Banca Monte dei Paschi di Siena SpA
MIL:BMPS
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Banca Monte dei Paschi di Siena SpA
Earnings Call Analysis
Q3-2023 Analysis
Banca Monte dei Paschi di Siena SpA
The company has demonstrated significant cost management with a reduction of 0.8% in quarterly operating costs and a 1.7% reduction in non-HR costs despite facing inflationary pressures. This impressive cost control is a result of last year's voluntary early retirement program that saw 4,000 employees leave and saved nearly EUR 40 million in non-HR costs. These savings underscore the company's ability to manage expenses proactively—a positive signal for future operational profitability.
The bank's Non-Performing Exposures (NPEs) stand at EUR 3.4 billion after disposing of EUR 200 million in the previous quarter, with expectations to settle by year-end. The gross NPE ratio is at 4.1%, nearing the target set for 2024. Coverage for total NPE after the sale is pro forma at 49.1%, marking a one percentage point increase from December last year. With the third quarter's cost of risk steady at 52 basis points (bps), the bank confirms its end-of-year guidance of 55 bps, reflecting confidence in managing risks even as the macroeconomic scenario may worsen.
In recent litigation developments, the bank received favorable outcomes, such as the Supreme Court's acquittal in a key criminal proceeding which enabled the downgrading of around EUR 800 million in litigation risks. This partially resolves some of the extraordinary legal risks the bank has faced. Furthermore, positive judgments in ongoing civil litigation support a declining trend in legal risks, with the potential to positively influence the bank's economic terms moving forward.
The company boasts a robust Core Tier 1 ratio of 16.7%, which is competitive among the top Italian banks. This capital strength is set to increase, with a buffer exceeding EUR 3 billion. The bank's liquidity position remains solid, highlighted by a liquidity coverage ratio above 160% and a net stable funding ratio above 130%. Having reduced dependency on European Central Bank funding by reimbursing EUR 3 billion of TLTRO, the bank's financial foundation appears sturdy.
Monte dei Paschi showcases resilience with a net profit of EUR 929 million over nine months, affirming its ability to generate capital organically. With an aim to elevate shareholder value, the bank is well-positioned to revise upward its core Tier 1 ratio guidance for the end of 2023, which previously stood higher than 70%. This financial health enables the bank to consider advancing dividends from the net profit of 2024. The updated 2023 guidance reflects a net profit target of above EUR 1.1 billion, reinforcing the bank's commitment to growth and value creation, and sustaining its leadership in the banking sector.
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Good morning. This is the Chorus Call Conference Operator. Welcome, and thank you for joining the MPS Group Third Quarter and 9 Months 2023 Results Presentation. [Operator Instructions]At this time, I would like to turn the conference over to Mr. Luigi Lovaglio, CEO of MPS. Please go ahead, sir.
Thank you very much. Good morning, everybody. Many thanks for joining us to Monte Paschi 2023 third quarter and 9 months results presentation.I would like to start by sharing with you the special feeling I had when reading a message or wishes I received from a shareholder on the day of the anniversary of last year, EUR 2.5 billion capital increase. It recalled me about the starting point of Monte Paschi transformation path with impressive progress the bank has achieved in the last 12 months.Today, I have the pleasure to present to you a set of solid results that are providing evidence of the improvement throughout our business. Monte Paschi is now among the best banks in Italy with a sound capability to be profitable in a sustainable way, and the strong drive in generating capital organically quarter-by-quarter as proved by the further increase of core Tier 1 ratio at the end of September to the level of 16.7%. That means almost 200 bps of additional capital generated in the last 6 months. We feel strong, well equipped to compete on the market going forward and proud of the strength of our brand, a powerful combination of our talented people and our loyal customer base.Let me now move on to some key highlights. Net profit after 9 months reached EUR 929 million, thanks to another strong quarter, the fourth in a row, and the return on tangible equity at a sound 15.1%. These important results make us confident to update the 2023 guidance with the net profit for the full year above EUR 1.1 billion. Profitability supported by 9 months' strong growth of the gross operating profit at almost EUR 1.5 billion, more than 2 times the level of last year, thanks to 22.9% growth in operating income and 15.2% decrease in operating cost.Core revenues after 9 months at almost EUR 2.7 billion, with net interest income reaching nearly EUR 1.7 billion with a growth of 62.7% year-on-year, more than compensating the decrease in fees by 6.5% related to the reduction in the third quarter of current account fees charges to clients and the usual seasonality.As regard the asset quality, the gross pro forma NPE ratio stable at 4.1%, considering the previous sale of EUR 230 million NPE portfolio. Pro forma NPE coverage ratio at 41.1%, higher than at the end of 2022. The cost of credit after 9 months is stable at 52 bps, in line with the 2023 guidance. It includes a further increase in management overlays.Excellent capital position with core Tier 1 fully loaded at 16.7%, including net profit for the period, increased by 80 basis points in the third quarter, thanks to the organic capital generation. The buffer on Tier 1 requirement is up to almost 600 bps, so that the excess of capital is about EUR 3 billion. Total savings were up in the quarter, contributing to the increase of the stock by more than EUR 4 billion in the current year, supporting our strong liquidity position with LCR ratio above 160% and net stable funding ratio above 130% even after the further EUR 3 billion TLTRO September reimbursement.Now, some positive news also regarding extraordinary legal risk. The recent sentence of the Supreme Court enable us to downgrade EUR 1.2 billion of the related petitum to remote risk. As a consequence, the overall petitum of civil litigation, not remote, has become half of the petitum we presented with the first half results. I will show on that some details later in the slides.Finally, for the so-called windfall tax, the Board has expressed the intention to propose to the next General Meeting of Shareholders to allocate not less than EUR 312.7 million at group level, including, therefore, Banca Widiba to non-distributable reserves.Now, let's move to some details regarding results. As I have just mentioned, after 9 months, we reported a profit of EUR 929 million, driven by interest income growth, a structural cost reduction. EUR 310 million was the contribution of the third quarter, practically in line with the second quarter, if we exclude the charge to systemic funds of EUR 75 million accounted for in this quarter. In the same period of last year, we have reported a loss of EUR 334 million that was entirely due to the one-off HR restructuring costs borne for the implementation of the solitary refund initiative connected with the voluntary exit of 4,000 people at the end of November.Let's move to gross operating profit amounting to EUR 509 million in the quarter. It's driven by core revenues confirmed at the previous quarter level, despite reduction, as I mentioned of the current count fees charged to customer and further cost savings. After 9 months, operating profit reached EUR 1,450 million, more than doubled since September 2022.The growth was driven by both higher operating income, plus 22.9% year-on-year, driven by net interest income, a significantly lower operating cost, which are down more than 15% year-on-year despite high inflation environment. The structural cost reduction, together with increasing revenues, allowed to bring the cost/income ratio down to 48% after 9 months. It means well below the 70% reported in September 2022. This level of cost/income ratio is already below the business plan targets.Now, let's have a look to the net interest income evolution. Also, in the third quarter, net interest income confirmed the positive trend of the previous quarters with a dynamic of plus 4.6% quarter-on-quarter, driven by further commercial spread improvement by 17 bps, thanks to both increasing lending rate and consciously managed pass through on deposit. After 9 months, net interest income reached almost the level of EUR 1.7 billion, higher by nearly 63% year-on-year with commercial spread widening by 162 bps.Now, looking at volumes. Let's start with loans. As you can see, performing loans are showing some resilience in a high interest rates environment and overall lower demand. In retail, in particular, the volumes were affected by lower new production, not fully replacing the maturities. We will continue to remain prudent and passionate with focus on risk adjusted returns, never chasing volumes grow. And despite this approach, very conservative, we keep gaining market share.Moving on savings. As you can see on the slide, commercial customer direct, indirect savings increased since the beginning of the year by more than EUR 4 billion, supported by the growth in the third quarter of the deposit base. Also on the side of deposit, we keep gaining, in the quarter, market share.Our clients confirmed their trust to Monte Paschi with higher deposit, and we can count also on a quality asset such as Banca Widiba. At the same time, the bank continues to be a key financial partner for those small and medium Italian companies, which build the country's real economy backbone.Focusing on indirect funding, the stock is up by 5.7% since December 2022. It is supported by the growth in asset under custody due to a strong interest for fixed income security. We keep to be #1 in Assogestioni ranking for net inflows, what are the so-called Gestioni Patrimoniali. And this is again a confirmation of the commercial strength of our network in a very competitive environment.Now, let me give you some update on our portfolio of Italian govies. The banking book is basically stable quarter-by-quarter, but with a progressive remix towards amortized cost component. This is in line with the business plan strategic approach to minimize the potential impact of interest rates and credit spread volatility on bank's capital.As I was explaining last time, the dynamic of our trading portfolio is reflecting our market-making activity on Italian government bonds and relatively high volume of this component reported at the end of June has been significantly reduced already at the beginning of July and amounts to approximately EUR 600 million at the end of September. It is also important to indicate the further reduction of fair value through OCI duration now at 1.8 years and consistently decreasing credit spread sensitivity.Now, moving on to the third quarter fees and commission income. On a quarterly basis, total fees and commission income is lower by 6.4%, with wealth management fees resilient quarter-on-quarter, notwithstanding market volatility. In the banking fees, we are observing a decrease, which is partially related to the structural component affecting the sector, that is reduction of current accounts fee charged to customer following the interest rate increase. Additionally, in the quarter, there is some typical seasonality affecting lending fees and other components connected with customer activity.Looking at the yearly fees and income evolution. Banking fees after 9 months are lower by 2.6% year-on-year and 1.8%, if we adjust by the reduction of fees on current accounts. The wealth management continuing fees component is stable year-on-year, while upfront fees remain affected by higher investor appetite for fixed income products. However, first sign of recoveries are visible in the last quarter.Now, let's move on to costs, starting with quarterly evolution. Structural cost savings are confirmed also in this quarter, with total costs further down by 1.2% compared with the previous quarter. Decrease in costs are reported, both in HR area with a quarterly reduction of 0.8% and also in non-HR costs down by 1.7% despite inflation pressure. The structural cost reduction visible on the slide after 9 months is really remarkable, not only for the HR savings connected with the last year voluntary early retirement of 4,000 people, but also for the almost EUR 40 million savings in non-HR costs, especially considering the persistent high inflation environment.We are focused on absolute cost targets and proactive cost management, and we keep delivering excellent results leveraging on our new cost governance approach and managerial expertise in this respect. We want to be ready and well equipped to support our operational profitability when interest rate will normalize.Now, a few words on asset quality. The stock NPE is at EUR 3.4 billion, net of the disposal of EUR 200 million executed in the previous quarter. Transaction is expected to be finalized by the end of the year. Performance gross NPE ratio is at 4.1%, close to the 2024 Business Plan target. After the sale pro forma, total NPE coverage is at 49.1% as of September, 1 percentage point higher compared to December 2022.The cost of risk in the third quarter remains stable at 52 bps, incorporating the effects for the macro scenario update and further increase in management overlays. We are confident to confirm the guidance of 55 bps cost of risk for the year end. Thanks to the great work done, the bank today is well equipped to manage a potentially worsening macro scenario as well.Now, few words on extraordinary litigation and extrajudicial claims. As I mentioned, we had in October an important positive development. The Supreme Court on the so-called Vigni/Mussari criminal proceeding confirmed a sentence of acquittal because there was no case, allowing the bank to downgrade to remote risk, EUR 800 million, almost 50% of the gross petitum related to civil litigation. Always looking at the civil litigation, it is worth to mention that the EUR 800 million not yet classified as remote are mainly related to 2 proceedings that count for 70% of the total amount.For one of these 2 cases with petitum of about EUR 450 million, a positive verdict in the first grade of judgment was already registered. The sentence of appeal is expected to be issued before the year-end. The mentioned sentence of the Supreme Court allowed us also to downgrade to remote risk, about EUR 300 million of the extrajudicial claims petitum. I would like to underline once more that the majority of all extrajudicial claims are promoted by the same consulting company on behalf of some institutional investor and in most of the case is characterized by lack even of documentation.On the 27th of November, second degree also called Viola/ Profumo proceeding is expected. A positive evolution also of this case will be an important development in the overall definition of the extraordinary legal risk bank legacy, determining also a positive impact in economic terms. In the third quarter, 2 additional positive judgment on civil proceedings relating to so-called Viola/ Profumo [indiscernible] NPE were issued. This additional 2 positive judgments brought to 17, the number of positive sentences registered up to now, 12 of which since the beginning of the year. This positive trend, together with the opinion of external legal advisors and our experts, give us comfort [ the third ] NPE proceeding, that is in the preliminary phase could evolve in a positive way.Now, let's move on to the capital. Core Tier 1 ratio is at 16.7%, positioning Monte Paschi among the best-in-class Italian banks. The ratio is increasing by further 80 bps in the quarter, and this confirming the capability of the bank to organically generate capital. Our buffer on Tier 1 requirement, as I mentioned, is almost 600 bps, which translated to the excess of capital of above EUR 3 billion.It give us the confidence to be well equipped for our future next step to remunerate our shareholders in line with our latest guidance, I mean, to anticipate the distribution of dividend with the net profit of 2024. Given the current capital position, we feel confident to revise upwards our previous guidance to be higher than 70% in terms of core Tier 1 ratio at the end of 2023.Let me now comment at the bank's funding and liquidity. The solidity of our liquidity position is confirmed. In September, we reimbursed further EUR 3 billion of TLTRO, with very limited recourse to MRO, effectively reducing ECB funding reliance. Liquidity coverage ratio stands at the sound level of above 160%, and net stable funding ratio at the level above 130%, with the counterbalancing capacity increase in the last quarter to above EUR 28 billion.Finally, just few closing remarks before moving to the Q&A session. Strong and solid set of results within net profit up in the 9 months to EUR 929 million. It confirms our capability to be profitable over the time and to generate capital organically with best-in-class core Tier 1 ratio at 16.7%. Core revenue supporting 2x higher year-on-year gross operating profit at almost EUR 1.5 billion after 9 months with increasing revenues, structural lower cost, leveraging on strong loyal customer base. Cost of risk at 52 bps with the year-end guidance confirmed at 55 bps.Any potential downside from extraordinary legal risk is now becoming more remote as visible in the decrease of the petitum. 2023 guidance confirmed in the key areas, with the net profit updated above EUR 1.1 billion, driven by net interest income and as well core Tier 1 ratio above 17%. Commercial strengths and clear value proposition will further boost Monte dei Paschi's operating performance towards our ambitious goals. And our value creation process is clearly reserving a leadership role to Monte Paschi in the banking landscape and the best options for its further development.Thank you very much for listening. We are ready to answer to your question.
[Operator Instructions] The first question is from Giovanni Razzoli with Deutsche Bank.
I have questions covering 2 elements. The capital position, which is incredibly strong, and the second one is the legal risks. First one on your capital. Can you share with us, given the abundant capital position that you have, a 17% CET1 ratio at year-end, what could be the impact on the CET1 from a potential repurchase of the insurance operation, which is a trend which is now evident across all the banks? I mean, recently, UniCredit has also confirmed the intention to do that and Banco BPM the same. So, it seems like that the Danish compromise is providing a quite interesting [ arbitrage ] into that. So, as a theoretical exercise, what would be the impact on your CET1?And then again on the capital. There is a lot of noise on still on your capital position, especially on this LGD waiver. If you can please clarify what is the benefit of that, because what I struggle to understand is that, if I move away from the potential impact of this accounting treatment, seems also that your leverage ratio is very strong. So, is looking at the leverage ratio a fair way to leave aside all this discussion about the weighting, the LGD waiver and so on and so forth? If you can comment a bit on this, that would be helpful.And the second question is on the legal risks on the Slide Number 18. I think that also the extrajudicial claims has gone down by EUR 300 million, which is a remarkable achievement. What does this trend reflect?And the final question. Sorry to ask. Because the matter is very difficult to understand, but there has been a Supreme Court judgment, whereby all the cases after April 2018 as you report in the press release are now time barred. I would like to understand how this can impact your legal risk going forward, if there is an impact?
Giovanni, Andrea speaking. Actually, the quality of the sound was not particularly good. I try to repeat the questions, so you tell me if I understood them correctly. I mean, on capital, I understood that you asked for implications of the potential implementation of the Danish compromise, if I got it correctly, which would mean acquisition of the insurance JV, if I got it correctly.And the second one was a question on the so-called waiver on the Valentine transaction, if I got it correctly. And on legal risk, you asked with particular regard to the extrajudicial claims. You noted that the claims are down, and then you asked about the underlying reasons. And then there is a question on claims that are time barred. Did I got it -- did I get them correctly, or?
Yes, Andreas. That's correct. And sorry for [ repeating ], but these are the questions.
Okay. So on capital, as regards the Danish compromise, as you know, for the time being, is not applicable for us since we're not the financial conglomerate. Of course, in case in future, we took the decision to repurchase our -- I mean, the stake, we do not have of our insurance JV. Then the implementation of Danish compromise would materially limit the capital impact while adding a sizable earnings component. But as you know, the partnership anyway is expected to expire in 2027, so it is nothing which is in our radar screen for the time being.As regards the so-called waiver, I just remind that the waiver, the so-called waiver is just an early implementation of the so-called Article 500 of CRR3, which all the European banks, or almost all the European banks have implemented so far. So the impact of the waiver is exactly the impact of the implementation of Article 500 for all European banks. So, we are not envisaging any disapplication of the waiver. It will stay in place for an indefinite period, and we do not expect any impact even in case of potential M&A.On legal risk?
Okay. The answer is quite simple. As far as the period [ 2008-2011 ] financial information, the bank will not be receiving anymore any related claims because the status of limitation is applicable in this case. So for one of the -- putting this way cluster of legal extraordinary cases, we can say that the situation is completely fixed.
The next question is from Azzurra Guelfi with Citi.
A couple of questions for me, mainly on the NII. Can you explain us how do you think the evolution of the NII will be over 2024? And when do you see the peak of the NII also in light of the funding evolution that we have seen this quarter? And also if you can comment on the deposit flows because you are continuing to see deposit inflows, and if you can give us some color on what is driving this trend?And linked to the funding, given the balance sheet improvement and capital progression that we have seen so far, do you think that over the course of 2024, you could see some rating upgrades and how this would impact both the funding structure and the funding cost?
Okay. So, we think that for considering the dynamic of interest rate, some changes also that we expect in our mix of lending, we expect the net interest income in 2024, almost put in this way, very close to the level of this year. And that despite we plan to have some additional issuing. But overall, we feel comfortable that also, thanks to the building up of the stock of consumer lending, some additional focus that we are going to put in place on the lending activity, particularly in terms of pricing, we can manage the interest rate income at the level I mentioned.As far as deposit, as I was mentioning last time, we believe that this is a crucial area of the bank. So, we aim at keeping a good level deposit, not only because it's important for the structure, our asset liability, but also because we believe that deposit is a good base for a further optimization of our asset management stock and is a way also to bring additional engine to the dynamic of fees and commission that I believe are the critical area for all banks in the coming years.
And finally on rating. Actually, we are working closely with the rating agencies, so they are monitoring our situation. So, yes, of course, we would expect some upgrades even if we cannot confirm because this is not, of course on, us in '24 and maybe even earlier.
The next question is from Noemi Peruch with Mediobanca.
I have 3. And the first one is on legal risk. And I was wondering if you could...
Sorry. Can you speak louder because we cannot hear you very well?
Okay. Can you hear me better now?
With some echo, but, let's say, louder but with some echo.
Sorry about that.
We'll try with the headphones.
So, I was wondering if you could update us on the NPE proceedings. So what is the related petitum at the moment? And when could this be considered final, now or after the hearing of the 10th of November?The second question is on the fees and costs. If you could give us a guidance for 2024? And finally, if you could share with us what do you think the risk and the opportunities of the digital euro implementation could be? And yes -- and that's it.
As far as the petitum relating the NPE, as we were mentioning in the mid of November, there will be a sort of hearing where the court will start finalizing all the civil parties' claims. We believe that it will take time because they will start, as I mentioned, assessing and the process can last for few months. So probably we will have some information in the first quarter of next year. As far as the guidance of the fees for the next year, we are confident that in some way, we can overcome the level that we have this year and particularly for 2 reasons. The first one that is you noticed already in the quarter, we are observing a positive recovery on the side of the upfront fee with the placement of additional products that in some way is the result of improving cooperation with our partners.Second, we are further improving our network organization, putting additional adviser on the side of, what we call, premium. That is one of the most important segment in our strategy. And moreover, we believe also that additional set up in an office with a dedicated division that will support all the adviser in defining the program and the plan in visiting customer, understanding better their needs will help in being more efficient. So, we expect some improvement on the side of wealth management, while on the banking fee, the growth will be less visible. But anyway, we expect to have a positive trend.As far as the costs, clearly, we have 2 different considerations. The first one is on the side on non-HR costs. It's clear that it depends how the national labor contract will be finalized and we will know something within the end, I believe, of this month. And there, clearly, we have to try to manage the increase of costs that is unavoidable. But, clearly, on this side, we will try to keep optimizing the level of the staff at the head office and try to really move as much as possible people to the, what we call, contact with customer. So on the side of HR, we are going to have probably some positive impact on revenues more than managing costs due to this renewal of the labor contract.On non-HR costs, we want to keep the pace, even if we are achieving very impressive results this year. But for us, it's crucial to offset the increase of the HR cost by saving -- keep saving on the side on non-HR and as I mentioned, by having more people dealing with customer in some way, having more contribution in terms of income. Overall, I prefer to say that on the side of gross operating profit, we want to clearly have a positive dynamic year-on-year. That is the combination of what I was mentioning earlier.
On digital euro, which is your last question, we, of course, are assessing very closely the situation. At this point in time, we see both opportunities and risks. In terms of opportunities, for sure, there might be the possibility to deliver new services to clients, both retail such as wallet or merchants. And we expect a further driver towards digitalization processes that per se will be beneficial for the banking sector.On the other side, there are also risks. And the first one is a potential trend towards this intermediation of banks with potential impact on deposits and commissions. Having said all of that, we think we are still in a bit of an early stage of implementation. So it is hard to, let's say, assess impacts for the banking sector for us in particular, because it will depend on how the digital euro will be implemented and how costs will be shared among market participants. So we are, as mentioned, closely monitoring the digital euro evolution. We will have more visibility in the next quarters. And so we will be able in the near future to provide an update.
The next question is from Alexei Lougovtsov with Bank of America.
Thank you very much for the great performance of the bank. And I have 2 questions for you, please. Last quarter, I remember that deposits grew only marginally, but assets under custody grew substantially and we discussed it with you. And you explained that customers invested in Italian government securities. So as a deposit taker, you have to compete with the government now. However, this quarter, I can see that deposit growth accelerated whereas assets under custody dropped. Do we see a trend of retail investors reducing the exposure to govies and going back to deposits? This is my first question.And the second question is my favorite one every quarter. Your funding plan until the end of this year and maybe some idea about your funding needs in 2024?
I will take the question regarding the savings. So practically, in this quarter, as you can see, we have a very positive trend in terms of deposit, even if part of these deposits are connected with some special action that will not have a sort of duration also for the full fourth quarter. But, anyway, the level that we are presenting is stable. This level of 68 to 69 is for us a crucial level, and we want to keep this level. Then, clearly, we are keeping flat position in terms of asset under custody, having also in mind that part of this dynamic depends on what the government is going to issue now. In the second quarter, there was special, a quite attractive product offer to the customer, not the same frequency in terms of issuing was in the third quarter.Having said that, it's clear that the trend of interest rate is also suggesting that probably is also the time to try to leverage on the market. Also thinking that interest rate in the future can also have a different dynamic and therefore, probably to try to be much more competitive on term deposit as well with the government bonds. It clearly depends on the needs of the customer. But overall, as I mentioned, for us, deposit, especially small business retail are crucial. So, we expect to try to defend this growing trend.At the same time, to be focused in keeping growing the [indiscernible], the overall commercial savings. I mean, together, we deposit also asset management, bancassurance products and as I said, asset under custody. We are saying bancassurance and asset management products because as I mentioned, for us it's crucial to leverage on this product to have a constant, dynamic, positive month-by-month on the side of wealth management fees. Because on that, we are building the future of our income and as I mentioned, we should be capable with additional fees in the midterm and with the cost in this case in a much more short period of time, shorter period of time to ensure a positive dynamic of our gross operating profit.
On, say, the funding plan, from an MREL perspective, we currently have, including net profit, a 26.54% total TREA ratio, MREL ratio. And so also taking into consideration the expected net profits for the fourth quarter, in theory, we could even avoiding issuing by the end of the year. But in practice, we will assess what to do in the next few days and weeks for '23.For '24, we still have to fine tune and to update our funding plan. What I can tell you is that EUR 750 million of MREL issuances currently outstanding will lose eligibility. So, this will, for sure, we'll have to replace. Then we would like to take into consideration also finally the final our MREL related funding plan. Also the potential expected payout ratio because also, this will be a parameter to be taken into consideration in this respect and the buffer we would like to have on the MREL requirements.From -- instead a more pure funding perspective, we will, for sure, starting from 2024 reassess the covered bonds market. Now, we have updated our program. So, we are ready to get back to the market and so there will be some covered bonds issuances. But, again, we will give you an update probably with the full-year results after the update of our funding plan taking into consideration our full-year results.
And a quick follow up. Given the high CET1 buffer, I guess, nothing on the subordinated front next year?
In terms of issuances, at this point in time, no, we're not expecting to issue any subordinated debt. What we might assess -- but, again, we are still at an early stage is some liability management on the subordinated debt that was not called in 2023, maybe coupled with the issuances of more senior products. But, again, at this point in time, this is just under assessment. Of course, if and when we take the decision, we will, let's say, communicate to the market.
The next question is from Andrea Lisi with Equita.
The first one is on your capital position that is really strong, 16.7% CET1. Just to have an idea of the actions you can take on capital and potential capital allocation, what is the target level of capital that you want to always keep? And if there is any chance you can anticipate some form of distribution to this year?And the second point is related to risks. In that, EUR 1.2 billion were reduced to remote risk. If [ we imagine ] that you have provisioned something on legal risk, on [indiscernible] risk, and so when and which -- under which scenario should we see a release of the provision set aside?
Okay. So on the first point relating capital, it's clear that we enjoy a strong position of capital as I said also. And we are also aware that this position of capital is quite high and is by far exceeding the need that we have to develop our business. Having said that, the fourth quarter is an important quarter. And we think that during the quarter, looking at the end of year results, we will set a proper policy of intimidation, including also the concept of dividend that we should take in consideration, especially having in mind some positive evolution that could really help the results of the bank.Having said that, it's also important thinking about the future in any case and considering the strong position we have to enjoy to be on the side of a bank that is best-in-class in terms of Core Tier 1, especially knowing that we have this capability to generate each quarter an important level of capital. And this is something that now is embedded in our operational activity. So, too early to define exactly how to optimize the excess of capital. But clearly, this is a point that is on our agenda and I believe after year-end, we are going to fix it properly.As far as the litigation, right, and the extraordinary litigation, as I was mentioning, no, it's clear that this month is another important month for us. '27, there will be a sentence relating the appeal of what the so-called Viola/ Profumo. I was mentioning that this is really a potential trigger that can support the bank, that can, in this case, have also the opportunity to benefit from the economical -- in economical terms of a positive evolution of this long-lasting and painful case.
The next question is from Corinne Cunningham with Autonomous.
And could I ask a couple of questions, please? First of all, on what drove the increase in NPEs before the disposal. Obviously, post disposal, they are flat. But what drove the increase ahead of that?And, secondly, your Q4 guidance sounds relatively conservative. So if you literally just took off the 9 months to get to EUR 1.1 billion, you are only looking at EUR 171 million for Q4, is that realistic? Or you're kind of thinking of a much more than EUR 1.1 billion guidance?
I really understand your point. It's clear that, mathematically, we can look a bit conservative. But fourth quarter -- first, we don't know exactly what will be the evolution of the labor contract, national labor contract, so we don't know exactly what is the level of expenses. And normally, we try to be as approach overall in the bank in terms of risk, in terms of trading, in terms of core revenues, always quite conservative. That's why also in giving the guidance, we can look a bit conservative. But let's see. We are confident that the guidance we gave is a guidance that is really achievable for us. And we prefer to, as I said, to be prudent also on this side, not because we have anything that make us not confident. But simply because we want to be sure to deliver and also to go above what are our commitments to deliver.
Okay. So, not expecting any major one-offs in Q4?
We're just now -- about the second question, the NPE ratio clearly is a ratio by definition, so also depending on the level of volumes of loans and by definition, we don't chase, as I was mentioning, volumes and we don't give targets of lending growth, except for the products on which we are completely focused in our strategy that are mortgages and consumer lending as more business. Clearly, it's more business especially in the agro sector, agricultural sector. It's clear that there are lot of pieces before reaching an important level of volumes that will help in decreasing the NPE ratio. It takes a bit of time. I was much more focused on the fact that, clearly, we have an increase of inflow on NPE. But I can with a lot of comfort say that it's absolutely in line with what we plan.Moreover, some of this inflow is connected with retail lending. And clearly, this has a double effect because we have a nominal value of what is entering and clear by definition, the coverage that we are setting for this kind of position is lower on the level that we have as a stock. So, it's clear that also we are showing a dynamic in terms of coverage that is positive compared to last year, but clearly is also reflecting the nature of the non-performing loans that are entering in our portfolio.We are particularly focused in managing this inflow, because we believe that the situation can keep in some way deteriorating, taking in consideration the level of interest rate. But as I mentioned, most of them are retail and we are also in the phase that we try to fix and to settle case-by-case, provided the customer has clearly the financial capability, a different structure of modality of repayment. And this will also create some benefit in the reversal of the trend. So, no particular concern, clearly high level of attention because we want to keep the very good quality of our asset. And for us, it's crucial for encountering on that to build up additional generation of profit.
So just to confirm, no one-offs expected in Q4?
Excuse me. We did not get the follow-up question.
Sorry. Just to confirm, you're not expecting any major one-offs in Q4?
Normally, we are counting on what we call sustainable results. So it's clear what I mentioned before that is not really a one-off. It's different what I said related to the extraordinary legal claims, right? If the sentence will be positive, as I mentioned, we will have a positive impact in P&L. If this is a one-off, according to me, it can also be the beginning of something that can be repeated in the future.So let's say, that is, as I mentioned, at the current stage, the only one-off on the side of the positive. If you mean something negative in terms of one-off at the current stage, we don't have any one-off in our horizon. Clearly, the national labor contract is not one-off. It's a one sample, that is the increase of remuneration of our staff. And this is -- I don't believe can be considered any one-off.
The next question is from Hugo Cruz with KBW.
Sorry, I don't have any further questions. They were answered.
[Operator Instructions] Gentlemen, Mr. Lovaglio, there are no more questions registered at this time. I turn the conference back to you for the closing remarks.
So, thank you very much. Let's see the next time. Thank you.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.