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 morning. This is still Chorus Call conference operator. Welcome and thank you for joining the MPS Group First Quarter 2023 Results Presentation. [Operator Instructions]
At this time, I would like to turn the conference over to Mr. Luigi Lovaglio, CEO of MPS. Please go ahead, sir.
Thank you very much. Good morning, everybody. Many thanks for joining us for Monte Paschi first quarter results. I'm pleased to present today a very good set of results. Monte Paschi is back, and in good and healthy shape, and the business plan targets are really concrete and at sight. The same quarter last year when we charged the one-off extraordinary costs relating to voluntary exit of more than 4,000 colleagues from the first of December, it was the Monte Paschi turning point.
Fourth quarter, we started to report one month of such structural benefits. Today, with the first quarter results, we provide facts about our sustainable profitability with makes easily understandable what could be the return for shareholders starting from this year.
Let me now move on to some highlights on the first quarter results. As I mentioned, this was the first good quarter after reduction of 4,000 headcount and therefore a quarter where the bank had the possibility to deploy its full potential. We reported a net profit of EUR 236 million versus EUR 10 million in the first quarter of last year and versus EUR 156 million we achieved in the fourth quarter of 2022. Basically in the first quarter 2023 we have already achieved on the firm 1/3 of the 2024 business plan target. The new operating profit reached EUR 309 million, plus 32% quarter-on-quarter and 2x the results achieved in the first quarter of 2022. The gross operating profit reached over EUR 400 million, almost 25% up quarter-on-quarter, as a results of higher revenues and lower costs.
Further improvement quarter-on-quarter on interest income despite the expected TLTRO negative one-off. The net interest income dynamic year-on-year is above 50%. Rebound of fees up by 7.3% quarter-on-quarter driven by both wealth management and banking fees components.
The costs are significantly down. In particular HR costs are decreasing by almost 20%. As I was anticipating, in this quarter we started to fully benefit of the staff exits realized in the last December. This was one of the main initiative of the business plan. We realized such initiative rapidly and with the well-thought preparation, thanks to which it went smoothly, with no impact to bank's commercial capabilities.
Our cost-income ratio is now at 53%, down by 7 percentage points versus December 2022, and more than 15 percentage points versus first quarter 2022. Quality of the asset confirmed a very good level with gross NPE ratio at 4.1%, still improving versus December and better than 4.8% of last year this quarter. The cost of risk is stable at 55 bps while NPE coverage improved by more than 200 bps.
Very good outcome on capital ratios. The core Tier 1 fully loaded including net profits for the period and after full implementation of the internal model review reached 14.9%. Such impact of risk-weighted asset of the internal model review is lower than what was expected in the business plan.
Last highlight on liquidity, hot topic of the last weeks: 3 positive messages. In the end of March to the real stock of direct and direct commercial selling increased. The LCR crossed the 200% and the net stable funding ratio stays firmly above 130%.
Let's go now through more details of the results. As I just mentioned, I just mentioned we reported in the quarter EUR 236 million net profit, up more than 50% compared to the Q4. In Q1 last year, the net profit were just $1 million. This is the second quarter in a row of positive results. We generated in the last 2 quarters almost EUR 400 million of profit, and this underscores the rebuild bank's capability to deliver sustainable performance. With the looking-forward view, I believe that this quarter could give a grounded direction of yearly returns potential.
Quality of the results and performance capability are reflected in the net operating profit dynamics. As you can see on the next slide, we reported more than EUR 300 million net operating profit, twice the level of last year and more than 30% compared to last quarter. Key drivers of such dynamics were operating performance, improving spreads and stable cost of risk.
Focusing now from operational performance. This slide shows how operating income and costs were significantly improving the jaws. Operating income reported almost 5% growth quarter-on-quarter, supported by both interest income and fees and commission. The year-on-year dynamics was close to 12%, underscoring our franchising potential and operating capabilities.
Similar positive dynamics on cost down by 8% quarterly by almost 14% yearly, reflecting the positive change in the bank's structural costs. As a result, gross operating profit crossed EUR 400 million, increasing by almost 1/4 versus last quarter and more than doubled year-on-year, excluding last year capital gains. The structural cost reduction and the revenue enhancement bring the cost-to-income ratio down to 53%, better than the 2026 target of the plan set at 57%. Such achievements in the operational efficiency gives comfort as regard the sustainability of our full quarter results in the coming quarters.
With this respect, let me focus on net interest income evolution. The net interest income kept on showing a positive trend, growing by 1.2% in the quarter. It reflects on one side the positive sensitivity to higher rates of our balance sheet, some loans growth and active margin management. On the other side, it reflects the negative impact of TLTRO compared to the positive one of the previous quarter. Just excluding such negative effect, the net interest and dynamic of the quarter would exceed plus 20%. We succeed in our proactive margin management with twofold approach.
The beginning of the quarter, continuing to focus on margin, remaining selective on corporate and following customer retail request of higher fixed rate via conversion into bonds. The gradual re-pricing the deposit was put in place in the second part of the quarter. As a result, spreads improved by 71 bps in the quarter, slightly positive market share grew according in February last date available. Total commercial customer direct and annual savings volumes increased.
Now looking forward, I believe that this quarter, net interest income level can be a good guidance on average for the coming quarters. Moving on to volumes. You will see in the next slides, some dynamics, which I have already anticipated. Let's start with loans.
As set in our business plan, we keep our focus on retail customers, small and medium enterprises. We increased during the quarter the stock by almost EUR 700 million, while preserving our conservative standards in underwriting and considering as well the increasing rates environment. According to the latest February figures available, we also increased our market share. We are progressing in building up our in-house consumer lending capability and we count in the second part of the year to deliver some concrete effects on such actions.
Moving on to savings. As you can see on the slide, commercial customers direct and indirect savings increased in the quarter by almost EUR 1.8 billion. The mix of savings throughout the quarter reflects the twofold approach mentioned while commenting the net interest income evolution. It is well visible in the monthly mix dynamics we present on this slide.
As you can see, we reported a constant growth in assets under custody over the last 6 months. And by the way, we were gaining market share on side deposits, both in January and in February. Then thanks to our proactive margin management, we ended the quarter with the month of March showing a positive dynamic also of the deposit base. And this trend was continuing also in April.
We have a powerful network and throughout the year succeeded in building up strong relation with our clients, ensuring to Monte Paschi a solid and loyal customer base. We are confident that such strength will support the development of the bank also in the future.
The positive network performance is reflected on this slide where positive influence in both asset under custody and asset under management contributed to the increase of the stock by 4.7% quarter-on-quarter and 6.6% since September. In addition to the already mentioned good performance in asset under custody in the first quarter, we reported the highest net flow over the last 12 months, also in the overall asset under management products. Such level of net flows supported as well the performance of the in-house so-called Gestioni Patrimoniali, positioning the bank as #1 in Q1 Assogestioni ranking for net improvement.
Our resilience on customer funding enabling us further improve our liquidity position, as you can see on the current slide. We can rely on a solid and loyal customer base with 75% deposit coming from retail, a small and medium enterprise clients eligible for LCR purpose. Resilience is reflected in market share on a deposit trend increased by 5 bps also in the quarter.
Finally, we succeeded to further enforce our LCR ratio crossing the level of 200 at the end of the month of March, while keeping the net stable funding ratio above 130%. We can count on a counterbalancing capacity of more than EUR 25 billion, which gives further confidence about the structural strength of our liquidity.
Let's move on to the next slide relating to the Italian govies portfolio. The overall stock is EUR 10 billion with a slight decrease versus December 2022. There was also a mix following the maturities from fair value through CI to the amortized cost portfolio, in line with the business plan strategy aiming at reducing P&L volatility. Credit press sensitivity remained stable at EUR 700 million, while slightly longer duration is the result of the maturities in the quarter.
We reported in the quarter a positive dynamic of the fees, as you can see on the slide, both from banking fees and wealth management. Altogether, fees are up by more than 7% compared to the previous quarter. The dynamic of wealth management fees, up by 12% is the result of the positive network performance with a record highest gross flow in the last 12 months.
Now let's move on costs. We reduced significantly our structural cost base thanks to the 4,000 staff reduction realized at once on the 1st of December 2022. HR costs went down by almost 20% year-on-year and by 12% compared to the Q4 when a month of the benefit was already booked. We keep reducing also non-HR cost down, both in the yearly and quarterly comparison despite the inflation pressure.
Cost with our bureau-based approach are persistently at the center of our strategic focus as it must be for any healthy organization. We want to be ready and well equipped to support our operational profitability when interest rates will normalize. That's why the level of cost of this quarter is the challenge we would like to face for the coming quarters despite the inflation pressure.
Now a few words on our asset quality. We had in the quarter an additional confirmation of the overall quality of our loans portfolio. The NPE ratio stock -- the NPE stock remains stable at the level of EUR 3.3 billion. The gross and the net NPE ratio went slightly down quarter-on-quarter at 4.1% and 2.1% respectively. NPE coverage now at 50.2% has increased by 210 bps quarter-on-quarter.
The cost of risk of the quarter is at 55 bps stable versus the previous quarter and allowing us also to increase some overlays. At the current stage, no particular signs of portfolio deterioration have been observed. That's why we can confirm our guidance of the cost of risk for the full year not higher than the previous year.
Now only a few words on extraordinary litigation and extrajudicial claims as there are no changes to what we disclosed during February full year results. Gross petitum for legal proceeding related to financial information is unchanged since then. I just would like to underline that all indications account for about 90% of the amount of EUR 1.6 billion of the overall litigation, excluding civil parties, and there is an additional positive judgment since our last presentation.
Now on capital. The core Tier 1 performance ratio, including net profit of the quarter, is at 14.9%, fully factoring an increase in risk-weighted assets for EUR 3.7 billion due to the regulatory headwinds. As I mentioned, the overall impact was lower than previously expected. The ratios are well above the SREP requirement and also above the 2024 business plan target, the set level for core Tier 1 at 14.2%. We have the capability now to generate further capital going forward. Given our first quarter high level, we feel confident to revise upwards our previous guidance to higher than 50%.
Finally, just a few closing remarks before moving to the Q&A session. The net profit of the quarter confirms a new capability of the bank to generate sustainable returns. Based on the current evidence, we are reasonably expect to replicate this performance over the next quarters.
Operating dynamics has improved. Gross operating profit is up by 20%, 25% quarter-on-quarter and is 2x versus first quarter 2022. And this thanks to both higher revenues and strong commitment in reducing costs with a significant improvement of cost to income, now at 53%, already ahead of the plan for 2026.
Core Tier 1 fully loaded at a sound level of 14.9% despite the EUR 3.7 billion increase in risk-weighted asset for regulatory headwinds, confirming the bank's capability to generate capital through performance. The bank relies on a solid and loyal customer base that keeps supporting us and ensuring high level of liquidity.
This is the time finally we can start to generate value for all our stakeholders, creating the basis for an adequate valuation of the bank. This is the time of results and not only commitment to expectations. The business plan targets are at side. Thank you very much.
[Operator Instructions] The first question is from Noemi Peruch with Mediobanca.
I have a few. So the first one is on NII. How do you see the competition in the deposit market moving? And after the recent rate development and the deposit fee that served, would you be in a position to give us some more color on your expectations on NII for 2023 and 2024?
And on capital, thanks for sharing the guidance for the year. Throughout the year, do you also expect some RWA efficiencies, efficiency measure such as expect securitization or would you expect the retained earnings to be the main driver? And lastly, on legal risk. Can you share with us the most important date on future judgment?
So unfortunately there was not a perfect possibility to hear and try to answer. Then if we need something, please let us know right and repeat the question. So competition on deposit. The competition is quite high and we have 2 kind of competition, of course. One is with banking in terms of rates that we have to apply to deposit customers. The second one is competition with what is offering the market in terms of bonds with a very attractive interest rate. I believe that this is the competitive advantage of Monte Paschi.
We have a strong network capability and loyal customer base. And as we were showing from the beginning of the year, despite a slight decrease in switching from deposits to asset under custody, our market share increased. So competition is high, but we are well equipped. And we keep, as I was mentioning, in growing on deposit base and also the last figures available are showing that this positive trend is confirmed.
So capital, we don't plan any particular action because we are quite strong and we count a lot on our capability to generate capital through performance. That's why we were mentioning about the upward guidance relating the capital. The bank is now in a process that, as we used to say inside with our business people, the capital -- you cannot buy capital always. You should be capable to generate it and we think Monte Paschi is showing this capability. And with the reduced cost or the structure cost of the bank, I think the profitability is becoming a strong evidence of what is our capability about performance quarter-by-quarter.
About legal risk, right. So clear, we are following all the criminal litigation that are on progress. Time frame is quite differentiated. So we have a sort of hearing before the Supreme Court for what we call the case up to period 2008-2011. And this is court scheduled in October of this year. Then the second degree of judgment regarding what we call the proceeding 955 rating Profumo and Viola has been starting on the 31st of March and it will continue on. And probably it will be completed before the end of the quarter -- on the end of the third quarter. And then there is the preliminary hearing on the issue of bad loans. And this is scheduled for the 12th of May.
We are following on these cases and I believe the approach we adopted is putting us in a very comfortable position, especially because what is happening up now in terms of judgment of the court and the overall situation is putting the bank in a confident position. Also in connection with the future development of all this criminal proceeding -- and by the way, I want to stress once again that our balance sheet is very well equipped to face any development of this kind of criminal proceeding.
I just have a follow-up question on NII. If you could just update us on your expectations for NII in the year 2023-2024 with the current rate environment.
Okay. I was trying to be clear when I was presenting and I try to be even more now. We said that the level of first quarter is, on average, a good guidance for the coming quarter. So I think it's just a matter to make a simple calculation. And this is a result of expectation in terms of interest rates. The fact that the TLTRO in the first quarter had a negative impact, we don't expect the same in the coming quarters.
Third one element is quite important as well. We show a strong capability in merging management combined and having a strong also view in terms of trade-off, making some preferences only to have deposit and I think this is rewarding us in, as you can see, from the LCR ratio. That's why we keep confident that if we are continuing this action with an effective merging management, we can stick to the guidance I just mentioned before.
The next question is from Corinne Cunningham with Autonomous.
Could I ask a question, please, about MREL, what your current ratio is and what your plans are in terms of issuance going into the year-end? And I'm sorry to come back to NII, but does this mean -- does your guidance mean that if we get further rate rises from here, the benefit of those would basically be passed on to depositors and would not drop through to the bottom line? Is that your guidance as well? Or would higher rates actually give you some further benefits?
Okay. I'm just answering about the interest income and then Andrea will say something about MREL. Yes, we still expect to have a positive trend in terms of coming from the rate. That's why net interest on the side of income is expected to keep growing. Clearly, gradually, we are going to put in place a process of re-pricing of deposits and we already started. That clearly will increase the base of interest expenses. But overall, as I mentioned, if we look at an average of the next 3 quarters, it's clear that the first quarter is a sort of threshold of the average that will come from the coming quarters.
On MREL, the ratio actually as of first quarter at 31st of March '23 is 24.7%, which gives us a comfort for the achievement of the target for January '24. And this will likely give us the possibility to reduce the size of our funding plan below EUR 2 billion as regards MREL-eligible evidence for '23, of course.
The next question is from Andrea Lisi with Equita.
The first question is on fees. We see a rebound versus the bottom reached in the first quarter, but still obviously below on a year-on-year level. Just to -- if you can provide us an indication of which are your expectations for fee going on and especially also on your strategy regarding upfront fees and recurring fees, how the mix should be seen.
And the second question is on the direct funding mix we have also in the presentation. We saw a strong increase in repos of some normal decline in current accounts. Just if you can provide some color on that and which are your expectation going on also considering the re-pricing strategy you put in place.
Okay. Sorry, I start with this about the question on fees. So as I mentioned, in the first quarter, we reported 2 important achievement. One is the record -- the highest inflow, gross inflow in the last 12 months and as well the highest net flows in the last 12 months. I just want to recall that we put in place the new organization of the bank with 14 regions focused on retail, starting from the fiscal December of last year. So it's clear that from the commercial activity, now we had a sort slow starting.
But now in the first -- in the last month of the quarter, as I mentioned that we were observing a very good improvement of the performance, and that's why I believe that this level of performance can continue and further improving because our commercial organization we got regime and then expected to be more and more efficient going forward. So we count to keep a pace of growing slight -- slightly growing, but we are keeping growing especially in wealth management fees. On what is the banking fee is clear that these are less dynamic growing because it's connected much more with the customer base because new customers are not influencing too much the level of these fees. But anyway, we keep also -- we are confident that especially through some fees connected with foreign transaction where we are reporting a significant improvement on what is the trading activity of the bank. We will also confirm the good level at a good pace that we reported in the first quarter.
Now for deposit, I am just saying it's clear that the trade-off between cost and volumes is, for us, very important. But on retail, we want to keep growing. That's why also in the forecast and the guidance on net interest income, we took in consideration some additional costs we can report due to the fact that we want to increase especially retail customer base. But I believe the volumes should grow. Now Andrea.
Yes. On -- specifically on funding source diversification. First of all, on repos, the trend is not necessarily a guidance on funding source diversification because then you should match it with repos on the asset side, it is more related to market making activity of our investment banking operations. While on a funding strategy overall, we confirm the sources that we have in the business plan. So mainly commercial deposits, as the CEO was saying, plus our funding plan, not only MREL-eligible liabilities, but also cover bonds now the market is reopening for Italian banks. And finally, we confirm the strategy to partially replace the TLTRO with MRO when TLTRO will expire -- will mature.
The next question is from Hugo Cruz with KBW.
I have quite a few questions. First on NII and the TLTRO, you mentioned a one-off in Q1. I just wanted to understand if that's the decline Q-on-Q of the contribution, but if there was an actual negative one-off in Q1 and if you could quantify that. Second, the CET1 ratio, you mentioned you want to go above 15%. Is there any room to use that capital, which is quite strong, to buy back shares from the government rather than having the government shares into the market. And third, you have the government as a shareholder, perhaps you have more visibility on the bank levy than other banks. What are your thoughts on that? You think we could see a bank levy from the Italian government this year?
I will hand over the question relating to the buyback and this potential levy on banking. So about the levy, honestly we don't have any information about that. So let's see what is going to happen, right. But I think it's too early to comment on that. Second, I think about capital and clearly, the excess of capital we have. First, we would like to have some excess of capital. But as I said, looking forward, the clear -- we have the capability to generate further capital going forward, right.
And as I was mentioning in one of my previous presentation, I believe that this capability has the capability to generate capital significantly quarter-by-quarter, create the room for the consideration to anticipate the dividend distribution already with the profit 2024. We are much more focused on that -- there any buyback. So Andrea, now TLTRO.
Yes, on TLTRO in the first quarter due to the increase of the year rate, we had around EUR 30 million negative one-off impact. Of course, we will have something also in the second quarter because of the increase, even if the increase is lower than what happened in the first quarter.
The next question is from Giovanni Razzoli with Deutsche Bank.
That are very, very quickly. The first one is if you can provide us with a target LCR ratio post TLTRO repayment. And the second one for is the clarification on your CET1, I have misunderstood your figures. But if I look at the press release, you mentioned that the fully loaded CET1 is 14.4%. But if I look at the Slide #18 of the presentation, I see 14.9%. So I'm a little bit confused with those 2 numbers.
Okay. So the target LCR, as you remember, we were saying that in the plan, we have a target that is about 160%, and I think we should confirm this target. About the 14.9%, I think, as I mentioned, the 14.9% we have in the secondary summary includes the profit for the period. This is the difference compared to 14.5%.
The next question is from Alexei Lougovtsov with Bank of America.
Thank you very much for a great quarter for Monte Paschi investors. And a quick question for you, if I may. What's your TLTRO repayment schedule in the next 12 months? And how are you planning to replace that funding with something else?
So we have to repay EUR 11 billion in June, another EUR 3 billion in September and the remaining EUR 5.5 billion in the first half of '24. We will repay thanks to liquidity. We have on the asset side, plus, as mentioned before. We will withdraw some billion of MRO. Then over time, we plan to further minimize the reliance on ECB funding, thanks to our target plan.
I see. So on the LCR, you mentioned would go down because some of your existing liquidity, right?
Yes. As planned and as so being our business plan target, we're going to converge to 160% -- I mean above 160% as mentioned by our CEO.
And sorry, I'm not sure I get the number correct. EUR 11 billion in June, EUR 10 billion in September?
EUR 3 billion. It's EUR 19.5 million overall, 11 June; 3 September; EUR 5.5 million first half next year. Okay.
[Operator Instructions] Mr. Lovaglio, there are no more questions registered at this time. Excuse me, there is a question from Gilles de Bourrousse, Octo Finances.
Just one quick follow-up about asset quality. I wanted to know what is the current size of the overlays in terms of loan loss provisions -- loan loss rate, sorry.
I'm sorry, but I mean I think the volume was low. And could you speak louder because…
Sorry. My question related to cost of risk. And I was wondering what was the current size of the management of rate or the extra provisions you booked, for example, during the COVID and after for the shocks pertaining to the energy crisis, something like that.
Yes. So we increased our overlays compared to the previous period. Now the overlays are above EUR 140 million.
Mr. Lovaglio, there are no more questions registered at this time. I turn the conference back to you for the closing remarks.
Thank you very much.