives and even at the one of the lowest NPE rate in Italy. So maybe, of course, that analyze that set that there will be some additional impact. But don't forget, the distracting point for us is very high risk-weighted asset density.

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Operator [78]

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The next question is from Ignacio Cerezo of UBS.

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Ignacio Cerezo Olmos, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst [79]

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I've got several questions. The first one is on your dividend policy for the year, your base case considering the 12% CET1 ratio target you have for the end of the year. The second one is a follow-up on just the question from Domenico on cost of risk, currency, et cetera. Do you foresee the need to continue to top up coverage to undertake disposals in the next couple of years? Considering that you're still around 9% NPL ratio, the market seems to be still putting pressure on that number to go down organically. And 3 or 4 (inaudible) only. The first one is if you could give your updated CET1 sensitivity to 100% -- sorry, 100 basis point spread move. And the fourth, if you can confirm there has been any NPL disposals in the quarter.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [80]

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I need a recap of the question. Could you remember the first one? It was regarding the CET1 12% that was -- sorry, could you repeat?

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Ignacio Cerezo Olmos, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst [81]

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Yes. The first one was around -- I mean you just mentioned that you should see basically a decline from the 65 basis points cost of risk, the recurring number. But again, this year, for example, the EUR 100 million you're incurring in Q2. If you think that it's going to be necessary over the next couple of years to continue to top up coverage on a one-off basis?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [82]

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Okay. Thank you. So on this one, what I can say is the following. That was the refining of 65 as the normalized one, so not including the sale of what we've done in this first half. I still think that we've been demonstrating that our coverage was good. First of all, don't forget that we have also in -- we have demonstrated the write-off that we use, the write-off is totally baked in by the market. When we made the [IAXA] sale of the last year, it was including the rate of (inaudible) as good by the market.

 

So if you look at our coverage ratio, including the write-off, we are in the area of total coverage and not just NPE at 50, which very well comparable with other players that do have anyway, on average, much lower level of securitized assets. So the coverage issue for us is over. And now it's not an opinion. It's the third and fourth market sale and not a marginal sale. We have sold, if I'm not wrong, altogether, more than EUR 3 billion of assets with almost no impact at all to -- actually no impact at all to the capital ratio. It must mean something. And I think it's time to take it as a given because it's not a preview. It's a fact. It's not we're [assuming] yesterday, I'm using your question for the whole market. Don't take it as a [mistake].

 

And so that's why -- that's why I'm saying that the 65 must go down. Then we will go down. It will depend again on the market condition. But the encouraging factor is also the default rate is so low. And so altogether, I see there is a scenario to decrease. The fact that we mostly do through a workout make us a little bit slower. But at the same time, may I say for a second that we haven't asked in all this year one single euro of that capital and we went from 15 to 9 and not a single euro of capital. So maybe we're not so wrong. With the 100 basis point analysis of sensitivity to grow, this is a 25 bps on net profitability.

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Ignacio Cerezo Olmos, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst [83]

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And on the dividend policy?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [84]

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On the dividend policy, we will -- we had in the previous one -- in the previous quarter 2019, we don't have the new one, a 40% floor. And we have no reason to say that we are lying there with a 40% floor. And then obviously, it will depend on the situation of CET1 at the end of the year. Again, I apologize, but the volatility on this trend has not been marginal. So it's very difficult for me to make statements till now. The only thing I can say is that the CET1 that we're publishing includes a dividend in the first half.

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Ignacio Cerezo Olmos, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst [85]

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I'm sorry, the final one was on the NPL reduction, if you can confirm that it has been completely organic or there has been some small NPL disposals.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [86]

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We have the strategy of internal workout. So the strategy plan A is all internal workout.

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Ignacio Cerezo Olmos, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst [87]

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But in the second quarter, has been any disposals? That was the question, if in Q2, you have had any.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [88]

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Yes. So I completely misunderstood your question, excuse me. In the second quarter, we have finalized the 150 of the factoring that was the disposal. The factoring component of the 900 is made more or less by 150 of factoring and 750 of leasing. Now the 150 of factoring is out both on cost and on total lending activity.

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Ignacio Cerezo Olmos, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst [89]

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Apologies for the confusion.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [90]

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Yes, no problem. The 750 -- no, no, but this allows me to make an additional [configuration.] The 750 leasing is out in terms of cost. So they have penalized the profit and loss and indirectly, the CET1. That is not out for both the total lending activity and consistently is not deliberating a risk-weighted asset. So whether it will be out of the total lending. But also, we liberate in positive way risk-weighted assets. So positive for capital. And that's why we are saying that actually, this disposal has not had any, and I'm saying any, impact on capital, exactly as the GACS 1 we had made no impact on capital. And this is why I'm so assertive on our coverage.

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Operator [91]

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Our next question is a follow-up from Riccardo Rovere of Mediobanca.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [92]

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Just one question on risk cost in this quarter or in the semester. As models -- internal models are being updated for, let's say, softer macro growth or have been already updated for new historical series and LGDs, NPDs, so in this semester, have you done anything like that?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [93]

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No. You don't have any -- we had something in March already made. We didn't have anything in this one. So apart from the operational risk that we have published, there's a few marginal things. We -- it's not that we had a particular tailwind coming from the model to [serve cap] at all. And the update of the potential sales was made in March.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [94]

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But with regard to the macro outlook, would you be in a position to share with us what kind of GDP growth is plugged into your models right now? And that maybe could be revised at some point? I think it should be revised at some point under IFRS 9. And this may...

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [95]

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Let me stop you, Riccardo, with a very straight answer. Today's model implies 0.2.

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Operator [96]

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The next question is from [Dalia L. Croani] of BNP Paribas.

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Unidentified Analyst, [97]

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I actually have a question about the net interest income. At the moment, you're still -- and the profit -- sorry, at the minimum, you're still very surprised by the view of NPLs. How are you planning on that assuming that on the long run?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [98]

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The NPLs do not -- our definition of NPLs is not including UTP. So NPLs for us are only the worst part of it, and this one does not generate structurally any interest rate. So what has been going out from NPLs, within our definition of NPLs, is not bad loans. We call NPLs bad loans. Sorry, maybe -- actually, thank you for this question because it allow us to maybe standardize our language. We call NPEs the total of UTPs plus NPLs that somebody else calls bad loans.

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Unidentified Analyst, [99]

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[Transferring of bad loans].

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [100]

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Yes. So that's why -- exactly. So in our case, we have no -- actually, to any type of interest margin because they do not produce, being bad loans, any interest income. Thank you.

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Unidentified Analyst, [101]

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But I mean, in your -- in the press release you just issued, you speak about the profits, which has been impacted by the same disposal of EUR 75 million. But just so I understand, it was back to your profit?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [102]

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If I understand the question because unfortunately the communication is very disturbed, if I understand your question, you want a recap the impact of the EUR 750 million that -- of the leasing part of the story, you want the impact of that?

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Unidentified Analyst, [103]

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No. I mean at the moment, you're still disposing of -- you're still conducting disposals, but it impacts the profit. How are you planning -- the disposals. How are you planning on balancing this impact in the future, minimizing this impact from your profit?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [104]

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The disposal of -- when we dispose through a sale, obviously, there is some loss because of the profit of the barrier. That's for sure. And then if I could understand you because, again, the communication is very disturbed, we said that in the future, our strategy is internal workout. So nothing that is going to change significantly the normalized cost of risk. And again, if we do something special, the rule for us is not to impact the capital component. So it must be substantially neutral on capital.

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Operator [105]

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

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Alberto Vittorio Luigi Cordara, BofA Merrill Lynch, Research Division - Research Analyst [106]

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Just a couple of points on the previous questions. The first one is you mentioned that the risk-weighted assets are going to be lower once you deconsolidate these NPEs. So you are going to have a positive impact on capital in the second half of the year. But then my question is shouldn't you have a revision of the LGTE for the rest of the portfolio? Should it be a negative impact coming from additional risk-weighted assets, maybe not next quarter but in Q4 or next year? And connected to that, I don't know if you are prepared to tell us something about EBA guidelines, if you have time to estimate the impact for you or we're waiting for the business plan to have clarification about that. And sorry for the question, but in the recent past, you've been commenting in negative terms about the possibility of a merger with Banco BPM. I don't know if you still have the same opinion or if there has been any change of thought about that.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [107]

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There could not be any change because I never commented. So I don't know who is making this statement. This would be very impolite, be very unrespectful. So I have no comment and I will never comment to a merger. Maybe when I do a merger, then I comment. But never comment before. So I don't understand the -- even the logic of the buzz. So there is no...

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Alberto Vittorio Luigi Cordara, BofA Merrill Lynch, Research Division - Research Analyst [108]

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You went to Bloomberg. So this is where I saw it.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [109]

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No. The only thing that Bloomberg asked me was if there had been any meeting with Banco BPM people. And I said, no, there has not been any meeting. That was the only answer I made. And if there is something different, which I don't remember, I don't think who's allowed to say that. There is no comment at all, Alberto, about any type of qualitative comments regarding a potential merger with anybody. Going back to the RWA, there is no impact at all on LGTE because of the sales we made are on standardized fact. Both Factor and Leasing are standardized. So no, zero impact.

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Operator [110]

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(Operator Instructions) The next question is from Carlos Tommaselli of MainFirst.

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Carlo Tommaselli, MainFirst Bank AG, Research Division - Analyst [111]

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A couple of questions for me. The first one is a follow-up on the loan loss provision, please. Sorry to come back on this. Just a clarification. The guidance of a normalized level well below 60 basis points could be considered in the medium-term only or for 2019, too? And the second question is on bad loan management. You clearly prefer internal workout, especially for UTPs. But I was wondering if [SCOW government bad] bank would launch a project to purchase UTPs with the net book value in kind of shares as recently we saw in the press, would this be an opportunity for UBI based on your strategy?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [112]

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The general workout is doing well. So I don't think even in that situation that would we give all our UTP to [SCOW] whoever would do something. We have done some, -- a few investments in this type of solution, very few. And we have been analyzing the behavior, that's just as an experiment. But it wouldn't be a radical change in our management because this -- if the UTP is a real UTP, this is something that we -- so there is a customer that you said in difficulties but that we think has a reasonable probability to go back to performing. And it's part of our core banking activity to have this customer to come back.

 

So only in a marginal way, this could be of interest for us. And so I'm not saying, no interest at all. But I'm saying, a larger complementary collateral approach to the main strategy that is, we are a bank and we must help our customers that have a probability to come back to performing to go there, back to performing. I was so enthusiastic to give you a question -- answer to the question that I have forgotten the first one, Carlo, I apologize. Could you restate the first one? I'm sorry for that.

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Carlo Tommaselli, MainFirst Bank AG, Research Division - Analyst [113]

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Yes. Back on the loan loss provision, the -- just a clarification. The guidance...

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [114]

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Yes. Yes. On the 60. Thank you. First of all, what I said in the previous answers was that we have a 65 and that we want to go below 65. So we hope, from a normalized point of view, so not including any potential possible, whatever, special say that this 65 million should go a little below. So already now in the third and fourth quarter, given cooling market condition, should go down. Don't forget, by the way, that I'm trying to make this statement while I'm playing for the first time with the new definition of default. That again is not sitting. So significantly, that can play a few basis points.

 

So in theory, if this closes, July has gone with the first application of DoD, we must go -- we must like to reduce. But again, this is very new for us, so manage and handle with care this statement, please. But given -- if I didn't have the DoD I would have made a strong assessment. It was DoD, nothing so serious, but allow me a little bit of room.

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Operator [115]

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(Operator Instructions) Mr. Massiah, there are no questions registered, sir.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Member of Management Board [116]

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Thank you to everybody for being with us on a Friday afternoon. And if anybody is going for vacation, happy vacation to everybody. Thank you.

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Operator [117]

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