Banco BPM SpA

MIL:BAMI

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM Group 9 Months 2022 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, and thank you, everybody, for being here for this conference out of the 9 results of Grupo Banco BPM. Before leaving the floor to Mr. Castagna for the presentation, let me remind that you can find the slide on our website in the Investor Relations page and the Q&A section is reserved only for financial analyst. Now I leave the floor to Mr. Castagna.

[Giuseppe Castagna, executive]

Thank you. Good evening, everybody, and thank you for being with us this evening. This round, we are, I think, the last bank to make a presentation, I hope you will be happy to give us your attention for the time of our results presentation. I am very pleased to present this 9 months results, 2022 with NI, I would say, to the equity story based on the achievement of the past years and quarters, but also giving you a very positive outlook on the future.

Let's start from the current results. Let's say that the 9 months results are a record for our bank. We have done an adjusted net income of EUR 652 million, very solid and strong operating performance in terms of cost income at 54.2%, well above the 57% of 2023 target of our business plan. Also in terms of commercial performance, we are still having a very solid set of results with new lending up 20.6% year-on-year and commercial banking fees almost 5% year-on-year. At the same time, also to the risk and the asset quality are overcoming the results of the Target 23 and in this case, also 24 with NPE ratio at 4.7% and the stock of gross NPE at EUR 5.3 billion with EUR 1.1 billion less than year-end '21. Net NPE ratio is down to 2.4%, with capital at 12.4% as common equity Tier 1 fully loaded and MDA buffer at 387 basis points.

We will give you also some hint about the insurance business of BPM Vita consolidated for the first time line for line together with some information about our commercial activity, integrating digitalization and ESG. Let me only remind that the common equity Tier 1 without the contribution of the Danish compromise would be 12.05% and the MDA buffer would be 353 basis points. As you know, we are in course of obtaining this kind of authorization with ECB.

Let's go to the numbers on Page 7. I would comment year-on-year results, but we have on the left also the quarter-on-quarter that is better over the last quarter basically in any main performance. Let's start from NII, EUR 1.59 billion vis-a-vis EUR 1.536 of the 9 months last year, also so better than last year as much as the net fees and commission that are better than last year at 1.44 vis-a-vis 1.42% of last year. Altogether, core revenues are at EUR 3.17 billion, 2% better of the results last year.

In terms of total revenues, we go to EUR 3.5 billion, EUR 3.47 vis-a-vis 3, 4 to 4 of 9 months 2021. So higher revenues of $1.4 billion yearly also taking in account the reduction of contribution coming from the TLTRO. Operating costs are down, slightly down, even better if you consider that for the first time, we have consolidated also the cost coming from the BPM insurance without which the like-for-like cost would be 1.4% lower than last year's results. Loan loss provision much lower at almost EUR 100 million, EUR 498 million. Last year was EUR 673 million, leading to a profit from continuing operation pretax over EUR 1 billion, EUR 1.1 billion which is 27% better than the 9 months '21 at EUR 788 million. After tax, the result is EUR 679 million, still 19% better than last year, and the net income is EUR 510 million after the system charge, which adjusted for the cost of risk and some other one-off items lead the results of the bank to EUR 652 million, confronting with EUR 565 million of 9 months last year. In terms of quarter, we ended with a net income of EUR 127 million, which adjusted is EUR 172 million.

Let's pass to Page 8, what we want to reflect in this slide is the very positive approach that we have looking at the number that we have reached and the guidance we are able to give you for 2022 to come from also with the business plan of 2023. So we are almost 1 year ahead in terms of results of performance of the main performance if we come from the results of these 9 months and full year '22 with the '23 strategic plan. In terms of total revenues, we have almost EUR 300 million more than the strategic plan, EUR 4.6 billion is what we expect for full year 2022, of which almost EUR 2.2 billion will come from NII with a strategic plan, which was higher than EUR 1.0 million.

Operating costs are small higher than the 2023 business plan due to the, of course, major cost in terms of administrative cost, we have guidance of a bit higher, the EUR 2.5 billion respect to EUR 2.4 billion of the strategic plan, which lead to a pre-provision income higher than EUR 2 billion vis-a-vis EUR 1.9 billion of the 2023 business plan. If we assume the same amount of loan loss provision, this brings us to a stated return on tangible equity, which is 1.5 points better than 2021 and already in line with the 2023 business plan, which stated a number of 7% for the 2023. If we take the adjusted figure for 2022 guidance, we are even better than 2023, and this is maybe the best way to confront the 2 years because, of course, in the strategic plan, there are no one-off. And so it's more comfortable with the 2022 adjusted. So more than 8% respect to 7% or 23%. This is, of course, mainly due to the trajectory of the Euribor growth, which give us a lot of opportunity also for increasing our project for 2020.

Let's go back to the asset quality for a minute. We have already said on Page 9, EUR 1.1 billion lower than the starting of the year, EUR 1.3 billion better than 9 months 2021 the ratio down to 4.7% compared with the final target in 2024, which was 4.8%. Also in terms of net NPE ratio, we are at 2.4% vis-a-vis 2.5% in '24. If we consider the EBA definition, we have gross at 3.9% and net at 2%. We still have some expectation on derisking of single names by year-end. Let's say that the total derisking up to now up to September was EUR 1.8 billion. We think that we will exceed EUR 2 billion in 2022. Not considering still keeping a reserve of EUR 500 million of potential disposal for which we have already front-loaded the cost of risk in the first 2 quarter of 2022.

Page 10 is a very important slide, in my opinion, which because give you what the bank has done during this year, what the consistency of the results we have done can bring the bank in the future based on real fact. We have, again, a very strong capital buffer, which is almost 390 basis points. Let's say that we started with the merger at 160 basis points. But we have to consider that at the starting point, we had to face EUR 30 billion of NPE stock. During this year, we have derisked the stock to EUR 5 billion, so EUR 25 million of derisking is still, we have been able to have an increase in the common equity Tier 1 of 1 full point from 11.4% to 12.4% without, as you know, any request to the shareholders. So all with our contribution and the capability to make some capital management actions, which give us the strength to the risk and reach a very favorable situation in terms of capital, especially compared to the net NPE ratio mini exposure, which is EUR 2.7 billion compared to the EUR 6 billion with which we started the merging in 2017.

This, coupled with still a lot of opportunity coming from the strengthening of the business model, both for the consolidation of the insurance business. As you know, we have started from this quarter to consolidate BPM EBITDA. We have applied for the recognition of financial conglomerate status in order to obtain in the near future, the Danish compromise status. And as you know, we are also undergoing on beauty contest or non-life activity for which we expect to be able to take a decision by year-end 2022. As far as the other branch of the insurance, which is the Vera branch, the joint venture with Catolica, we expect potentially to define the call exercise by the first half of 2023 in order to have the opportunity to have a closing by year-end 2023. The integration process of the bancassurance business is underway. Of course, we still have to build up the profitability contribution because we have only 1 quarter in our profit and loss.

Also in terms of digitalization strategy, we are having a step ahead. We are overcoming the results that we had for 2022 in our business plan. We have created a strong SME management model with the new 135 specialized centers activated, especially in the north of Italy, with more than 440 relationship manager relocated from the normal branch to the activity dedicated to SMEs. Also in terms of NRRP project, we have trained more than 1,000 colleagues in order to take all the opportunity coming from this unique challenge that we have, activating also a digital platform available to all our employees and dedicated to more than 13,000 customers targeted for this activity.

In terms of ESG, we are going ahead with our program of issuing of green bonds. We have had a new transaction green in terms of new lending for more than EUR 7.5 billion. We have had increasing our improving our sustainability rating by 2 rating agency.

Let's go more in detail to some other detail let's give you the consistency of our performances. Also having a look to the business plan in order to have some comparison with our projection. Core revenues are up quarter-on-quarter, 1.3% year-on-year. But as you can see, we are improving each month the go we are at EUR 1.07 billion, which is already more than the average of 2023 business plan, very close to the 2024 business plan. The cost income as well is better than the 2023, which was 57% and is very much close to the 53%, which was the target for 2024. Pre-provision income are very high, better than '23 and '24 at EUR 534 million. And also cost of risk is under control, even though we still have a prudent stance when we have to imagine potential situation of reduction of GDP in 2023.

On Page 14, NII, some details about -- I already say that the year-on-year is plus 3.6% quarter-on-quarter, plus 4.5%. The evolution bridge of NII give you the real growth will come from the real growth from. As you can see, the positive outcome come from the Euribor increase, both in the commercial activities, we grow EUR 55 million in the quarter and EUR 12 million on both portfolio contribution. Meanwhile, we had a negative of EUR 46 million in the quarter coming from the TLTRO, especially interest regime ending. This growing our NII evolution from EUR 22 million to EUR 551 million, of course, as you can imagine, the vast majority of the increase of Euribor, which you can see on the bottom part of this slide on the left is yet to come because on Q3, the Euribor was still 44 basis points now, as you know, is a multiple of this number. And this is one of the main reasons why our commercial spread went up to 192 basis points, consolidating the liability spread, which grew from 43% negative to 33% positive.

On Page 15, is still very important. We give you some guidance both for 2022, NII and 2023, starting, of course, from the new increase of ECB depo facility over the last 27 of October, which brought the rate from 0.75 to 1.50 following this pattern. Our first half NII was EUR 1.39 billion, from which you have to deduct for calculating the second part of the year, almost EUR 100 million, both more than EUR 100 million, almost EUR 110 million from the elimination of the special premium and the tiering. On the opposite, we have a contribution of higher than EUR 200 million coming from the increase of Euribor. This should bring the second quarter to EUR 1.14 billion of NII contribution, which should bring in a total contribution of NII for 2022 of EUR 2.18 billion.

With the trajectory, I will come back to the 2023, the trajectory of the Euribor, as I was mentioning before, should increase has already increased from the average of 2022, which was almost 35 basis points. We have 140 basis points in October, but our projection for 2023 is 200 basis points. Considering the sensitivity, which considering the new regime, TLTRO after the decision of ECB to reduce the contribution of TLTRO reduce our NII sensitivity from EUR 360.22 million for each 100 basis point. We assume that in 2023, we can reach a total contribution from NII, which will be higher than EUR 2.5 billion, which is almost 15% higher year-over-year. Of course, the main drivers of this sensitivity come from the floating short term, medium long-term rate on the loans, which are 57% of our total loans and a very conservative assumption on the deposit beta, which is 41% vis-a-vis 11 basis points, which is the current cost of our deposit.

On Page 16, we go back to our very good commercial performance. We were quite cautious in approaching the increase of lending. We had a very good stance for the first 6 months. So we already reached basically 6 months, the total target that we expected 422 the pace that we expect for the entire business plan, which was 3.2%. So we stay at EUR 102.9 billion, in line with the plan, but without pushing on loans. Let's give you some example on the stock. We have extracted a small business exposure from our total loans, which is around EUR 19 million of this EUR 19 million when before COVID, we had a position guaranteed or collateralized for almost 50%. Now for this cluster of clients, we have increased the total guarantee to 73%, increasing the state guarantee from 10% to 44%. Let me remind that in this category, which, of course, is one of the more riskier in terms of opportunity to increase the revenues in an inflation context. We have only 2.9% of SME portfolio classified at high risk, of which 78% is also secured.

Let's go to the inflow. The new lending is higher, 20% vis-a-vis last year is EUR 20.3 billion and was EUR 16.8 billion. The entire growth is with corporate and enterprise. The household is still EUR 3 billion, like last year. But the composition by rating class of these new grants is 96% into the best asset class, low to medium risk, only 3% mid-risk, only 1% in client classified as high risk. If you extract the EUR 3.1 billion granted to the small business. In the first 9 months of the year, this amounts to EUR 3.1 million, of which 74% is secured, which 55.9% with state guarantee. So we are strengthening very much the quality of our portfolio with all the cluster of our clients, both in terms of rating and in terms of guarantee.

Total PSD2 commission is another very good results considering the backfire coming from the reduction of assets under management investment pace. As you know, this has experienced a reduction due to the market situation. We are almost EUR 2.5 billion lower than last year results in terms of investment product placement. And this brings to have a lower result of 2.8% year-on-year. And also in terms of quarter, we had EUR 4.2 billion Q3 '21, EUR 3.9 billion in Q2 '20, EUR 3.3 billion Q3 '22, is also a normal seasonability effect because in August, as you know, the investment sales product is reduced very much. But all these negative effect has been recovered by the very strong performance of the commercial banking activities which increased the total fee contribution, 5% year-on-year and 3.4% quarter-on-quarter. The vast majority of this contribution comes from the lending fees, up 30%, payment service fees up 12%, trade finance-related business, up almost 11% year-over-year.

Also in terms of management, intermediation advisory fee, the negative performance of assets and funds and Sika was almost covered almost entirely covered by the positive performance of the sales of insurance products, certificates, intermediation of consumer credit with our Argos and the strong increase in credit card related products. So all in all, a very comfort of 1% higher than last year. The same reduction of almost 1% comes from the global cost with a major reduction in terms of cost of personnel, a slight increase in terms of administrative costs, of course, almost entirely due to the energy cost inflation. The good results of 1.1% lower vis-a-vis last year would be even better if you do not consider the cost of insurance, which are, of course, included in this quarter and is not included neither in the previous quarter this year or in last year's results. We can also say that we have almost completely terminated our early retirement scheme will have a further 80 people leaving the bank by year-end. So we will reach the final contribution to the reduction costs starting from 2023.

On Page 19, cost of risk again, also conserving a very conservative stance, both in terms of increasing coverage and also in terms of provisioning, we have a cost of risk at 47 basis points core, which including the one-off for further derisking reached 61 basis points in 9 months '22. Of course, very much lower with respect to '21. As you can see, the vast majority of increase in Q3 performance is due to the coverage increase that you can see on the bottom right of the slide, which led us to increase the bad loans coverage 120 basis points, the UTP coverage of 140 basis points, the total NPEs 160 basis points quarter-on-quarter very good also the default rate still 0.9% as much as the danger rate below the target of the plan and a very good workout rate higher than our expectation at 24%.

Some further information about the prudent approach in our loan portfolio management, again, almost EUR 19 million of loans guaranteed by the state, which is more than 17% of our total portfolio. The average guarantee for this amount are 84%. On the bottom part, you see the differentiation between Stage 1 and 2. Also in this case, we had a prudent approach, increasing changing our model for Stage 2 consideration increasing the global amount of Stage 2 rising for EUR 11.2 million to EUR 13 billion. Some update about an early engagement campaigns that we activated rate in Q2, and we had another round in Q3 vis-a-vis particularly the borrowers, particularly exposed to energy, raw material intensive sectors.

This engagement campaign, of course, is aimed at detecting at very early stage, any potential disruption or problem for our clients, anticipating also the early warning that we reduced in our normal activity. We had a one-to-one approach with clients, which represent a total exposure of EUR 9 billion, higher than EUR 9 billion. As you may remember, in June was EUR 6 billion. So we increased the perimeter of this campaign and up to now, up to October. So considering also October, the up down to the EUR 55 million of classification done in Q2 has increased only of other EUR 47 million in the last 4 months.

And again, the conservative approach was also in staging because we increased EUR 2.5 billion of this perimeter, the Stage 2 portfolio. Let me give the floor to Edoardo Ginevra to have some consideration funding, liquidity and capital.

[Edoardo Ginevra, executive]

Thanks, Giuseppe, and good evening to everyone. So Page 21 shows the intense activity that we are still having confirming similar issuances in the first part of the year. In July, Greenier preferred EUR 300 million private placement in September, green senior nonprepared of EUR 500 million. In general, contributing to a very solid level of funding, 84% of operating funding being represented by deposit for EUR 103 billion and with EUR 36.4 billion of cash plus unencumbered lead assets. The equivalent funding ratios are well above the minimum required by the rules with LCR at 179 and SFR above 100%. For LCR, this is subject to some potential reconsiderations for future projections given that in the new rate environment, the cost of the liquidity buffer has been increased taking into account the new level of rates.

Rating agency assessment are maintained at a very comparable level. DBRS has increased our rating in October by 1 notch. Now we are full Fitch is assigned to the bank and confirm that the B minus, so investment grade as well. More these upgrades were launched in May, as we communicated in the previous presentation to BA1. In general, this positive assessment are supported by the evolution of asset quality, profitability, operating efficiency and capital position, together with the strength recognize an in the franchise and in a liquidity and funding position.

The following page shows the evolution of our bond portfolio, which has been reduced to EUR 31 billion as of the 30th of September, of which 68% at amortized cost and with a progressive reduction of the share of Italian gold. This now declined to 36%, contributing to the level of diversification at a much higher pace than was originally included in our strategic plan, a target that we have announced in the plan was lower than 50%. What also reminding that most of the Langos are classified at amortized cost, the share of fair value added comprehensive income being as low as 2%. -- just to remember where we were in 2016, Italian govies were 99%, 64% of them at fair value of the competitive comprehensive income.

This also introduces in the following page to help in reading data on the evolution of reserves. Fevertree reserves are now minus EUR 628 million, but this is the reflection of, first of all, market risk, much more than a credit risk phenomenon. And the pie in the bottom of this page on the left explains why Italian gold is contributing only for 13% of the reserve impact in the 9 months of this year. And second has to be considered as a transitional temporary phenomenon given that these the figure of the net negative reserves is subject to pull-to-par, which is worth well above EUR 100 million per year in the next in the year 2.

Net financial result is positive for EUR 75 million, and a significant part of it is attributable to the contribution of fair value added comprehensive income related component more than around EUR 40 million, which are mostly attributable to option hedging. Finally, capital sensitivity remained at similar levels as it was 3 months ago. So government bonds having a DPV total contribution of EUR 2.6 million and with 300,000 only attributable to Italian Gov, which is a negligible impact.

Turning to Page 24. The evolution of our capital is shown in this page, providing a number of very important drivers that need to be commented. First of all, the performance, which gives a positive contribution of 21 bps, net profit of the quarter, minus 14 basis points from dividends and 81 coupons. 3 basis points is the combination of the various residual elements, including RWA, DTAs and so on and so forth, leading to a first sub total of 12.9%. Then 28 basis points is the negative contribution of net reserves. 19 basis points is the contribution coming from the acquisition of 81% of BPM that which took place July and which has been here reported and estimated using a prudent approach, assuming the Danish compromise leading the total to 12.4% without the compromise the stated level of CET1 is fully phased at 12.05%. Phasing is 13.5%.

Fully loaded capital position is also positive and well above minimum requirements. If we look at Tier 1 and total capital at 14.6%, respectively, and 17.5%, RWA declining to EUR 61.7 billion. buffer MDA bus and also the buffer versus the total minimum common Tier 1 requirement is slightly below 398 bps fully efficiently utilized given that we have filled in total, both the additional Tier 1 and Tier 2 base. The final conclusion on the highlights of this performance before giving back the floor to the CEO confirmed in the quarter, the delivery track record that we have shown consistently in the last few years and since especially since the announcement on the plan, leveraging on the strength of this bank. So the operating performance shown the highest level of net income in 9 months at EUR 652 million. The growth in core revenues, 2% year-on-year. Pretax profit above EUR 1 billion, plus 27.1% year-on-year. Cost income at EUR 54.4 million, cost of risk, EUR 61 million, but most important core cost of risk at 47 bps.

Asset quality is ahead of the strategic plan target. This bank is now at 4.7%, gross NPE ratio at 2.4% net NPE ratio with default rates fully under control, the solid capital position I just commented with 12.4% of CET1 assuming the news complements and 387 bps for the MDA master.

Some final conclusion about the outlook of '22 and '23. We already anticipated something during the presentation in the previous slide. But I think it's very important to update the previous guidance that we gave you, taking into consideration the new Euribor Boost and also the new regime under the TLTRO. So really considering the negative effect of the recent decision from ECB. In any case, the total revenues previous guidance was EUR 4.4 billion, now it's EUR 4.6 billion.

Operating cost was EUR 2.5 billion, is now is above 2.5%, which lead to a pre-provision income, which was EUR 1.9 million, now is higher than EUR 2 billion. More important, profitability and in per share, up to $0.45 from higher than $0.40 and adjusted higher than EUR 0.50. With the payout, which still remain at 50% and foregut on common equity Taron always in the region of 13%. Of course, the contribution and the boost of NII, as I mentioned before, with the sensitivity, which helped our bank in a double figure growth should lead with a flat GDP at 0 and an average river 2% to an expected EPS forecast for 2020 of higher than EUR 0.60 for our for share. I remember that in the business plan was $0.50 targeted for 2023.

We are very happy of the results, but we are even more happy about the forecast that we can give to you. The management team is very cohesive, very specimen, I would say, in changing the situation that happened in the market in the positive, the best positive opportunity for the bank. And I think the equity story of this bank shows quarter-by-quarter and year-by-year, this capability from our management team. Thank you very much.

[Roberto Peronaglio, executive]

Now, we'll leave the floor to you for the Q&A, if you want to start.

[Operator]

[Operator Instructions] The first question is from Noemi Peruch of Mediobanca.

[Noemi Peruch, analyst]

Thank you for all the details you provided on NII. On the latter, I just have one follow-up question, which is what MREL issuances you have included in your guidance for 2023. And then I have other 2 questions. One, if you could just update us on your decision to whether or not to sell your merchant acquiring business? And the last one is on common equity. If you could share with us the main drivers that will lead you to reach above 13% by year-end.

[Giuseppe Castagna, executive]

Okay. Thank you, Ms. Peruch. Let's say that we are having many request inquiries on the Merchant acquired business, but nothing we decide. As you know, we are very much involved now and committed to try to get the best possible decision related to the bank insurance. And so we have had very few time to consider also the merchant acquired, but could be, for sure, one of the opportunity that we could decide to exploit in 2023. I maybe for NII and capital, I give to Edoardo.

[Edoardo Ginevra, executive]

Yes. Thank you, Giuseppe. So MREL issuances -- sorry for capital, first of all, let me say that we are, on one hand, of course, continuing in our actions on optimization on the level of assets and on the RWA efficiency for the absorption of such assets. On the other hand, the assumptions, the assumptions that we have made explicit that this 13% accounts for the Nice compromise or is adjusted for the niche compromise. And secondly, that we assume the level of bond mills to remain unchanged versus the previous year. concerning the level of issuances that you specifically refer to MREL. Here, we're talking about around EUR 2 billion of new issuances during 2023.

Yes, on capital, yes, we need also to complete the PPA process for BPL Vita, which has been acquired in the second half of this year and is expected also this to contribute to total capital at the end of the quarter.

[Operator]

Next question is from Giovanni Razzoli of Deutsche Bank.

[Giovanni Razzoli, analyst]

Couple of clarifications on my side. It seems like you have incorporated a relatively prudent transaction for NII in 2023 as you are factoring a 2% river at EUR 2.5 billion for next year. So if I look at Slide #15, am I really correct that assuming another 50 basis points, we should add something like EUR 100 million of higher NII to the stated target. And then on the deposit BITA, also there, it seems like you've been very prudent because your peers are incorporated at that level only for a higher level of Euribor. I was wondering whether you can share with us what was the sensitivity of the deposits in the past if you have a kind of historical side to share with us.

Second question, is it correct to assume that the underlying cost of risk in the third quarter is stable at around 55%. And you said that you increased the coverage of bad loans and the UTP. Is that increase only related to the future disposal to the EUR 500 million? Or is it something to build additional buffers for the macro downturn? And related to that, can you share with us what is the amount of provisions overlays that you are on balance today? Final question. Can you remind me what is the impact on the call option on Vera Vita for 2023? Thank you.

[Giuseppe Castagna, executive]

Thank you. Here we are. So of course, I understand that it's not that easy to make a square the sensitivity with the forecast of increase of Euribor. I'm not sure that the more you go ahead, the more you receive the same amount of money, I heard about also my colleagues who are in some difficulties. But I would say that EUR 100 million is a prudent approach to -- for considering another 50 basis points. In terms of deposit, what can I say? We were, of course, 2, 3 basis points when the interest rate Euribor was negative. We have almost EUR 8 billion, EUR 9 billion, which are sort of floating, so linked to the Euribor -- the rest is still at the level in which we were before.

So the total is now -- the average, as I mentioned before, 11 basis points. Nowadays, we are in the region of 14, 15 basis points. So very much below the 41% of the sensitivity analysis. The cost of risk, yes, 55 is including 60 basically is including what we already have provisioned in order to have started derisking we still are having -- we think it's only fair to have a very good FPS projection considering a prudent approach on cost of risk. Then we will see if our approach is more prudent or not vis-a-vis other competitor, but we feel comfortable in giving you this kind of guidance and maybe trying to be better if the situation will be like this year at 1% of default rate.

The overlay right now, I think, are a 15 125 million, so slightly below EUR 140 million, which we have in June. Maybe for the call option of the for the collection of AR, the data that we are using now are approximated based on the current level of own funds of hero and on the current level of net equity in the era what could be the fair value comparison. So I have a total amount measured by January 25 when Basel IV comes into play, which is minus 17 basis points. To be fair, this minus 17 basis points includes already the new weighting of Basel IV of the Danish compromise even in BPM. So there is a part of this impact is due to BPMB. So the net tower is around 10 basis points.

[Operator]

The next question is from Christian Carrese of Intermonte.

[Christian Carrese, analyst]

I have 3 questions. The first one, on the guidance you provided in 2023, the EPS above $0.60. I was wondering what kind of assumptions have you got in terms of cost of risk. If I'm not mistaken, you are assuming a GDP flattish for 2023. So what are the assumptions according to this scenario? And if you have also an adverse scenario with SCB recession. The second question is on capital. If you can clarify the bridge to reach the 13% common equity Tier 1 fully loaded by year-end.

In particular, I assume some benefit from the P&C business disposal and maybe also there was some excess capital on the PMI that we can release or if there is any capital headwind tailwind that could help to reach that target. And finally, on net interest income, the guidance you gave for 2023 is based just a clarification based on current rates or you're looking at the forward curve by year-end for 2022. So just to understand what kind of upside you have on that number?

[Giuseppe Castagna, executive]

Thank you, Carrese. In the first question, you are even more demanding the DCB, I would say, because you want to know in advance all the details. But let's say that what I was mentioning before that our bank been normally very much more prudent is also reflected in the cost of risk of 2023. So the assumption of $0.60 is not with a massive reduction of cost of risk, I would say, which is with a cost of risk which is implied at 0 growth. Common Equity Tier 1, I think we have already responded with Davos there are no other disposals. There is no other potential component. We think that we can reach the team with the full impact of the Danish compromise plus some plus, of course, profitability of the quarter and some further optimization. In terms of NII, we think that we are based, again, on 200 basis points.

[Christian Carrese, analyst]

So it's a bit lower than the ureter and only a few basis points more than the current Euribor situation.

[Giuseppe Castagna, executive]

The target in 2023 is as what kind of lever by year-end 2022. An average of 200 basis points.

[Operator]

The next question is from Andrea Vercellone of BNP Exane.

[Andrea Vercellone, analyst]

One question and one clarification. The question is on your EPS target, both '22 and '23. I just wanted to make sure that these are clean EPS. So you have not included anything related to the possible disposal of the -- or part of the P&C business, merchant acquiring and so on in either year. And the clarification is on the sensitivity, the EUR 220 million for 100 basis points -- did you -- do you provide that guidance with the starting point, you rebate at 0.75 as it was in September or the current one 1.5.

[Giuseppe Castagna, executive]

Thank you, Mr. Vercellone. I will give you no, the APS is compared with the business spend of 2023. So we don't have any action one-off, any particular contribution from capital management transaction that just line by line, the projection of this new environment of Euribor projected to the figure that we have reached up to now. So we feel that there is not basically, there is no one-off at all. So it's the normal the coverage situation project on are with the new interest rate environment handover sensitivity?

[Edoardo Ginevra, executive]

Yes, sensitivity has been calculated using the models as they were in September. So they are not updated with an evolution in interest rate, just -- but the key sensitivity of the sensitivity. If I think to the deposit beta, the increase in the deposit beta from June to September was 3 basis points, which is worth EUR 30 million of sensitivity just to give a ballpark.

[Operator]

The next question is from Adele Palama of UBS.

[Adele Palama, analyst]

Yes. I have one question on the asset quality details slide. I see there's a decrease in performing loans. Can you explain what is driving that decrease on the gross performing loans. And then on TLTRO, sorry if you already mentioned it, but what's the plan? I mean, for the repayment, are you planning any early repayment of the facility? And then on the deposit EBITDA, can you please remind us what's the deposit EBITDA behind your 2023 guidance? And then last on LLPs for the quarter, what's the amount of one-off in the total LP that you reported this quarter?

[Giuseppe Castagna, executive]

I hope I understood all the questions. Please clarify if I am wrong in answering. No, the ratio may be is because there is a decrease in bonus related to the repo activity, of course, not to the clients because you have seen that we are increasing the line for the client activity. So this should be the underlying factor. TLTRO, we didn't of course, as you know, it's very recent, the decision. So of course, we are changing all our plan, but it's very much possible that we wouldn't have any need for postponing the duration of the TLTRO by year-end, we think that we can reimburse me consistent lives, I would say, above EUR10 billion, possibly of TLTRO.

Beta behind the 23% is what I mentioned, 41 basis points. And LLP is one-off. No. In Q3, there is also only the yes, some of course, we have always some monomer on calendar provision impact and also on increasing the coverage of our NPE stock. Is that all right?

[Adele Palama, analyst]

Yes And the euro amount of that one-off LAPs?

[Giuseppe Castagna, executive]

I wouldn't say that it's a one-off, but it's around EUR 30 million. Okay sorry, Adele. You mean the previous, the one in the first and second quarter.

[Adele Palama, analyst]

No, no, the third quarter.

[Giuseppe Castagna, executive]

In this quarter, again, it's not a one-off, but it's some more provision due to the calendar provisioning and the increasing of coverage.

[Adele Palama, analyst]

Okay. And sorry to add another question, and apologies if you've already mentioned it. But are you planning to increase the Govies portfolio? I mean not specifically on Italian Govies, but European growth is given the fact that it has been down even this quarter.

[Giuseppe Castagna, executive]

Yes, we are currently analyzing the various alternatives in the new rate environment and in a new test funding. So we may proceed to very tactical investments, especially concentrated in amortized cost to exploit opportunities for Kari low duration, lower B.

[Operator]

The next question is from Marco Nicolai of Jefferies.

[Marco Nicolai, analyst]

A couple of questions from me. First is on insurance. So given that the process of buying back the insurance is now well underway. How do you feel about the targets that you gave during the strategic plan in terms of insurance business contribution to the P&L? And do you have at this point any idea of the potential synergies you could extract from the integration of these 2 JVs. And also, you had EUR 14 million contribution to P&L from BPM Vita this quarter. So what should we expect from this line going forward? So is this kind of a target level? Or we could expect even something more. Then another question on the M&A strategy.

So also in light of the recent capital increase of Monte dei Paschi, I picked up, obviously, a few comments on the press on this, but if you could just give us an update on your view on M&A strategy going forward? And also, if you could give us an update on Argos and how you see behaving the consumer lending in this inflation environment? On one side, inflation could be a positive, let's say, in terms of consumer lending because volumes are kind of inflated as well. But at the same time, this is true only if consumer spending holds up. So how do you see this trade off? And what do you see for Argos contribution going forward? Thank you.

[Giuseppe Castagna, executive]

Insurance, of course, no, we have only 1 quarter in our balance sheet. So of course, we have to consider the full year, and we still feel that apart from the situation, driven also by the performance of the bonds and the reserves of the insurance company, which are nonperforming very well. Likewise, I would say the bond in our portfolio in terms of valuation, but the level of contribution is still the one that we mentioned in the plan that is around for BPM beta is around EUR 29 million, I think, per year.

And we can confirm that the level is this one. Of course, it's completely going to change the total contribution that we have in 2024, which when we did the plan was done, including 100% of both the company incorporated into our bank. Of course, if we will decide to sell the P&C to some of the current bidder, we will give you a new guidance on the total contribution coming from the stand-alone business driven by ourselves and PSC business driven by the joint venture.

Of course, our consideration is that if we go with very competitive and professional in the bank insurance business is because we want to accelerate the results that we were forecasting when we did the plan. And so possibly what we lose in terms of contribution from the 100% will be compensated as much as possible by the speed of the pace of the joint venture driven by professional insurer.

Then M&A, frankly speaking, I don't have anything too hard to what I said for many times, many years I am very happy that MPS did is capital increase successfully. I'm sure that now they have to work on their business plan. And of course, I cannot say anything rather than we were not interest before. We are not interest now, and we go ahead in our road map that, as I mentioned in the figure that I pressed to you, we feel it's very successful also on a stand-alone situation. Argos. This was a year record for Argos. So up to now, things are doing very well. Of course, there is a bit of slowdown vis-a-vis the first half of the year due to the increase of Europe. But at the same time, of course, as you were mentioning, this is also the inflation gives some opportunity to invest in consumer goods. So I think we will have -- we don't have yet, of course, figures for 2023, but we expect a year, which is at least like the one we had up to now.

[Operator]

The next question is from Luis Garrido of Bank of America.

[Luis Garrido Regalado, analyst]

I have 2 on capital, if I may, please. Just on the Danish compromise, do you have any visibility for when you might be getting the approval? You booked a benefit of about 30 basis points now before the approval, you hinted there might be a greater benefit in the fourth quarter. Is that right? How much benefit and by when exactly? That's the first question. And then the second question I had is on your capital target and how you communicate around them. In the second quarter, you mentioned the 13% fully loaded guidance by year-end, including the Danish compromise. You also mentioned this MDA buffer target above 420 basis points by the end of the year. This is no longer in the slide now. Should I take it that, that guidance has gone -- and if it is, what is the MDA buffer level that you feel comfortable with going into a recession?

[Giuseppe Castagna, executive]

Just on a general point, then I will leave to Edoardo the precise number, but we feel very comfortable, of course, both with 13% and 420 basis points. But this is not something that we would like to have as a target in the future. It's very much, I would say, abundant, and especially if you consider the 420 basis points. So we think this is our guidance for the full year. But going ahead, it's possible that we can use this capital. This is what we feel we can get by year-end.

[Edoardo Ginevra, executive]

So on the level of buffer, the 15% target we gave is fully consistent with the buffer that was provided in last quarter, we thought the market was interested only to the capital, but we can confirm most of the other guidance. For the Danish compromise, what we have put now is a conservative estimate of the benefit of the lens compromise. The technicality behind the fact that we needed to have an estimate is that we haven't completed yet the PPA process for the stake in BPM Vita. Once this will be concluded, which is end of next quarter, we will be more precise in including a more accurate estimate of the benefit from [indiscernible] compromise. On timing, this is not under our control. What we can say is that we submitted in July, sorry, the application for the financial conglomerate, which is the prerequisite for this compromise, we feel that the conditions for the financial conglomerate can be easily verified.

So it's just a matter of process management from the viewpoint of the various supervisors involved, which is not only ECB but also the insurance authority. After the financial conformant status is granted, then the organizational requirements on the Danish contents, which are related to the ability of the bank to prove that it controls in full the insurance managers, the risk has a clear grip on the key processes. This can be proved very easily because we're easing from our perspective, at least because actually, since the day 1 of the acquisition of BPM Vita, the company entered seamlessly into an integrated approach with the group, adopting homogeneous policies, committees and risk appetite framework. So really, we are not in a position to provide commitments for the supervisors, we're all in a position to provide confidence that the requirements are met.

[Operator]

The next question is a follow-up from a from Andrea Vercellone of BNP Exane.

[Andrea Vercellone, analyst]

Sorry, one more. I'm referring to the Slide 23. Maybe this one helps answering all of the questions on 13% at the end of the year. Can you give us an update on your reserves on debt security at fair value, the number that is now relative to the minus EUR 628 million as of the end of September.

[Edoardo Ginevra, executive]

Yes. Thanks, Mr. Vercellone. Actually, let me first clarify that the 13% is based on an assumption that reserves are not changed. So that the bond deals are not changed. So in general, this is we don't have control on the evolution, the further evolution of the financial market, we can commit to the 13% if there are no negative trends in the future level of results. What's happening in October is that we are very close to the level that we are showing here, the 68 and the number that we have today is, I think slightly below, but...

[Operator]

Gentlemen, there are no more questions registered at this time.

[Giuseppe Castagna, executive]

So thank you, everybody. I'm glad that you would have all the information we were providing. Of course, Mr. Peronaglio and our team is available for any clarification. Thank you, and good evening.

[Operator]

Ladies and gentlemen the conference is now over. You may disconnect your telephones. Thank you.