Banca Monte dei Paschi di Siena SpA
MIL:BMPS
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Banca Monte dei Paschi di Siena SpA
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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the MPS Group First Quarter 2020 Results Presentation Conference Call. [Operator Instructions]
At this time, I would like to turn the conference over to Mr. Marco Morelli, Chief Executive Officer and General Manager of MPS. Please go ahead, sir.
Good morning, everybody, and thanks for attending our Q1 '20 results. Before we dig into numbers, I would like to express my warm thanks to all of you guys for having participated to the last 4 years of life of Monte dei Paschi. Your inputs, your suggestions, your questions throughout this period have always been fully taken into account by our management team and myself to make sure every single round of presentations and talks afterwards was tentatively done in a better way. So thanks again. It has been, as I said, of great help.
Q1 numbers, let's start from Page 2. I think as usual, this is pretty much a snapshot of key items and key topics in our agenda. Pre-provision profit of EUR 181 million, which is basically -- which basically encompasses 2 relevant features. Net interest income is essentially stable net of the calendar effect. And commission and fees, in spite of the fact that as you would expect, March was pretty much a sudden month. We had a better performance than Q1 last year and pretty much in line with Q4.
Cost of risk, we had a very relevant point. We did decide to have a very conservative and precautionary approach which, by the way, and I would like to stress this, pretty much reflects the approach, you might recall, we did have Q1 2019, i.e. fully factor in our loan loss provision policy, the impact of the more adverse macro scenario. And we will give you in a while full detail.
The reason why we opted for this kind of, as I said, conservative stance is that -- is very simple. We do believe it better reflects what is the overall impact of what we are experiencing and living, both from a professional and personal point of view, since the beginning of March, what the potential impact going forward is going to be for the foreseeable future.
Net of EUR 193 million of additional provisioning, which are split on the nonperforming portfolio and the performing portfolio, as we will see in a minute. The ordinary component of our cost of credit would have landed at 60 basis points.
Net income, as a result of this extra provisioning and topping up EUR 112 million of nonoperating cost, would take us to EUR 244 million net. As we did again in Q4 and along the same lines of being conservative, transparent and in order to adopt a very caution view, we did not reassess the DTA number from fiscal losses. And therefore, contrary to the first 3 quarters of 2019, there is no DTA impact.
The result of this comprehensive approach leads us to a Core Tier 1 of 11.9% fully loaded and a total capital of 14.5% fully loaded, which also factors in the ongoing reduction of our gross NPE ratio. As you recall, we were at 12.4% year-end '19, and that number was actually the target of the restructuring plan 1721, and I'll dwell upon the restructuring plan in a while.
We progressed and throttled forward along the same trajectory. And we now stand at 11.8%, which is 11.1% gross NPE according to EBA definition.
Liquidity-wise, pretty much on track on every single kind of metrics and our internal overall assessment, both on LCR, net stable and overall counterbalancing capacity.
The next 3 pages is a picture and snapshots of what we did during the COVID 8 weeks in terms of working along different rules of engagement, internally and vis-à-vis our clients; what kind of access we did record on our digital channel vis-à-vis our branches, traffic; and what kind of measure we are putting in place and implementing in order to make sure we do provide a visible and tangible help to the Italian economy. You see a few numbers here. Worth mentioning the fact that we had, during the last 8 weeks, peaks here and there of beyond 85% of total number of employees working remote and that includes branch and frontline people and back-office colleagues. We did that without any major operating and logistical issues along the period.
If we move to Page 4, this is numbers in terms of application and gross exposure we had according to the moratorium environment. As you see, EUR 12 billion roughly of total exposures. We had 90,000 applications. You have the split between corporates and households, both in terms of gross exposure and overall numbers. 25% of the overall demand are MPS ad-hoc initiatives, i.e. this is something the bank decided to move forward in favor of families, individuals and households altogether outside the scope of the 2 relevant decrees ruling the moratorium and the guarantee.
Page 5. Same analysis on application received for, this we call, decreto liquidità, close to 20,000 applications for an overall exposure gross of 45 -- EUR 450 million. And again, as everybody knows, 90% is guaranteed by the Fondo Garanzia. And we are implementing as quickly as possible, according to the procedure, this kind of approach.
Page 6. A few numbers and a split on our commercial performance. As I said, bottom side of the page, we continue to grow our current accounts and time deposits despite COVID, pretty relevant number because the increase vis-à-vis year-end '19 was in excess of EUR 3.1 billion.
Commission-wise, top -- right top of the page. The pace for the first 2 months, as I said, was very, very encouraging. And then we had, as you might expect, the drop in March, considering March had only 3 real full working days before the weekend of the 6th and 7th of March. And same applies in terms of trajectory and year-on-year absolute numbers on the flow of new mortgage.
A few words on Widiba, Page 7. I think eventually, and I would say in spite of COVID because Widiba had no real impact in terms of key numbers of the balance sheet and the profit and loss accordingly. In spite of COVID, both on business continuity and all the initiatives on innovation, as you can appreciate, numbers are very, very encouraging; 230 million new flows on the retail side compared to the beginning of the year.
Page 8. How do we stand in terms of capital ratios according and in the light of the amended SREP level, which, as you all know, was formally communicated by the ECB mid-March. We have a buffer of 475 basis points on our Core Tier 1. And we do not expect to have any divergence from this trajectory. The new SREP guidance is 10.14%, sorry, 8.83% for Core Tier 1 and 13.64% was the original for the total capital. So buffers are pretty much there.
Funding and liquidity, which I quickly dwell upon. Again, the main message is that in Q1 we did reimburse EUR 8 billion of GGBs, which were expiring January and March. And in spite of the fact that we did have to proceed according to those lines, we managed to place the remainder of the Tier 2 bonds, EUR 400 million in January, an additional EUR 750 million senior again in January. And so far, we had no impact on -- in Q1 out of potential COVID-related tension.
Before I pass to Andrea Rovellini for additional comments, and as I said focus will be on our end loan loss provision approach, let me make 1 final comment. You remember, I repeatedly stated in the last 2 years that Monte dei Paschi was pretty much handling a thorough vertical and cumbersome restructuring plan. And at the same time, had to reposition the bank and relaunch the bank from a commercial standpoint. I think we managed to do it in spite of very stringent commitments, you're all aware of, because many times we elaborated upon the extent to which was easy or difficult or impossible to cope with such stringent commitments. By all metrics, Monte dei Paschi is now a bank which is back in the market. And numbers in terms of growth of our loan book, the reduction of our NPL, the growth of our commercial deposits, the various initiatives we've been launching. And I just mentioned two Officina MPS and strengthening Widiba.
MPS is back in the market. I do believe it's fair to say that at this juncture, the bank and the shareholder, but the shareholder in principle and to start with, should not only think of revising or adjusting the restructuring plan, but I do believe it's time for an overall risk -- an overall revision of the plan, a new plan for Monte dei Paschi, which will put the bank at least on a sort of similar level playing field vis-à-vis of all our competitors, which by the way, in the last 12 months, came out with brand-new plans, brand-new projections, brand-new targets, which, in turn, will have to be revised and revisited according to the macro environment.
So I would make this sort of closing remarks before stepping down as CEO of Monte dei Paschi because employees and clients of Monte dei Paschi and our stakeholders, in general, I do believe, deserve at this juncture a totally reframed framework and picture as far as Monte dei Paschi is concerned. Andrea?
Okay. Thank you, Marco. So 10 minutes in order to add some further detail on the structure of our results for the first quarter.
Page 11. You can see that net of COVID provisions, the net operating result is in line with the results of the last quarter, which included about EUR 130 million for the one-off revaluation of 1 participation on financial assets.
In the other page, Slide 12, we have the trend of the net interest income. And we can say that after the drop in the net interest income, we've seen in the fourth quarter last year, the level remains essentially stable due to a spread with customer, which is still at 184 basis points and the fact that the average rate of the new lending overall remain at the levels of the second half of '19. Net interest income for the first quarter is also affected by the cost of the senior and the sub and the Tier 2 bonds we issued in January.
If -- so if we move to the fee and commission income, we can see that the performance of the net fees and commission for the first quarter was positive for us, allowing us to replicate what we achieved in the last quarter last year. [ That includes ] the month of March contributes for less than half of the results of the previous 2 months, EUR 11 million more than the first quarter of the previous year correspondent exactly to the guarantee fees that we paid for the GGB that were reimbursed. And this advantage will be duplicate for the next 3 quarters.
Moving to the financial revenues. We have results in line in the quarter of around EUR 40 million, of which EUR 12 million from the contribution from AXA. And I wish to highlight the results of the recomposition of the banking book Govies portfolio with a contribution of around EUR 50 million, thanks to the positive condition in the first 2 months of the year. And -- but on the other hand, the negative market condition in the second part of March generated annualized losses on the fair value profit and loss book managed the portfolio of Capital Services. But given the average duration of this kind of portfolio, we expect to recover losses fairly quickly as the securities reach the maturity in the next quarter.
The rigid cost control discipline continues to produce good results. Costs were reduced about 8% to the previous quarter, 4% considering the first quarter last year. And this in spite of the increase coming from the renewal of the collective labor agreement that weighed around EUR 5 million in the quarter.
We can have some more detail on the structure and the composition of the cost of risk. And I believe that our method of calculation of the cost of risk in basis point is pretty clear. We have the ordinary part equal to EUR 122 million, that annualized makes and generates 60 basis points, while the extraordinary part linked to the macroeconomic change scenario is considered at the moment as a one-off and weighed for the remaining 23.
Now we can have some more detail in Page 17. And we must, first of all, bear in mind that we are considering a scenario that foresees a cumulative drop in the GDP in '20 and '21, with negative peak in '20 with a drop in the 2 years that is 3.4%.
In this regard, you might recall that we have already adjusted our provision with the modification of the scenario last year. And we can say that the determinants of the new scenario are an increase in the level of the PD for the performing portfolio with an expected increase in stage 2 with around -- with a percentage that is around 15%. And then a reduction in the rate for the unlikely to pay and a longer recovery times for bad loans.
So this is the reason why we have under -- around EUR 120 million additional cost of credit for the performing exposure and EUR 74 million increasing provision for the nonperforming exposure. But we have to consider also that we -- obviously, we worked on everything in this portfolio that requires a collective evaluation. So 99% of the tickets in terms of number, 36% in terms of value of our nonperforming loans are evaluated with the statistical method. And then we can quickly adjust the provision to the new scenario in terms of trend of the economy.
And for the next quarter, for sure, we have to make specific attention to the position that are evaluated on an analytical basis that at the moment are not included in our evaluation. The good -- we say, the good trend of the, what we consider current cost of credit are linked to a decrease of default rate to 1.1% in the quarter. And this is Page 18.
We can go directly to the other page of the structure of our balance sheet. And we have -- we can have a quick comment on the trend of the volumes. So Page 20, we have -- we can show continual growth of loan -- our loan portfolio that is EUR 2.1 billion in the quarter.
Page 21, we have excellent performance in terms of commercial funding. So the current accounts and time deposits grew 7.2% on the previous year -- year-on-year and 4.7% quarter-to-quarter. We have asset management that are impacted by the market effect without net funding in the period, in line with the trend that we had in last quarter last year. And the decrease in the asset under custody is due to the outflow of our deposit from a large corporate customer without any kind of impact on the profitability.
We can go directly to Page 24, in which we can have the results of -- and the value of our Govies portfolio. So the Italian Govies portfolio is stable compared with the previous quarter with the fair value to other corporative income component, which reduced a little the credit spread sensitivity to 1.4 million per basis point. This is something that affects the structure of our capital ratio. And we have around EUR 70 million reduction in the equity, EUR 40 million coming from the Govies.
I pass, again, the call to Marco for the final remarks.
I think I would rather give room to you all for questions and then we wrap up later.
[Operator Instructions] The first question is from Jean Neuez with Goldman Sachs.
I just wanted to ask 2 questions, please. The first one is going to be, I guess, some of your peers have given outlook for full year loan losses and then for 2020 and some also for 2021. And I just want to know whether you'd be willing to share some sort of a base or stress case scenario for those 2 years in regards to your macro assumption?
And my second question was on what was occupying the headlines at the beginning of the year with regards to the potential transfer of NPLs with state vehicle to relaunch essentially the discussion with the commissions, et cetera, et cetera. And I wanted to know whether there is any update with regards to this project?
Marco Morelli. I think question number one, outlook for 2020 onwards. I do not feel appropriate to try to shed light and come up with my own idea on the outlook, considering a new Board will be fully functioning in a matter of 10 days. So I would rather leave to the new CEO and the new Board to possibly come back to this very point at the next analyst presentation on half year results.
On the macro, Andrea commented upon earlier, we took something which is pretty much in line to consensus, even considering the most recent outlook of 48 hours ago in terms of close to 10% drop in GDP for 2020 and a rebound of 6.5% for 2021.
Your second point, NPL transaction either, I think on a formal basis, as we speak, the bank has not been notified by the Italian Treasury of any formal decision by the European Commission. My feeling is that I would really hope it's not going to be that long. But as I mentioned, more than one time -- more than once, for the bank, it's critical to have a formal positioning by our shareholders and the European Commission in turn.
The next question is from Riccardo Rovere with Mediobanca.
A couple of questions, if I may. The first one is on the moratorium, the slide you provided right at the beginning of the presentation. I've seen EUR 10 billion, maybe a bit difficult to understand the charge, but it doesn't seem to be a small number to me. It's anywhere between 10% and 15% of the book. And especially on corporate, it looks like a fairly large number, at least to me. Should I -- how do you interpret this level of application? Do you see any reason to be worried about that?
And the second question I have is on -- again, to get back to COVID-19 provisions. If I understood correctly, you plugged 10% GDP decline and then a 6% bounce in 2021. Let's put it this way. If the GDP projections remain more or less this one, the EUR 190 million you charged in this quarter should be more or less all. Is this the way we should interpret this -- your statement?
And maybe finally, on the loan growth, which went up by a couple of billions, the loan book went up a couple of billions, but I noticed that a decent part was actually concentrated in repos. So maybe that is a volatile one. Anything that you can -- any light that you can shed on how we should see loan growth going forward? Also in light of loans guaranteed by the government and so on, do you think that the loan book is going to expand maybe because clients, firms, corporations will try to secure liquidity as soon as they can?
Thank you for your question. So for the moratoria, we don't have, at the moment, any particular issues. So the level of the demand we witnessed is reflecting the cautionary approach adopted by the corporates. And we are not expecting specific modification in the trend that we saw in the first -- in the last weeks. And for the first information that we can also receive from the statistical evaluation that we have on the trend of this product for the Italian market, we can say that we are more or less in line with our market share, both for the corporate and the private, the household. If -- so no specific issue on this side.
Considering the trend of the GDP, we prefer to consider the different level of the GDP that we have considered in our assumption in 2 years' time or better 3 years because this is the time frame that we consider in order to analyze exactly the potential effect on our -- the level of our PD. So we know that the combination within the deep -- decrease in this year and growth in the next year could generate some differences. But at the moment, we are working with minus 7% in this quarter, but a very limited -- excuse me, this year but with a very limited expectation of growth for the next year. We know that other provider in terms of expectation generate higher level of decrease but higher level of increase. What we are considering now, very important, is the level that we can reach at the end of next year in order to analyze exactly the impact on the cost of credit.
For the cost of credit, we have updated all our statistical and collective evaluation to this scenario. For sure, we have to expect some possible for increase in the cost for the analytic evaluation of the nonperforming exposure that we have to do in the next quarter. This is something that we could add to our natural and to our current trend in the cost of credit. But I can tell you that in this -- our -- in our estimate, we are not factorizing also the possible switch of the credit risk from banks to the scheme of guarantee that are defined in the decrees issues by the government. This is something that is very, very difficult for us to understand. I can imagine that our conservative approach on the statistical method that is not considering this effect could also compensate some specific increase in terms of provision for the single name.
In terms of loan growth, what we are seeing -- we saw in the first quarter that there is no specific increase in the utilization of the credit line from corporates. So we have seen some [ withdraw ] increasing, but we're managing the situation without any worry in terms of liquidity.
And for the next month, at the moment, it's quite -- it's not -- for us, it's quite difficult to generate forecast. We are readjusting all the planning cycle in the next weeks. I think that a better view could be complete only at the end of this cycle of planning with the presentation of the second quarter results.
Everything is very clear. Maybe just one thing I'm only a bit confused about when you mentioned the GDP decline plugged into your internal models to calculate, take into account EUR 190 million. Did you say minus 7% this year and then a mild bounce next year, did I get it right? Because [indiscernible] the 10% that I understood before. Just not to be confused.
No. At the moment, we are considering around less -- a decrease of 7% this year and then an increase that is 3.5% next year. So the average of -- the final point at the end of '21 is minus 3.5%. And then we are expected a very limited growth also for '22. So this is the structure of the expectation that we had when we decided to close the results for the first quarter. We are considering also that a different trend of the GDP in this year. Usually, also considering all the forecast that are defined by the institution are combined with a higher increase next year. So we are considering that if we update this kind of evaluation at the end of the second quarter, we could have more or less the same results. So we are confident in this structure of number for the moment.
The next question is from Corinne Cunningham with Autonomous.
A question which it might not be one for you, it might be one for your successive management team. But on your capital drawdown and capital targeting, what do you see is an acceptable buffer to run with versus the SREP? And I'm thinking particularly because the ECB has said that it's okay to use the capital conservation buffer. Just wanting some guidance really on what kind of further degree of drawdown in capital you would see is likely or possible over the next couple of years?
We can say that -- Rovellini speaking. So if we consider the trend of the capital ratio for the future, we have also to combine the flexibility that was announced by ECB in order to manage a possible breach of the Pillar 2 guidance and also the capital conservation buffer. If we consider this, we could have a buffer in terms of -- an increasing buffer in terms of available capital in order to face further negative trend of our results that are very, very important. So this is something that, for us, is good because having a higher buffer means that we are not to stay very, very strict to the results, also considering the possible develop of our business for the future in order to support the economy. And then we have also to consider that the anticipation of some modification in terms of the supporting factor for SME also -- and also the possible change in the valuation of the deduction from the software are new rules that can also give us a possible higher level of capital that is important in order to increase the buffer towards the requirement.
Okay. Could I ask you some questions about the TLTRO as well? You mentioned that there's an additional EUR 10 billion that you could draw down. Is your expectation that you would make some use of that additional EUR 10 billion? And if so, what would you expect to do with the proceeds?
For us, at the moment, it is important to stress that the potential utilization of the TLTRO III moves from 16 to 26. And this is very, very important. We know that -- also that the condition in order to reach the full benefit in terms of impact on the net interest income are easier and this is something that was defined in the last days. So we will analyze exactly our position. And if there are the opportunity in terms of balance for our P&L and also the structure of our funding, we are happy to have this kind of more flexibility in order to support the results of our net interest income.
And just on that last point. Is there a request being made currently for regulators to be more flexible in terms of recognizing the volatility on the BTP books or your mark-to-market books? I know back, historically, there had been a waiver from the need to book that volatility against capital. Is this something that you're aware of that Italian banks are asking to be reinstated to enable banks to make full use of the additional TLTRO III capacity?
I'm sorry, but I'm not able to catch exactly your question. Could you repeat, please?
Yes. So if, for example, you use the additional TLTRO III capacity to buy more BTPs, for example, if those are held in the trading portfolio, then obviously, the mark-to-market volatility affects the capital position. Historically, there's been the potential to have a waiver to book that mark-to-market volatility. Is this something that you think Italian banks might be looking for at the moment to be able to make maximum use of the increased TLTRO capacity?
Okay. Thank you. More clear now. No, no, the level of the -- our investment in the Italian Govies remain at the level that we have now. We have also some specific commitment that we took with precautionary cap. So we can't grow this kind of investment. And when I refer to the potential benefit in terms of net interest income, I refer only to the condition of the TLTRO III, but not the situation in which we can use it to invest in financial instrument.
The next question...
We can also give, but we can also give you some more detail directly from our financial department.
[indiscernible] speaking, finance department. Just to clarify, we have more than EUR 20 billion of unencumbered counterbalancing capacity, which is our eligible asset that when we use, we use collateral. Therefore, we don't have any need to significantly increase our financial assets in order to give collateral and to do so-called credit trading. It's not our policy so far. And what we spoke before of the potential impact on net interest income is only based on the rates of the TLTRO, which is very favorable because in the first year from June -- June of this year and the June of next year, there's a total benefit of [ booking ] that may arrive at about 1% in terms of rate compared to other financing on the market and another 0.5 point in the following 2 years. So is -- we will design our strategy on the TLTRO in the next months, considering also this benefit coming from the rate of the ECB.
The next question is a follow-up from Riccardo Rovere with Mediobanca.
Yes. I just wanted to ask your opinion on the government-guaranteed scheme. Is this now up and running? Is it functioning well? Do you expect this to be -- let's say, to support a good part of the brand-new loans to be originated in the coming months?
Yes. We are, in this moment, analyzing exactly all the condition to receive this kind of guarantee. And we -- so -- and define also some interest from our customer. And we think that in the new planning for the rest part of the year, the next year, we had to consider the fact that a part of our new loans will be covered by this kind of guarantee. It depends a lot on the level of the prices that we can, at the end, define the condition. But we are, in this moment, starting the request from our customer in terms of sustaining the financial structure, and we are advising them in order to define a better solution. We think that, in any case, this is a real and important support to our corporate customer for the next quarter.
The next question is from Manuela Meroni with Banca IMI.
A couple of questions from my side. The first one is, you have a sort of sensitivity of your cost of risk to different level of rigidity, so what is going to happen if GDP decline is not minus 7% this year, but it's bigger than all of this?
And the second question is on the DTA reassessment. You say that you didn't reassess any DTA in the first quarter 2020. I'm wondering if you are in the condition to reassess DTA in the remaining part of the year or in the next few years?
Okay. Yes. For sure, we have a sensitivity in terms of possible effect on the cost of credit, considering the level of this GDP. At the moment, considering an average movement in the 3 years, so the average level of the GDP movement for 10 basis points can increase the cost of credit by 3 basis points. This is more or less our sensitivity. And for the reassessment of the DTA, at the moment, we have -- we decided not to include any kind of reassessment because as you know, the reassessment have to be linked with our expectation in terms of profitability for the next future. This is the reason why with a macroeconomic environment that is worsening, we decide not to take this kind of advantage. I think that, in any case, for the second quarter, with a defined and better complete cycle of planning, we could have the final decision in terms of accounting on this element.
In any case, the movement on that are not having any kind of reflects on the capital ratio.
[Operator Instructions] Gentlemen, there are no more questions registered at this time.
Okay. Marco Morelli again. So wrap up. Stress and underline my thanks again for your input throughout. I do believe we did try, every single time we engage, to be as factual as possible, as open to disclosure as possible. And I really hope that helped you all to sort of gauge and assess the performance -- the financial performance of Monte dei Paschi. Good luck to you all for your personal and professional life. Many thanks. Goodbye.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.