Banca Monte dei Paschi di Siena SpA
MIL:BMPS
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Banca Monte dei Paschi di Siena SpA
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Before giving you the key highlights of our financial performance, let me make a few remarks on the principles that have guided the bank over these last 2 months when the COVID pandemic grew and the economy began to contract. Firstly, Monte dei Paschi has been one of the pillars of the Italian real economy during the difficult times. Since the beginning of the pandemic, our support to our customers, families and corporates has been continuous and effective. We have disbursed EUR 25 billion in the form of suspended payments, not revoke the order spendable evocable lines of credit and advances and new guaranteed loans, a concrete contribution from Monte dei Paschi to the effort in sustaining the economy.
Second, from a commercial point of view, I would like to highlight that the recovery of commercial activity after the spring lockdown, which proves the productivity of my colleagues and our solid customer base. In the first 9 months of 2020, we have granted new mortgages for EUR 8.6 billion, leading to a 9% increase in outstanding since December '19 and place the wealth management product for EUR 8.4 billion figures debt, as we can see later, are better than a year ago, outstanding the 3 months lockdown.
Third, our liquidity position has further strengthened with current accounts and the time deposits increasing by event EUR 7.5 billion since December '19. This is better than system and the proof of our customers' loyalty and of our strong commercial network closer to our clients. For [indiscernible] transaction, as you know, is underway and expect it to be concluded by the beginning of December. With this deal, the risk profile of the bank will strongly improve, allowing us to achieve one of the lowest gross NPE ratios in Italy.
As a result of the huge cleanup effort and legal claims you are all up-to-date on, our capital ratio has been impacted in order to take into account these provisions and efforts related to the AMCO deal and the evolution of regulatory microeconomic context, we are reviewing our capital plan with the full support of the controlling shareholder. But before we discuss these matters in detail, you can see on Slide 3 a few highlights on 3Q results, which will be commented in more detail by Giuseppe Sica, our new CFO, who you already know. The quarter closed with a preprovision profit of EUR 203 million, up by almost 9% from Q2.
Revenues has increased by 3.5%, thanks to the increase of net interest income, driven by resilient funding/lending activity and by the effect of the TLTRO III on the overall cost of funding. And the increase of fees and commissions by almost 10% quarter-on-quarter, following the better network activities after the spring lockdown. With the return to normal operations, the additional cost for the implementation of COVID safety measures administrative expenses are up from last quarter. However, costs are down by almost 4% on a yearly basis. Faster benefits on our cost base are expected, starting from Q4 with impact of the exit of 560 employees just 4 days ago.
Cost of risk is 84 bps, and this includes EUR 300 million provision booked in the first half of 2020, related to the impact of COVID. Without this additional component, the cost of risk would be 49 bps. At the moment, the full rate and the danger rate are basically in line with Q2, also thanks to the effects of government support measures. Net operating result is positive for EUR 100 million, in line with 2019 quarterly average figures and significantly better than the first half of the year, which I believe bodes well for the future. Net results or Q3 is negative due to nonrecurring, nonoperating cost from an overall amount of EUR 570 million related to additional provisions for legal risks and restructuring costs due to the exit of personnel on November 1.
So let's move to balance sheet. Gross NPL ratio stands at 11.1% and it doesn't consider the impact of the deal with AMCO. Including the derisking deal, the pro forma gross NPE ratio is around 4%, one of the lowest levels in Italy. Finally, as for capital and liquidity positions, all indicators remain above regulatory requirements with transitional one at 12.9% and total capital ratio at 16.2%. Liquidity coverage ratio above 150%, net stable funding ratio above 100% and counterbalancing capacity exceeding the EUR 28 billion, thanks to [indiscernible] funding flows and the TLTRO trade financing.
Let's turn to Slide 4. We have continuously worked to help our customers minimize the financial strain of these difficult months, thanks to our active approach and to dedicated task force and [indiscernible] processes. Until now, we have suspended repayment on loans granted to about 115,000 clients for more than EUR 15 billion and have extended the validity of lines of credit and advances for EUR 3.7 billion. Since the beginning of the pandemic, we assessed applications for EUR 6.1 billion of new granted loans, with an acceleration of activity in Q3, thanks to a well-established operational and commercial machine.
The fact that moratorium and guaranteed loan market shares of Monte Paschi are above standard loan market share testified to the focus on supporting our clients, government measures and what is very important for me in mobilizing the network. Now Slide 5. The strength of our franchise can also be seen by taking a look at the wealth management and mortgage flows, which picked up immediately after the networks return to usual operation in June and continued to improve throughout the third quarter.
For the first 9 months of the year, wealth management gross flows were EUR 8.4 billion, almost 1% more than the same period last year despite the 3-month slowdown and importantly, a 40% quarterly increase. New mortgage flows in the first 9 months of 2020 were up by 54% year-on-year, boosted also by financial risk measures. October figures confirms this positive trend.
So let's turn to Slide 6. Moving to Widiba. Its positioning is particularly effected in the scoped phase, more relevant than ever for the change in customer behavior and for diversifying the group's channels. The commercial funding inflows continued in the third quarter with total net inflows at the end of September exceeding EUR 500 million, 4x the amount of the entire last year. This figure is also connected to the 30% year-on-year growth of new current accounts and to the strong increase registered by our platform usage indicators. Also during the pandemic, Widiba has continued to innovate the products and processes.
And now to Slide 7, on to funding and liquidity. Current accounts and time deposits grew increasing by EUR 3 million from June and by EUR 7.5 billion from the end of 2019, confirming the value of the bank's franchise and the confidence of our clients. This positive commercial dynamics, together with the EUR 300 million Tier 2 bond issued in September, and a further pick up of TLTRO III for EUR 3 billion, led to a solid liquidity position with as already mentioned, counterbalancing capacity exceeding EUR 28 billion and all liquidity indicators well above all requirements.
And now Slide 8. Our gross NPE ratio at the end of September is 11.1%, reduced from the 12.4% of the end of 2019. This ratio still includes the portfolio of EUR 7.5 billion as of September 2020 to be transferred to AMCO. Net of this portfolio, the ratio is around 4%, one of the best-in-class levels in the data and the level that allows us to face the possible impact of the difficult macroeconomic context on credit quality. These figures benefits from the financial support measures launched by the government and rolled out by the bank, but a certainly proof of our productive management of the credit portfolio. We faced this new emergency, which reviewed the credit strategies and credit standards and improved early warning detection system, which allowed us to detect its relation signs and promptly manage the relationship with clients.
And now Slide 9, relating to AMCO deal. The AMCO deal is proceeding according to plan. Let me remind you that ECB approved the transaction at the beginning of September, subject to a few conditions. The condition whose implementation is in the hand of the bank has either been already met. At the beginning of September, the day after receiving the authorization from ECB, we issued a EUR 300 million T2 bond, above the minimum amount of EUR 250 million requested by ECB. The deal was approved by the extraordinary shareholder meeting of October 4.
Regarding the comfort letters received from at least 3 investment banks, confirming our capability who had in case of issuance of a potential 81% at least 30% subscribed by private investors. We have the commitment to send them to ECB after the 10th of November. Apart from ECB conditions, I remember that EUR 150 million, maximum disbursement for the buyback of stocks tender and the right of sale or withdrawal, was satisfied. The sending minorities standard shares for a total of EUR 33 million, well below the EUR 150 million cap on the maximum value of shares to be bought back. We are currently proceeding with the asymmetric option, which may be exercised by shareholders wishing not to have a portion of the Monte Paschi shares can sell and substituted by AMCO shares.
Now Slide 10, relating to capital. Our CET1 ratio is down from Q2 due to the impact of extraordinary items on quarterly results, partially offset by reduced RWAs, mainly due to lower composition with a greater portion of guaranteed loans. CET1 stands at 12.9% versus 8.83% rep requirement. Total capital ratio is 16.2% benefits from the EUR 300 million Tier 2 issued in September. We are working on a new capital plan, which will take into account the impact of the deal with AMCO on the evolution of the macroeconomic and regulatory scenario.
Now let me hand over to our new CFO, Giuseppe Sica. Please, Giuseppe.
Thank you, Guido, and good afternoon, everybody. I'll start with Slide 12, which shows the P&L figures on which I will comment in detail in a moment. But what is certainly encouraging to me is that the bank commercial performance has improved despite a difficult environment in which our network has to operate. Net interest margin has been resilient. Commissions have, picked up driven by our clients' activity. And costs and provisions remain under strict control. The bank's net operating results for the third quarter is positive for around EUR 100 million. This is significantly better than first half 2020 and is in line with pre-COVID 2019 average.
Let me turn to Slide 13 on net interest income. Net interest income is up by almost 4% quarter-on-quarter, showing a resilient commercial performance, although still affected by the persistent pressure on lending rates. In the quarter, the positive contribution for the TLTRO take up was largely offset by the cost of excess liquidity deposited with ECB and by higher institutional market funding due to the recent bond issues our CEO referred to, but also by our strong increase in direct deposits. Year-on-year evolution of the net interest income, which has been worse than market average, reflects, in addition to the systemic pressure on asset spread and volumes also the case for reconstitution of the liability structure with the Tier 2 issuance and senior bonds in the second half of '19 and 2020. But also with other impacts related to the bank's restructuring process, and in particular, the sale of Monte dei Paschi, but also with the significant sale of unlikely to pay. These 2 actions alone account for around EUR 50 million decrease in net interest income commissioned on Slide 14.
After the lockdown drop in Q3, with the restoring of the commercial activity fees and commissions rebounded, registering a circa 10% increase versus the previous quarter. This was driven largely by wealth management, where placement fees alone were increased by 40% quarter-on-quarter, but also by traditional banking fees. The decrease again versus last year has been mainly driven by lower placement fees on consumer finance. As you know, the bank distributes third-party products without taking balance sheet risk. So the decrease is healthy and the recent performance is encouraging.
I'll move very quickly to Slide 15. Dividends and profits include, as usual, the contribution from AXA, which has been somehow below average, which, as you know, is also led by the level of interest rates for an insurance company. On the positive side, we have continued the derisking on our government bond portfolio. I will discuss the overall stock in a moment, but the impact on P&L has been positive in the quarter for around EUR 52 million.
Now on cost. Slide 16. With the bank's return to full on-site operational capacity, operating costs showed a quarterly increase of 1.5%. But as our CEO already said, the 9-month figure shows that the bank is continued focused on cost control, with expenses down 3.8% year-on-year. There would be more reductions to come. Around 560 colleagues that left the bank just a few days ago as a measure of our solidarity funds. We will start to see this additional positive impact on cost of personnel already on 4Q results.
Moving to the cost of risk on Slide 17. Let me remind you that the bank had already booked a healthy COVID-related provisions of around Eur 300 million in the first half of the year. So the Q3 figure is already clean of that effect. The result is an overall cost of risk of 84 basis points, net of the adjustments COVID-related, which I've just mentioned, that cost would be 49 basis points. Provisions booked in the quarter and in line with what the bank has booked as ordinary provisions in the 2 previous quarters and while caution is due, we have not seen a sign of deterioration of stress on liquidity. Clearly, thanks to public support measure, also thanks to public support measure. In fact, gross NPE ratio has further decreased to 11.1% versus 11.8% at June 2020, even before the AMCO deal closing. The coverage is overall stable.
On Slide 18, you see that the key trends in asset quality are also evident, if you look at the migration metrics and the main indicators of credit quality. Default rate and danger rate do not reflect at the moment any particular sign of deterioration.
On to Slide 19. I will comment quickly as most of the elements have already been disclosed to the market now. EUR 569 million of nonoperating costs reflects, in addition to the contribution of the deposit guarantee scheme for EUR 41 million and the quarterly DTA fee for EUR 18 million, mainly costs related to provisions for risks and charges connected to legal claims and restructuring costs for the solidarity fund maneuver, which I've just mentioned for EUR 511 million overall. This cost confirmed the bank's continued approach in managing risks. The prudential approach is also confirmed looking at the tax line. Considering the review of the business plan is currently underway, a positive reassessment of DTA was potentially not booked in the quarter pending the definition of future economic and financial perspective.
Let me now move to balance sheet on Page 20. Customer loans significantly increased quarter-on-quarter by EUR 4.6 billion, essentially thanks to new mortgages. Also sustained by the government's financial relief measures, for which we have already underlined the strong commitment of the bank to support our customers. Let me stress once again as highlighted by our CEO that the bank has taken a proactive approach to utilizing existing guarantee schemes in moratoria and the results achieved showed the ability of our bank to mobilize commercial resources quickly.
On Slide 21. Regarding direct funding and liquidity position, the key messages have already been discussed before by our CEO. The increase in direct funding reflects the client's conservative behavior in a difficult time. The bank is focused in satisfying client needs, but over time, this liquidity pool represents a source of potential additional income for the future. As a result of this, all our liquidity ratios remained strong and have actually further improved compared to previous quarters.
On Slide 22 on indirect funding. As mentioned, we had strong wealth management growth flows during the third quarter of the year, reflecting the return to almost normal branch activity. Net inflows reflect what I said before about clients' conservative behavior. This notwithstanding stock of assets under management increased, also thanks to positive market effects and are now close to pre-COVID levels. The performance of the bank remains strong, and our long-standing partnerships continue to work well and in a well-coordinated manner. You see this also in our above-average market share in asset management and bancassurance, but also in the composition of our revenues with almost 50% of revenues coming from commissions.
On Slide 23, details of the capital structure are given, but don't add much to what already our CEO has said. I will conclude with, as promised, a few words on our Italian government bonds portfolio. The reduction mainly derives from MPS Capital Services trading components. And it's also a consequence of strong demand for Italian government bonds. So the spread in the asset class is lower. The banking book, importantly, remains stable but there is a further reduction in the duration of the portfolio.
Thank you for your attention, and let me now open to questions.
[Operator Instructions] The first question is from Antonio Reale with Morgan Stanley.
It's Antonio Reale from Morgan Stanley. I have 3Bs. The first one is on capital. And of course, you've talked about it. We've seen the CET1 level at 10.9%. And if I take your as and add an estimate of the sort of pillar 2 guidance that the last you've provided. We look at the numbers, and it's clearly sort of buffer, especially in the context of COVID, we're in the middle of a second wave and the visibility on loan losses remains relatively low. On top of that, of course, you have the EUR 10 billion litigation charge. You did say you're reviewing capital options. But can I just ask you what would be the management buffer you'd like to run the bank with over the minimum requirement? That's my first question.
And then secondly, could you please remind us sort of the moving parts on capital, both sort of headwinds and tailwinds? And if you have any levers as to optimize your capital base from here? And finally, my last question. Looking at Slide 31, I think it's very clear the way you classify your legal risk in probable, possible and remote. So thank you for that disclosure. Could you talk about what are the conditions you set for each definition? And what makes you change your specification? Any color you can share that would be much appreciated just for us to have a better understanding of what could be any future moves? And if you have available to share, could you provide the time line of the sort of key trials or key events in the calendar with respect to your legal risk?
Thank you, Antonio. Maybe I'll start to answer your questions, but the line was not very clear. So if there are follow-up questions of you let us know. With regards to the buffer on our requirements, if you look at the numbers of June 2020, I feel the market was comfortable with debt level. Clearly, post-closing of the AMCO transaction, I think you can run the bank below that level just because our NPE ratio will go down to 4%. So I would say, in that ballpark is a level where the bank [Technical Difficulty]
Excuse me, this is the operator. We lost the connection with the moderator. So please hold the line. [Operator Instructions] The conference will resume shortly. Mr. Bastianini, your line is open.
Okay. Maybe the market didn't like the answer on our CET1 level. But I think I answered, Antonio, your question about the buffer we would like to retain also in light of the AMCO transaction. On the amount of legal risks, clearly, is a big number, we provide a lot of disclosure also in the presentation that we have distributed on our website. I think, number one, that we are prudent, as I highlighted in our presentation in the way we provision for risks. We normally ask for third-party opinions on any kind of claims we do receive and often more than one. It's also fair to say that we were a bit of caught by surprise by recent events, and that's why we had to book this additional provision, which you find in the quarterly results. I think on the classification, again, we tend to use third parties opinions.
The next question is from Jean Neuez with Goldman Sachs.
I have a follow-up question on the capital level. So the first one is on the. So obviously, because there is the AMCO transaction coming, there is likely to be or at least I'm sure that you are talking to the ECB to probably get a change in the rep going forward. And given that you already indicated in your press release today that you're reviewing your capital options, I wanted to understand as a follow-up to the previous question on the buffer, what you would anticipate your SREP to do or whether you had any indication from your supervisor as to what they could do?
And my second question is the segue on this, in particular, related to asset quality. So I noted your slide about your unwavering support to your customers through moratorium and on guarantees. And the great gift, this is a very, very high number. And obviously, the outcomes are less certain than they were paying today, I would imagine. The question is, first, how comfortable are you with your level of reserves, they were low this quarter, the loan loss results. But with regards to the asset quality of these? And could that be an offsetting factor in the eyes of your super vigor when it comes to revising your SREP for the reduction of the risk profile that follows the AMCO transaction?
The line again was not super clear, but I was try to answer to your question. So on the debt requirement, obviously, we cannot comment. Clearly, I think the fact that the ECB approved the transaction means state light, the risk profile of the transaction. On the use of moratoria and guarantees, i.e. -- I said during the course of our presentation, we really have been proactive in using these instruments as provided by our government. You get a very good return on allocated capital by doing so. In many cases, we have lent money to our clients and the clients, we can see has not used them and still on our deposits, which, to be sure there is no, as I said, stress from liquidity. So I don't want to say that we feel comfortable for the future, but we feel as comfortable as any other bank operating in this environment in Italy.
The next question is from Riccardo Rovere with Mediobanca.
I have a couple, if I may. The first one, when you show headwinds and tailwinds on your capital. In this presentation, you make mention of TRIM. If I'm not mistaken, in the previous presentation, you were highlighting the possibility of having EUR 3 billion, maybe EUR 3.5 billion of RWA installation related to TRIM, while I don't see any mention of that in this presentation. I was wondering whether this has been canceled or maybe postponed? Or is it eventually still there, it is not just mentioned in the presentation? And the second question I had you clearly stated to the beginning when you were talking about NII, that the benefit from TLTRO was somehow in good part wiped out by the cost of funding of the subordinated plus the drag from the excess liquidity. Can you tell us how much was the contribution of TLTRO in this quarter? And how did you account for that? Did you account for 1/4 of 100 basis points for this quarter? Or has it been done in a different way?
Maybe I'll start with the question on TSTRO, which is probably easier. So the first one is on accounting we have used the benefit -- we have accrued to benefit on a 12 months period of the extra benefit for the TSTRO. We are well above target in terms of new loans. So we feel pretty confident that benefit can be achieved or will be achieved. On the impact of the TLTRO for the quarter that was around EUR 58 million. But as I said, we had to deposit excess liquidity for ECB, which cost around EUR 20 million. We had around EUR 15 million from increased cost of deposits and around EUR 6 million from lower component on our bond portfolio. So that's -- these are the key figures. The rest is really driven by commercial components.
Just to get back 1 second. Sorry, if I may, just 1 second. The EUR 58 million you were mentioning before on TLTRO, this is a quarter of 100 basis points on the amount you have taken, right?
Yes. Yes.
That's okay. Okay. Okay.
Yes. Yes. With regards to the impact on RWA of the TRIM review, this has been postponed. So the figure will accrue at some point in the future, but not in this calendar year.
Okay. Okay. Okay. No, that was clear. So it's still there, but not in 2020? And the amount is -- did you say that the amount is more or less the same, EUR 3 billion package? If I'm not mistaken, it was about EUR 3 billion or something like that?
I think it really depends. As you know, there have been a few discussions on change of definition of default. So there may be an impact there. But it depends on what is happening somewhere else.
The next question is from Hugo Cruz with KBW.
Really, I wanted to ask around AT1 issuance because when you talk about the requirement. I think you're already assuming the usage of the 104a Article. And -- but you haven't issued any Tier 1. So if you could tell me -- tell us what are your plans in the theory, that would be helpful? And then another question, now being more high level, more strategic. You now have been at Monte dei Paschi for a few months, you've had more time to kind of see the place from the inside. What would you like to change or focus strategy going forward on?
Sorry. Is -- just a question on what we are going to do on the AT1 and on rep considerations in general, just to be clear?
Well, because with the shaft you communicated, it's already assuming that I understood already seen the usage of the Article 104a, which implies some at AT1 issuance, which you haven't done yet. So I just wanted to understand that?
Yes. But on the AT1 issuance, we -- as part of the transaction, we have carved out close to more than EUR 1 billion in equity. We have had indications from this that they would want us to see -- they will want us to see issuing AT1 as our CEO said, there will be -- should be let us coming only -- not earlier than 20 days before the closing of the AMCO deals. And I and I think that these letters will come. Then there is a question on what would be the cost of these instruments, but that will depend on market conditions at the time of the issuance, which will require of an AGM to happen for the cation of distributable results.
The next question is from Corinne Cunningham with Autonomous.
You mentioned you're going to talk about a capital restructuring. And I think you've been talking about the Tier 1 as well. Personally, I think it would be quite difficult to issue Tier 1 into the market on the numbers that we see now. The conversations that you're having on the capital restructuring. And how -- I suppose, how can you do that without triggering some kind of state-aid referral? The Tier 2 bonds are trading at a relatively distressed level. And I think holders are still quite nervous about the overall capital position of Monte dei. And how they fit in with any kind of state that capital raise? So if there's anything you can -- any light you can shed on how the -- how you could raise capital backed by the government without triggering state aid? That would be very helpful.
I understand why you asked the question. Obviously, it's a very delicate question. So we would prefer not to answer at this stage, which is why we are expressing, we are reviewing our capital plan at the moment.
Okay. But for the investors in Tier 2 securities, should they expect to remain whole? Or do you think that Tier 2 securities will form part of that discussion by recapitalization?
Repeat, please.
I think the line went.
Sorry. Could you repeat, please?
Yes. Just for Tier 2 investors. And is Tier 2 expected to be part of the recapitalization discussion? Or will be Tier 2 bonds continue to be required going forward?
For Tier 2, we have already issued at the beginning of September. So that condition is has already been fulfilled. So the next step, which again is not a closing condition for either will be the issuance of AT1, for which, as you know, there is already form of support in this public from our controlling shareholder.
Okay. So that's a reasonable template for us to use and provided the 30-odd percent can be issued in the market, then no bailing required?
Yes. For instance, the Tier 2, obviously, I think I can say that, so no participation of our controlling shareholder in the issuance. The fact that the shareholder was there was helpful to the issuance, I believe, but the book was over EUR 1 billion at the time. As I said, we will have to see what happens to market conditions as we enter the new year.
The next question is from Nandan with BTIG.
Going back to your discussion about your threat in 2021. Obviously, you'll have amongst the best asset quality metrics in Italy, so it should go down on that basis once the AMCO demerger is completed. But is the ECB also considering your elevated legal risk. Because obviously, they've doubled from the first quarter to the second quarter. So is that why there was press speculation that you would breach your SREP in the first quarter without a capital increase?
Yes. We will have SREP test in the next year, yes.
But regarding the legal risk, legal risk be incorporated into that? And are the legal risks going to be incorporated into your SREP requirement, the capital requirement from the ECB?
So the line is disturbed, but we didn't catch your question. Would you please write it to the Investor Relation?
Yes. I'll send you a separate e-mail.
The next question is from Alex Algoso with Bank of America.
Actually, my question was already. I just didn't know what to press to cancel the question.
[Operator Instructions] Gentlemen, there are no more questions registered at this time.
Thank you very much to all. Thank you. Bye.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.