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Edited Transcript of UBI.MI earnings conference call or presentation 10-Feb-20 2:30pm GMT

Q4 2019 Unione di Banche Italiane SpA Earnings Call

Bergamo Feb 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Unione di Banche Italiane SpA earnings conference call or presentation Monday, February 10, 2020 at 2:30:00pm 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 & Director

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Conference Call Participants

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* Adele Palama

UBS Investment Bank, Research Division - Equity Research Analyst of Italian Banks

* Andrea Vercellone

Exane BNP Paribas, Research Division - European Banks Analyst

* Antonio Reale

Morgan Stanley, Research Division - Equity Analyst

* Azzurra Guelfi

Citigroup Inc, Research Division - VP

* Christian Carrese

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

* Giovanni Razzoli

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

* Jean-Francois Neuez

Goldman Sachs Group Inc., Research Division - Executive Director

* Noemi Peruch

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

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the UBI Banca Group Consolidated Results as at December 31, 2019, Conference Call. (Operator Instructions)

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

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [2]

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Good afternoon, and thanks, everybody, for attending the conference. First of all, a general comment. I think this was a very good set of very rounded results. We tried to summarize this in -- on Page 3 or Slide 3. Let me go through for a sec.

Operating income was up 3.4% in terms of core revenues year-on-year and accelerating in the fourth quarter, plus 10%, and even fourth quarter and the fourth quarter previous year's was around 10%. Operating expenses were in continued decrease. It was minus 4.4% or in a -- on quarter-on-quarter basis, minus 6%. On the -- excuse me, it was minus 3.3% or minus 6%. Our net operating income we had altogether plus very steady performance -- may be in plus 18.5%, and on a fourth quarter and fourth quarter basis, plus 47.9%. We had an increase in cost of risk of 15 basis point, but this was justifying a massive reduction in the stock of NPEs. I will comment on that later on how this was generated.

The pretax profit was a strong growth, plus 10% -- more than 10% year-on-year, and the dividend proposed per share is up to EUR 0.13, which is an increase of 8.3% on the 12 of -- last year. Strong increase also in Common Equity 1 and total capital ratio. This, on the total capital ratio, do not include AT1 that was issued in January. I will elaborate on that through the presentation. Gross NPE was, as I was saying, a massive one, minus almost 30%. And the minus 30% does not include another disposal that is under -- buildup in a way. Some of -- a significant component of this cost, of this disposal, is already in the figures of 2019. And again, I will elaborate on that.

Total funding was up 5%, and very important growth in the stocks of asset under management and Bancassurance was -- grew by 10% each. Performing loans were down minus 3.2%. This is not a green on this exhibit, but the reason for that, you know very well, is our price strategy. We defend the markup, and I will show you what have been the consequences of this on our spreads.

Altogether, let me also stress, it does not have a color, but in my opinion, it should be a strong green, MREL compliant. This bank is already MREL compliant since a couple of quarters. And this is very, very important, in my opinion because it's clear -- clearly justify that it's a balanced management of the bank, altogether. In terms of records, in a way, this was the best year ever for net fees, income and inflows to NPEs. Best result in a decade for normalized net profit.

We show you on Page 4, the decade. Full year 2019, we had a normalized profit of -- net profit of EUR 173 million. Today, it's double. It EUR 353 million, going through quite a decade. And it's important also to be able to understand that the true state of results are uncomparable because of DTA recognition of the previous year.

Page 5, excuse -- Page 6, we have some details regarding revenues and core revenues. The definition of core revenues, this is obviously, NII and fee-based business and does not include any trading or other types of revenues.

So revenue, in total, were up year-on-year by 3.4% and core revenues by 0.5%. So that means that notwithstanding the decrease in NII on a yearly basis, which was in absolute terms minus EUR 65 million, on the bottom left of the slide, the increase in net commission income were more than compensating the decrease in the NII.

In terms of total revenue, we have plus 10.2% fourth quarter versus third quarter, plus 3.5% in core revenues. So the core revenues in the fourth quarter were increased by 3.5%, which means that the minus EUR 15 million of the net interest income were, again, more than compensated by the plus EUR 44 million of the net commission income.

Just to clarify regarding the fourth quarter, there was, obviously, a good performance by component of performance fee. The performance fee do not justify all the increase. I will elaborate on that. But just to give you an idea, on year-on-year basis, they justify something thing like 50% of debt even less. And so I would like to make it very clear that the growth is sustainable.

Regarding my comment on the NII, please go through -- let's go through together on Page 7. The decrease in terms of net interest income year-on-year was minus 3.6%. Let's comment that in absolute terms. The limited decrease of EUR 57 million, excluding EUR 8 million for IFRS 16 introduced in 2019. So of this minus EUR 15 million, EUR 7.4 million were one-off of second quarter because of the earthquake in the market region and minus EUR 6 million were interbank and financial activities, mainly due to higher excess liquidity deposited in ECB.

The impact of decreasing market rates, minus 3 basis points and lower volumes of NPEs and performing loans mitigated by safeguard of commercial spread. That means that they were also an additional component. How can we say that? Please, have a look at the bottom left. Fourth quarter of 2018, the business with customer component, the NII, was EUR 380 million. Third and fourth quarter were EUR 366 million and EUR 364 million.

So it was substantially stable. This notwithstanding that we were reducing the stock of UTP. So as a matter of fact, the component of the commercial part was doing -- delivering a very reasonable performance.

But let's go in even additional details on Page 8. If you look at the flow of markup on lending, it went up, from 244 to 247. This means the customer spread was back to 175 back from 173 in the third quarter, notwithstanding that the markdown on funding was going up.

So this means, again, that we're doing something sustainable on time and very good management on, let's say, defending the pricing strategy. This was not sacrificing, in particular way, the new flow of lending because as a matter of fact, the stock of lending were more or less flattish. But again, we're ready to, obviously, continue this strategy. Why? Please, we will be presenting in the twelfth component of this slide from some quarters, the evolution of the new originations.

As you can see, the flows on the fourth quarter of new origination were higher than the third quarter, a EUR 2.7 billion versus EUR 2.3 billion. And to the commercial spread was 251 versus 254. Why? In terms of reimbursement, the new reimbursement were EUR 3.65 billion at 206. So again, we're able to, let's say, issue or subscribe new originations at a much higher level of the one that is expiring.

On Page 9, we do have this new record ever of fee-based and commission. Best result ever, EUR 1.662 billion, almost, almost reaching the level of the NII, which is quite a significant message for the future.

As I was saying before, this is on the bottom left, net fee and commission. The component of upfront and performance fee, we had a higher performance fee of EUR 27 million and lower upfront fees of EUR 1.7 million, while the whole difference of this one was EUR 25 million. So altogether, this was -- the effect of that -- this does not -- has nothing to do with the plus 5.4% on the management, trading and advisory services and the plus 3.1% on banking-related commissions.

So I know there was a question regarding the sustainability. We have been isolating the component of upfront fee and performance fee, and this has nothing to do with the other and as to show how doable is -- if we should grow on net fee and commission.

Also having a look on the fourth quarter versus fourth quarter, again, the component of performance fee out of this EUR 55 million is, as we've seen before since it was EUR 27 million, it's only -- justify 50% of the growth. So again, performance fee fourth quarter 2019 versus fourth quarter 2018, justify only half of the growth. The other half of the growth is regular commissions.

Operating costs, on Page 10, down by 3.3%. But I would like to stress that actually the real reduction was much higher. The point is that as we've been presenting already in some meetings during this year, we've been investing a lot in innovation and business development. And we are talking about EUR 146 million in 2019, which were comparable to EUR 82 million in 2018, here in the footnote of this [page], which makes an increase in 78% of our investments. This is consistent with what we're doing. It would be also relevant to discuss about this in the next week when we are going to present our new industrial plan.

But it's important for you to keep in mind that we're reducing cost by the increases in (inaudible) investment. So this the -- a net effect, including also this huge effort.

On the balance sheet on Page 12, we have the new minimum of high risk component on the performing portfolio. It's on the top left. We have -- we are now below 3% of high risk component of the portfolio. This is very consistent. Justify why we do have 1.1% default rate on the top right, notwithstanding that this 1 of July of the year 2018 -- 2019, we are applying the new definition of default. We are among the very few that are already applying the new definition of default. And altogether, it's 1.1% or would be slightly below 1%, excluding the new definition of default, just to allow you to compare with previous statistics.

So it's important to know because this was driven -- it was not for free, such a low impact. It was applying additional discipline in the network, but I must say that the network has very well applied this discipline and customers have collaborated. And altogether, this had allow us to have a quite significant, good result of that. Also, in absolute terms, on the bottom, you can see that we are below the level of 2007 in absolute terms of gross inflows from performing.

Please keep in mind that this is a gross net inflows from performing, on the bottom right, have been EUR 378 million. So this helps a lot to go to the next page, Page 13, where we analyze what have we reached in terms of gross NPEs and total gross loans.

Don't forget that the total gross loans have been significantly reducing. So this does not completely compare the -- this percentages because you have to keep in mind also that the baseline of the gross had been significantly reducing, making much more difficult to reduce the percentage. But notwithstanding this, today, we are 7.8%. 7.8% that was achieved without extending any type of platform. Our 450 people are doing an excellent job, and I'm going to elaborate on that on the next page.

If we do a pro forma, including the -- what we consider to be the last, and please keep -- hear what I'm saying, the last, this massive disposal, will be this SME is going to be in the area of EUR 800 million and a significant part of the effect of the economic asset that has been already posted in the 2019 results. This means that we're going to reach pro forma already below EUR 7 billion in the gross NPE. You can understand how important is this before launching the new industrial plan. So keep in mind this when we're going to present this next [Monday].

On the -- in general terms, as I was saying, gross NPE went down. I'm on Page 14. And now you will understand why I'm so happy with our [18] in recovery. Yes, we said that we were not going to keep as the main strategy the disposal, but you may say, we have already disposed a lot in 2019. True, but please have a look at this breakdown on the top of Page 14.

The total disposal of gross NPE was among GACS and others factored and leasing, UTP, altogether, was making EUR 1.8 billion. The internal management, even with this massive disposal, which were exceptional for its size, were not the majority. The majority was still internal work, internal management, which was EUR 2 billion. But please keep an eye also at the work on the bottom -- that is represented on the bottom of the page.

Back to performing in year 2019 was 3.9%, it was 3% in 2018 and it was below 3% in the previous years. So very good job in managing UTP and bringing back to performing on a (inaudible) rate. This was also coming together with a lower cash recovery. But altogether, it was an 11.7% in percentage -- in percentages, which was very good performance altogether.

Put together that with the recovery rate bad loans of 6.5% and which compares with the 5.2% of the previous year, and this, in my opinion, explain why I'm congratulating with the management regarding how this was managed.

Since the massive disposal, where almost only bad loans, you would have expected a decrease in the coverage if decreases regarding the coverage was appropriate. But happy enough, lucky enough, this was not happening. The level of coverage is still remaining the same, notwithstanding this important disposal.

What is good is that at level of Texas ratio, we went from 85% in 2018 to 56% in 2019. Was a huge sacrifice in cost of risk, you judge, it was 87 basis points, 15 above the previous year, but this was including all these disposals.

So I think it was a very reasonable sacrifice since it was also including the -- as I said before, a significant component of the SME disposal in previous year. This means that we are expecting a significantly lower cost of risk in 2020 because, as I said before, we work on corporate, we work on retail, and now we're working on SME. And from now on, we think that the pace that we've been delivering in the previous years with internal management is now sufficient to go where the guidelines to be a European bank in terms of some leverage and gross NPE is set as a goal, but we will elaborate, again, a week from now.

Second doubt of the market was since they are going to decrease so aggressive with the NPEs. Apart from coverage, (inaudible) good sacrifice in terms of common equity, is it going to be necessarily a cost -- an increase in capital? Actually, the capital in terms of the ratio went up, and it went up by almost 100 basis points, 95 basis points to be precise, up to 12.29%.

In addition to that, the total capital went up by more than 200 basis points, and this is not including the AT1 that was issued in January. If we include the AT1, we're going to have something in the area of above 16.5%. And this is a total capital ratio that must be increased by 0.7% pro forma.

I would like also to comment the component of the -- at the right of the slide. If we add CET1, AT1, Tier 2 and senior nonpreferred, it means that we have a buffer of 19.1% that protects the senior non -- preferred bonds. This means that investors in our debt are, if for may say, quite protected by all the buffers that we've been issuing during this year.

You have the detail of what we'll be issuing on Page 17. I'm not going to elaborate too much, but I'm just asking you to have an eye on the top part of the exhibit on what is expiring in 2020, '21 and '22. There is nothing that is a worry. In absolute terms, it's a marginal expiry. So it was a good job also on the bond part -- on the debt part, sorry. And we have a huge degree of freedom of what to do in the next 2 years.

Additional compound risk for an Italian bank is, of course, by some investors consider it the Italian Govies component. We said that we were going to 50% of the total portfolio, I would say that we're almost there. You have the flow of the percentage from 17.7% ( sic ) [75.7%]; December '16 to 60% January '19; 51.1% December 2019. Also here, we have delivered work we promised. In terms of liquidity resources, the only thing I can say, on Page 19 is that in total, we have almost EUR 36 billion and unencumbered of EUR 23.6 billion. So -- and also the composition of eligible assets is well diversified. So all together, again, I think, quite a solid situation.

Last but not least, the business outlook. The re-composition in the mix of core revenues will continue in 2020 in favor of the growth in net fee and commission income compared with net interest income. The strategy to safeguard commercial spread will continue, consistent with the dynamics of market competition. Attentive control over operating expenses will be maintained. Gross nonperforming exposures are expected to decrease, driven from 2020 onwards by internal workout. So again, we are not expecting any more massive disposal with the exception of the last thing we're going to finalize hopefully in the first half of the year.

And then as we began at the end of 2019 of an operation to dispose the nonperforming SME loans, amounted to approximated EUR 800 million gross, to be implemented by the end of 2020. As a result of the strong reduction in nonperforming exposures achieved mainly in 2019 and of the limited inflows from performing to NPE status, loan losses are expected to reduce significantly compared with 2019. Finally, net profit for 2020 is estimated higher than in 2019, which consequently increases the dividend at this market condition, of course. Thank you for your attention.

We are now ready to take all the 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 Ms. Azzurra Guelfi of Citi.

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

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There is no doubt on the (inaudible) in terms of asset quality and cost you're really focused. So my question will be mostly on revenue with less on revenue control, if you want, in a way. But when we look at fee income, there has been a strong momentum in those. Is it linked to be the factor that the Italian spread has come down and so there is a little bit more willingness to invest? Or do you have introduced new product? Have you done some repricing? If you can share a little bit on these, and what's your outlook for next year? Because I see that fee income is part of the rebalancing on the revenue.

When I look at the NII, this is a double question, NII and capital because the loan volume overall seems to be shrinking, which I assume, help your risk-weighted asset and help your capital generation. But in the longer term, this would affect your NII. I understand NII, it's all about margin, defending the margin and actually not suffering on that side, but what is the plan in the different components and how do you see the market evolving there over time?

And then a very quick one on the recovery rate. They've done well in 2019. Do you expect this to continue in 2020? Or they could slow down because part of the portfolio has changed?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [3]

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Thank you, Azzurra. First of all, fee income. Just an example of why I'm saying don't get too much in love with the performance fee. I was having a look at the new inflows on both asset management and insurance product in the fourth quarter of 2019 versus fourth quarter of 2018.

Well, surprise, surprise, there was an increase of 50%. Almost 50% higher new sales of insurance product and asset management. We have gained a significant market share. Everybody, and I understand, is focused on some market share give up in the lending component. But please have a look at how much market share we are getting on the asset on the worst part of the story. Worst part that it is not consuming capital.

On the risk-weighted assets in the NII -- connected with NII, have a look, Azzurra, at Page 30, it's in the annex of the presentation, and you will see that, yes, the risk-weighted assets have been decreasing, but not that much as maybe somebody could think. It was EUR 58.6 billion in September '19. In December '19, it was EUR 58 billion. So yes, but don't think that much.

On terms of fee-based gain, please keep in mind that we are helped by the fact that we have with us the factories. We have not sold the factories. We had the long-term strategy that is paying back now. It was a long-term strategy, but this is why now we are in a way harvesting, this is why the future is sustainable on that, but we will elaborate more on the -- in the presentation of the next year -- and excuse me, next week, industrial trend.

Back on the NII, as I was saying before, the commercial component is much more solid than somebody could think. We are not helped by additional increase of portfolio. So you may judge if this is more sustainable or less sustainable compared to other strategies. But something is for sure, we've not increased, significantly, the component of the portfolio.

What has been working on our NII has been an important decrease of the NPEs and which something was also coming from the UTP, but not that much, but something. So is it sustainable? We are sticking with the strategy, we're sticking with a certain spread. It disappear to be, in a way, allowing us to have one of the lowest decrease in the NII. We already commented that in previous meetings on previous quarter results.

For the moment, we have no reason from a quantitative point of view to change the strategy.

On the recovery rate, of course, is a percentage. I mean we have to keep in mind that these are percentages. So -- and the more we reduce the NPE, the more that is going to be difficult, of course, to recall (inaudible) also because the most digital part of the story is going away. And I would like as it's coming now into -- becoming evident to have more back to performing from the UTP than having a recovery of another type from the NPEs.

But I mean, what I -- we're going to present also next week. So we're using this -- in the day after the Oscar night, we're using a trailer for the next week industrial plan. Something also from an organizational point of view will come with the presentation next week. I hope I answered to all your questions, Azzurra, but I'm not sure.

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Operator [4]

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The next question is from Jean Neuez of Goldman Sachs.

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Jean-Francois Neuez, Goldman Sachs Group Inc., Research Division - Executive Director [5]

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I just wanted to ask 2 questions, please. The first one is, I wanted to come back on your Slide #4. On the Slide #4, it says that the normalized net profit is EUR 353 million, which is up and the best in a decade. This being said, this amounts to -- if you divide it by the end amount of tangible equity, round about 4%, 5% return on tangible equity. I know conditions are difficult and rates are low and cost of risk is still high.

This being said, to make your cost of capital, this needs doubling with the same balance sheet. So -- and the question I wanted to ask is, whether you believe that there is a possibility for a bank like UBI to make that cost of capital with -- on a stand-alone basis? Or do you need anything else or rates to go up? Or do you think it's possible to approach the cost of capital yourself?

And the second question is, obviously, linked to this is -- in the last few years, the tax rate for Italian banks has been extremely volatile. Your tax rate seems to be 25% this year. Can we have an idea of what you expect your tax rate to be over the next 2, 3 years, please?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [6]

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The second one is -- will be in the area of 30%, more or less, as normal tax rate. Regarding -- of course, this is the easy, very simple reaction, then will depend also on how much are we going to be able to use some DTAs that are not in this 30% answer. This 30% answer does not include DTA. Again, please come to the presentation next week.

Regarding the return on tangible equity, let me stress to you, I'm not going to answer now. We're going to answer next week on your question, but please keep in mind that the normalization is -- this result is normalized by accounting principle. Accounting principle do not allow to normalize the disposal -- domestic disposal costs.

So please keep in mind that there are some additional costs, special costs. They are not going to be repeated in the EUR 353 million. That are actually not showing the real return on tangible equity (inaudible) today is among us.

So please keep in mind that this is something that is -- or let's say, the starting point is not that 5%, but probably, it's a little bit more than 5% or a little bit in English phrases, not so little. Something is (inaudible) than that. So it's a better starting point as per (inaudible).

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Operator [7]

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The next question is from Mr. Antonio Reale of Morgan Stanley.

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Antonio Reale, Morgan Stanley, Research Division - Equity Analyst [8]

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I've got 2 questions, please. The first one on net interest margin. Then the second one on dividend, please.

So the first one, we're now a few quarters in since your strategy to defend margins. I heard your comments very clear. And looking at Slide 7, it seems like you were able to defend customer spreads in the quarter while performing loans were flat quarter-on-quarter, which in an industry context, you've actually been gaining share. So my question is, how is competition responding to your initiatives? What are you seeing from peers? And also, how much was the contribution from tiering in the quarter? And can we expect this to be stable, in 2020? And please, that's the first question.

The second one, about your comments on increasing distribution next year as you guide for a higher net profit, and I know it's something you've been doing for a number of years now. So well done to you and your team. My question is, how should we think or how do you think between cash dividends and share buybacks, given the discount is just a trade on?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [9]

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On the second one, regarding cash dividends, we have been always distributing cash dividends also in the -- at the peak of the crisis. I think we are, from what I know, among the top banks, the only one that can say has always distributed a cash dividend. So I don't think this is going to change.

And they -- never say never, but it's cash, cash, cash. We like our shareholders to be -- to have a degree of freedom to choose then to buy or not to buy a share.

(inaudible) is not from a tax point of view, but we are not paid for that. We're paid to, let's say, offer, in my opinion, a degree of freedom to all the shareholders to decide by themselves if they want to reinvest or not.

Regarding the NII, the tiering would be a plus EUR 3.5 million in the interbank part of the story. So let me say, it's not that big deal, if I may. If I understood your question, but I'm not completely sure. If this was the question, it's not that big.

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Antonio Reale, Morgan Stanley, Research Division - Equity Analyst [10]

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No -- I mean, yes, that's part of the question. But I was also keen to understand what you're seeing from competition? How is your competition responding to your...

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [11]

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No -- yes, you're right, excuse me. Look competition, we see different behaviors and (inaudible) quite volatile behaviors. I had already -- a few times, some of competitors saying that they wanted to go for a higher (inaudible) in pricing. I must also say that some of them started to do that. Not all of them stick for a long time. It's a question of being patient. It's a question of being -- in other -- I don't want to use the word brave, but solid enough to be consistent. It's not something that you can do for 1 month and then come back because, obviously, this makes only a -- quite a disordered market.

(inaudible) now there be read. I mean I think that the performance of NII are pretty different among different competitors, and the players have all the database to decide. I think that you may be irrational for a few quarters, so you have to be rational long term. And we are not among the worst, if I may, on the NII.

I mean then you guys love to stick to minus 0 point something. But if I may ask you to compare our performance -- compare to the others on a yearly base, I think, we are not among the worst performers.

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Operator [12]

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The next question is from Mr. Giovanni Razzoli of Equita.

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Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [13]

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I've got a couple of questions. The first one, in the past, we've been familiar with you into a negative impact from the recalibration of internal models parameter because of the macro. Now if the macro stabilizes or improve a little bit -- in Italy, it has not been that strong in terms of performance in the GDP, you may get some benefit in the future. Can you remind us what was the amount of this negative impact because of the procyclicality and a bit of the model parameter related to macro in the last couple of years? So that we can have an idea of what could be the upside if the situation does not worsen. And this is my first question.

The second question is on Slide #17. I don't want clearly to enter into the details of your business plan, but you have a quite significant amount of retail bonds expiring in the next couple of years or something like EUR 3 billion. Can you share with us what are your thoughts about in the future and medium- to long-term perspective, given the (foreign language) the several commitments that you have in terms of funding? What is the nature of the retail bonds for a large retail bank, like you guys? So that we can have an idea of whether your commercial strategy will be focused on replacing part of them or trying to convert them into better deposit as some of your largest competitors are trying to do.

And the very last question, sorry, to ask on NII in the Q4. Going forward, we still have to factor in something like EUR 25 million of full year cost of the AT1, plus the EUR 800 million of NPL disposal may cost you, I don't know, EUR 5 million to EUR 10 million, probably more, something in the range of EUR 5 million and EUR 9 million, if I benchmark to what you've done in 2019.

So on a pro forma basis, your NII should be something like EUR 30 million lower than the Q4. I was wondering what could be the counterbalancing action that you can implement to compensate this amount, assuming that my calculations are correct. And the last point, allow me to say you this, I completely share your point about the buyback and preference between buyback and dividends, as I think that investors the personal cash, in the end, is like cash in the pocket of the bank.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [14]

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Okay. On the models regarding the future trend, of course, the future trend will allow us to have in the (inaudible) some benefits, but this is something that always comes together with all the continuous iterative update and validation with the authorities. So allow me to say that it's not completely in our hands, for the good or for the bad, let me say, it's a correct, continuous interaction with the authorities.

Let's make an example. Nobody knew already from the beginning what would have been the impact of the new definition of default, and the new definition of default is going pretty well. This could help us in the future. But obviously, the first data is more conservative, more prudent.

So it's impossible to answer to that. But I can only say in general terms that definitely the new info, what we're doing in terms of stock reduction is, obviously, a good contributor. So we must be, in general terms, optimistic for the future, we cannot be precise on when is going to be significant. Definitely, the trend is going in the right direction.

On the NII, you're right. There is something that is going to add, but there is also something that is going to, let's say, help on the opposite side. As an example, retail bonds are cheap, but not free. Are we obliged to renew the retail bonds? (inaudible) retail bonds today is much lower than it was 1 year ago or 2 years ago, and this is not a must to be renewed at all. Also because in terms of liquidity, in terms of MREL, in terms of all these things, we are been in quite a comfort zone that allow us to be very strong on that.

Just to give you an idea of what I'm talking about, at the January 2019, the stock of loans that were issued was EUR 7 billion. At the end of 2019, we're already EUR 5 billion -- I'm sorry, less than EUR 5 billion. So EUR 2.4 billion of retail bonds gone. Just to use the same, (inaudible) it made (inaudible) 1% and midway above 1%. But this is just to make it easy statistic, I have more than the cost of AT1 going with the retail bonds that have been diminishing. So for the good or for the bad. So it's more complex than that. So we, obviously, again, managing, I hope, the balanced way also the effects and the profit and loss of our issuing, but there are different components.

And as you may see, we can easily find EUR 20 million of components to pay our AT1 and having, by the way, a much more strong, both capital and total capital.

I'm sure I forgot a piece of the answer. Could you remind me what I didn't...

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Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [15]

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No. I think you answer all the questions because, basically, there is one on the retail bond and one on the NII.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [16]

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Yes, yes -- but on the retail bonds, Giovanni, I did not elaborate enough. It's the degree of freedom. You were asking me if we're going to renew or not? It's really a degree of freedom. What is going to drive, of course, the new inflow of deposits? We are not looking for deposits. The deposit is coming to us, and of course, we cannot have both, deposits and retail bonds.

We are not applying -- as you know, we decided not to apply any negative rate into the deposit, and we've been trying to at least not have additional flows from corporate, which we need much less than the retail one, but it's coming.

So if they come in from 2019, probably the level of new issue of retail bond will not be significant. So it will be even more than (inaudible) that we fly away.

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Operator [17]

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The next question is from Christian Carrese of Intermonte.

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Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [18]

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Congratulations for the results. I have 3 questions. The first one on fees. Looking at the weight of assets under management compared to total funding, you increase -- going back to 2016, it increased by 5 percentage point the ratio. I was wondering, going into the new business plan, what you could define as a (inaudible) could be converted into assets under management?

The second question is on cost of risk. You define -- you gave a target for 2020 of the cost of risk significantly lower than 2019. If I look at the gross NPE ratio that you improved a lot and looking at internal workout, according to my estimate, you should close 2020 with a gross NPE ratio, assuming the same trend of this year, a near 6%. So I was wondering what do you think, how should we look at cost of risk for 2020, much lower of 2019?

And finally, on capital. If you can share with us any capital headwind for 2020 and without anticipating anything on the business plan. But on Bancassure, just Bancassure, just to understand if you decided to keep Bancassure to develop in-house, the Bancassurance, do you think there could be some important negative impact on capital?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [19]

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Okay. So we have -- on the first question, we still have, as I was saying before, more deposits, and we need more a nonmanaged (inaudible) under -- deposits under custody that have not been, let's say, using, in my opinion, the most effective way of protecting the setting. Of course, we don't have to forget that this is rather beneath (inaudible) regulations. It's nothing that we decide by our self. But I think the customers are realizing more and more that a deal forever is not necessarily the best strategy. So there is still something to be exploited. As I said before, the growth has been significant, but it's not where, in my opinion, should be. There's still room for additional development of the fees. Let's also -- do not also forget that all the insurance part of the story is not where it should be. It can be -- we are among the best. We -- if I'm not wrong, we are the fifth in terms of stock, like insurance, including everybody banks and insurers in the country, but still the level of penetration of life insurance is improvable in the country. What I can say regarding the strategy in insurance, we have a deadline. The deadline is the 30th of June. Until the 30th of June, all the possibilities are there. What I can say is that we consider possible everything. From a renewal with the current players to renewal with a third player with some -- and even some internal management. No decision has been taken, there is a lot of interaction, not ready to say something even next week. Next week the only thing I can say is that in the plan, you will see the most conservative one.

Then anything can happen to -- and I think that we will try and -- quite an interesting solution, but too early to talk about that. In terms of cost of risk, I cannot, obviously, say something in terms of detail. I can only say that with such an inflow that it's very well under control, and with stock at 1/3 lower and with a significant part of the disposal, which will be the last disposal already posted in 2019, it's impossible not to do much better than this year. But I'm sorry, I'm not going to make any precise number.

On capital, I think, again, the best answer can come next week. Next week, we're going to be more transparent because, yes, there are some headwinds, as usual, as every year, but we have also some tailwinds that you don't have in your radar today. My only advice is don't think about this for a week. We talk to -- next week, but there are not only headwinds. There are also tailwinds for capital. And we are not increasing it. We're not asking for new capital. We have something that is still not under your radar. This is a good trade isn't it?

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

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When you said in the plan, we'll see a much conservative way on the Bancassurance, also in terms of capital. So you will give...

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [21]

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We will -- of course, capital and revenues come together, and you know that perfectly well. So you have to put the 2 things together. But as per today, we -- you will see something that is going to be anyway conservative, believe me. Never took any risky position without being sure of what we were doing. So it's going to be consistent with our traditional approach, very sustainable.

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Operator [22]

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The next question is from Mr. Andrea Vercellone of Exane.

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Andrea Vercellone, Exane BNP Paribas, Research Division - European Banks Analyst [23]

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Two questions. The first one is also on update of PD and LGD series, sir. However, just refer to Q4, I just wanted to know whether there was any impact from factoring in H1 or last year? You usually do it in Q4, but last year was Q1.

So if it wasn't in Q -- I mean, this year was Q1, I think. If it was in Q4 if we should expect something for Q1?

And then the second question is on your real estate portfolio. We have seen 2 other Italian banks putting the portfolio at fair value and reporting pretty visible benefits on the capital side. So they revalue the assets. And there's an indirect benefit also on amortization another Italian bank did it a few years ago.

So I want -- just wanted to know, whether -- given that this seems to be a trend, whether you could do something similar? And if so, if you can share with us what the benefit on capital could be?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [24]

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Answer to the second, you will see next week. Answer to the first one, PD, LGD. This has been quite a strange year, Andrea, because we had some impact in March different from other years. And next year may be same, again, we don't know enough. It's in the hands of the ECB, but nothing that is not under control.

It's -- don't expect negative surprises. It's going to be completely under control. We -- but we don't have time of the impact under our own control. We have to wait for, again, an authorization that is coming sooner or later.

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Operator [25]

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The next question is from Adele Palama of UBS.

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

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One question for me on asset quality. In particular, on calendar provision, I was wondering if you have seen any impact from regulation. And linked to that, if you can share us -- some detail on the NPE portfolio in term of -- like the remaining NPE portfolio in term of secured, unsecured; the coverage of the secured, unsecured; and the aging of the portfolio?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [27]

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We had -- I mean, we had a lot of problems to really understand clearly what you were saying -- excuse me, my apologies. But can we go slowly to understand because it's not a very good sound coming from your microphone. So please, could you again restate? As per number one, provisioning regarding what?

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

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Yes, the calendar provisioning impact. You said estimated -- yes. You said estimated an impact from calendar provisioning, both on new flows and stock. And then linked to that, if you can share us -- with us some details on the NPE portfolio, the remaining NPE portfolio that you have, which is the percentage of secured and unsecured, the coverage and the aging of the portfolio.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [29]

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We have -- on the portfolio, you have on page -- I didn't stress that much during my presentation, but can we go back to Page 15 for a sec. And you will see on the comment on the top right of the slide, on Page 15, that 85% of gross NPEs and 92% of net NPEs are secured. So I think that if you weight this percentage with the level of the coverage, it tells you why, notwithstanding all the comments made during the years, there has not been such a crisis. It decreased by 30% of the portfolio.

And this is what is remaining. Don't forget that the first GACS against all the other strategies, we sold more unsecured than secured in the first GACS. Everything is becoming more consistent today, I think. On the calendar provisioning, again, we'll talk next week. I'm sorry, but there are a lot of questions that must be answered next week. But this is the way to have you, again, with us. Bloody advertisement.

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Operator [30]

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The next question is from Noemi Peruch of Mediobanca.

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Noemi Peruch, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst [31]

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I have a couple of questions from my side. First of all, on revenues. In Q4, you have increased your exposure to corporate bonds. And my question is buying more debt securities on the table to offset the NII impact from the disposal of NPEs?

And secondly, can you please disclose the size and the duration of your macro hedge portfolio? And again, on revenues, have you repriced fees on current accounts? And if so, how much will the impact in 2020? And lastly, on quality.

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [32]

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Hold a second, please. I'm sorry to interrupt you. I didn't get your third one, the last one, the last question you asked right now. Could you restate that, please? I didn't get it.

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Noemi Peruch, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst [33]

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Sure. So my third question is, whether you have repriced fees on current accounts in 2020? And how much do you think this will contribute to the fee income in 2020?

And finally, my last question is on asset quality. The cost of risk in 2019 partially considered higher provision related to the sale of the EUR 800 million NPLs. So how large do you expect top up in coverage will be in 2020?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [34]

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I'll start from the last one. The last one, we've been saying that our coverage was including considering the mix of the secure and unsecured quite consistent with what it should have been.

We are -- now with subsidiaries half of what was the picture, the coverage more or less the same. We've been going through many different (inaudible) ECB inspections. The coverage is still there. I don't know what else to add.

But please consider that we are there and it's half. How do we justify the first half? I think it's a question that is appropriate to the market. Are you happy with the first half? It's done. It's not an issue anymore.

On the current accounts. Yes, we will have some additional maneuvering in the next year. We're not going to quantify, but yes, we have.

On the last one, in terms of the duration and in terms of the macro hedge, we have a nominal duration of 7 and the real duration of 1. So you understand why, how -- with what we've done to the portfolio. It makes it only almost 1 year duration of portfolio, thanks to the macro hedge. 1 point -- excuse me, I read it 1.9, to be precise, duration of the portfolio. From 7 to 1.9. This is exactly how we are macro hedging.

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Noemi Peruch, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst [35]

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And on the possibility to buy more corporate bonds as...

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [36]

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Oh yes. You're right, you're right, you're right. The strategy of the corporate bonds is a tactic. It's not a long term. What do I mean by that?

Having corporate bonds allow us to compensate some of the lending activity we're not doing because of the pricing. But if the pricing situation is going to improve in the market, it's a bit -- the quality of the corporate bonds we've been buying is top. It's -- they have the significant liquidity. It's very fast for us to drop the corporate bond and go back to increase the lending activity.

So it's a tactical -- if you want, it's a kind of tactical coverage of the lower penetration of the lending activity on the corporate -- yes, on the corporate customers.

Higher corporate customer lending, lower level of corporate bonds. That's more or less how we do compensate one or the other. It's not that we're lacking capital on that, it's just a question of compensating because of the pricing. We are very focused on having the appropriate markup.

Today, unfortunately, it's easier to have a higher markup, as a matter of fact, through the synthetic instrument of the corporate bond than on the -- what is today in the Italian market.

Is it irrational? I don't think it is, but it is what it is today, and this is the way we compensate. And (inaudible), if I read it. (inaudible)

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Operator [37]

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We have a follow-up question from Andrea Vercellone of Exane.

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Andrea Vercellone, Exane BNP Paribas, Research Division - European Banks Analyst [38]

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One follow-up question on administrative expenses. You outsourced a few activities in Q4 if I'm not mistaken. I was just wondering, whether the trend -- but only of administrative expenses, not of total costs, should we expect this to trend down next year or not because of this?

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [39]

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Well it's -- Yes, we've done some of this. But Andrea, this is not going -- it's an interesting small experiment, but don't think -- it's not relevant at all. There is a reasonable -- it's not going to make a clear change among the personnel expenses versus the administrative expenses. It's not a big deal. Don't get in love with that.

It was an experiment in a way. We see this year how it works, but it's small. It's not big.

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Operator [40]

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(Operator Instructions)

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Victor Massiah, Unione di Banche Italiane S.p.A. - CEO, GM & Director [41]

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Thank you, everybody, to be attending. And for the last time, I'm inviting you, again, for next week in [CET1] presentation. Thank you all.

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Operator [42]

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