Banco BPM SpA

MIL:BAMI

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM First Quarter 2022 Group Results Conference Call.

[Operator Instructions] At this time, I would like to turn the conference over to Mr. Roberto Peronaglio, IR Manager of Banco BPM. Please go ahead, sir.

[Roberto Peronaglio, executive]

Thank you very much. Thank you, everybody, for the attendance for this first call of 2022. Before leaving the floor to Mr. Castagna, let me remind, as usual that you can find all the materials on our website on the Investor Relations page. The session Q&A is reserved only for financial analysts. And let me ask you to be so kind to limit on 2 questions for each analyst to leave room to the other analysts to make the question.

So now I leave the field to Mr. Castagna.

[Giuseppe Castagna, executive]

Thank you, Roberto. Good evening, everybody. Happy to be with you to present a very solid strong set of results for Q1 2022. Very strong profitability, at record level, basically in any phase of the profitability, before tax, after tax net profit, coupled with the sound capital position. Still improving our asset quality through EUR 700 million sales transaction.

Let's go through some main figure representing all these different targets we have been able to reach already in Q1 '22. Revenues are up 9% Q-on-Q. Cost are flat. Cost-income ratio at a very good level of 52.7%, BPI plus 21%. And the profit before tax from continuing operations to almost EUR 400 million with net income of EUR 178 million.

This is going together with a solid growth in volumes, both in core performing loans, up almost 2%, 1.9% Q-on-Q. New lending up to 15%, investment placement up to 14% Q-on-Q. Further improvement, as I mentioned before, in asset quality, through a new transaction, a new disposal of almost EUR 700 million, which will be -- which has already been signed, but which will be concluded during Q2. We will reach EUR 5.6 billion of total NPE with a reduction of 12% Q-on-Q and more than EUR 3 billion compared with the Q1 '21.

Gross NPE ratio is finally below 5% at 4.9% and 3.8% following EBA definition. A very good default rate in Q1 at 0.8%, allowed us to have a cost of risk at 54 basis points. Common equity Tier 1 at 13.1%, MDA buffer at 462 basis point with a very good LCR figure and as well as NSFR. All in all, as I was mentioning before, a strong sector results, which put us with a very sound position to follow the strategic plan target, which are well on track.

Let's go on Page 7, looking at some figure compared with Q1 '21 and Q4 '21. Total revenues were up 9% Q-on-Q and 5% on Q1 '21. Operating costs flat with the last quarter '21, minus 3% year-on-year. Pre-provision income EUR 561 million, plus 21% Q-on-Q and 16% year-on-year. Cost of risk, as I mentioned before, 54 basis points compared with 78 and 79 in the 2 quarters we are comparing these results with a final net income of EUR 178 million, almost 80% more both of Q4 and Q1 '21.

Cost income already at the level of business plan '24 target as well as cost of risk following the direction towards the '24 target, which is 48 basis points.

On Page 8, some figure representing the solid commercial performance, which also in this case, is very close to the target that we have for the '24 strategic plan. New lending is up to EUR 6.7 billion, almost EUR 1 billion more than the quarterly average of 2021. Assets under management, although slowed by the economic situation, which is, for sure, not so booming like last year, is still in the same average as 2021 quarterly result at EUR 4.5 billion. Let's remind that the target for 2024 is EUR 4.9 billion per quarter.

Core performance -- performing loans -- customer loans up 2.1% year-on-year to EUR 101 billion with 18% of that guaranteed by the state through a different measure we have had the opportunity to granting loans in the last couple of years.

Direct customer funding still growing at EUR 107 billion, up 5% year-on-year, which, of course, give us, again, the room, the ammunition in order to foster further growth in asset under management.

Some update about the progress we are pursuing in digital-driven distribution model. We have been able to reach 85% of remote-based transaction on total transaction -- and more important that we have now in Q1 '22 more transaction app-based rather than the transaction executed directly into the branch.

As you can see from the graphics, in Q1 '19, we had 9.6 million of transaction in the branch versus 2 million with adoption of the app. And now we are 5.5 million in the branch, 6.6 million with app. So this shows that our improvement both in the future, in the quality of our app is incentivating our clients to adopt even more a digital and remote approach, allowing us to pursuing the branch rationalization we have already done in a very strong way during the last year.

Some few updates. We have launched a complete digital -- fully digital customer journey for SME smart lending. The PILOT target 3,000 SME, and we have already had 500 loans with EUR 15 million volumes in the first weeks as well as we received a price of innovation for our SME app in the financial service arena, in which we were able, in a few months to enroll already 30,000 SMEs with 900,000 login since November 2021 when we launched the SME app.

Also the Digital Identities developing very fast. We have now reached 500,000 clients enrolled on Digital Identity, which is the -- basically represent the possibility to transform the bank in a completely paperless bank for all the activity.

In asset quality, we already said in -- for the full year presentation that we were targeting EUR 1 billion of disposal, we have been able, thanks to the low cost of risk to foster even more our provisioning and increasing of a couple hundred billion -- a couple of hundred million, sorry, our total target of disposal for 2022, which we will confirm will be executed by a H1 '22 higher than the total EUR 1 billion we announced. All in all, we reduced from EUR 8.7 billion the GBV of NPE to EUR 5.6 billion, of which EUR 1.9 billion bad loans and EUR 3.7 billion UTP. This, of course, a figure post Argo transaction.

As you can see, we have already reached the target of EUR 6 billion, which was the target of our strategic plan. Also in terms of NPE ratio, we are down to 4.9%, 3.8% we did by definition with only 0.8% net NPE ratio for bad loans.

Some quick note on the Project Argo, the disposal was almost EUR 700 million for a total of 400 position, half bad loans and half UTP, mainly corporate loans with a very high vintage, much higher than the average of our vintage portfolio for 70% of which were secured with vintage higher than 7-year and 30% unsecured with a vintage higher than 5 years. The binding offer were received and accepted at the end of April, the closing is expected by H1 '22 results presentation.

The positive impacts, of course, are the reduction of gross NPE ratio to 4.9%, and also the reduction of the average vintage of the remaining portfolio to counterbalance the impact of calendar provisioning to the end of the year.

Page 11, the liquidity and funding position. We have already said, a very sound LCR and NSFR ratio. Let me also add that we have now a liquidity higher than EUR 44 billion and that we have done in the first quarter the transaction that we needed in order to fill the remaining buffer needed for Tier 2 and AT1 to cover the whole amount of common equity. In this respect, we have now reached the transaction where the EUR 400 million in January '22, EUR 300 million in April for AT1. And we don't have to perform any other by 2024.

Let me add also that we also were able to issue the first green bond of EUR 750 million is a covered bond under the new ESG bond framework. You will find other ESG upgrade that we were able to receive at Page 41.

We are also very proud to announce that in the last weeks, we had received from Fitch an investment-grade rating BBB minus, which has been, for us, very good if you consider than we were last time that we were rated from Fitch, we were BB minus. We still have an investment grade from DBRS, and we are having the new rating also from Moody's, but still we haven't yet received.

On Page 12, you have some update about the bancassurance situation. As you know, bancassurance has been described in our strategic plan as one of the pillar for our growth and the base was the internalization and the acquisition, 100% of the existing bancassurance JV. This will be -- the plan was to be executed by 2023 with the full effect in 2024. We anticipate the decision to internalize one of the 2 joint venture in 2022. We have already exercised the call option, and we will be able to execute by July, the 100% deal in order to start with this part of our bancassurance, the process of internalization.

You can also be aware that we have, in the meantime, received some reverse inquiry, some expression of interest from many strong insurance company in order to propose a new joint venture with us. We have decided to evaluate this proposal just to be more flexible and more -- to have a major understanding of the effect of this potential transaction, which, of course, will be confronted with our -- compared with our internalization under the financial point of view, a strategic point of view and an operational point of view. And we will be able, of course, in due time to update you about the potential progress.

Let's go to the figures of this Q1. On Page 14, as you can see, we have good results, but -- increasing results both in net interest income at EUR 512 million against EUR 506 million in Q4 and EUR 497 million in Q1 '21. Net fees and commission EUR 480 million, higher than Q1 '21, lower to EUR 406 million of Q4 '21. All in all, considering that in Q4, we had a one-off from one of our product factory, AGOS, so EUR 42 million. As you can remember, we are -- basically, we had Q-on-Q 0.4% results and year-on-year plus 3.1%.

Also, net financial results was very sound at EUR 128 million, which brings total revenues to EUR 1,186 million, which is 9% higher Q-on-Q and 5% compared with Q1 '21. Pre-provision income after operating cost, which were the same level of Q4 '21 and almost EUR 20 million better than Q1 '21 set pre provision income at EUR 561 million, which is EUR 100 million better in Q4 '21 and EUR 80 million better than Q1 '21.

Loan loss provision better than both the previous quarter brought us to the profit from continuing operation pretax of almost EUR 400 million, which is an increase of 54% compared to Q1 '21, 200% compared to the last quarter '21. After taxes and system charge and others, we reached EUR 178 million compared to EUR 100 million both for Q1 and Q4 '21.

Going through some of this figure, I think it's interesting to notice that net interest income was able in Q1 to be better of both the previous quarter. Particularly, it's important that we were able to do a better results of Q4 '21, notwithstanding EUR 11 million missing from the 2 days contribution characterizing the Q1 versus Q4 '21. This is boosted by a solid commercial banking activity and also from a bond portfolio contribution, which could benefit from an increase of our Govies portfolio.

There is also a slight increase from -- a slight increase from TLTRO interest of EUR 1.7 million and a negative NPE contribution vis-a-vis Q-on-Q of EUR 2.3 million. On the commercial spread, we have customer spread increasing 2 basis points, thanks to the liability spread following the bettering of the Euribor and the asset spread only paying 2 basis points due, of course, to the fixed rate part of our loans, which were lower than Q4 '21. All in all, a bettering of 2 basis points. Let's only say that the EURIBOR average at the end of March was 54 negative basis point, nowadays is 44 negative basis points. So there is still a further improvement to be benefiting our commercial spread in the next quarter.

Our sensitivity is still very strong. It's about EUR 450 million with a 100 basis point parallel shift and EUR 150 million on 40 basis point parallel shift.

On Page 16, fees and commission, a very sound progression despite the worsening in macro. Of course, the impact on our management and advisory activity has been impacted by the geopolitical situation. As I mentioned before, we were able to sell investment products for EUR 4.5 billion versus EUR 5.4 billion of Q1 '21, notwithstanding that the fees and commission coming from the management and advisory business is the same of Q1 '21 and 6% higher of Q4 '21. This is thanks to higher fees, running fees and only a small decrease, of course, in upfront fees. As you know, the higher percentage of our fee income comes from the running fees.

Very good results also from commercial banking fees with an increase of almost 4% vis-a-vis first quarter '21, and there is a seasonal minus 7% of Q4 due to seasonality impact, especially on leverage finance transaction.

Let me remind that the contribution, again, of running fees is increasing quarter-by-quarter. And we also have better results vis-a-vis the second part of the year '21 also for upfront fees, of course, not related to the Q1 '21 in which we had a record results in upfront fees. All in all, we have the same results of last year.

Operating costs remain on the level of Q4 '21, 3% better than Q1 '21, mainly due to the same figure for -- as for general expenses. Meanwhile, we have a 4% reduction year-on-year on cost of personnel due to the early retirement scheme that we posted a couple of years ago, which is going to benefit the profit and loss, especially in 2022.

The number of people which are now in the bank is 20,360, Still, we have almost 300 people leaving the bank. In the meantime, we have hired 500 people. And by 2023, we will have other 300 people coming on board.

Going back to the cost of risk reduction, almost 30% vis-a-vis last year. We already say that 54 basis points were the results, also a small increase in disposal forecast for Q2. But we feel that we are now at a level in which we can easily reach the 2024 target without the core cost of risk, even though, of course, for this year, we have some prudent approach due to the geopolitical situation, which, in any case, we is not going to damage our forecast, which were done at the end of the last year, taking in mind the potential negative effect of the moratoria expiring in Q1 '22, which at the opposite didn't have any material effect in terms of increasing materially the default -- the global default rate of the bank, which is set at 0.8%. The same we can say for the danger rate, which is 10%. Both this figure below or in line with the 2024 target, as well as the workout rate, which is 21% at the same level we have in 2024 target. All these 3 index are much better than our forecast for 2022.

Let me say also that we are doing the same exercise we were doing for moratoria in terms of early engagement campaign toward the clients as posted to energy cost increase and raw material cost increase. We are targeting thousands of clients for which we are already having a strict staging classification and to which we will, of course, propose the remedial action, which will be allowed by the intervention of the government, which during this day allow the bank to make support measures, both in terms of offsetting partially the cost of energy and to sustain counterparty, which are materially affected by the geopolitical situation.

Just on a final note, let me say that we have -- we confirm to have a very negligible exposure to the geopolitical situation in Russia and Ukraine. We have already classified Stage 2, all the direct exposure and, as I was saying before, basically also a part of indirect exposure through the stage classification for a company exposed to energy and raw material increase. We don't have any bond or other financial instruments linked to that geographical area.

Let me also remind that out of EUR 16 million of moratoria considered and despite nowadays by the bank, we have had on the 2 years of the moratoria a default rate of only 1.8%, which is, of course, higher than the normal default rate, but very much lower or whatever forecast we had done in the past.

Going back to the stock of NPE. Again, we have a reduction of 36% year-on-year, 12% quarter-on-quarter after Argo with the share of bad loans, which is going to decrease from 41% to 34%. And as far as coverage ratios are concerned, we are still increasing our coverage in order to foster the Argo transaction up to 62% before write-off, 70% with write-off as far as bad loans are concerned, with UTP at 44% and past due at 26%. We have still a share of secured bad loans at 2/3 of our stock of bad loans.

On Page 20, some update about the -- our debt securities portfolio. We have completely switched since the merger, the composition of our Govies portfolio from 99% of Italian Govies when we started the merger, we are now at 49% of Italian Govies, 78.6%, of which are concentrated in the portfolio classified to amortizing cost. So that means that the impact that we had on FVOCI portfolio on the reserves of FVOCI portfolio, which we have, of course, made into our capital walk to this quarter are 99% represented by non-Italian Govies. This means that, of course, the bank is still exposed to interest rate but not to hit the Italian spread.

Let me also say that the EUR 236 million negative performance of the FVOCI non-Italian Govies is very well counterbalanced by a hedging strategy, which allowed us to bring almost EUR 100 million in our profit and loss under net financial results.

Going to the capital position on Page 21. We passed from 12.7% 1 year ago to 13.4% of end of 2021 through the performance of this year, the provisioning of dividends and 81 coupons. Let me remind that we are calculating dividends and with 50% of payout, the RWA dynamics linked to the increase of our loans portfolio and the effect of the FVOCI service. We are now down to 13.1% of common equity Tier 1 with a 14% phased-in.

None of this effect affected Tier 1 ratio and total capital ratio because, as I explained before, of the filling buckets of Tier 1 and Tier 2 with the EUR 400 million Tier 2 issue in January and the EUR 300.81 million issue in April '22, which brought the MDA buffer to a very slight reduction vis-a-vis December '21 for 470 basis points to 462 basis points compared to EUR 377 million in March.

So all in all, let me say that we think that we can be confident of the results we have reached. We are confident that we can pursue the road towards the full accomplishment of the 2024 target as well as we are sure that with these results in a normal environment like the one we are experiencing right now. So with a complex situation we are living in, we can still say that we can beat 2021 net results and having a solid strong growth towards the results of the strategic plan that you already know for 2023 and 2024.

The main potential positive impact to the next quarters will come from the potential increase of NII due to the interest rate increase. As I mentioned before, we have plenty of potential increase due to our situation, but also to the possibility to have an opportunity from the TLTRO, which we announced would have been reimbursed for EUR 19 million in June this year due to the lower price, the lowering from the extra price of 50 basis points, we are examining the opportunity coming from the different level of pricing of TLTRO and the opportunity to still grow the full amount, thanks to potential investment with no risk but better yield. So we feel that there is room also to improve the good results we have done on under NII results.

As far as the asset quality, as I mentioned before, we have still some opportunity to increase in the second quarter, the reduction of NPE ratio and total NPE. We are pursuing other transactions in order to set our target even below what we have already reached. And of course, we are very confident also of our workout activity, which is above 20%.

I would stop here. Thank you for your attention. Of course, we are ready to answer to your question.

[Operator]

[Operator Instructions] The first question is from Antonio Reale of Morgan Stanley.

[Antonio Reale, analyst]

It's Antonio from Morgan Stanley. 3 questions for me, please. One on NII, another one on strategy and your views on Bancassurance. And lastly, a clarification on cost of risk, please.

So the first one on NII, I see in the quarter, NII was positively affected by higher contribution from the government bond portfolio. What contribution would you expect from carry trade to NII this year? I see on Slide 20 that you've increased your sovereign book in the quarter. So if you could sort of elaborate a little bit more on what should we expect from carry trade going forward? That's my first question.

Second question, you've mentioned and you've highlighted on Slide 12, the internalization of your insurance operations, which is, as you put it in your words, a key pillar of your business plan. And I would say, would contribute to a big shift in the bank towards a capital-light model, which is clearly accretive to your ROE. So my question is, what would make you change your views to internalize the business -- if you can maybe share the pros and cons that I think will be extremely helpful. It seems like you would be price agnostic, especially with the Danish compromise, you would free very little capital unless I'm missing something, but you would lose quite a big part of your recurring earnings going forward. And you already see some quite a lot of capital anyway. So I just wonder if you could elaborate a little bit more your thinking there, that would be extremely helpful.

And my last question is really a clarification on cost of risk guidance for the year. We've discussed it before, you're 2 years ahead with respect to your NPE targets. Your default rate is early stage, but it's running at below budget. And I see you're talking about annualized cost of risk at 54 basis points in your outlook on Slide 22. I know there are many moving parts, but is this your -- are you feeling comfortable enough to make this your new guidance for cost of risk this year?

[Giuseppe Castagna, executive]

Thank you. Carry trade contribution. We start from the point and of course we will miss from July, 15 basis points from TLTRO, which we say is almost EUR 90 million in total. We feel step-by-step a bit more confident that through the Govies portfolio increase and through the action, we still do, again, leveraging on the potential carry trade that we have from the cost of funds from TLTRO, which, as you know, is not a fixed cost of fund, but it's an average cost of funds and the possibility to invest short term either in deposits, simply in deposits or in other, let's say, free risk opportunity.

We think that we can increase and possibly try to recover a good part of the missing contribution coming from NII. Of course, coming from TLTRO 50 basis point reduction. Of course, it's difficult to make a clear assumption about that because, of course, you know that rates are changing very quickly and still, we don't know exactly if the TLTRO will assume the same form that it is test right now. But for the time being, we think that with the current situation, we can have some very good carry trade contribution also from this aspect. So leverage both on the Govies at higher yield that we bought and we are still buying to replace the maturity. And with this arbitrage, we can possibly try to offset the negative side of TLTRO.

Let's also remember that, of course, through the trade sale that we had -- the forward sale that we had end of last year, of course, we have some strong amount of Govies going down during the year, which we will replace time by time.

Second question, bancassurance. We still feel that internalization is a good point. Of course, it's very generic to say, to speak about bancassurance. They are basically 2 completely different business, life and non-life. We are going to be week-by-week more in deep in the different aspect of this business. Of course, there are Danish Compromise advantage that you can capitalize more on life rather than on the non-life. So having been object of this interest from strong insurance company, we feel that it's only our interest to explore if there are strategic or financial or operational aspects that can try to beat the business internalization that we have under our business plan.

Let's wait and see. Of course, it's not something that we are obliged or forced to do. It is an option, and we feel that it is good for us to explore all the options.

Cost of risk, yes, we are very confident that -- last year we said 55 basis points was the core cost of risk. Of course, we reduced a lot also the NPE target from [ EUR 4.3 billion] . So we say that this year, we had only EUR 1 billion in our -- of disposal as our target.

The inflow rate -- the default rate and the inflow coming from performing is very low. So this allowed us to provision in something more in order to increase and to have -- to match all the opportunity that we feel in terms of single asset disposal. And if the situation continues this way, we can really be confident that the cost of risk will be at the level of the first quarter. Let's wait and see, because you know that the situation -- the geopolitical situation and the effect of the energy cost increase and raw material cost increase possibly can give some potential problem in the next quarter.

[Operator]

The next question is from Christian Carrese of Intermonte.

[Christian Carrese, analyst]

The first question is on the trend seen in the first quarter in terms of product placement and the attitude of customers. I saw that in March, the trend in fees was still quite good and also you placed a quite high level of products. So I was wondering if you see a sort of slowdown now -- it's now 2 months that they were started, or still this could be a trend confirmed in the coming quarters? And also the attitude of customers looking at government bond is now the BTP, the 10-year BTP is almost at 3%. So customers started to look at Govies again rather than buying asset management products.

The second question is on cost of risk. It's quite low, very low. The default rate has further improved. It's clear the guidance you just gave on 55 basis points is underlying the cost of risk. I was wondering why such a good trend, not just for you but for the sector? What do you think, it's a matter of origination, better origination in the last few years, government support to corporates? I don't know if you can give some color on that.

And finally, on Bancassurance, I understand your thinking about the internalization rather than disposal. In case of internalization, there is a phase-in in terms of capital impact phase in compared to fully phased. I mean there could be a negative impact of more than 30 basis points when you buy Govies minorities? And then after having both the Vera Assicurazioni stake, you will have a release, thanks to the Danish Compromise, if you can elaborate a little bit on that.

[Giuseppe Castagna, executive]

Thank you, Mr. Carrese. Basically, April was so good as March because if you consider that April is only 19 working days versus 23 working days of March, you can see that EUR 1.4 billion compared to EUR 1.6 billion is an average of EUR 50 million per day, and we do almost EUR 65 million to EUR 70 million per day. So basically, April is even better.

May started even better than that because we have an average of more than EUR 70 million in the first week of May. So basically, I don't hear too much the level of investment in product placement also because our target -- our plan is not based on a strong increase of investment product placement. They only have to reach in 3 years EUR 4.9 billion rather than from the conversion of deposits into assets under management. This, of course, has been slowed down because of the prudent approach of our client during this first month, especially from February from the Ukrainian crisis. But we still feel that there are many products and of course, with the right products, let's -- again, thanks to the bancassurance life products that can be offered to clients in a moment in which inflection is such a peak, and we have to try to defend our clients to leave money on current accounts and basically having the negative effect of inflection versus 0 interest rate in our current account.

So still, we feel that there will be a good attitude from our clients. And again, we are also increasing our deposit base so that this is also going to foster possibly this situation. Let's remind that, of course, we are very much under the question mark of the evolution of the geopolitical situation. And of course, if this will be stopping somewhere, there could be some stronger recovery also on this aspect.

Cost of risk, why is so low? Basically, we think we have a good prudent approach. So it's low, but it's not so low vis-a-vis other competitors. Still, we have a very prudent default rate in our forecast, which up to now did not materialize. It's almost half of the current default rate is half of the forecast that we put in our budget. So we have a lot of room to be prudent, should the situation deteriorate or to be very fortunate to have a low cost of risk and fostering net profitability.

[Christian Carrese, analyst]

Could you remind us -- maybe in the presentation I missed -- the overlays you have, if you released some overlays in this quarter? And also on bancassurance, interest rates going up, this means because in the business plan, you made basically, if I remember properly, minus 15 basis points Euribor in 2024. So interest rates going up faster should help you to make more money on bancassurance. Is it correct?

[Giuseppe Castagna, executive]

Overlay in cost of risk, of course, we still have what we had with the moratoria scenario. So we were provisioning also on the performing loans and on Stage 2, a good amount of provisioning, which, of course, we are not moving because of the geopolitical situation. It's an amount of around EUR 40 million to EUR 50 million.

In terms of NII scenario, as you remember, we have only in '24 Euribor movement towards 0. Meanwhile, in 2022 and 2023, we don't have any embedded positive effect. So whatever comes is on top of our forecast.

[Christian Carrese, analyst]

I was wondering on bancassurance rather than NII, interest rates up should help you to make more money or not on life insurance?

[Giuseppe Castagna, executive]

No, it will depend. Of course, it's a question also capital, not only of different tools that we have in bancassurance. Normally, if you refer to [indiscernible], of course, a recovery in interest rates should help and could foster again recover in this kind of product. But during this last year with lower negative interest rate, we were also able to switch from [indiscernible], which are also more interesting, both for banks and clients.

[Christian Carrese, analyst]

And on the phase-in of the capital impact from bancassurance, Danish Compromise?

[Giuseppe Castagna, executive]

Yes, you're right. The phase-in is almost 30 basis points, which then we then should -- for the first part, of course, for this, let's say, for the BPM EBITDA for the Govies joint venture, then became positive 5 basis points with the Danish Compromise. Meanwhile, we feel that another advantage to start the application for Danish Compromise at this stage with the incorporation, the first joint venture will give us also the opportunity not to wait too much to get the total Danish Compromise also in time to incorporate Vera.

[Operator]

The next question is from Noemi Peruch of Mediobanca.

[Noemi Peruch, analyst]

The first one is on Govies. So you bought EUR 4 billion of Govies in the quarter, that compares to EUR 9 billion of disposals in the last 6 months of 2021. Do you plan to replenish your portfolio in the coming quarters? And can you give us an update of the common equity sensitivity to 100 bps of higher sovereign yields?

And I have a follow-up on cost of risk. So given the change in the macro environment, do you expect to update your IFRS 9 assumption in Q2? And did I understand it correctly that if so, you would not offset it by releasing some COVID overlays?

[Giuseppe Castagna, executive]

Let me be more precise about disposal and what we have already done. I think we have done forward disposal for almost EUR 9 billion. The total concluded the maturity of this year will be EUR 12 billion, and we have bought a bit more than half this amount up to now.

Sorry, for the sensitivity, I cannot give an answer because -- sorry, EUR 7 billion, EUR 7.5 billion out of EUR 12 billion. Sorry, for the sensitivity, I'm not in a position to give you a right figure, but I think you can recover a quite fair amount if you consider the loss that we have in Q1 vis-a-vis the option contribution in terms of positive NFR. Also, you have the basis points. So I think it's easy to have the sensitivity for what we have done. Of course, it's a sort of work in progress, and it's difficult right now to give how much could be the effect because it's a moving portfolio.

The third question is some -- please reference -- again, we had I think further EUR 30 million to EUR 30 million, I think, in Q1 linked to IFRS 9 for the further disposal. Of course, the one that we already provisioned in Q4 were related to the Argo disposal.

[Noemi Peruch, analyst]

So I am referring to the IFRS 9 macro assumption on the entire portfolio given the macro environment and GDP downgrades that we are currently seeing.

[Giuseppe Castagna, executive]

As I mentioned before, we had a scenario with the moratoria, which, of course, made some provision under IFRS 9. Now we have updated the scenario to the geopolitical situation without releasing any of the IFRS 9.

[Operator]

The next question is from Giovanni Razzoli of Deutsche Bank.

[Giovanni Razzoli, analyst]

I have a clarification and a question on the outlook. The clarification is on the bancassurance. You are starting an evaluation process for the business. But shall we take for granted that you would go for a JV? Or is that just an option that you can activate or not?

And the second question is on the outlook for 2022. Well, first of all, I was wondering whether -- I mean there are still several moving parts on the NII, higher rates, lower TLTRO benefit, increased contribution from Govies. I was wondering whether the run rate of the Q1 that was very, very brilliant, can we consider it sustainable for the next couple of quarters when excluding then the EUR 90 million of contribution from the TLTRO?

And more broadly, I'm looking to the guidance that you are giving us, and thank you for that. For the net income in 2022 where you see growth in the net income vis-a-vis the 2021 that was something like EUR 550 million, EUR 560 million, consensus is for a decrease in the net income.

If I look at Bloomberg, it is EUR 525 million. But if I pencil down the cost of risk guidance of 55 basis points for the full year and you do assume some volatility on the revenue here and there, you would see approaching the 2023 net income target of EUR 700-plus million. So what I'm missing here?

[Giuseppe Castagna, executive]

Thank you, Mr. Razzoli. You are very optimistic about the scenario. We cannot be able to be so optimistic as you are. But we are very confident in what you said. So of course, the option to increase the profitability are there, and the first quarter shows that we have a big capability and still some ammunition if you think to NII, for instance, not so much in relation to last year results, of course, or this quarter results, which was affected by the full impact of TLTRO, but from the possibility to offset the 50 basis points of extra premium with some managerial action and the Govies portfolio. So for sure, we are trying to recover the potential losses that we have from the TLTRO. For sure, also the Euribor is going to give an end to still have some good ammunition in order to increase the NII as well as in terms of cost of risk, with the current default rate, we would be able to do much better. But we cannot bet on the current default rate because that situation and the forecast are not that normal as usual, I would say. So good for us that we have been not yet hit by any situation, good for us that we are lowering our stock, which, of course, is a cost in itself. So we are reducing the cost of risk related to stock. We -- so until we will have lower default rates, we will be able to have a very solid cost of risk, question mark the geopolitical situation.

Sorry, bancassurance, I didn't answer because I think it's quite clear what I said. The focus for us is internalization. We have been solicited by many important insurance company willing to propose potential extraordinary transaction. We will see what they propose and we will judge if they will be better than a stand-alone proposition. But until we don't see, it's difficult to give you an answer because we are still working on the internalization.

[Operator]

The next question is from Adele Palama of UBS.

[Adele Palama, analyst]

I have a question on the capital. If you can remind us the headroom and value that you're expecting for '22 and '23? And then, I mean, I know you talked about the 30 basis points or plus 5 basis points for Covea on the impact on capital without Danish Compromise. But can you remind us which is the expected total impact from the buyback of -- I mean, including also the joint venture with Cattolica. And then can you tell us the coverage that you currently have on your Russia exposure of the -- EUR 108 million?

And then the last question is on the held to collect portfolio on like the government bonds. Can you tell us the average yield of that portfolio, the majority? And I was wondering if you have any flexibility to dispose part of that portfolio every year. If you have an internal limit that you need to comply or regulatory limit that you need to comply?

[Giuseppe Castagna, executive]

Lot of question. I will try to give you some answer. Otherwise, of course, we can then do a more precise job with our investor relator people. Let's say that you are right, as I mentioned, 30 basis points would be the impact from Covea. But as I mentioned before, it's just a phase-in impact because at the end of the Danish Compromise will be a tailwind rather than a headwind.

The savings is going with Vera because being the potential acquisition forecast to be executed in the second half of 2023, we could be also in the position to already have the Danish Compromise if we start July this year with the request for authorization.

Coverage of Russian exposure is basically the Stage 2 coverage. As we said, we have only EUR 80 million of exposure with Gazprom. So Stage 2 is well enough in our opinion to cover this risk and EUR 44 million of lateral credit, of which the vast majority, not yet utilized. So putting in stage 2, we think that the coverage will be enough in order to cover the potential risk. All in all, it's EUR 140 million of exposure.

Frankly speaking, I'm not able. I think I'm waiting for some -help from my colleagues. I don't know if we have the average yield maturity on each of the different category of Govies. I think we can give you some information with our IR.

Headwind, 2022, 2023, we said I think that we had until 2024, some 10 points of headwind. Frankly speaking, now I don't remember, I think it would be more in 23 rather than in '22 and then nothing less until Basel IV with the beginning of 2025.

[Operator]

The next question is from Luigi Pedone of Equita.

[Luigi Pedone, analyst]

2 questions from my side. The first one is on inflation. I was wondering which is the effect of the rising inflation on your cost base? And the second one is regarding the NII and the sensitivity because BAMI is one of the banks with the highest sensitivity on NII from an increase in rates. But which is your expectation regarding lending volumes, commissions and cost of risk from such a sharp increase of rates?

[Giuseppe Castagna, executive]

On cost, we don't have a big expectation of inflation because we already have the contract for the workforce already concluded. So there are the normal -- I think it's almost 2% of increase already now embedded in our figure. Meanwhile, we, of course, are also exposed to some increase in cost of energy, but it's really not so material in terms of affecting the cost base. All in all, thanks to reduction of cost of work, the cost, we think, will be lower, of course, of last year.

The NII sensitivity, again, I mentioned the figure is 40 basis point is EUR 150 million and 100 basis points to EUR 45 million, to which we could also add some further 10 basis points if we have an active portfolio management on the exploiting the TLTRO opportunities leveraging on the lower cost of funds and the possibility to invest at higher cost. So this opportunity would even inflate a bit more the sensitivity to NII.

As far as the effect of our client up to now, of course, there was a sort of running towards lending, both in terms of mortgages and in terms of customer -- corporate loans because everybody fearing a further increase is very willing to fix the rate. So as you were seeing in our figures, we had a record of new loans granted this quarter. And still the situation is this way. Now we have to see also if the measure from the government recently a couple of days ago, announced will have the same effect of the moratoria and of the loans granted for the pandemia.

So still too early maybe to understand. For sure, there are a lot of loans that have to be refinanced and also some loans granted under the pandemia that has to be refinanced. So up to now, a good situation. But again, it's difficult to be -- to have a clear for regards to such complex geopolitical situation.

[Operator]

The next question is from Hugo Cruz of KBW.

[Hugo Cruz, analyst]

Sorry to insist on the M&A and the bancassurance. But just 2 questions there. On the bancassurance, do you have a deadline to finalize your review? Is it going to be just beginning of next year when you can exercise the remaining call options? Or will you give clarity to the market before them? And then I noticed that there has been some press speculation around the potential sale of the merchant acquiring business? If you could comment on that, it would be great.

[Giuseppe Castagna, executive]

Okay. For bancassurance, of course, to exercise the second call, we have the first half of 2023. So from January to June, we can exercise the goal in order to start and internalize the activity from July. We don't have any set maturity for the potential process of joint venture, of course. Meanwhile, as well, we don't have any news about the merchant acquiring. We have been also in this field approach in recent -- in last weeks in the last months, maybe by many potential reverse inquiry. We have seen a lot of movement characterizing both Italian banks and international banks. We still have to understand what is better for us.

For sure, it's important to know that we have another potential strong ammunition to increase our profitability or our capital base. So this is a level that we will exercise after we will have decided the final discussion in bancassurance.

[Operator]

The next question is from Marco Nicolai of Jefferies.

[Marco Nicolai, analyst]

I've got a couple of questions. The first one, again, on bancassurance. Now that you exercised one of the options, do you have a clearer idea of what level of synergies you could expect on the internalization of the full bancassurance perimeter? And again, on this, you reiterated the EUR 125 million net income contribution. And when do you expect to share the revenue impact of this consolidation and also the costs related to it?

And second question on distributions. Today, one of your competitors announced the approval of a buyback tranche, showing that regulators are still open to approve plans when capital levels are adequate. So in light of this and also in light of the sensitivity you showed at the latest result presentation, the one regarding the 70% payout and CET1 sensitivity. Could you please update us on your thoughts around buyback and distribution in general?

[Giuseppe Castagna, executive]

Okay. Of course, for bancassurance, we are not yet in the position to give you all these details. But what I can say is, if we make reference to EUR 125 million, we already said that the anticipation of the internalization of Covea will bring, I think, something like EUR 30 million in 2023. Of course, in 2022, we will have half a year, but there will be also some impact from the PPA when we will have the fair value on the final acquisition. So it's difficult to make some forecast that is, I would say, negligible for this year.

Not yet many details about the split between synergies in revenues and costs. This is something that we will be also eager to understand in exploring potential external opportunity.

Buyback is an old story. I say that, of course, we will -- when we present the full year '21 results, we said that we will be very much able providers that the fair level of capital would have been 12%, 12.5% to increase our distribution to shareholders, both through increase of payout and also potentially through buyback. But as I said the last time, being the first year that we are able to contribute a 50% payout, very important for us for the first year. We were not in the position to examine the option of the buyback. If we will be able to be so consistent as we have been in the Q1 also for the second part of the year and for the year to come into the plan, we say that we will explore also the buyback is a question that depends, of course, of the price to book of the bank of the different situation that we will be able to examine. But right now I can only say that it's for sure a good opportunity that has to be examined when is the right moment.

[Operator]

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

[Giuseppe Castagna, executive]

So thank you, everybody, for being with us. And I hope to hear -- to see you directly during the next week to go deeply into this set of results.

[Operator]

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