Banca Monte dei Paschi di Siena SpA
MIL:BMPS
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Banca Monte dei Paschi di Siena SpA
Earnings Call Analysis
Q2-2024 Analysis
Banca Monte dei Paschi di Siena SpA
Monte Paschi reported a net profit of EUR 1.159 billion for the first half of the year, with EUR 827 million generated in Q2. This impressive result was bolstered by a one-time net tax effect of EUR 450 million. Operating performance has also seen significant improvement, with gross operating profit increasing by 18% year-over-year to surpass EUR 1.1 billion. Revenues in the first half rose by almost 10% reaching EUR 2 billion, driven primarily by an 8.3% increase in net interest income and a 9.8% rise in fee income. The cost-income ratio improved to 46% from 49% the previous year.
Monte Paschi has maintained tight control over operating costs, which stood at EUR 925 million in the first half. A notable 6.7% decrease in non-HR costs almost completely offset the financial impact of labor contract renewals. Commercial savings increased significantly by EUR 6.5 billion since the start of the year and by EUR 2.7 billion in Q2 alone. Both deposits and asset under management saw growth, reflecting strong market trends. Meanwhile, the cost of risk remains in line with guidance at 52 basis points, and gross NPE ratio is at 4.6%, with net NPE at 2.4%.
Monte Paschi's liquidity position remains robust with a Liquidity Coverage Ratio (LCR) around 160% and Net Stable Funding Ratio (NSFR) of about 130%. The bank's fully loaded CET1 ratio reached an impressive 18.1% at the end of June, indicating a strong capital base. This includes net profit for the first half, assuming a payout ratio increased from 50% to 75%. The bank continues to maintain a significant buffer above regulatory requirements.
Monte Paschi plans to invest EUR 500 million to enhance its commercial business through AI and other technological advancements. Specific investments include EUR 40 million for Widiba, EUR 100 million to upgrade its operational platform, and EUR 60 million to enhance security and meet regulatory requirements. These investments aim to drive the bank's transformation and improve efficiencies. They also plan to upskill more than 1,000 employees and hire new talent to support this transformation.
The bank projects net profit to reach EUR 1.3 billion by the end of 2024, aiming for a payout ratio of 75%, which translates to over EUR 150 million in cash dividends. The CET1 ratio is expected to remain above 18% throughout this period. By 2028, the bank anticipates a CET1 ratio of 18.5% and pretax profit to reach EUR 1.7 billion. The anticipated cost of risk will decrease from 54 bps in 2024 to 44 bps by 2028.
Monte Paschi is dedicated to being a customer-centric bank that combines technology with a human touch. They intend to leverage AI for better customer insights and introduce advanced analytics to support decision-making. Investments in a new CRM for Widiba and enhancements in digital platforms will further improve customer experience. Moreover, the bank is focused on providing holistic wealth management and advisory services, aiming to grow fees and commissions significantly over the next few years.
With a solid capital base, Monte Paschi sees strategic opportunities for value-accretive alternatives. They have excess capital of more than EUR 2 billion and plan to utilize tax loss carry forward DTAs to generate additional capital. This strategic optionality provides a cushion and growth opportunities, reinforcing the bank's resilience and future potential.
Monte Paschi has demonstrated strong financial performance and has laid out comprehensive plans for future growth and transformation. The focus remains on leveraging technological advancements, maintaining a strong capital base, and enhancing customer-centered services. The bank's strategic investments and disciplined cost management will position it well for future challenges and opportunities.
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Welcome, and thank you for joining the BMPS Group 2Q '24 and H1 '24 results and financial target update and business plan 2024 to 2028 presentation. As a reminder all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Luigi Lovaglio, Chief Executive Officer and General Manager. Please go ahead, sir.
Thank you very much. Good morning, everybody. Welcome to Monte Paschi half results and business plan presentation. Today, I will first highlight some key achievements after 6 months of the year and then walk you through our evolving journey that combines technology with a human touch, inspired by a strategy that always revolves around our customers.
So let's start from financial results. Net profit after 6 months, at EUR 1.159 billion, of which EUR 827 million in Q2 that includes a positive net tax effect of EUR 450 million. Solid improvement in the operating performance is visible in gross operating profit that crossed EUR 1.1 billion increasing by 18% compared to last year and supported by EUR 455 million profit in the second quarter.
The result was driven by almost double-digit growth in revenues year-on-year and effective cost management that enabled us to practically absorb the impact of labor contract renewal. Cost income ratio has further improved to 46% versus 49% in first half '23. Revenues above EUR 2 billion in the first half and higher by almost 10% compared with the last year, thanks to strong growth in both net interest income, up by 8.3% and fees income up by 9.8% and this growth is driven by a 20% growth in wealth management fee. Operating costs under control, and they remain at EUR 925 million in the first half. They are marginally growing, and this is the combination of the effect of ongoing optimization of non-HR costs that are dropping by 6.7% that are almost offsetting the impact of labor contract renewal.
On the volumes, we're seeing the growing trend is confirmed, commercial savings are up by EUR 6.5 billion. And this is a trend since the beginning of the year and by EUR 2.7 billion in the second quarter. We are reporting a growth both in the deposit and asset under management. Net performing loans remained substantially stable versus the end of the previous year, and this is a full reflection of the market trend. As regards asset quality, cost of risk at 52 bps after 6 months in line with the guidance, gross NPE ratio at 4.6% and net at 2.4%, slightly up, but then we will elaborate on that.
The NPE coverage improved to 49.8% and is up by 70 basis points versus December 2023. We are keeping confirming our strong liquidity position with LCR about 160 a net stable funding ratio about 130 million counterbalancing capacity is now above EUR 33 billion.
Finally, fully loaded CET 1 ratio in June at 18.1% at the top of the banking system. That includes first half net profit net of dividend, assuming a payout ratio increased to 75% from the previous guidance of 50%. We are keeping a significant buffer compared to the Tier 1 ratios RAP requirement.
Now let's go quickly through more details of our results. As I mentioned, net profit after 6 months at EUR 1.159 billion. The result is higher. There is an important contribution in terms of net positive impact on tax. But just -- and you will see later in some slides, as I mentioned last time, taxes are asset of this bank. And they will come more and more important, more and more visible in the coming years. So it's not a one-off is an important positive component that is part of our balance sheet.
The contribution of the second quarter to net profit to EUR 8827 million a year, we have the EUR 450 million tax positive net tax.
And if we make a comparison in terms of homogeneous entities, we can see the dimension of the grow of our pretax profit is in terms of double digit. Gross operating profit, as I mentioned, we crossed in the second quarter, EUR 1 billion in terms of income. And then we reported a flat trend in terms of cost and combination of the 2, we have a gross operating profit at EUR 555 million. As a result of this positive trend, we are further improving our cost/income ratio.
If you look at the dynamic year-on-year after 6 months, we crossed at the end of June, the EUR 1 billion of gross operating profit, thanks to EUR 2 billion of revenues that are up almost 10% and marginal growing in terms of cost that was capable to absorb most of the impact of the labor contract renewal. After 6 months, cost/income is down to 46%. Now let's look at net interest income evolution. In the second quarter, net interest income amounted to EUR 585 million, almost at the same level of the previous quarter. And year-on-year, we are crossing the EUR 1 billion, in line with the guidance with a grow at year-on-year is up by 8.3%. As it's visible on the slide, we are resilient in terms of spread despite we are paying more deposit, and we are keeping in a good position also the overall lending rate.
Now let's move to the volumes. We are substantially flat from the beginning of the year. It's important to mention that if we look at the recent statistic in terms of market share, anyway, the bank is keeping growing. So despite we are decreasing, we have to say that we are decreasing less than the market. Positive trend in terms of savings. Overall, we are, as I mentioned at the beginning, crossing for more than EUR 6 billion. We have more than EUR 6 million in additional savings from the beginning of the year and the quarter was quite positive with almost EUR 2.7 billion. The trend of deposit for us is quite important, as I was mentioning, but as well, I would like to remind that this action we put in place in the first half of the year we're aiming at increasing the base for further conversion of deposits, especially on retail to value-added products like asset management, bancassurance.
Now we are using the tactical approach from now on, and this process started already in July, and we will be very selective, trying to make some privilege in decisions in terms of price more than in terms of volumes as we believe we have enough buffer to organize our commercial action for commercial in Asset Management. Now [indiscernible], I will go very quickly. We are keeping -- overall banking book portfolio is basically stable and we keep -- and is visible in our policy to use the portfolio just as support to liquidity. Majority of the portfolio is in what we call amortized cost portfolio. Now fees and commission, I think, is a very positive message coming in this quarter because the first one was an exceptional quarter in terms of fees and commission, and we are replicating almost at the same level also in the second quarter.
So practically the level of commercial banking is slightly up by EUR 10 million and the wealth management advisory fee slightly down, much more for the continuing fees, so some way connected with the market. But there was a very positive also commercial action put in place by our team. So total fees after quarter-on-quarter slightly up. And if we look at the overall fees year-on-year, we are going almost 10%, reaching and crossing the level of 730 with a very good performance at the level of wealth management advisory fee. This is what we want to keep. And as you will see in the next slides, we count a lot on this capability that we are implementing and benefiting in terms of revenue generation in the area of asset management, bancassurance product.
Cost, excellent results, despite inflation, we are keeping the cost almost at the level of the first quarter, there was a very good level also which are flat. So overall, quarter-on-quarter positive trend, and I believe is even more significant if we move on the first half, where practically, we are completely absorbing the renewal of labor costs, so the increase of more than EUR 50 million in HR for this reason with a significant reduction on non-HR cost.
Now gross NPE ratio. In this slide, as you can see, practically, we slightly increase the NPE ratio. -- and also the stock increasing by EUR 100 million. But it's worth and I believe, make really sense to spend a few words on that. If you look at the EUR 3.7 billion that we have at the end of June, a significant portion of that and we'll try to give some figures as far as the split of this portfolio, we have almost EUR 1 billion that are secured by the state guarantee. We have almost EUR 700 million that are forborne mortgages, and we have almost another EUR 1 billion that are other real estate guaranteed.
Practically, we have only EUR 1 billion that is unsecured at the level of coverage of this unsecured is about EUR 70 million. So as we were -- I was already mentioned. Now we can sell any time portfolio, we are ready but considering the composition, we try first to find solutions, especially for the retail mortgages. And I have to say the forborne that we have already in place are regularly paying. And so we have a clear timetable where practically, we expect this portfolio to go to bonus. And so we have really -- we are paying a lot of attention in order not to destroy value also on this portfolio.
From the next slide, you can see the cost of risk is in line with the guidance and the coverage improved to 49.8% and this improvement is practically 30 bps quarter-on-quarter, 70 bps since December '23. Funding, as I mentioned next slide, we have a strong position on liquidity. We reduced significantly that reliance on ECB funding, and we keep a very high level LCR ratio and NSFR ratio as well.
Now capital, I was already mentioned in the beginning, this is a bank that is capable to generate capital. And the reason is because we have a strong discipline in risk-weighted assets. We invest in terms of loans on customers that have a density that is lower compared to the average even that we have now. We are trying day by day to adopt an approach of us keeping in order to optimize not only on credit risk, but also on the other side where we have allocated risk-weighted asset, and this is a trend that make us confident can keep on going. So practically, despite we are increasing the guidance in terms of payout from 50% to 75%, our capital is well above 18% and make us confident that this is a level that can be maintained throughout even our new business plan.
Now I will move on to the business plan 2024-2028. The good results of the first half are setting the base for the financial targets. So the business plan 2024-2028. And in order to facilitate the financial target comparability, we provide you with an estimation to be considered for registration purpose of 2024 projection. So what has been achieved in the first half according to also guideline that we gave. We make an estimation 2024 then in order to make a comparable for the purpose of analysing the trend from 2024-2028, we are also excluding Monte Paschi Bank, that is our French subsidiary for which we have a negotiation ongoing for the sale and has been already classified as discontinued operation.
By the way, I think it's worth also to mention that we are speaking about less than EUR 20 million contribution to the gross operating profit. So excluding this bank, the 2024 that we are forecasting is the starting point for the P&L projection of the business plan 2028.Nowthe strategy of our previous business plan is worked very well. So we are going further than our financial tax and well before targets well before the schedule. So we are evolving our way to do commercial banking to serve families and corporate business. We named this new plan, clear and simple commercial bank revolving around customers, combining technology with human touch. As you know, it's quite common to talk about client-centric organizations.
We prefer to define us as a bank, which is revolving around the customer as our clients represent our unique energy and the better we serve them, the stronger we become and grow. We aimed at enriching our business model sustainability through enhancing and innovating initiatives that are underpinned by digitalization and new technologies, leveraging as well on our strong historic franchise and talented people. And all that will be driven by our ESG culture.
Now let me provide you with some key financial targets of the plan, and then I will present the strategic and financing initiatives that are supporting those figures. So a clear, simple commercial bank revolving and I want to stress the revolving approach around customers will deliver a delta compared to the end of 2024, EUR 155 million of fees and commission in 2026 and EUR 260 million in 2028. The cost/income ratio will remain at the level of 50%. The cost of risk will decrease to 44 bps in 2026 and 54 bps in 2028. The pretax profit will reach EUR 1.4 billion in 2026 and EUR 1.7 billion in 2028. As I was mentioning, our capital will be above 18% over the cold period of the plan.
Now let's move to our evolving journey. I will go very quickly at the beginning of the slide. So first of all, why we are entering this new business plan because we surpassed business plan target for 2026. So we need to update our financial targets to 2026 even beyond to 2028. Now I will not bother you with all the achievements, so I will skip the next slide.
And I will come to the second reason why we need to update our plan. Macro environment is changing industry dynamics and customer preferences and needs have change it. That's why we have worked to define the evolution of Monte Paschi journey, adding to our strategy -- that is a strategy very clear from the very beginning, starting from the diesel plan of 2022, and we are adding to our strategic clarity, some enhancing and the innovative initiatives in order to make for our customer, our way of banking with us much easier, and we want to provide them personalized advisory service for more complex needs.
Now the evolution of our journey is rooted in our I mentioned strategic clarity. And is based on a few initiatives. As usual, we like to be focused on a few things, but to do what we plan to do in the best way we can. So first of all, there will be evolution of fee-based proposition. We will have a new dedicated service model for value-added activities. We are going to enhance our sold lending solution, and we are developing 2 new verticals for small business. We're going to revamp our operational platform. And then this is a message that has been passed through all the organization of the bank in a broader aspect of risk culture, we want to keep a 0-based approach to risk.
We are confident that we can achieve all these initiatives, and we will successfully implement them because we have important enables. First of all, our strong historic franchising and our brand. Second, our talented people and our culture, easy culture. And further, the investment we are implementing in terms of digitalization and innovation via new technologies.
I will go through the key action and we selected some of them. So the evolution of fee-based proposition will be implemented through the announcement of wealth management advisory capability. We are going to be much more active and introducing non-life insurance offering in a sort of holistic coverage of client needs. We have a build-up we did a platform at scale through targeted hiring strategy, and we are strengthening the fee-based proposition for corporate clients, focusing particularly on transactional banking and even more sophisticated solution.
The new dedicated service model for value-added activities will be based on new upper affluent segment. So we identify a new segment to upper affluent customers, new wealth management centre and advisory that we set up in order to develop a tailored investment solution. And then -- and this is an important step in our organization, we want to our tie customer journey across multi-channels, ensuring them the same experience with the evolved role of branches and face-to-face interaction. So practically, digital remote channel will be developed in order to do through this channel, simple transaction and to have a proactive offer of simple product while physical branches will be utilized more and more for client-facing value-added more complex activity.
In order to give a concrete sense on how we are investing in digital and technological areas, we identify specific projects in terms of technological investment that are connected, we want to -- what we want to do. So we want to give a strong concrete aspect to our investment. -- in order to optimize the money we are putting inside and at the same time to create discipline for responsible achievement of the investment we have put in place.
So we are further enhancing Athena that is a platform for several seasonalities. And this is the next step, the upgrade will have better support customer wealth planning. We are going to introduce advanced analytics and also AI tools for better understand through behavioral scoring, if we have hidden value clients that today we are not capable to identify, we are going to invest significantly in CRM for Widiba. And we are going to use, as I was mentioning, this digital hybrid channel like digital branch and modular platform for enterprise to enhance the role face-to-face interaction.
The web collaboration remote advisory tool will be as well used to integrate the customer journey. Today, we have several processes that are end to end. But now we want really to step up significantly in this process in introducing remote advisory tool and also to develop much more our capability on onboarding to post-sales support. All these actions and the investment that are connected will bring us -- will give a strong contribution to the EUR 260 million increase in total fees over 2024- '28 and of which EUR 185 million, so a significant portion will come from wealth management and protection fees.
Next area is the announcement of our sole lending and development of new verticals for SME. So we are upgrading proposition for [indiscernible]. We focus on mortgage. Mortgage is an essential product doesn't resist a retail bank without a mortgage. And you should be a top player because the mortgage is a hook and anchor product is ensuring acquiring full relationship across client life cycle. We want to accelerate in consumer finance. And then on the side of small business, we are developing new specialized agrifood and green energy verticals for SME. This is a sort of approaching with tailored product offering and dedicated commercial organization.
So we are going to have to open almost 18 centers. We have expert professionals that will go through a specific training in order to support customers and they are planning in their program as well in everything that is connected with the chain of production, especially in the agrifood sector. Then we are going to enhance the product offering through the first lending for micro business. We set up a specific coverage on the micro business area, introducing specific scoring as well capability to grant almost on time for this kind of company. Then factoring this is one of the areas where we are particularly focused, we want to make end-to-end paperless activity. And having as well as sort of digital factoring dedicated specifically for SME. So investment on this area will be a sort of upgrade of what we have already for mortgage.
We want also to explore opportunity with companies like Google in order to understand how we can leverage on their experience. We want to enrich a scoring system through advanced analytics for consumer finance. And then we have this digital work flow with the corporate client. And this is a tool, supporting identification of the serving customer as well as prescoring processes for faster credit approval. All these actions that are improving our asset mix will help us in mitigating the decrease of interest income to EUR 80 million. At the same time, we will succeed in keeping substantially flat net interest income related to commercial activity over 2024 and '28.
From the operational point of view, it's clear that we have to invest in the platform, that operational platform. So some additional organizational Implementation on the area of G&A discipline in order to improve G&A discipline, we are going to set up as already in place, but it will be probably a regime in the third quarter, a new central dedicated unit for project governance. We want to steer strategic investment and ensure time execution in order to see what we are spending will come back according to the original plan of payback.
We are going to invest in order to strengthening our IT structure, so BMPS license hardware. And then we count a lot on our most important asset as our people. So we are going to have a sort of a natural generational change of the workforce with hiring talented professionals at the same time, with broader upskilling, training in order to utilize the most we can -- the competencies of our people for value-added activity.
On zero-based approach to risk, I think I already mentioned in the beginning, we are covering all the areas, underwriting, monitoring an indication, and it's clear that last month, but not least, we had in mind to be much more effective in a proactive management of our NPE. And as I mentioned before, also the disposal if our action will not be very effective. So digital investment, advanced analytics, digital automation, hybrid channels, enhancement, as I mentioned, upgrade of network services, hardware and licenses.
For the risk, we are discussing with some company in order to enrich our algorithmic capability, especially for retail. We want to introduce and to reinforce the usage of AI-enabled scoring system as well early workflow management with the advanced analytic technology. So the cost will be almost flat despite inflation despite the increase of the labor contract and the cost of risk, as I was mentioning, will decrease from 54 bps to 44 bps and 54 bps. Gradually, we are going back what we believe is a normal level for a bank as Monte Paschi.
Now I believe it's useful with this slide to recap how our model will work. It's a sort of virtues and sustainable circle, which fits itself. We can grow and reward stakeholders through the investment and validation of human capital, we increase efficiency, we announced value-added activity. We control our balance sheet and we approach a zero-based risk. And then is a sort of natural results. We have sustainable earnings generation. This is the cycle that we want to keep and to maintain year-by-year because it's the way how we ensure the future to our bank.
So as I mentioned, important growing fees and commission, EUR 125 million in 2026, EUR 260 million in 2028. The net interest will decrease, but fees and commission will offset the decrease of operating income will be up EUR 5 million in 2026 and EUR 216 million in 2028. Cost/income at the level I mentioned cost of risk, EUR 34 million is important pretax profit, EUR 1.4 billion, 2026, EUR 1.7 million in 2028.
Now let me just a bit underlying this slide because it's clear that, as I mentioned, there is a sort of natural and positive cycle that is generating additional capital in 2024, we expected to have a net profit according to the guidelines we gave at the beginning of the year at EUR 1.3 billion. We increased the guidance of payout ratio from 50% to 75%. It means that we are going to have more than EUR 150 million cash dividend. And we will keep a CET1 ratio of 18%. So just for illustration purpose, we are seeing that if we assume in the calculation, a dividend similar to this 75%, we are going to have throughout the period of the plan, a CET1 ratio above 18%.
And there is another aspect that I was mentioned at the beginning that I would like to underline even if it's not visible, but we are getting closer to the period where this asset of the bank will become visible. So this CET1 ratio doesn't yet reflect the benefit a CET1 level of the off balance sheet at the on balance sheet tax losses carry forward DTAs. There will be around EUR 2.4 billion at the end of the business plan. And this level will be fully captured progressively after 2028. This is capital.
In this position, it's clear that we have in front of us a significant strategic optionality for value accretive alternatives as we have in our cash more than EUR 2 billion of capital in excess. Clearly, based on this estimation, it's just a calculation, what is something that is a logical and rational that can happen and can verify. And this EUR 2 billion is if we assume a sort of 14% CET1 ratio as an internal target.
Now a few words. As I was mentioning, investment is crucial. We are going to invest an important amount of money. It will be EUR 500 million because without investment, it's difficult that we can implement all the changes we want to implement in the bank. So part of the money around EUR 190 million will be invested on commercial business enhancement through AI. Widiba, as I said, is really one of our goal to build up and to speed up the growth of this asset that is very important for us. So EUR 40 million Widiba, then we are going to improve our technological operational platform, almost EUR 100 million on risk zero-based approach. We are going to invest around EUR 30 million. And overall, the upgrading of the operational architecture and enhancement of the system will require more or less EUR 80 million. So security and cyber are as well important as an important the regulatory requirements, so other EUR 60 million.
So on this EUR 500 million, we can say that more 80% of this EUR 500 million adjust for change, change in the way we do bank, change in the way process transactions and change also in the way we are thinking. So 2 important levers: one are, as I mentioned, technological investment, but the most important and the most powerful of our enables our talented and committed people. And we believe that we have still a lot of potential that we can unlock, and we want to do it through dedicated program our skilling and we plan to skill more than 1,000 people. We want also to recruit and new resources with distinctive capabilities sort of natural generational change of workforce. And all these resources will be dedicated to build most of them with customers.
So the platform innovation, the digital branch where we have a sort of team that will act in a remote way and with digital attitude, then we want to make stronger and we need the skills also the capabilities, wealth management evolution, new relationship manager and specialized verticals, new professionals for Agro-Business and Green Energy. The bank can count on important academy that is something that is working quite well. So we are going to sort of step up our academy with advanced training, continuous upskilling of all employees, and we have a lot of programs, and we are going to increase significantly the hours of training for each employees.
Clearly, we will keep on the incentive scheme for throughout the plan that we introduced last year for the first time. Incentive came and the variable part of remuneration connected to the results. And then we are going really to make a successful plan or succession in order to make and give to our people a clear perspective of development and growing internally to our organization.
Now let me go quick through this 3. So we are just using this slide because it is a way -- in a simple way, how we are designing to explain how we are designing our distinctive way to do banking. So we are leveraging on our strong franchise. Our brand, our people, our territories and leveraging on that, we are revolving around our customer with a journey that has practically 3 different moment of true.
One is the face to face in branch. The second is the hybrid channel, and the third one is the fully digital. We want to provide our customers with the same experience, combining technology with human touch at the end on the top of the 3 starting from the routes is Monte Paschi, a bank for family and businesses that want to be a best-in-class in the territories where we operate. It's a practically a future ready way to do banking. Clearly, of that should be deeply rooted in our strong ESG culture. So we are just providing some example. Green product for individuals. We mean green mortgage, sustainable linked loans and green loans. We want to support a small business in the green energy transition, as we said, particularly in the agri-food sector.
We are going in the area of wealth management offering product ESG solution. On the social side, we want to further strengthening the social role of the bank, financial education programs, micro financial solutions. It's clear that we cannot do all these things if we don't instil inside the bank and we spread around the bank, the culture of ESG, and we can do it across planning, compensation system, risk management models and as well career path in order to offer as well flexibility option and career path dedicated for women in leadership roles.
Now let's now move on financial targets. So the overall macroeconomic assumption are the one of meter, probably there are some difference, and I believe we were quite conservative at least at the moment to formulate the plan in terms of over 3 months in 2025, but we will not change better to be a bit conservative.
Now these are the financial targets to recap. So we are going to have sustainable revenues. So with improved mix in 2026 3, almost at the same level of 2024 with the change of the mix. In 2028, we're going to have lot cross EUR 4 billion. The cost will be slightly up to financial development that we have in place. Gross operating profit will increase already at the level of crossing the EUR 2 billion in 2028. Provision will decrease. Net operating profit will increase, but tax profit will benefit also a reduction of systemic charge. So at the end, as I mentioned, we will already mentioned, we will reach around 2028 1.7%. All the KPIs with a going positive direction, and let me just underlining the CET1 ratio again, 18.5% 2028 and the stated royalty at 13.3%. Clearly, if we think about the adjusted, if we consider the 14% capital it will be much higher.
Operating income will grow CAG 1.4 where interest income will go down but will be completely offset by fees and commission. The other income are mainly dividend AXA and some trading revenues to simplify and to make much more visible the efforts that we have in place in terms of dedicated lending. The net interest component related to the commercial activities that are negatively impacted, especially in the first 2 years, will be practically offset in the period 2026-2028, where volumes that already are visible between 2024, 2026, will practically offset completely the impact of interest rate as well as the dynamic rate will help on that.
In terms of volumes, we are going to grow. And in selected segment. Mortgage is our priority consumer loan is our priority is me connected with the 2 verticals, our priorities, tactical approach in large corporate lending just to get fees generation products. Commercial savings will go up, and we will pay attention already in 2024 to optimize as much as possible a trade-off between volumes and price, but they are expecting to grow. In terms of fees and commissions, we are going to have a significant growth on wealth management product that will have a pace faster than the other product. So at the end, we are going to generate, as I mentioned, EUR 260 million, and a significant portion of that will come from the wealth management product.
Just a focus on wealth management. So the projected sustainable growing wealth management tragically is visible and is supported by the indirect funding growth. We're going to have almost more than EUR 20 billion with the important contribution that will come from asset management products that will grow by EUR 17 billion. Now a simple bridge for fees and commission. We are growing in several areas. So there is no quick and faster , growing driver.
It's clear that the upper affluent, all the segment of affluent which we're going to be very much focused will give an important contribution as well as the private banking customer and the family office that we have. So it's quite easy that to connect the delta increase wealth management product with the initiatives we have in place. So we want to be more and more a fee-based organization capable to lead it's P&L and the grow commission through top class services to our customer that needs advice in terms of investment product.
Now Widiba. So Widiba feature we are in place is the grow of network. So we are accelerating the recruiting with focus on particular geographical area, and we want to further to upgrade some digital channels, even if we did buy as a very front-end top class among the best even in Europe. We are going to have a sort of focus, distinctive value proposition, especially for the private segment. We want to expect to extend the product range. And then I think there would be a sort of coordination in terms of overall strategy of investment with our Wealth Management Advisory Center.
Advisory, the financial adviser, we are almost -- will be more than 200 total assets will grow by 62%. The share of asset management total will increase by 20% to 58%, and the gross commission will increase from EUR 80 million to EUR 146 million. Then the net is clearly being impacted by what will be paid to the financial adviser. Costs, as I said, cost will be almost complete rental control with 2 different drivers. HR connected with Remuneration Incentive Scheme as well, labor contract increased, while Non-HR cost, we really try to do our best in order to offset the higher cost that we are going to have for investment and for inflation with additional efficiency that we want to introduce. Depreciation will increase because of the investment.
Bridge, very simple to explain. So the increase of HR is much more connected with the incentive scheme and the total remuneration connected with the national banking contract on other non-other cost nonshare costs, we have EUR 11 million in the first 2 years of inflation. We have EUR 9 million that we spent for the bank transformation, optimization of the action will help in offsetting more than 50% of this cost. And this will be the same in the second part of the plan. Now on nonperforming just is a bit of a crowded this slide, but I think it's important, as I was mentioning before, to spend a few words now because we have a gross NPE stock of 3.7%. As I mentioned, practically, we have EUR 1.1 billion and it is unsecured. And EUR 700 million that are forborne.
So we count in improvement of collection to rate and the cure rate, but part of this will be initially achieved through the stock that we have already of mortgages we fill that are -- most of them, the part of forborne are regularly paying. At the same time, from the repayment of the guarantee from the state for the loan the EUR 1 billion that we have already in the stock. Default rate will decrease. Having in mind that the default rate 2024 has been affected in the first half of the year. Now a little bit less from mortgage and retail mortgages due to the impact of interest rate in the instalment. And now we have a position where out of 100%, only 30% of our mortgage have a variable rate in place.
So we believe that there are all the conditions to reach the goal that we have in mind by decreasing the stock and at the same time, adopting also the approach of selected disposals that anyway is our backup in the case, we are not successful achieving the optimization of the portfolio. The coverage that is the important indicator of this slide on the top right, bad loans [indiscernible]and the overall average is 55% and net NPE ratio 1.7. Now Andrea maybe
Thank you, Luigi, and good morning to everybody. Our funding strategy is clear, and I would say, simple. We plan to issue approximately EUR 11 billion bonds in the plan period from 30 June up to '28 versus around EUR 9 billion of reimbursement, which will allow us to increase our wholesale funding component from EUR 10.2 billion to EUR 12.4 billion. This strategy has 4 drivers. First, we plan to increase the covered bond size by issuing more than what expires. In this way, we will fund our retail mortgages growth. On senior preferred bonds, we plan to issue just slightly more than it expires in order to keep good buffers on the MREL requirements.
As regards to ordinated bonds, we plan to issue less than what it expires or will be called at the relevant dates. In this way, we will optimize our capital structure given our excess total capital. And finally, we will replace some ECB funding with bilateral to transactions. In this way, we will achieve the following. We will have a very good buffers around 2% on MREL total TREA. We reduced exposure. We will level CR at 160% and SFR over 140%.
Now we come to the slide on DTAs, which is a very important slide. Why is it important? First of all, the update of our financial targets and the progressive achievement will allow us to progressively write up our off-balance DTAs on tax loss carry forward so that the bulk of our off-balance DTAs will be written up during the period. In this way, we will be able to keep a very low tax rate during the planned time horizon.
But even more important, the usage of our tax loss carry forward DTAs over the period will allow us to generate capital since we will be able to progressively reduce capital reductions by using tax loss carry forward DTAs. We will, therefore, be able to generate almost EUR 1 billion in the plan time horizon by using DTAs on tax loss carry forward, thanks to our sustainable taxable base. On top of that, as already mentioned by our CEO, we will still have EUR 2.4 billion of additional capital to be generated in the following years linked to tax loss carry forward DTAs.
Moving to the next slide. We are showing the bridge of common equity Tier 1 ratio from 24 to 28. Some remarks. We start from a very solid capital base, 18.1% expected at year-end. We have a strong capital generation. You can see in the bridge 5.2 plus 5.7 percentage points in the period, driven by our expected net income. We expect very manageable RWA dynamics. As anticipated in previous calls, for us, the CRI impact will be positive so that we expect lower RWAs by EUR 1.3 billion with first application. Then we will have a small impact linked to the update of our IRB models for around EUR 0.8 billion of higher RWAs, which will be fully offset by the positive impact of CRR.
So even considering a 70% payout ratio on net profit, which is the level factor in our projections for the purpose of the capital bridge, we will lend to a very strong 18.5% common equity run ratio in 2028. And let me remind again, the additional EUR 2.4 billion capital to be generated, thanks to the usage of tax loss carry forward DTAs in the following years.
Finally, let me hand over to Luigi for the concluding remarks.
Thank you, Andrea. So just one slide that I think is showing the evolving journey of Monte Pascchi Renaissance to the future. So 2 years ago, I was presenting the plan, and we were speaking about legacies of the past. Then we achieved what I already mentioned, a so called Renaissance, and whatever is that now we are a bank clear and simple revolving around customers combine technology with human touch. It means that we are ready for the future
Thank you very much, and we are happy to answer to your questions.
Thank you, sir. Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. [Operator Instructions] The next question is from Giovanni Razzoli of Deutsche Bank.
Good morning to everybody. Thank you for the presentation. Just a couple of very quick clarification. If I see on the slide, you are mentioning EUR 1.9 billion of distributions from '24 to '26, which means more or less EUR 150 million in the next 2 years. So I was wondering whether shall I read this correctly. So basically, you do see a broadly stable distribution to EUR 950 million in '25 or '26 million and clearly '24. That's my first question. And the second question is on the potential impact on the sale of Monte Paschi Bank, am I correct in saying that the disposal would be neutral or slightly negative or on your CET1 ratio.
Sorry, we missed your second question. Sorry for that, Giovanni, can you repeat it?
Yes. If the disposal -- I mean, you mentioned that you are in tolls to dispose of Monte Paschi Bank in France. I was wondering what could be the impact on the CET1? I assume that the impact will be neutral or slightly negative, but if you can clarify this.
Okay. Thank you, Giovanni. I will take the 2 questions. On the first question. As mentioned, we are factoring in our projections, a 75% patriation net profit for the partners of the projections. So you can easily derive the amount in euro, which again, are projections. As regards Monte Paschi Bank, the P&L impact is already factored in the first half results. So it's there. While the positive capital impact of a few basis points, we will get it most likely by year-end when the bank will be sold.
Next question is from Ignacio Ulargui of BNP Paribas.
I have just 2 questions. I mean first one is on the dynamics on the lending growth and direct savings that you are willing to gain throughout the plan. And have you contemplated any kind of margin pressure for the market gains that you are targeting? Or do you expect the market to grow similarly to what you are expecting in the plan? And second question is if you could update us a bit on what's your thoughts about the legal risks going forward and whether you have contemplated an incremental delays of provisions throughout the plan?
Okay. So regarding the trend in terms of volumes, it's clear that, as I was mentioning before, throughout the cycle, we have the first year that the market will practically reflect or go down. The second 2 years as the market will go slightly up. What is going is slightly not significantly, but constantly up our mortgages and consumer lending. So we believe that we can grow in this sector because we have still a significant penetration number of customers in our bank.
And we believe that especially because are also our customers, and so we have also an approach that is connected with a cross-selling view, and we see what is happening up to now, we will be competitive, but we don't need really to go by far below what would be the average of the market. So in other words, we don't expect that in order to grow, we will penalize our strength.
On credit litigation or whatever, we want to use, and I have committed that I'm not using this word since a few months, so sometimes legal risk is something that is becoming less familiar touching wood. We were saying already that in a conservative way, and we are a bank that was always very conservative, as I mentioned, because all these kind of issues are professionally managed by our lawyer and by our Chief Accountant. So we kept conservatively part of the reserve, and we believe that what we kept sooner or later can be also -- can go to a contribution to our P&L. It's just a matter of time. So absolutely, we don't expect nothing negative on the opposite.
Okay, any positive on it?
Now conservative approach means that it's better to come on what you have for certain. And we have just wait. We have to stress our organization and our commercial attitude in order to deliver the plan without any extraordinary item. And if it happens, it's more than welcome, but we count on ourselves.
Next question comes from Noemi Peruch of Mediobanca.
I have 2.One is on your rate sensitivity on Page 43. The rate impact there, it showed a EUR 119 million when you assume basically in the period of 100 bps of lower rates. So my question is whether we should consider this new impact as the new rate sensitivity or whether you also included their other factors? And then question on tax loss carry forward, you mentioned EUR 1 billion absorption in the plan. I was wondering if you could give us a bit of more color on the timing throughout the plan.
Okay. So, I will take the questions. On as regards to the interest rate sensitivity, actually, our interest rate sensitivity, which is being reduced now in the neighbourhood of EUR 130 million for minus 100 bps is a sensitivity of the whole balance sheet to 100 bps parallel shift of the curve. So it is somehow theoretical. But in this case, we are looking at the sensitivity on commercial volumes of shift, which is not parallel of the curve. So this is the sensitivity, which is applicable in the scenario that we expect will materialize on our commercial volumes.
Then on the DTAs, basically, since the usage of tax of DTAs on tax loss carry forward comes after the usage of the DTAs on the usage of convertible DTAs, and this is going down, you can expect an acceleration of the usage of the DTAs on tax loss carry forward starting from EUR 100 million plus roughly this year and going over time
The next question is from Hugo Cruz of KBW.
Just 2 questions. The IRB model updates when you expect that to happen? And second, any plans to consider buybacks as part of the 75% payout target or on top of that payout target?
So as regards to IRB models, we expect the RWA impact by year-end '25.
For the time being, we are focused on dividends. And as we said, we have in front of us a lot of opportunities, and we will try to capture the best interest of our stakeholders.
The next question comes from Andrea Lisi of Equita.
3 on my side. The first one is on deposits. We have seen a good growth in deposits and is consistent with your strategy. Just to know the split between side deposit, term deposits. And so the impact on NII spectro this increase in deposits. The second question is on fees, if maybe I missed it, but if you can provide us an indication of upfront fees in the quarter? And what are the assumption on upfront fees can be in the plan? And the very last question is on your plan. In particular, you said that you want to introduce [indiscernible]-life insurance offering and just to know if you have already identified the partner or if you are still looking for it or something else?
Okay. Majority of our deposits are at site. And practically, the current movement is mainly focused on that side. We started last year also to offer a set deposit. They are going, but I need to say a majority of our cost is connected with the current account, where we have a majority of our deposits. So we have to say that probably we are thinking also to better enlarge the offer of term deposit, but for the time being despite we are going probably to have higher volumes in the future anyway, will not affect the cost overall of the opposite, as I mentioned before, as we reached a level very important of deposit.
So we are from now on, paying even more attention to the trade-off. So we want to grow, but what we call with residual deposit on current account and also on corporate business, this platform, transactional platform that we -- on which we are investing and is an upgrade of what we have now. We are sure will enable us to have much more residual deposits from corporate customers as we are going to increase the turnover with them.
As far as the level of upfront in this quarter, more or less, they are flat quarter-on-quarter because practically, we are going to have -- and we are going to have -- the slight decrease was connected much more with continuing fees. So there is no particularly trend and no particular action in order to push the front practically, we have, if I remember well, the amount 64, 64% at the same level. In the plan, we have a conservative approach in terms also of inflow.
Clearly, we want to improve the net flow. And we believe that we can do also by leveraging on our Athena platform with better fixed and better make us understanding as well the customer, the profile. And the way of investment also the investment center will help in better decline, which are the preferences of our customers. So overall, we will keep more or less the same ratio between the upfront and the management fee probably in the year '26-'27 when we are going to have the remote channel working a bit more, that could be a sort of slightly growing trend for upfront fee compared to the wealth management that, as you know, depends a lot also from the market -- on the market...
And as regarding nonlife insurance?
Sorry, I forgot, I apologize. No, life insurance in our plan, we have an initial load important growth, but with the inertia in terms of organization. So we plan to go ahead with the current situation. Clearly, as we said, as we have a lot of capital, we are keeping open eyes and try to understand if there are opportunities to further enrich the fee-based business that we have, thinking about also to some opportunity for insurance factory.
The next question is from Fabrizio Bernardi of Intermonte.
On top of the question I made 1 second ago, I would like to understand if on the back of the free capital position you have in this business plan that goes to 2028, there is the buyback of the JV with AXA. And in case, if you can give us a number about what I think could be a call option to buy back the remaining part of capital that now is in the hands of AXA.
So thank you for the question. I will try to be a bit clear on that. we put in the plan what depends on us. And this is the sort of philosophical approach and is part of the clarity of the strategy. So if will appear an opportunity to incorporate the joint venture, it will be a positive impact, will have a positive impact on our plan. So as I said, it's something positive that as we cannot count it doesn't depend on us. We are not considering the current stage.
Sorry. On top of this, given that you are a contributor to Anima and you have a 0% stake, this is a bit misleading in the sense that you are giving somebody else some fees. So I was wondering whether Anima is also a potential partnership that you could reconsider given that in the past, you had 10%.
I have to say that when we start thinking about financial issues, I'm a little bit weak. I'm focused exclusively on commercial things. So at the current stage, honestly, we are entering in a plan that is quite challenging for us, but is also exciting because we have wonderful people that are our really strength in the network. So to be honest, we are at the current stage completely focused in dealing with customers. So we'll see if there are opportunities, as I mentioned, we are going to capture, but it's not the kind of focus that we have.
The next question is a follow-up from Ignacio Ulargui of BNP Paribas.
I have one more on costs. And you have mentioned throughout the presentation several times, your willingness to replace the head count. I mean should we contemplate any kind of relevant cost cutting initiatives in form of restructuring charges? So we contemplate that in the plan or the plan, yes, looks to the normal replacement of headcount.
We don't plan a particular action on that. As I mentioned, we are going to hire professionals. It's clear that we have a natural turnover in the bank. So we are trying to have a good trade-off between what is the natural turnover and the people we are hiring. And we believe that also with this in mind, we can be quite effective and to have a gradual optimization of our organization. We have to say, as I mentioned before, that we plan to have more than 1,000 people and thanks to introduction of some technological instrument and digitalization will be, in some way, skilled and can be utilized in value-added activities. So from cost, we move much more to revenues, clearly with the period of trading. So what we are going to optimize is much more the composition between back office, front office than a sort of action in order to implement a sort of another voluntary exit from the bank.
The next question is the follow-up from Giovanni Razzoli of Deutsche Bank.
Shall I read correctly your target that the strategical option to push Val accretive alternatives, is it correct to assume that the share buyback in the future could be a way to be considered a value-accretive alternative to a usage of your more than EUR 2 billion of excess capital. I just want to have your personal view.
I think almost I answered previously to this question. It's clear that we are a normal bank. So if you go ahead with the important excess of capital, you don't have opportunity then you have to optimize. But honestly, we prefer to utilize capital for growing, investing and to capture opportunity that the market can present and to have a strong position in any of this opportunity. So mathematically or [indiscernible], you can make all the exercise that I think is possible to force, but it's not what is the current stage on our table .
The next question comes from Manuela Meroni of Intesa Sanpaolo.
I have a follow-up on the redeployment of your capital. You clearly have a very high excess capital. It's clear that you could potentially buy back the joint venture in the insurance business, if there is an opportunity. Could you please share with us what could be the potential impact on your profitability targets and common equity Tier 1 targets if you are able to take this opportunity? And are there other areas in which you might be interested in redeploying your excess capital? And the second question is on the asset management growth. You're assuming a plus over 9% compound growth in the assets under management. I'm wondering what is the effect of the new inflow and what is the performance effect that you are embedding in these numbers
Okay. So clearly, we cannot disclose the potential impact that we have on our capital. If we buy the 50% of the joint venture, what we were seeing, and I like really stress on that, our position of capital and our capability also to be active in the bancassurance sector make us in the position that this option will generate additional value for our company. And I think is what I can say. So if we do tomorrow, as I said, will have a really important positive impact on us.
[Operator Instructions] Mr. Lovaglio, there are no questions registered at this time, sir.
So thank you very much, and thank you for participation in this [indiscernible] time to our presentation. See you in November. Thank you very much.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.