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 the Chorus Call conference operator. Welcome, and thank you for joining the MPS' Third Quarter '22 and 9 Months '22 Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Luigi Lovaglio, Chief Executive Officer and General Manager of MPS. Please go ahead, sir.
Good morning, everybody. My warm welcome to all of you. Many thanks for joining us to Monte dei Paschi's third quarter and 9 months results presentation. I'm very satisfied because we are starting a completely new chapter of the oldest bank in the world.
With the results I'm going to present, I'll reveal strong points of Monte dei Paschi's life. In August, I told you we were working on the plan implementation at full steam. Today, I can say we have already delivered the most important pillars of our plan. EUR 2.5 billion capital increase that allows the bank to reduce the HR cost by over 20% in 1 shot and to be in the position to fully exploit its huge potential in coming quarters. We can start this new era having already booked the EUR 925 million of restructuring costs, so we can present EUR 537 million of profit in the quarter, excluding such one-off costs, paving the way for the future of improving results already starting now.
Last but not least, our new approach to the management of legal risks is bringing results, allowing us to reduce both the petitum and the risk provisioning in this quarter. Let me now give you some more details from the presentation.
We successfully completed the EUR 2.5 billion of capital increase in a very complex and volatile market. And this thanks to the support of our partners and investors that show confidence in the success of our plan. I would like also to thank all the colleagues, the President, and the Board of Directors, we made this possible. Now after the capital increase, we have a core Tier 1 ratio fully loaded at 14.7%. We successfully implemented the main business plan action related to the staff reduction through the voluntary scheme, going well above the original target. From the 1st of December, over 4,000 people, 20% of the current staff, will leave the bank, enabling to realize more than EUR 300 million yearly savings above the original amount of EUR 270 million assumed in the plan.
The related one-off restructuring cost of EUR 925 million were already booked in the third quarter. Excluding these restructuring costs, the third quarter '22 net profit amounts to EUR 537 million and EUR 565 million after 9 months, thanks to a pretax profit of EUR 130 million and EUR 407 million positive tax effects. Including the one-off restructuring costs, the third quarter net result is negative for EUR 388 million and EUR 360 million after 9 months.
The 9-month gross operating profit, excluding gains from securities disposal, increased by 13.5% year-on-year. The results are showing positive dynamic in core revenues, especially in net interest income. In the 9 months, net interest income increased by 15.7% year-over-year with a strong contribution of third quarter, up by 12.7% quarter-on-quarter and by 21.2% versus third quarter last year. Fees and commission income has been affected by upfront fees on wealth management.
Operating costs continued to be under control with HR costs lower by 1% year-on-year after 9 months and non-HR costs higher by 3.1% year-on-year due to some positive one-offs in third quarter '21. With the 4,000 early retirements, a structural reduction of the cost base is already assured.
Moving to asset quality. The gross NPE ratio pro forma after the disposal of EUR 900 million NPE portfolio is at 4% and the net NPE ratio at 2.1%. The 9 month cost of risk is 55 bps with pro forma coverage improving to 47.8%, plus 130 bps year-on-year and 220 bps quarter-on-quarter.
Now some details with additional slides. As you can see on this slide, and I mentioned, in this quarter, the bank has realized a net profit of EUR 53 million, excluding the HR restructuring costs, with a pretax profit of EUR 130 million, with positive impact on taxes of EUR 407 million.
The reported result is negative for EUR 388 million, after including the restructuring costs related to the implementation of the solidarity fund for EUR 925 million. It is worth to underline that the positive impact from taxes is only a portion of the bulk of more than EUR 3 billion of deferred tax assets that can be utilized for the future profits.
The 9 month ordinary net profit amounts to EUR 565 million, if excluding, again, the one-off HR restructuring costs, sustained by pretax profit of EUR 130 million and the positive tax effect of EUR 415 million. The reported result is negative for EUR 360 million including the restructuring costs.
In the Q3, as you can see from the slide, we reported an increase of 9.6% year-on-year in gross operating profit, thanks to the operating income up by 4% year-on-year, driven by higher net interest income. Cost dynamic is impacted by a positive one-off in the third quarter of 2021.
On a quarterly basis, the gross operating profit is slightly decreasing due to some seasonality in revenues, partially compensated by lower operating cost, down by 1.7%. The 9-month gross operating profit increased by more than 13%, excluding gain on security disposal, thanks to positive revenue dynamic, up by 3.7% year-on-year.
Now with interest income. In the third quarter, we observed a significant improvement in interest income, confirming the positive sensitivity of our balance sheet to growing interest rates. We reported more than EUR 70 million of additional commercial interest income quarter-on-quarter, equal almost to 25% growth.
Also considering TLTRO related income that is in a decreasing trend, we are showing a double-digit growth both quarter-on-quarter and year-on-year. The key driver of the growth is the improved commercial spread, driven by the increase in lending rates. In cumulative terms, net interest income after 9 months is up by 15.7% year-on-year with commercial up by more than 20% year-on-year, thanks to both higher lending rates and lower funding rates.
Moving to volumes. Performing loans show a positive trend both quarter-on-quarter and year-on-year in retail in line with our strategic direction. As far as deposits are concerned, we consolidated in the quarter the previous level of retail deposits in which we maintain our strategic process, still resisting to some market pressure on higher rates. We keep progressing with the reduction of expensive time deposits.
Looking at the Italian govies portfolio, the total amount of Italian govies portfolio decreased due to some maturities. We expect to reinvest part of the amount matured in the next few weeks, booking the securities in amortizing component in line with our conservative portfolio management approach. The fair value to P&L portfolio dynamic is reflecting our strategy to reduce volatility in the P&L.
Next, fees and commission. We keep showing a certain resilience year-on-year on banking fees, those connected to the operational activity with customers, with some impact quarter-on-quarter due to seasonality.
Also in the third quarter, we are observing pressure on wealth management upfront fees due to market volatility. Similar feature for 9 months, where, as you can see, banking fees are slightly up in the yearly comparison and wealth management fees impacted by market volatility.
As you can see from the slide, the impact of market volatility and the challenging macro environment is also visible on indirect funding stock, which is down both quarter-on-quarter and year-on-year. Even on a quarterly basis, we are decreasing less than the market effect.
On operating cost, as you can see, costs are under control, both HR and non-HR, considering the one-off reported last year, and this dynamic is confirmed quarterly and year-on-year. The same dynamic we reported also for the 9 months. Total costs are stable in a year with HR costs down and non-HR costs slightly up, having in mind, however, the positive one-off in third quarter 2021.
Now let me give some details about the HR reduction action we put in place from the 1st of December, which represented a key pillar of our strategy. As noted, from December, more than 4,000 people will leave the bank, about 20% of the current workforce. They represent 25% of adoptives in the administrative staff and 14% of branches' staff.
We have been working since the very beginning to set up a proper operation and commercial plan to ensure the full operational service and the effective coverage of customers from day 1. No negative impact on revenues is expected.
Moving to asset quality. Gross NPE stock is now at EUR 3.2 billion, decreasing by 24% year-on-year after the NPE disposal announced last August. This is one of the first actions of the plan that we implemented immediately after the presentation of last June.
Thanks to this action, we improved significantly our gross NPE ratio now at 4%, down by 100 bps versus September last year. And our net NPE ratio is currently at 2.1%. Positive results we are reporting particularly on the coverage.
The coverage pro forma after the disposal of the EUR 900 million of NPE portfolio is 47.8%, 120 bps higher than last quarter, despite the disposal. The 9 month cost of risk is at 55 bps, 49 bps in Q3. And I can say we don't observe, for the time being, any signal of deterioration of the loan portfolio.
We believe that the conservative approach used up to now in those in the quarter gives us some confidence about our capability to face potential downside in the economic scenario. Capital. Fully loaded Core Tier 1 pro forma ratio, including the EUR 2.5 billion capital increase, is now at 14.7%, supporting the implementation of the business plan strategy.
The solid starting point of our capital position and the positive evolution in terms of interest income and lower cost base, supporting the capital generation creates some room for the consideration to anticipate the dividend distribution already with the profit in 2024, of course, subject to lack of specific regulatory limitation.
Now let me comment on petitum for legal risks. As I was saying at the beginning, our new approach in managing the legal risk is bringing some results, allowing us to reduce both the petitum and the risk provisions in this quarter. In October 2022, 2 extra judicial claims for an amount of EUR 800 million, were withdrawn, reducing the claims amount to EUR 1.4 billion.
As I mentioned already in Q2 presentation, the majority of such extrajudicial claims are characterized in most of the cases by lack of documentation, lack of legitimacy and casual nexus. The positive development of the court case for 2008-2011, regarding the former Chairman and the General Manager, who were fully discharged in May on the following grounds of the positive judgment of the Milan Court of Appeals disclosed in early October gave hope for the reassessment of related risk. As a result, respective provision for the period 2008-2011 were released in Q3 '22.
Let me conclude by saying that we are fully on track in the business plan implementation, timely delivering the key results as the capital increase, the termination of employees and the merger of IT factory effective as of 1st December 2022.
Following the EUR 2.5 billion capital increase and earlier NPE disposal, we made a solid step towards the target to be a strong and resilient balance sheet. We already gave evidence of our positive exposure to interest rate growth, building already a strong base for the next year ahead of the planned assumption.
The implementation of the voluntary scheme of 4,000 early retirements allows us to start 2023 with more than EUR 300 million on lower HR costs, bringing since now contribution for more than 40% to the EUR 700 million pretax profit target planned for 2022. At the end, we can also confirm the positive evolution of the legal risk according to our expectations. We look to the future even more convinced that Monte dei Paschi would be a clear and simple bank capable of generating EUR 700 million pretax profit in 2024 and EUR 900 million in 2026, leveraging on the net profit strength, the distinctive capitalized business model, and the historical and valuable brand.
As I said, we are at the turning point in Monte dei Paschi life and I believe that the best is yet to come. Thank you, and we're leaving for your questions.
[Operator Instructions] The first question from the conference call in English is Giovanni Razzoli of Deutsche Bank.
I have 3 questions. The first one is on the phasing on the more than EUR 300 million of HR cost. I was wondering whether we may see most of it already in 2023? So if you can give us an idea of the phasing on this.
Second question is on NII, strong performance in the third quarter. You mentioned there has been a commercially positive impact in this quarter. So I was wondering what is the underlying run rate of the NII, excluding the TLTRO benefit, so that we can have an idea of the starting days for the future in light of the increase in the rates. And then we have made this exercise for all the banks. So asking what is the NII guidance for 2023? Can you share with us your thoughts on this?
Last point on the legal risks. I've seen you have mentioned that you have released some provisions in the third quarter. If I'm not mistaken, there should be something in the region of EUR 100 million, if I'm not mistaken. Can you confirm this amount?
And then on legal risk, sorry if I ask you this, but it's not really my subject. I saw the offer in circular that the agenda of the hirings of some of the clients is relatively diluted in time, so to say. So I was wondering whether time can play in favor of Monte dei Paschi on these pending trials, so to say?
Okay, I will take the question about HR and the legal risk. So about HR costs, as I was mentioning, we not only are going to have the benefit immediately in 2023, but already in December, the pro rata is going to impact positively our P&L.
So the logic behind the concept or turning point, I would say, in this quarter is because already the last quarter of this year will be a clean quarter where, in some way, you can have a view of what is really the potential of the banks, and we are going already, as I mentioned, to account pro rata for 1 month for the benefit of the exit of the 4,000 people.
Then on legal risk, yes, the release of provision was slightly below EUR 100 million, considering cost of the time value. And as I mentioned, we are keeping a very conservative approach also in the concept of this releasing, because as you correctly pointed out that we can also have some additional benefit coming from the status of limitation that in some way can be considered for some of the cases that are currently ongoing in the court.
So this back of residual provision I can just confirm that there's a potential battle that conservatively we want to keep, but should be a positive factor to take into consideration while we are considering the potential value of Monte dei Paschi. Now I will ask Andrea to say something about net interest.
Yes. Thank you. On net interest income, as you can see at Page 8 of our presentation, the contribution of the TLTRO was EUR 115 million in the 9 months. For the full year, we expect something between EUR 150 million to EUR 160 million, roughly.
Then in terms of dynamics and guidance, yes, we're still incorporating the higher interest rates in our net interest income. So expect fourth quarter increasing over third quarter. All in all, in terms of guidance, if you refer to our 2024 and 2026 targets, you can assume that the '22 and '23 are higher than '24 and '26, respectively, and are already out as a guidance.
Then when looking at the year-on-year dynamics, so '23 over '22, you have to take into consideration that the TLTRO contribution will disappear and become negative in '23. So this reduces for the first year our NII sensitivity, and then as we move forward, we will have a slightly higher cost of funding. So let's say, the rate of improvement will be less steeper than we had in '22.
The next question, gentlemen, comes from Corinne Cunningham of Autonomous.
Could I ask some questions about your funding plans, please? And then also on capital. So you have a Tier 2 bond that's callable in January. Do you have any thoughts as to how you might tackle that one? And then also on MREL, I didn't notice anything in your slides or press release on MREL. So if you could update us as to what the position there is?
And then just on capital, you're showing a slight improvement in RWAs quarter-on-quarter. But what would be the target or the expected RWA inflation when you do finally book the TRIM impact?
Okay. So I'll start with the Tier 2. Yes, we have, let's say, Tier 2 callable in January. Let's say, as a stance, in, let's say, we would in the future tend to be as market friendly as possible. Having said that, we will have, when deciding whether to call or not this Tier 2, we will have to look at the trade-off with regard to the P&L impact.
So we will look at market conditions while approaching the data and take a decision. I have stated that at the moment, let's say, conditions are not particularly constructive. But on this, we will take a decision where we are closer in the potential copay.
As regards to the funding plan, for the time being, the funding plan that was communicated in the context of the strategic plan presentation is confirmed and that the funding plan is slightly more skewed into the first 2 years. Having said that, we will most likely fine-tune our, let's say, MREL requisition slips, taking into consideration the new capital level, the RWA dynamics and, let's say, the potential partial reimbursement of TLTRO [indiscernible] that might have an impact on the [indiscernible] requirements.
Final point on the RWAs, again, for the time being, we are confirming [indiscernible] in the plan, but there might be the case, as you can see, looking at the third quarter numbers, that RWA inflations could be lower than expected. So all in all, as you can see, our capital ratios are, at the moment, better than what was originally envisaged in the plan. And this might have an impact again also on general issuances.
Anything on the timing of when TRIM might be booked? Would that be in Q4 or not until next year?
Yes. Actually, this was expected in Q4 and might be postponed to Q1 '23. Anyway, it is approaching. And actually, on this, we are, let's say, waiting for, let's say, the final outcome. But all in all, let's say, the outcome, so the inflation related to this implementation of models might be lower rather than higher than expected.
The next question is from Hugo Cruz of KBW.
Can you give a little bit more guidance on the NII sensitivity? I don't know if you can give guidance for 2% ECB rate, or if rates go up another 100 basis points, how much would that mean for your NII? Because obviously, there's a lot of moving parts in there, so if you could give us a little bit more help, it would be great.
And then a question on legal provisions. Can you give us an amount of your -- at least -- it's hard to -- obviously, I know you cannot split the legal provisions by buckets. But if you have total amount for legal provisions, including nonjudicial claims or a total number for legal provisions for judicial claims would be very helpful?
And then finally, on DTA. You've already booked something now. What's your guidance for Q4 and 2023? Do you think you can also book additional DTA reassessment? That's it for me.
All right. I will start with the legal provision rate, and we are not disclosing the split. So what I can say that, as I was mentioning before, we believe that we've been very comfortable about the level of provision. And we are monitoring the evolution of all these cases and we are confident also that we can even face a positive evolution again on that. Now guidance, net interest, I will ask Andrea to take over.
Yes. So first of all, let me reiterate what I said before. We gave '24, '26 targets, and first of all, you can refer to them and assume that '22 NII is higher than '24 target, then '23 is higher than '26 target, and this gives you already an absolute number of reference.
Then in terms of sensitivity, the EUR 150 million sensitivity for 100 bps, part of the shift of the curve, is in both terms confirmed, with 2 caveats. I mean, the first one is that for the first year, the sensitivity is reduced and lower than EUR 100 million because of the change of the TLTRO terms and conditions.
And the second caveat is that as the curve moves up, the sensitivity reduces because then we'll start having some impact on the cost of fund.
As regards to the question on DTA, broadly, we confirm the trend that we presented in our strategic plan. So we would expect, let's say, material write-up in '24.
And the reason why we are saying now that we are expecting a material write-up in '24 is because in a conservative way, we assess now the DTAs, taking into consideration the only explicit period of '22, '23 and '24, and then we will update the projections in '24.
Having said that, we will have, as we move forward, also the time value effect on further assessments of DTAs. And of course, as, let's say, the projections serve to be better moving forward and the plan that this might have further upside might generate further upside on the DTA reassessment.
This includes the ratio that we still have, EUR 3.5 billion -- after, let's say, the write-up, we still have EUR 3.5 billion DTAs on balance sheet, which is quite a relevant amount.
[Operator Instructions] Actually, we do have a question from Gilles de Bourrousse of Octo Finances.
I've just a couple of questions. The first one relates to the state guaranteed loans. I was wondering if you are also confident on the evolution of the credit quality? And if you can remind us what is their maturity? Is it 3 years? So if it's 3 years, it means that next year you will have EUR 6 billion which will mature.
And my second question relates to the capital increase. At that time, the English press pointed out about potential concerns from the EC regarding the possible existence of state aid in relation to the amount of the fees received by the banks guaranteeing the operation. I was wondering what is your view on this topic? Is it nonrelevant or it doesn't concern even you because it's a potential discussion between the EC and the state, not the bank?
Okay. About the process of capital increase, I think you already have understood properly saying that, that is not something that concerns the bank, because Digicomp is mainly dealing with the government. So we are just involved for the commitment that are in some way connected with the bank, but it's part of the agreement that is exclusively involving the Italian Republic and the European Commission. So it's not an issue at all for the bank.
Now as far as the state guarantee, what we were observing already and is something that we are monitoring closely, we started from EUR 10 billion, we already have EUR 3 billion repaid and we didn't observe any issue in terms of portfolio deterioration.
And we can say that even observing existing residual portfolio that we are monitoring closely with a dedicated team of people, once the portfolio is becoming without guarantee, we are saying that the trend in terms of default rate is even below the normal trend of the bank. So we don't expect any deterioration coming from this kind of portfolio.
In any way, the default rate is absolutely in line what is the level of the bank I was just mentioning before, showing a very positive trend also in this quarter, enabling us also to keep some conservative approach in view of potential deterioration that can come from the economical environment.
We have a follow-up question from Mr. Giovanni Razzoli of Deutsche Bank.
It's a question for Andrea. Just to be clear. You said that in 2023, you do expect an NII above the 2026 target, that is EUR 1.47 billion. Is my understanding correct, Andrea?
Yes, it is correct.
Yes, that's the plan.
So thank you. I understand there are no more questions. Anyway, we are available eventually. Further question can be raised in the coming days. So thank you very much, and see you at the next presentation.
Thank you, sir. Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.