Banco BPM SpA

MIL:BAMI

Earnings Call Transcript 2023-Q1

[Operator]

Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM Group First Quarter 2023 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]

Good evening, everybody, and particularly for all of you that are linked from London that today is a bank holiday. Before leaving the floor to Mr. Castagna for the presentation, let me remind that you can find slide on the website on the Investor Relations page. Then following the presentation, we will have a Q&A section reserved to financial analysts. [Operator Instructions]

Now I leave the floor to Mr. Castagna.

[Giuseppe Castagna, executive]

Thank you, Roberto. Good evening, everybody. Thanks for being with us. I'm very proud together with my management team to present this first quarter excellent set of results, which allow us to lead our expectation and our ambition to a higher level vis-a-vis the previous guidance we gave to the market, both in relation to the original strategic plan of end 2021 and also to the more recent guidance given during the presentation of the full year '22.

Let's say that we can foster many very good results. First of all, profitability, net income growing 49% year-on-year to EUR 265 million which, of course, is a very good point to imagine growing profitability for the full year, but also the capital strengthening is a very good news. We have 80 basis points of increase in capital in common equity Tier 1, which adjusted for [ Basel ] is 14.15%.

And finally, we still are developing some very important initiative, which we already gave some hint in our previous press release related to the boost in capital generation and profitability coming in '23 and '24 from the bancassurance and the payment and merchant acquiring transaction, which are on our target.

Going to the guidance, so we think we can be in the position to increase very much both '23 and '24. We are prepared to deliver guidance for EUR 1.140 billion of net income for '23, which means 75 basis points of APS, which have to be compared with 49 on the original strategic plan and 60 which were given on February this year as much as we can increase to 90 points of APS for 2024. Also in this case, compared with 69 basis points of the original strategic plan and the 75 basis point gave in February this year. This means basically that in '23 and in '24, we will double the net results of '21 and '22, respectively.

On Page 7, again, some numbers, some figure about the increase of profitability driven, of course, by NII, which grew 45% year-on-year but also together with the fees. So the core income grew 23% year-on-year.

Cost of risk is still very prudent approach shown by our bank in the past. And we still assume that 51 basis points is a concrete figure to forecast for this year, leading to, again, Net Income of EUR 265 million, which again is 49% year-on-year increase at 26% on last quarter result.

We already said about common equity Tier 1 increasing 80 basis points. The same was for MDA buffer, which is still very much important in terms of potential remuneration to our shareholders.

Finally, liquidity and funding, very good position. The total liquidity grew to EUR 41 billion with LCR 199% and next NSFR above 130%.

Let's concentrate about the improvement of NII, which, of course, is leading the growing profitability. As you can see, we have -- we took advantage of any increase of Euribor in the recent quarter.

In 1 year, we grew from minus 44 -- 54, which was the average Euribor in Q1 '22 and, now in Q1 '23 was 264 basis points. In April it's 317 following the ECB decision to increase the ECB debt facility rate to 3.25%. The more recent Euribor is the last in 5th of May is 3.28%. In this respect, we were very good in maintaining at a very low level the deposit cost.

As you can see, quarter-by-quarter, we grew only to 46 basis points the overall cost of our deposit, which in turn increased also of EUR 2.5 billion in April with respect to the results of March this year. This allow us to have a revised guidance also on NII, which now we assume could lead to NII, total NII higher than EUR 3 billion in 2023, replacing the EUR 2.7 billion guidance of February. The previous guidance was based on Euribor 2.5%. This new assumption is based to the current Euribor, which is 3.3% and observed the deposit beta, which is reduced from 46% to 33%.

Let's also say that the potential further impact for alternative interest rate scenarios allow us to imagine a faster growth of EUR 300 million for 100 basis points of interest rate increase.

On Page 9, as we also announced in February this year, we think that the result we observed in Q1 '23 allow us to say that the previous strategic plan targets are completely surpassed. We are higher than quarterly representation not only of 2023, but also 2024 strategic plan. As you can see, both in terms of total revenues, we are now at EUR 1.250 billion vis-a-vis the plan, which assumed EUR 1.075 billion for '23 and EUR 1.150 billion for '24.

The same is for core revenues, well higher than the '24 business plan as much as the pre-provision income, which is now EUR 610 million compared with EUR 520 million of '24 in the original plan. Also, the cost of risk is now at the same level we had, a bit lower than the level we had for 2024 in our plan EUR 137 million versus EUR 145 million as well as net income is much higher that the forecast for '23 and '24 at EUR 265 million, which if we want to normalize the impact of the systemic charge that, as you know, are calculated on Q1 and Q3, if we assume that this would be annualized, the normalized results for Q1 would be almost EUR 290 million.

Not saying that, of course, we know that this is the last year in which we should have the systemic charge from EU resolution funds. So most probably, the impact of the system in charge in 2024 will not be there anymore.

Strong capital position. As we said, we have, as usual, the 2 figures, both for December '22 and for March '23. On a stated point of view, we grew from 12.83% of common equity Tier 1 to 13.57%. Meanwhile, if we add the calculation about the application of Danish compromise, we grow this figure from 13.34% to 14.15%.

The evolution is fostered by the Q1 performance with 50 basis points which, of course, will be reduced by the dividends and AT1 coupons of 28 basis points, but with further improvement both in the reserve post tax of [indiscernible] sales on a positive dynamics of RWA as well as other positive impact mainly driven by the DTA on the HTCS portfolio.

Capital ratio will increase as well, Tier 1 to 16.5%, TCF to 19.3% and gained a very comfortable capital buffer growing to EUR 544 million adjusted for Danish compromise with a fully efficient capital structure having filled all the bucket of AT1 and Tier 2.

Furthermore, we still have to deploy completely to action which you have been already informed either directly by us or through a press release we gave on the payment system transaction. Let's give you some more detail.

We have still in place these 2 projects. One is as usual, bancassurance. We are in the process after concluding the strategic partnership with Credit Agricole to get in the application for the Danish compromise after having the recognition as financial conglomerate in March by ECB. And before the closing of H1 '23, we will exercise the call option on the 65% on Vera Vita and Vera Assicurazioni, which would lead by year-end to the acquisition of our joint venture. This is something that you already know. Of course, what is fairly new is project on payment cards and merchant acquiring.

We have -- let's first of all give you some idea of the magnitude of this business. We have 140,000 point of sales. We have 4.4 million of payment cards, which nowadays give us a total transaction volume of more than EUR 20 billion in terms of issuing, EUR 30 billion in terms of acquiring, EUR 21 billion in terms of ATM, but showing an increase year-by-year, which is double figure, especially in terms of acquiring 23% or issuing almost 16%.

These volume generate P&L contribution in '22. And again, we are experiencing also in Q1 '23 double-digit increase. Gross revenues, let's say, revenues pool of EUR 300 million, which after paid scheme, intercharge and processing fees leave us with a pretax contribution of EUR 140 million, which is 14% more than the previous year.

What we are trying to conclude is a transaction which will give a value potential of EUR 2 billion of net present value to this business through a long-term exclusive distribution agreement with a partner, which would be aimed to preserve completely the running fee levels so without considering further margin to our partners with a consistent cash-in of an upfront component, creating additional room for shareholder remuneration with the mechanism enabling us to extract further value from future expected growth.

So not, again, like for the other product factory in which Banco BPM is always sit together with partner on the driving seat. Likewise in asset under management, consumer finance, bancassurance, we would like to have the same structure of stakeholders and participation also in the payments business. And this would be a further strengthen of our profitability and opportunity to deliver more reward to our shareholders. We are in the final step of this transaction. We expect to have a term sheet signed by end of June this year.

Let's go to some figure about our first quarter. I wouldn't know to all numbers. We already said that NII is 45% more than last year, very good also fees and commissions at the same level of Q1 '22 and 7% above Q4 results.

Another important figure is income from insurance business, which with the new IFRS 17 accounting standard have a standard contribution of EUR 10 million in this quarter vis-a-vis a contribution of EUR 40 million in Q4 '22, which took count of the revaluation of the Govies portfolio of our insurance company. Of course, this like-for-like would have been EUR 10 million if we would have applied IFRS 17 also in Q '22 (sic) [ Q2 '22 ], leading to an even greater increase of profitability comparing Q1 '23 to Q4 '22.

Operating costs are basically in line, 1.7% below Q4 -- sorry, below Q4 '22 and slightly above Q1 '22, 2.5% showing, of course, the capability of the bank to take care of the inflation growing during 2022 and this first quarter of the year. Pre-provision income again 9% year-on-year, growing loan loss provision 9% year-on-year, minus 25% on last quarter '22, leading to a profit from pretax of EUR 474 million, which is 20% year-on-year growth and 42% quarter-on-quarter.

Leading again to a final result of net income of EUR 265 million compared to EUR 210 million Q4, which again took advantage of the income from insurance calculated with the whole standard model and EUR 178 million in Q1 '22, which is an increase of almost 50% year-on-year and 26% quarter-on-quarter.

Let's have a look to the component of NII. As I show you on Q1 -- year-on-year, of course, the growth is massive, 45%. If we go comparing Q4 '22 to Q1 '23, it appears to have only 2.6% of increase. But if we eliminate the benefit of the contribution of TLTRO from Q4 '22, which was EUR 80 million, you can see on the right side that also excluding the effect of the 1 lower day -- 2 lower days, sorry, effect Q1 '23 on Q4 '22, the NII increase quarter-on-quarter is almost 18% driven, of course, by commercial activities, only slightly impacted by the increase of cost of wholesale funding.

As you can see on the bottom side of the slide, we were able basically to maintain a very good discipline on asset spread, which remained at 1.53%. Meanwhile, we took a very big advantage from the liability spread growing 63 basis points quarter-on-quarter up to above to full point at 2.04%.

Volumes were supported by a very good customer base, a very qualitative franchise. We -- as you know, since June '22, we are not pushing for customer loans. So we are trying to, of course, keep our pace giving priority to the quality of our loans and to the guarantee and collateral, which can come together with our granting loans.

And so you can see that out of the EUR 5.2 billion of new lending, EUR 1.3 billion were assisted by state guarantees. 96% of these new lending was concentrated in the best rating classes, and 71% of the new lending was granted in the north of the country.

Also very important to stress that out of our EUR 91 billion of loans granted to household and nonfinancial companies, 68% are either collateralized or state-guaranteed. And this percentage only for the state guarantee grow from 19% to 28% if we consider only the loan granted to nonfinancial companies, so excluding household.

Another important figure is on the right bottom side. If we consider only the small lending to small SMEs, which amount to 19 billion, 43% -- more than 43% is under state-guaranteed support. And only 3% of SME portfolio is in the high risk rating class, of which 76% secured.

Net fees and commission, again, very good results in line with Q1 '22 in which the first 2 months and last year were very good and not impacted by the war. So we are very happy to grow again to that level of results.

As you can see, Q4 '22 was much lower, 7% growth in Q1 '23. And the growth that we are experiencing vis-a-vis the Q4 is both on the management and advisory fees in which we grew 13% and in commercial banking fees in which we grow 2.4% with a growth year-on-year on 5.3%.

It's very important to remark that a good part of this contribution comes out of the product factory in which we are investing a lot, likewise, insurance product and payment services. Cost dynamics well under control, plus 2% year-on-year notwithstanding inflation rise, basically a bit below Q4 '22.

Capped cost, I would say under control. We have considered, of course, a saving in cost due to the early retirement scheme, which we renewed for 2023 and '24. We will have another 250 early retirement person -- colleagues, which were not considered in '22 for which we have provisioned in '23.

Cost/Income ratio down to 51%. And we took advantage for a normalized pace of depreciation and amortization, which were inflated in Q4 '22. The insurance business costs, of course, are included in these costs, the amount only to EUR 2.7 million in Q1 '23 for this year.

Let's go at Page 18 to the cost of risk. We wanted to show you our reduction in cost of risk goes together with the reduction of the NPE ratio. We are now down to 4.2%, which is 3.7% with the EBA definition and almost around 2% in terms of net NPE ratio.

Our 51 basis point are basically 30 basis points coming from inflows, also with a very good default rate basically in line with our main competitors, 0.85%, and the remaining 20 basis point coming from the maintenance of the stock. This means that we continue to provision at least between 35% and 40% every inflow in nonperforming loans.

Let's say that we have already -- we have increased to EUR 0.75 billion over the planned horizon, so '23, '24 the additional disposal for which we have already Cost of Risk front loaded. So we will split between '23 and '24 further reduction in NPE through this disposal.

Meanwhile, our overlays is stable at around 160 million. The cost of risk is declining, but we are increasing NPE coverage, notwithstanding a low default rate. As you can see, the total NPE go down to EUR 4.7 billion, almost evenly split between UTP and bad loans with a net NPA of EUR 2.3 billion.

The migration rates are maybe the best ever for our bank. Default rate 0.88% vis-a-vis 0.94% last year with a rate which is almost double Cure rate of '22, which lead to a net default rate of 0.72%.

On the bottom part of the slide, you see the increase in NPE coverage, which globally is growing from 50.4% of March '22 to 50.6% of December '22 to 51.4% of March '23, which is splitted between UTP covered at almost 41% and bad loans, 65% or 72% if you consider write-offs. Stage 2 loans maintained almost at the same level of the previous year.

Let me give the floor to Edoardo Ginevra for some slides about debt securities portfolio and liquidity funding position.

[Edoardo Ginevra, executive]

Thanks a lot, Giuseppe, and good evening, everyone. So on debt securities portfolio, the total stands at EUR 36.2 billion as of the end of March with 72% represented by amortized cost component for a total of EUR 26 billion. EUR 9.8 billion is the remaining part of the banking book at fair value comprehensive income, very limited the amount of bonds for trading purposes EUR 400 million.

In terms of the composition of this EUR 36 billion, EUR 5 billion will be more -- EUR 5.4 billion is corporate, EUR 30.8 billion is government bonds. Share of Italian bonds, so Italian-related risk is -- stands at limited levels -- is confirmed at limited level at 37.7%. Bear in mind that the share classified to fair value other comprehensive income, which is exposed to capital fluctuations, is as limited as 20%.

The following page gives an idea of the usual relationships between the capital and the P&L trends attributable to the bond portfolio. So as far as reserves, the comprehensive income reserves are concerned, we have seen an improvement of the net level from EUR 626 million as of the end of last year to now EUR 538 million. This has been partially offset by the impact of hedging strategies, which led to a negative level of the net financial results, the EUR 34 million.

Having in mind that during the quarter, we entered through an update of our hedging strategy so that we have -- we presented at the end of the quarter a situation where the total sensitivity in terms of basis point value of the fair value other comprehensive income portfolio is as limited as EUR 0.25 million, of which only basically 0 is the component attributable to Italian government bonds.

Liquidity and funding profile is even more solid than it was the case 3 months ago. LCR now up at 199%. The total of the liquidity cash plus unencumbered assets is almost at EUR 41 billion, of which EUR 23 billion almost is cash, EUR 33 billion of unencumbered ECB-eligible security is almost EUR 5 billion of other marketable securities that are unencumbered.

The comparison with the ECB position leads to highlight that the total income by the eligible asset is EUR 43.6 billion, either placed in ECB or placed for other activities such as REPOs. The nominal exposure to TLTRO III is after the anticipated reimbursement in December is now EUR 26.7 billion, but the net ECB funding position is -- went down to only EUR 4.7 billion with an SCR level debt from the current amount of almost 200% may go down to a little bit above 140% after we complete the TLTRO reimbursement plan, thanks to a limited recourse to refinancing operation for ECB.

These very solid liquid position results -- the result of the deposit base of the group, more than EUR 100 billion -- EUR 101 billion as of the end of March, of which 80% represented by retail and SME. So fragmented deposit base, the guaranteed level is EUR 58 billion, and the average size of such deposits is as limited as EUR 22,000.

Worth noticing that the overall amount of our direct plus indirect customer funding constant increase throughout the quarter from EUR 199 million to EUR 202 million. And managerial data as of April goes up EUR 205 million with an increase of indirect funding from EUR 91 million to EUR 96.6 million flows of more than -- almost EUR 2.5 billion in the first quarter with a steady level of core direct, current account and deposit more or less stable between the end of December and end of April using Managerial data.

For the conclusion, let me hand over again to Giuseppe Castagna.

[Giuseppe Castagna, executive]

Thank you, Edoardo. So just one page, the guidance for '23, '24. Let's say that the current profitability, the deposit base and cost, the capital position, the cost of risk allow us to really be not even more prudent about our ambition. The management team feels very comfortable in assuming this new guidance, which basically will double year-by-year '23 and '24 the performance of '21 and '22.

Basically, we think we can increase the ROTE of '21, which was 5.5% to 11% as well as the 7.4% of '22 up to 13% in '24. If we will assume the same common equity Tier 1 of '22, which was around 13%, the ROTE for '24 will be around 14%.

And this will go together with, of course, doubling the remuneration for our shareholders, which was a bit more than EUR 600 million in the previous 2 years, '21 and '22. And we will grow doubling up to EUR 1.25 billion in '23 and '24 with an increase of more than EUR 600 million and representing a cumulative market cap of 22%.

This new guidance will lead to PE of only 4.8x the '23 and only 4x the '24 results with a yield which will be well above 10% in '23, in the region of 13% in '24. Let's say that this new guidance leave the room together with the capital management action that we presented to generate room for even additional shareholder remuneration for which, of course, we will be even more precise during the course of the year both with the quarter presentation, but also with the presentation of the new business plan, the new strategic plan '23, '25.

Thank you. And of course, Edoardo and myself will be available for a Q&A session.

[Operator]

[Operator Instructions] The first question is from Antonio Reale from Bank of America.

[Antonio Reale, analyst]

It's Antonio from Bank of America. I have 2 questions, please. One on the user capital strategy and secondly, on deposit betas net interest income, please.

The first one on capital. You have good visibility on the outlook for earnings. Your CET1 ratio is above 14%. If you include the Danish compromise, you come from a long journey of freeing up the bank and implementing cost initiatives.

I think you're increasingly shifting the business towards capital-like activities like payments and insurance. And the organic capital generation that you referred to in the upgraded guidance means you have a lot of flexibility when it comes to using some of this capital going forward.

So I wonder how you're thinking about this capital use between both on M&A, investing in product factories, increasing shareholder remuneration, more restructuring. Just I'd like to hear your thoughts and where your priorities stand. And also, could you remind us any visibility you may have on regulatory headwinds to come?

My second question is on net interest income. If I understand correctly, you assume deposit beta in your NII guidance for 33% for this year. Now you have a relatively large share of your funding coming from retail, which has proven to be quite resilient in terms of deposit betas.

So can you talk about what your deposit beta is today for the group and how you get to 33% that you assume, and particularly, the trajectory between now and year-end is particularly important. So what have you assumed as your end-of-year deposit beta so Q4 because if 33% is an average, I'm not sure it is, but if it is, it implies quite a big increase. And I'd like to understand that better as key to understand what the sustainable part of NII in 2024. Thank you

[Giuseppe Castagna, executive]

Thank you, Antonio. Let's say that capital, of course, we have a forecast which is very much encouraging. Let's say that we still have to foster the capital management action, the potential growth coming from Danish Compromise for Vera Vita. At the same time, we said also in the last section that we expect some headwinds in terms of the new model.

So all in all, we feel very comfortable. And again, end of this process in '24, we think we will end up higher than 14%. This, of course, is not our target in terms of leaving at this level the capital, but give us together with a very comfortable MDA the possibility to really consider eventually an increase in remuneration of our shareholders.

If you remember, we always say that at the level of remuneration realized in '21 and '22 was not that useful to talk about increasing the remuneration for our shareholders. Nowadays, we feel that is the moment to go further and to, again, with the business plan we will present to give also a different possibility in the capital remuneration.

Of course, everything will be possible. We know that there is a difference between saying that we will increase the payout or maybe consider a buyback that give us the time we need in order to fix all these numbers. But for sure, what we've shown with profitability and capital growth is a very good buffer of capital to be distributed.

On the other side, we don't think there is any M&A, which, again, can give us the same remuneration. We think that we have this situation again in bancassurance and payment system. But both will bring us capital so are not negative for capital. And on top, we think also we'll grow our profitability.

So all in all, very confident to increase the remuneration policy. Beta, we are a bit tired of exercising ourselves on imagine forecast on the beta. We were not that good in the previous 2 occasions, a very prudent approach. So we preferred to say that observed beta is 33%.

We think that is something feasible for us, but we don't know what the market reaction will be in the next months depending also to the Euribor movement. If the Euribor will stay more or less the level that it is now, we think that this is very feasible to maintain also due to the fixed rate deposit cost, which represent almost 80% of our deposit base, only 20%, 22% linked to floating remuneration. That's all basically.

[Operator]

The next question is from Giovanni Razzoli from Deutsche Bank.

[Giovanni Razzoli, analyst]

Two questions. One clarification about the possible improvement in the shareholder remuneration policy. You've been pretty clear in saying that part of the proceeds from the payment system will be returning back to shareholders. The term sheet expected to be signed by June this year. Can we assume that a part of this capital will be returned to shareholders already early next year with the 2023 dividend payment? It is a reasonable time frame on top of what you have already said about EUR 1.25 billion of cumulative dividends for '23 and '24 based on the 50% payout in the revised targets.

The second question is on your funding structure in the medium term. I would like to know your thoughts about what is in the medium term the funding mix of the bank like Banco BPM. So do you think that sooner or later and if so, in what time frame the Banco should start again if -- should start again to issue time deposits or term deposits so that the cost of funding increases because of a change in the mix. So do you think -- do you see this scenario in the medium term? Thank you

[Giuseppe Castagna, executive]

Thank you, Giovanni. As I mentioned before, we are confident to have a term sheet signed by end of June, of course, not the final contract, which most probably will take more time, let's hope end of 2023 or maybe beginning in '24. In any case, of course, whatever will come from this transaction in terms of capital boost will be, of course, in 2024 in terms of potential shareholder higher remuneration. For the funding structure, I would like Edoardo to take the call.

[Edoardo Ginevra, executive]

Yes. So of course, the key point to be more [ entered ] is the maturity during 2024 of the TLTRO funding facility. And as we said in the presentation, this is -- will be addressed by using flexible and available long-term instruments, also those provided by ECB. As [indiscernible] said very clearly last week to make sure that we can stay at a very comparable level of LCR such as 140% or in that region.

Having said this, turning to the specific product instruments. We, of course, have rather some evolutions such as, for example, retail bonds. Other ones may be introduced the news from a tactical -- with a tactical approach to optimize our funding structure according also to the evolution of depositors' preference.

Up to now, what we have observed was a very stable behavior of deposit. And as Giuseppe had just clarified in previous questions, an observed beta which was much below the level estimated by statistical models.

[Operator]

The next question is from Noemi Peruch from Mediobanca.

[Noemi Peruch, analyst]

So the first one is on guidance. So the increase in net profit guidance for 2023 is very clear, the contribution from NII, but I was wondering whether you also viewed the guidance on other core lines such as fee cost and cost of risk? Or shall we still assume flat fees cost of 3% and cost of risk about 50 bps?

And then I have another question on deposits. So could you give us some color on the competitive landscape on deposits that you are seeing and that you are expecting for the future and also the dynamics you see in the market when it comes to deposit outflows IT Govies, Assets under management, bank bond or a repayment of loans?

[Giuseppe Castagna, executive]

Okay. For the first one, I will try to answer. Basically, the only main line, I think, would be the fees and commission. We think that 1.9% is a potential forecast which we think we can reach. Let's have in mind that starting from Q2, we will have some less remuneration on 2 important aspects.

One is the commission applied until March due to the negative interest rate which starting from April, we will recognize again back to our client and a slight increase in the securitization due to the reduction of RWA. So these are the 2 negative.

Of course, all the others, both commercial and also, I would say, in bancassurance and management are growing. So more or less 1.9% could be a figure that you can refer to.

Deposit, I'm not sure if I got your question, but let's say that we are growing in deposit base, both in direct and indirect deposits. We are in a very comfortable position to make our clients happy because if they want to stay in current account, we are happy to accommodate them with the current deposit cost. But we are also very happy to switch into assets under management as well as we had a big increase also in assets under custody with the BTP issue and for instance, the ENI issue that we placed with our clients. On top, there are certificates and so on. So basically, the aim is to make what our client wants. And this is bringing into a total increase of our deposit base, adding direct and indirect deposits.

[Operator]

The next question is from Christian Carrese from Intermonte.

[Christian Carrese, analyst]

Congratulations not only on net interest income, but also fees. I feel that you made one of the best results among peers year-on-year. Just a few clarifications. One on capital. If you can elaborate on the 35 basis points coming from risk-weighted asset optimization and others. And if you can guide us on the bridge coming from the agreement with Credit Agricole and also the other moving part Vera Assicurazioni.

I suppose you have now the number of the own funds of Vera, so you should know the negative impact on capital coming from the exercise of the call, if you can elaborate on that? And the second on costs, 250 additionally obviously in 2023. Can you give us a guidance for the full year?

[Edoardo Ginevra, executive]

Okay. Thanks for your questions. Mr. Carrese, it's Edoardo Ginevra. So on the capital work, I think it's helpful to add that most of what you see in the improvement on RWA dynamics is the evolution of the credit component, the gray risk component, where we are able to optimize capital absorption from some of our items.

Also, there has been a small reduction in the market risk in RWA from market risk. For the Vera, the good news is that the level of the own funds is low, at a low level. And it's been crystallized as of the end of '22.

We need to take into account for the overall impact of the exercise of the call a number of items which are not yet final. First of all, some adjustments due to the recent adoption of IFRS 2017. And secondly, what will be the impact of the net profit that will be recognized as a component of the price for the stakes in Vera Vita and Vera Assicurazioni. Putting together all these elements, we believe that the impact will be quite manageable and generate a positive taking into account the application of the Danish Compromise..

[Giuseppe Castagna, executive]

Speaking on your second question, cost, both the combined effect of the last part of the previous early retirement scheme and the new one will lead to a further reduction of EUR 20 million to EUR 25 million of cost to labor for '23 and EUR 15 million to EUR 25 million in '24.

This, of course, without considering the increase of costs related to the national contract, which, of course, we are not prepared to comment due to the negotiation in place. So we are making room in order, of course, not to have a big effect from the component of the national contract. And I would say that the figure that you have with the savings I mentioned to you and the application recount, that should give you a final figure which is not that different from EUR 2.6 billion.

[Operator]

The next question is from Domenico Santoro from HSBC.

[Domenico Santoro, analyst]

This is Domenico with HSBC. Two questions. First of all, can you tell us what's the level of NII implied in your guidance for...

[Technical Difficulty]

[Giuseppe Castagna, executive]

We can go on and then we will let Domenico again if he's is able to reconnect.

[Operator]

The next question is from Marco Nicolai from Jefferies.

[Marco Nicolai, analyst]

The market is pointing to a rate cut in the future, maybe even at the end of 2023. So can you give us some color on where you see NII in 2024 compared to 2023? And maybe also a little bit of color on the delta in terms of EPS in your guidance for 2024 compared to 2023.

And also, your numbers point to a return on tangible equity extremely attractive for 2024. So do you think this type of profitability is something sustainable also for future years? And if you see ECB cutting rates in the future, how can you offset such a negative NII impact?

[Giuseppe Castagna, executive]

NII take account also some aspect we are considering about the [ contabilization ] of certificates. Of course, we think that would be part of higher cost of deposit for this component. So it's possible that we will switch this negative effect from [indiscernible] to NII.

All in all, we feel that '24 could be a bit better than '23, but slightly better. Yes, not taking in consideration for '23, of course, what I said before in terms of certificates. If, of course, we would [ contabilize ] the effect of the certificates in NII, this will lead again to the number that we gave as a guidance.

In terms of EPS, I would say the main aspect will be from bancassurance, as you know, cost of risk, commission and of course, the higher contribution from the product factory. So both assets under management activity included the bancassurance own 100% and also the payment system.

Let's also have in mind that as I mentioned before, the systemic charge in 2024 will not be there at least for the part related to the EU fund. ROTE, very attractive. As I mentioned before, you have to wait, of course, in order to get the '25, the business plan. We are not really now in the position to give you how much would be last time we gave a guidance in which we say that a further increase of more or less 10 basis points of a [ piece ] would have been possible.

But I guess that you have to wait for the presentation of the business plan to have the '25. I am happy that you are asking for something in 3 years' time. I think we are very consistent in giving '23 and '24 precise guidance.

[Operator]

The next question is from Andrea Lisi from Equita.

[Andrea Lisi, analyst]

The first one is on capital, in particular, if given the current environment, the fact that you are having further improved your asset quality position and so on. You have seen in some way the CET1 [ at certain threshold ] at which you are happy to work with, and if you can disclose it in case.

And if we have the -- some regulatory headwinds going on starting the year. And the second one is just a clarification of systemic charges that in the first quarter this year were lower than previous year. And if you can anticipate which amount of systemic charges do you expect that in this year?

And just as a comment, if -- the talks you have also with regulators and so on, is it -- is there a chance that at one point, the level of systemic charges could be increased again in the next years? I don't know, maybe for improving the level of insured deposits and so on. Just a comment -- point of view on that.

[Giuseppe Castagna, executive]

Yes, we feel we are a pure commercial banking, very rooted on the territory, very basic commercial activity. So we feel that we are very consistent in our results. We have shown year-by-year that even in the worst situation, we didn't need any capital increase from the market.

We were able to manage our action in terms of capital management to give the right value to our product factory. So we feel very much comfortable not including that, of course, on the future years, we will have also the positive effect of the DTA, which, of course, will increase even more the capital.

So we feel that again, this yet to realize, but we feel that this kind of common equity Tier 1 is very much comfortable for us. We always say that an MDA above 300 basis points is comfortable for our business.

Systemic charges is just because this year to the Italian banks, I think to all the Italian banks, the request was lower from EU. So in relation to our stake, we got this reduction in terms of requests. And again, we think that the next year, having reached the top level, we wouldn't have any more impact from these kind of systemic charge.

[Operator]

The next question is from Hugo Cruz from KBW.

[Hugo Moniz Marques Da Cruz, analyst]

Just really want to get a clarification on capital and the timing of the new business plan. So when do you plan to announce a new business plan? And did I understand correctly that any decision around an increase in the dividend payout or maybe potential buybacks will only be made in 2024? Is that correct?

And then finally, just again another clarification on the Danish compromise. Do I understand correctly that the Danish compromise and the Vera deals, the Vera deals will be a positive impact on top of the current pro forma CET1 ratio that already includes the impact of Danish compromise? Is that correct? Yes, so that's it for me.

[Giuseppe Castagna, executive]

We will share our answer with Edoardo. If I got exactly what were asked in the timing of the business plan will be second part of the year, most probably the last quarter next year in order to get precise -- of this year, sorry, in order to get precisely the pace of the Euribor and what will happen in terms of ECB decision.

We -- again, in terms of capital contribution from the transaction we are dealing with, we think this could materialize in between year end, beginning of next year if we talk about payment system. And so that would be also the right timing for announcing whatever increase in terms of maneuver for further remuneration to our shareholders. Danish compromise, if I go -- let's have Edoardo...

[Edoardo Ginevra, executive]

If I understood correctly the question, the Danish compromise, we will have, of course, 2 several steps, at least this is our understanding of the process in our conversations with ECB. One step is the Banco BPM beta, which is exactly the impact we highlighted in our presentation.

And the second step will be after the acquisition of Vera Vita, so the exercise of the call option with [indiscernible]. As far as Vera Vita is concerned, we expect this impact as acquisition plus application of Danish compromise to be positive in the sense that this will tend to increase likely at least the capital position of the group.

[Hugo Moniz Marques Da Cruz, analyst]

In the second step, after you do the Vera deals, there was a press release before you talked about 13 basis points capital [indiscernible]. So that's on top of the Danish compromise [indiscernible] ratio growth?

[Giuseppe Castagna, executive]

I'm sorry, but we don't understand the question. Sorry. It's very difficult to hear your voice.

[Hugo Moniz Marques Da Cruz, analyst]

Sorry. Okay. I just want to understand the second step after getting the Danish compromise, the second step, you're still expecting a positive impact, correct?

[Edoardo Ginevra, executive]

Yes, yes. At the end is also the impact of the second step is positive once the Danish compromise is taken into account.

[Operator]

The next question is from Manuela Meroni from Intesa Sanpaolo.

[Manuela Meroni, analyst]

The first one is on the NII. Can you share with us the assumption that you have made in terms of interest rates in 2024 based -- on the basis of your net income guidance? And when do you expect the NII to reach its peak?

And the second question is on the risk-weighted assets. I wonder if you -- if we can expect a further reduction of risk-weighted assets going forward and what is the guidance of risk-weighted assets at the end of the year? And lastly, clarification, the guidance for 2023 and 2024, and that 50 basis points cost of risk in both, I know that it has already been asked but I didn't get the positive answer.

[Edoardo Ginevra, executive]

Yes, Manuela. Thank you for your questions. So concerning the level of interest rates, as we said in the presentation, the expectation for the overall average level of Euribor this year is in the area of 3.3%.

With a growing path, meaning that we assume this will be in year -- I would say 350, 360 end of the year, and I'm talking about this year. For the next year, we expect a moderately downward trend leading to an average level slightly below 350 basis points, which leads to the guidance which Giuseppe was describing earlier.

RWA path, we expect to experience some inflation in our overall level of RWA due to the outcome of the discussions we are having with ECB in the current period. But we confirm that this will be fully manageable with our organic capital generation. So no significant negative impact expected from regulatory headwinds.

For the cost of risk guidance, I leave the word -- the floor to Giuseppe.

[Giuseppe Castagna, executive]

On cost of risk, I would say we are a bit surprised by the big reduction in cost of risk that we are experiencing on the market. Basically, we are getting the same inflows in terms of default rate of the other bank, which is quite comprehensible, taking into account our geography and routing network. And this, by definition, brings to, let's say, 25 to 30 basis points of additional cost, which means to cover new UTP from 35% to 40%.

Of course, the percentage of the guarantee of the state could a bit reduce this amount, but the region of the provision in the one I told you. On the other side, the remaining part is related to the maintenance, I would say, of the NPE, which means on the positive side to go back to positive to non-default.

And on the negative side, to switch from UTP to bad loans, which in turn would mean another 30 basis points, 30, [ 35 ] depending collateralized or not in terms of cost of risk. So all in all, as we said 2 years ago, 45 to 50 would be the normal cost of risk. We feel that our portfolio is enormously bettering if -- as for the beta, we will experience a better situation in the next quarter. At least, we have covered that our expectations are not that far lower than what we are doing right now.

[Operator]

The next question is from Andrea Vercellone from BNP Exane.

[Andrea Vercellone, analyst]

The first one is just a clarification. I guess nonnumerical on the personnel costs. I just want to know if you have made any accrual for the banking contract in Q1 or there are none? The purpose of the question is to see if you book nothing, of course, everything will be booked later on.

The second is again, a qualitative question on the transaction you are exploring in the payment business. Can you give us some color as to how do you square the comment that you plan to, on the one hand, maintain the current level of fees linked to this business and on the other hand, also book an upfront component linked to this transaction. Because usually what we've seen in the past from competitors, they book a capital gain, and then they lose fees. But you seem to be suggesting that you will go ahead with both components, which would be rather positive, but it's a little bit puzzling.

[Giuseppe Castagna, executive]

Thank you, Andrea. No, personnel costs, of course, we did not accrue any -- anything for banking contract. As I mentioned, we have some room to accommodate the banking contract with the reduction in cost of personnel that we are fostering it through the early return scheme. But of course, we have also some cautious approach in our budget.

For payment business, thank you for your question. This is exactly why we consider this transaction very, very good for our bank and can allow us to extract a lot of value because the way we are dealing with our counterparty is based not on the -- let's say, giving back further EBITDA, which will be a reduction for us and an upfront in terms of capital gain.

We are trying to make a real joint venture in which we can still participate with the relevant stakeholding to the new brand factory in which, of course, we will put all the business we have now already dealing with our partner. And this would bring to a considerable upfront coming from a potential partner.

On top, of course, we will continue to increase the revenues from sharing because of our stakeholding in the product factory. So the base is to maintain the level of profitability as it is to get in any case, good upfront, and to still increase through the stakeholding participation in product factory our profitability in this business. I know that is [ unprecedented ], but we are trying to do that.

[Operator]

Next question is from Delphine Lee from JPMorgan.

[Delphine Lee, analyst]

I just want to come back to net interest income. Just trying to understand your guidance for 2024, which is going to be slightly better than 2023. But on the other hand, you seem to be losing 100 basis points in rate. So I'm just trying to understand where the improvement is coming from?

And also what is the deposit beta assumption you have for 2024 compared to the average 33% you have in '23? The other question is in terms of sensitivity, if you could give us a sensitivity to 1 percentage point increase in deposit beta, how much that is in NII million?

[Edoardo Ginevra, executive]

I'll try to elaborate. So we didn't say we are losing 100 basis points in rate. What I say answering to the previous question was that we expect a slightly moderate -- very moderate reduction the overall level of rates next year compared to the end state as of December, meaning that on average, let me be very clear, the level -- expected level of Euribor and average for 2024 is slightly higher than the expected level of Euribor average for 2023.

Beta, I think was a question raised earlier. Hence, the end of the year level of beta is around 40%, a little bit above 40% compared to the current level of 33% we used to project the overall guidance for the year. And -- but at the end of the day, given that we expect slightly an overall stable level of interest rate, it doesn't -- it's not -- beta does not have the same relevance it has to explain the numbers for this year because it's a derivative of something that is quite stable.

Hoping these helps clarifying. In the sensitivity, if I got correctly the question, the sensitivity is in the current -- calculated starting from the current level of rates as of end of March this year, what happens in case of an increase of 100 basis points using a beta which is consistent with our current observed 33% level, so gives you an idea of what can happen differentially from the guidance we provided if the level of rates goes into unexpected direction.

[Delphine Lee, analyst]

Great. So basically, your -- the rates are slightly higher in '24. The deposit beta is higher. So how do you manage to grow your NII just to understand this? Is that volume? Is that -- or your assets rate are improving? Or anything on your investment portfolio?

[Edoardo Ginevra, executive]

So the beta is not a driver of the increase in -- of the delta in NII in 2024 because more or less, the level of rates is stable. So it's -- the overall impact is driven by repricing of the book of loans by the refresh in the level of bonds -- of outstanding bonds that progressively mature and replaced by new ones and a moderate increase in overall volumes. But nothing that has to be expected as -- and up to higher compared to the previous trend. That's more or less the overall story.

[Operator]

The next question is from Adele Palama from UBS.

[Adele Palama, analyst]

One clarification on the Single Resolution Fund. The -- like what do you assume for 2024? So if you can give us like the benefit that you would have? I mean, I understood that you are assuming that, that level will decline in 2024. I just want to understand the benefit versus 2023. That's it, yes.

[Giuseppe Castagna, executive]

Again, we say that we have reached the top of the request from EU. The demonstration is that this year was already lower than we expected. And without any extraordinary components happening in the market, we assume that for 2024, the EU SRF is 0.

[Adele Palama, analyst]

And that is...

[Giuseppe Castagna, executive]

Of course, we still assume that we will have the contribution to the Italian mechanism for the guarantee on deposits.

[Adele Palama, analyst]

Okay. That is -- that assumption is included in 2024 guidance, the main target?

[Giuseppe Castagna, executive]

Yes, it's included.

[Adele Palama, analyst]

Okay. And sorry, can I add another question? In the 2024 target, which is the run rate for the insurance results that you are assuming?

[Edoardo Ginevra, executive]

The insurance, we started from the previous assumptions that we included in the plan, which was of a total contribution to net profit, 125, 400% of stakes in insurance. We readjust bearing in mind that we are going for the sale of the stakes in the non-life, in the P&C in execution of agreement with Credit Agricole assurance. Overall, the contribution is in the area of -- the adjusted contribution is in the area of EUR 100 million.

[Adele Palama, analyst]

And that includes Vera Vita as well?

[Edoardo Ginevra, executive]

That includes? Vera Vita, yes. The full contribution for the year of Vera Vita.

[Operator]

[Operator Instructions]

[Giuseppe Castagna, executive]

I don't know Mr. Santoro is back. I would leave the room for his question. Otherwise, of course, I have to thank you all for being with us. And of course, in the next few days, we will be around to further in deep discussion about this set of data. Thank you very much.

[Operator]

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