Banca Monte dei Paschi di Siena SpA
MIL:BMPS
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Banca Monte dei Paschi di Siena SpA
Earnings Call Analysis
Q4-2023 Analysis
Banca Monte dei Paschi di Siena SpA
Monte Paschi has undertaken a radical transformation, focusing on becoming a simpler and more commercially driven bank. This transformation has culminated in impressive full-year earnings for 2023, showcasing a net profit surge to approximately EUR 2 billion. This performance is attributed to robust underlying operations and strategic management of legal risks. The bank has achieved a net operating profit of EUR 1.5 billion, a significant improvement from the previous year, which displays the bank's new-found potential to create sustainable profitability.
The bank's gross operating profit soared to EUR 1.950 billion for the year, almost doubling the previous year's figures. This significant rise was fueled by a nearly 25% increase in core revenues and a 12.6% reduction in operating costs, owing largely to the reduction of approximately 1,000 full-time employees as part of a structural cost-saving initiative. The concerted effort has led to a cost-income ratio of 49%, which undercuts the target of 57% set for 2026, highlighting the bank's heightened efficiency.
The bank has confirmed a net interest income of EUR 600 million for the previous quarter, culminating in a total of almost EUR 2.3 billion for the year. This demonstrates an impressive year-on-year increase of close to 50%. The bank's loan portfolio expanded its market share despite a general decrease in credit demand due to elevated interest rates. Customer savings also increased considerably, indicating a strengthening trust in the bank's financial services.
The bank has strategically maintained its Italian government securities portfolio, keeping it stable at around EUR 10 billion. This approach minimizes potential volatility impacts from interest rates and credit spreads on the bank's capital.
The fourth quarter saw total fees and commissions income rise to EUR 335 million, marking an increase of 5.9% from the previous quarter. Stronger banking and wealth management fees contributed to this uptick. Overall, fees for the year were slightly down by 3.1%, largely due to reductions in current account fees and pressures on wealth management front-end fees.
Monte Paschi reported a stable gross non-performing exposure (NPE) stock of EUR 3.5 billion at the year's end, following the disposal of a EUR 200 million NPE portfolio. The bank has seen improved coverage ratios for bad loans and reduced cost of risk, aligning with guidance. In addition, 17 positive legal judgements, including the rejection of a major claim, have allowed for the release of provisions amounting to EUR 466 million, signifying a marked improvement in litigation risks.
The bank's liquidity remains robust, with a liquidity coverage ratio above 160% and a net stable funding ratio of 130%. Even more impressive is the bank's capital strength, as reflected in the CET1 ratio of 18.8% before dividends, one of the highest in Europe. The capital adequacy is further evidenced by a Tier 1 requirement buffer of 750 basis points, translating to an excess capital of over EUR 3 billion.
Looking forward to 2024, Monte Paschi is optimistic about maintaining revenue levels similar to 2023, with anticipated increases in fee generation and asset mix improvements. While minor cost increases are expected due to personnel expenses, the bank aims to maintain the cost of risk similar to 2023. Laying a foundation for consistent shareholder returns, the bank plans a dividend payout ratio of 50% on the 2024 net profit, signaling confidence in its sustained profitability and capital generation.
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Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the MPS Group's Fourth Quarter and Full Year 2023 Results Presentation. [Operator instruction] At this time, I would like to turn the conference over to Mr. Luigi Lovaglio, CEO of MPS. Please, go ahead, sir.
Hello. Good morning, everybody. Many thanks for joining us to Monte Paschi 2023 fourth quarter and 12 months results presentation. Full year 2023 results present a breakthrough for a decisive switch for Monte Paschi Di Siena towards its stakeholders, clients, employees, shareholders and communities in which we operate. Key drivers have been our talented people, strong commitment, hard work and managerial discipline.Renovation has been our attitude. We have brought to life again our heritage, our tradition in doing commercial banking and serving the families and small and medium companies, the backbone of our country's economic system. Thanks to an integrated model that can well combine skills for our people and digital innovation.Now Monte Paschi is reset. Somebody defined our revolution as [Foreign Language]. Honestly, I don't know if we can speak about [Foreign Language]. For sure, we have created the right conditions for this to happen.With all the colleagues, we did our job with a heavier weight on our shoulders, that is the weight on our balance sheet of the legal issues. It's like climbing a mountain with a much heavier backpack, as you can easily imagine. Now, as we firmly believe the backpack has become much lighter, and we can further accelerate our speed with our new energies and talented people, and thus, we want to strengthen our commercial focus and ensure the execution of our commercial plan in 2024. Maurizio Bai, already Chief Commercial Officer, corporate and private clients, has been appointed by the Board of Directors, Deputy General Manager. Maurizio is very much appreciated manager by our clients, the point of reference for all the network people.Let me now move on to some key highlights. Net profit after 12 months crossed the EUR 2 billion, thanks to an exceptional quarter with a net profit of about EUR 1 billion driven by a very strong underlying operating performance, supported by net release of provision related to legal risk and positive tax component. The results of the quarter confirm once again the trajectory down more than 1.5 year ago towards a clear and simple commercial bank and confirm the capability of the bank to deliver sustainable results.Profitability is supported by 12 months gross operating profit at [ EUR 1.950 ] billion, almost doubling the level of [ the ] [indiscernible] with a 21.7% growth in operating income and operating costs lower by 12.6% year-on-year. Core revenues crossed EUR 3.6 billion after 12 months with net interest income reaching almost EUR 2.3 billion, with a growth of almost 50% year-on-year, more than compensating the decrease in fees by 3.1%.Looking at the commercial performance, direct and indirect funding, what we call commercial savings, grew almost EUR 10 billion during the year, with a strong dynamic [ cost ] in the last quarter, confirming the powerful customer franchise. Loan development is reflecting overall lower market demand for the credit in this high rates environment. However, the trend is showing better performance than the market and allows to report increase of market share at the end of the year.With regards to the asset quality, the gross NPE stock is stable at EUR 3.5 billion level, that practically was very similar to the previous quarter. The NPE ratio is at 4.4%. The NPE coverage ratio is 49.1% by -- 100 bps higher than at the end of 2022. The cost of credit after 12 months to 56 bps, in line with the 2023 guidance. Strong liquidity position also in this quarter with more than EUR 30 billion of counterbalancing capacity. We reduced also the reliance on ECB funding to 11%.Now, regarding the extraordinary legal risk, we downgraded in the quarter, almost EUR 1.6 billion of Petitum, thanks to the recent positive court sentences. As a consequence, the total Petitum at the end of December decreased to around EUR 900 million plus the EUR 400 million related to the Alken case, for which positive second degree sentences were issued in December. Thanks to such downgrade, we were able to release a net amount of around EUR 460 million of related provision. I believe that there is ground going forward to switch to an ordinary mode of management and reporting on such litigation.All the values of Monte Paschi and even more after the release of provision has emerged during the year 2023. That's why we are now ready to give back to our shareholders with the proposal of a dividend distribution of EUR 0.25 per share for a total amount of EUR 315 million, subject, of course, of ECB AGM approval.After the dividend distribution, the core Tier 1 will be still above [ 18% ], confirming the strength of our balance sheet, positioning the bank among the highest in Europe in terms of capital. Let's go now through more details on results.The profit. As I was just mentioned, after 12 months, we reported a profit of about EUR 2 billion. This result is driven by operating performance that was very much positive in the quarter, thanks to the very intensive commercial activity, on the top of which we benefited in December of the net release of almost EUR 460 million of legal risk related provision, as I mentioned, following the positive court sentences issued in the last quarter.Further contribution to the results came from the positive impact on the tax line of EUR 340 million, mainly relating to DTAs reassessment, which also benefits from the acceleration following the repeal of [ ACE ] starting from 2024.Moving on to the next slide, we are presenting the net operating profit. After 12 months, we reported a net operating profit of EUR 1.5 billion, which is almost 3 times higher compared to the results achieved 1 year ago. The net operating profit for the fourth quarter amounts to EUR 371 million and includes the impact of the labor contract renewal on HR cost in the amount of approximately EUR 40 million.We believe that the level of net operating income in 2023 is a confirmation of the bank's achieved capability to generate profitability in a sustainable way. And this is a confirmation of the completion of the path to become really a bank profitable in long-term horizon.Now, let's see the gross operating profit that reached EUR 508 million in the quarter, practically on the same level as in the third quarter, despite the negative impact of the national labor contract renewal on cost. Thanks to the positive dynamics of revenues growing in the Q4 by 4.1%, we managed to offset the EUR 40 million impact on higher HR cost, that include in this quarter the 7 monthly cumulative effect of contractual salary drift. We believe that this gross operating profit is a measure of the capability of the bank to be profitable with its commercial activity, can set the sort of bar of what are our aspirations for the coming years on the line of this gross operating profit.Now, gross operating profit, [ yearly ] evolution. As you can see, after 12 months, the gross operating profit reached [ EUR 1.950 ] billion, almost doubling the results of the previous year, with core revenues up by almost 25% driven by net interest increase and costs down by 12.6%, fully benefiting of the staff reduction of 1,000 FTEs implemented in 2022 and the ongoing non-HR optimization that is giving very important results.The structural cost reduction, together with increasing revenues, allowed to bring the cost/income ratio down to 49% after 12 months, well below the 60% -- 68% reported at the end of December 2022. This level of cost/income ratio is already below the business plan targets that were assuming 57% for the year 2026.Now, let's have a look to the net interest income evolution. In the last quarter, net interest income confirmed the EUR 600 million level of the previous quarter, allowing to reach almost EUR 2.3 billion in the whole year 2023 and [ is ] [ higher ] by almost 50% year-on-year with commercial spread widening by 144 bps in this period, thanks to both increased lending rate and carefully monitored cost of funding.Now, looking at volumes. Let's start with loans. As you can see, performing loans volumes in general are reflecting the market trend that is impacted by the overall lower demand for credit in this high interest rate environment. In the last quarter, we were observing increased activity in retail when it comes to the new production.Overall, our decrease in trend is lower than the one of the market, allowing to increase market share year-on-year. I would like to say again, we will continue to remain prudent and [ patient ] with focus on risk-adjusted returns, never changing volume growth.Moving on to savings. As you can see on the slide, commercial customer direct and direct savings increased in the beginning of the year by almost EUR 10 billion, supported by the growth of more than EUR 5 billion in the last quarter, growing in all lines, including deposits that increased by EUR 1.4 billion in the quarter. Also, on the side of deposit, we keep gaining market share.Now let me give you an update on our portfolio in Italian govies. The overall amount of Italian govies portfolio is basically stable on the level of EUR 10 billion with the progressive [ remix ] towards amortized cost component in line with the approach to minimize the potential impact of interest rates and credit spread volatility on the bank's capital.As we were explaining before, the dynamic of our trading portfolio is reflecting our market making activities on Italian government bonds and relatively high volumes of this component report at the end of December has been significantly reduced already at the beginning of January.Now let's move on to the quarterly fees and commission income. Total fees and commissions income in the fourth quarter amounted to EUR 335 million and were higher by 5.9% quarter-on-quarter. This growth was driven both by banking fees, which were up by 9.4% and wealth management fees growing by 1% quarter-on-quarter.This is one of the best quarter in terms of performance of our commission income, taking into consideration that normally last quarter is not necessarily the best in terms of growth. So we are very happy to see how the network reacted to the request to accelerate, and I think is a good signal for 2024.Looking at the early fees -- looking at the evolution. Year-on-year, total fees in 2023 amounted to EUR 1.322 billion and were nominally lower by 3.1% if we consider the reduction of current account fees introduced in Q3 and the homogeneous perimeter in terms of consumer loan for which [ in-house ] production was developed last year. And in some way, also the pressure on upfront fees in wealth management, this adjusted 3.1% and -- we adjusted 3.1%, and we will be lower by 1.5%.Now let's move on to costs. Starting with the quarterly evolution. Major costs in the fourth quarter were impacted by the renewal of the National Bank contract that is effective since the 1st of July 2023. In this quarter, 7 monthly cumulative economic effect of EUR 40 million was booked, distorting in some way comparability with the previous quarter.Non-HR costs at EUR 164 million is a strong confirmation of the capability to be effective -- the reduction of recurring costs. And the result of this fourth quarter is even more important knowing how normally in the quarter you have some seasonality effect.If we look at the yearly evolution, the structural cost reduction after 12 months is remarkable, not only for the HR saving is connected, as I mentioned, with the voluntary early retirement of 1,000 people in last quarter last year, but also for more than EUR 50 million savings in non-HR costs achieved, thanks to the ongoing rationalization effort, especially considering the [ persistent ] high inflation environment. We keep being focused on absolute cost target and proactive cost management and we keep delivering excellent results, leveraging on the new cost governance approach and manage [indiscernible] expertise in this respect.Now let's move to asset quality slide. The gross stock of NPE amounts to EUR 3.5 billion at the end of December '23 after the de-recognition of EUR 200 million NPE portfolio disposal finalized in August 2023. Gross NPE ratio stands at 4.4% and the net ratio is at 2.3%.If we look at the coverage of the cost of risk, the total NPE coverage is at 49.1% at the end of December and is higher by 1 percentage point compared to December 2022. The bad loan coverage has increased also in the quarter, now is at the level of 68.1%, 3 percentage points higher year-on-year. [ The ] unlikely to pay coverage at the level of 57.6% has been impacted during the quarter by some inflows of retail mortgage loans with lower expected loss. The cost of risk in the whole year is at 57 bps, in line with the guidance.Now a few words on the extraordinary litigation and extrajudicial claims. As I mentioned earlier, we had very important positive developments in the last quarter. In November 2023, the Court of Appeal confirmed the first degree sentence, completely rejecting Alken's claim. In December 2023, full discharge of Profumo/Viola by the Criminal Court of Appeal.I would like to recall that the total number of positive sentences are 17 up to now, of which 12 related also or exclusively to NPE's matters. As a consequence, we were able to materially downgrade the risk from probable to possible in all cluster of extraordinary civil litigation. The Petitum of criminal proceeding related -- relates also to civil parties of NPE proceeding, still at preliminary stage.As you can see, the total outstanding Petitum for civil litigation and criminal proceeding as at December, at the end of the year stands at almost [ EUR 900 million ], excluding the EUR 420 million of the Alken case for which, as I mentioned, the first degree sentence completely -- was completely rejected in November 2023. The Petitum on extrajudicial claims downgraded to remote risk. All these positive events enable us to report in December net release of provision for risk and charge for the amount of EUR 466 million.Concluding, we can say that the situation has significantly improved. And as I was mentioning at the beginning of the year, there is ground now to switch to an ordinary mode of management and reporting on litigation going forward. I believe we have reached another milestone on the road to be a clear and simple bank.Now let me comment on bank's funding, liquidity. The [ soundness ] of our liquidity position is confirmed. Counterbalancing capacity is close to EUR 30 billion with almost 25% of total assets. Liquidity coverage ratio is above 160% and net stable funding ratio at 130%. Reliance on ECB funding is reducing, while ECB funding representing now 11% on total liabilities versus 16% at the end of 2022.Let's move on to the capital. CET1 ratio is 18.8% before the dividend and 18.1%, including the effect of proposed dividend distribution in the amount of EUR [ 315 ] million. The remarkable level achieved is again a confirmation of the strength of the bank capital position, of the capability to generate capital with this business, and the level we achieved is one of the highest among the European landscape. The ratio is consistently increasing quarter after quarter. Our buffer on Tier 1 requirement is 750 bps, which translates to excess of capital of above EUR 3 billion.Now let's move -- and we would like to present with the next slide some thoughts as regard to the outlook for 2024. Let's start from revenues. We are expecting a level of total revenue similar to 2023, thanks to resilient net interest income despite the decreasing interest rate expectations, thanks to improving lending asset mix and increasing fees generation on wealth management products and banking products as well, leveraging on the reinforced commercial activity of enhancing in the wealth management area partnership [ cooperation ] and also increasing the number of advisors dealing with customers.Costs, we expect slight increase despite our continuous effort, aiming at further improving the efficiency. But still, the goal is to offset the negative impact on personnel cost for the renewal on national labor contract.Cost of risk. We are expecting to maintain the cost of risk on the level close to 2023, leveraging on effective credit underwriting process, the continuous improvement of ongoing monitoring, a very selective approach going forward.The tax profit. We believe we will increase the profit before tax compared to 2023 if we adjust for the release of provision for risk and charges. On dividend, we assume we will be able to start the regular yearly distribution of dividends with payout of 50% on the 2024 profit before tax. We will keep our outlook for CET1 ratio in 2024 at above 18%.Let me conclude by saying that Monte Paschi enters 2024 as a renewed and competitive bank [ renovated ] with a sustainable business model, driven by performance and the ongoing value creation. As I mentioned on the beginning -- at the beginning, the new Deputy General Manager just appointed will ensure enforcement of our commercial effectiveness to pledge the execution of our plan for 2024 and to further support the value creation culture within the bank and to be very well equipped to face the new challenges. Some additional changes have been introduced in our key functions by appointing a new Head of HR and the new Chief Operating Officer and the new Chief Retail Officer.Finally, just a few closing remarks before moving to Q&A section. Full year results confirm the achieved bank's strong sustainable profitability, driven by improving operating performance and high efficiency and further supported by net release of provision on risk and charge and positive tax impact in Q4.I believe it is worth to mention about DTAs that still amount of EUR 2.6 billion of balance sheet is available. It ensures further positive support to our net profit in the next few years, given the expected higher taxable base projection to consider on DTAs' probability test, compared to those of the business plan 2022-2026 assumed up to now.It means, in other words, and to be more clear, that the net positive impact of 2023 is not really a one-off, but can be [ replicapable ] for additional few years. We reported a very strong acceleration on commercial performance, EUR 10 billion increase on total savings and confirmation of a strong deposit franchise, high organic capital generation that allows to remunerate shareholders 2 years in advance, proposing a dividend of $0.25 per share for a total amount of EUR 315 million and to guide for a payout ratio of 50% on 2024 net profit. Top Tier 1 capital position with Tier 1 ratio at 18.1% post dividend at the end of December 2023.I would like to conclude by just saying that really, I think, and we all know, especially [ tennis fans ], how high conviction, passion and hard work can be crucial to achieve targets. And I believe these were the key drivers for our performance throughout 2023. Our talented people will ensure Monte Paschi continues to act as the main player also in the years to come because the high conviction, the passion and hard work is the DNA of our people, and I take this opportunity to thank each of them for the excellent results we have achieved.Thank you. We are available for Q&A session.
[Operator instruction] The first question is from Giovanni Razzoli, Deutsche Bank.
The first one is on the dynamic of the deposits in the quarter that, in my view, are very, very good. Can you please elaborate a bit more on this, what segment of clients drove this increase? I've seen that you have raised a little bit of funding cost in the Q4. So I was wondering whether you've been a little bit more aggressive in your commercial policy in there? And then very clear, the guidance for the revenues in '24. Would you be able to share with us also a trajectory for NII, specifically in 2025?And last question on your capital position and dividend, which in my view is clearly and evidently very strong. I've also seen that leverage ratio is now 7%. Can you say some words on the narrative that we continue to hear about your capital position, the fact that you are not applying the same parameter for internal model that you have LGD waiver? It seems to me that these are a little bit not very concrete arguments, especially now that you are still committing to a 50% payout ratio. But if you can again comment a little bit on this, that would be clear.
So, I think the deposit dynamic is something that we plan because, if I remember well, when -- in the last presentation, I was mentioning that for us, deposits are strategic and we wanted really to grow, especially in retail and small business, and this is the main segment on which we grew. Clearly, we had also some corporate deposit. And probably, we collected even more than what we were expected, but it was just initiative of customer. It was not the sort of request, so we didn't have particularly price on that. And normally, where customers that were keeping money at the end of the year on our accounts.The strategy on that is to keep growing, paying a lot of attention on deposits also, because, I think, you know that we have also some constraints. In terms of pricing, we cannot be higher than the average of the sector. So despite the willingness to keep the cost of deposit absolutely under control, I think also this constraint is supporting -- adding a certain discipline at the level of network.The second point regarding net interest income, I was mentioning that practically, total revenues are expected to be almost at the same level in 2024, and we don't expect major changes compared to the level of '24 also in 2025 with a different combination. So the commercial net interest income, that is the one that we keep absolutely under control. That is the net compared to what we pay to customers for deposits and what practically we ask customers to pay for loans will be kept -- in 2024, slightly growing, and then in 2025, in our estimation, will come back to the level of 2023.Then clearly, we are going to have some bonds that we want to issue. So generally, we are going to have some burden in terms of cost. But overall, if we see the total net interest income, we don't expect to be both in 2024 and 2025 a very much different from the level of 2023. Different is the trend on fees and commission. We want to grow in 2024, and we want to grow even more in 2025.All the efforts we have put in place with this new organization, appointing a new Deputy General Manager, that is a very skilled manager of the bank, to be completely focused on delivering the commercial results, is a [ value-added ] that I believe will be very much visible already in 2024.Moreover, we are also reinforcing the capability in serving customers with the wealth management products, creating a sort of center that will work across all the divisions, building up a sort of bulk in order to have also what we call today mass market customer, ready to switch towards the upper affluent, the upper level of the segment, so lower affluent, in order to follow the real cycle of the life of the customers.And I think this is one of the most important projects we want to set up for 2024, leveraging also on the platform, [ Athena ], on which we invested a lot of money, and I believe we'll start giving some results in the model of servicing the premium customer this year.
On -- Giovanni, on the -- your question on -- basically, I think you were referring to the waiver. I just reiterate what I've said already in other calls, i.e., that the bank received a waiver with, let's say, no expiry, if you said -- if you can say. And that was referred to some massive disposals of NPE and was received prior to the approval in the CRR of the famous Article 500. So that was received some months before. It basically relates to the same topic. So we think we are definitely, let's say, on the same level than other banks in Europe. We do not expect that this will expire at any time, either if we stay stand-alone or if we combine with another bank. So for us, this is a non-issue.By the way, we have a [ rich ] density, which is in line, or even higher than other banks. And to the opposite, I would like to focus on our DTAs. Actually, we still have EUR 2.6 billion of DTAs of balance sheet, and we have EUR 0.7 billion -- you can look at the last slide of the presentation -- EUR 0.7 billion of DTAs on balance sheet on tax loss carryforwards. These are deducted currently, but this will be capital. So our capital will pile up over time. So I will look actually at the upside and not a downside, that we really think will never materialize.
The next question is from Antonio Reale, Bank of America.
First of all, well done on results today, it's great to see the turnaround. I have 3 questions, please, one on strategy, one on NII and lastly on asset quality. The first one, I mean, the bank has gone through a long and challenging journey over the years and now has been reset, as you said, as an equity story. So I guess, at this point in time, raises the question as to what is the direction of travel for Monte Paschi? We've seen important changes to your capital structure and your shareholder base. You're now sitting on 18% CET1 ratio, that's a large excess. So my question is, how will you manage the bank going forward, particularly around the excess capital? Now the asset quality and legal risks have been broadly addressed and you're generating capital organically. Is the excess eligible for more distribution? Should we think of this excess as buffers for a potential strategic buyer? What's your thinking here, please? That's my first question.My second one is a follow-up on the NII outlook. On Slide 9, I see that it's the first quarter in which customer spreads have dropped. Do you think that with respect to commercial NII, we've reached the peak here? And maybe if you could talk about some of the mitigants you could implement at this stage to lower your rate sensitivity on the way down?And my third and last question is on asset quality. I know you've cleaned up your balance sheet. Your stock of NPE is broadly in line with peers, yet your cost of risk guidance is still somewhat higher at 55, 57 bps. What's driving that? What would it take for your cost of risk to go below 50 basis points from now on?
So it's nice to have a question what to do with the capital when we have a lot of capital, because we make an increase of capital just practically, if I remember, 1, 2 years ago, right, something like that. So, I will enjoy to answer. It's clear, as I was mentioning, that the capital is important for any further development of the bank. So we are in this early stage. We know perfectly that 2024 will be an important year for the bank. It's clear that we are cautious, that in any case, we can -- we have to take an opportunity to optimize the capital even through managing and leveraging an opportunity that come in any partnership that we have. So we will monitor closely what is going on, and we will be fast if any opportunity will come, having the buffer that you were mentioning.On net interest income, I will ask Andrea to answer. I want just to stress one point. What is happening in terms of spread, this is actually what we plan. So we are not absolutely surprised by the decrease of the spread. We said already last time. And our idea is also that 2024 will be a year where also the commercial spread on which we are particularly focused, will not be very much different from the exit level of the Q4, maybe with some adjustment in the Q1.And then if we look at quarter -- dynamic quarter-on-quarter, all in, we are going to have what I call, again, commercial that probably will be at the same level the first quarter and the second quarter and also third quarter and probably growing in the fourth quarter 2024. Then clearly, as I was mentioning, we are going to have some issuing in terms of bonds that can, in some way, impact this trend that is relating to the commercial.But overall, the net interest income will be not very much, as I mentioned, different from the total we reported at the end of 2023. Now Andrea will elaborate much more on the -- some [ hedging ] [ gradient ].
Yes. Basically, we have already -- let's say, as other banks are doing, we have already started working on our ALM strategy, and we make use of [ hedge ] derivatives differently from other banks. We don't think that hedging [ we are ] -- the so-called replicating portfolio that often is mentioned to ask questions could yield a superior performance. But anyway, we have already started positioning our ALM strategy towards, let's say, the expected decrease of short-term rates that anyway for the time being are still from -- let's say, 1 month to 6 months around 3.9%.What we've already started doing and we're still doing is to achieve an optimal, let's say, balance the trade-off between preserving the front-end NII and making the future NII contributions less risk. But this is already in place and our NII guidance for the next 2 years, at least [ a factor in ] this strategy.
I will elaborate on asset quality. Okay. I think we were almost always confirming that for us, it's quite important to have a very conservative approach in terms of cost of risk. And the conservative approach of cost of risk is to keep the level, as we were mentioning, around 50 -- between 50 and 60. So I think -- I'm not saying anything new because I heard somebody else, let's say, that a good level of cost of risk is 30. I can say for a Banca Monte Paschi, the good level of cost of risk is between 50 and 60. And I will -- I think we will stick to this level because we believe that we have to be prudent to think about the future of the bank.
The next question is from Noemi Peruch of Mediobanca.
Could you please share with us the assumptions of deposit beta and rate cuts imply that in your guidance -- your NII guidance for 2024 and for 2025? And then if you could also give us your latest NII rate sensitivity to 100 bps of rate cuts and also the implied deposit beta in that sensitivity? And then I have 2 questions on the legal risk. If you could please just give us a bit of color on the NPE proceedings? If I'm not mistaken, you said the EUR 660 million of criminal proceeding claims are related to this, but correct me if I'm wrong. And when we could see further updates on this?And then lastly, if you could please give us the reclassification of the EUR 1.3 billion of outstanding Petitum between likely and possible?
So on NII guidance for '24, based on, let's say, our macro scenario, which is based on an external provider. We are assuming a 1 month Euribor around, on average, 3.6%. With EBITDA that -- from 20% actual for '23, we expect that could be between 20% and 30% [ so ] from '25, say. For '25, of course, we expect rates to go further down. As regards the NII sensitivity, I guess that you are mainly interested on the sensitivity to rates going down. So for minus 100 bps of parallel shift, the impact on the first year is slightly above EUR 100 million. And the -- say, the comparable beta -- because often everybody speaks about beta, but from [ day ] to time, they speak about different parameters. But let's say, the comparable beta what we calculate for our NII is still around 25%. So this on NII, while on litigations, Luigi would like to comment?
Yes. So I think also in this last presentation on the slide, we are in some way showing the conservative approach of the bank because, the cleaning up proceeding that you are mentioning, theoretically is still subject to verification by the court, that is expected to happen within the first half, hopefully, of this year. So it means that the amount we put and we identify as Petitum is a very conservative estimation from our side. And as usual, and this is the style of the bank, we want to be prudent and to be ready for even the worst scenario. But despite that, it's also important to underline that [ having ] part of this risk still prudently classified as probable. Still we have some reserve set aside for eventually the worst scenario.So really, the way how the bank address -- is still addressing this legacy is in a very conservative approach. And the release of provision we set aside is a clear message that we are seeing -- that when we were mentioning at the beginning even of the business plan, that the issue of legal risk is well addressed at the time where [ awards ] now is profit and dividend for our shareholders.
And sorry, I have a follow-up on the NII sensitivity. So basically, in 2023, NII basically grew by almost -- or more than EUR 700 million year-on-year, with 300 bps of higher average [ Euribor ] more or less. So if -- now with -- the guidance of the sensitivity on the downside is much smaller. So I just wanted to ask what changes in the balance sheet on your [ hedges ] that you already done right now, that would indeed back that new rate sensitivity?
Actually, I can give you, let's say, some qualitative comments to explain, if I got your question. First of all, in '24, anyway, you still have a positive carryforward effect because we are still writing new business at higher rates than the back book. And this will go on for a while. So you cannot simply apply, say, parallel shift any -- sometimes parallel shift. So this is the first point. Second point is what I mentioned about our ALM strategy. And the third point is that we can optimize our wholesale funding compared to our business plan and compare also -- which is not public, but [ having ] into our budget, the expected cost of new [ issuance ] is far lower based on [ quotes ] we are receiving for investment banks than we originally expected.
The next question is from Azzurra Guelfi from Citi.
A couple of questions from me. One is on cost. When we look at your guidance of ongoing cost efficiency to set the increase of the personnel costs, can you give us some indication of what could be the major action that you plan and given also [ your ] -- and then linked to this, you have excess capital. It's a nice problem to have today. And just to try to understand a little bit better, would your preference to use this capital for restructuring or strengthening of the balance sheet or earnings, accretive actions in the medium term versus actually keeping this excess in a potential, I don't know, combination or as an advantage in any potential negotiations coming? And on this, if you can give us the impact that you expect from regulatory development or risk-weighted asset migration?The last quick thing is just a clarification on your risk and charges, legal provision. Can you give us the number as of the fourth quarter post-release? And how should we think about this in terms of how conservative they are, given the positive stream of sentences that you have recently received?
Let's start from cost. So as I was mentioning, practically, it was very successful this year, the action we put in place. I want just to recall what has been done. Since the launch of the strategic plan, we build up a new cost governance company -- sorry, structure. I used to say company just because I believe that our cost of governance should work across the bank, so with the power almost [indiscernible] in order to get optimization of the cost. So -- and we reduced from 50 cost centers with the budget in only one. Today, we are only cost center, and all the payment of invoices should go through a gate where we have a structure that is analyzing. It's clear that also the segregation of the cost management with the procurement brought additional benefit. And as is [ never-ending ] process, we are introducing additional changes in the organization in order to be even more effective.If we look at the item on which practically we got the best results in terms of efficiency, is clear that if we want to start from -- the most important was the process of renegotiation of telecommunication contracts. I mean data, [ beta ] fixed, mobile everything.Then we reduced the cost connected also to -- with the synergies of IT by incorporating 2 subsidiaries, as you can remember. Then we had additional benefit in terms of reducing whatever was connected with technical consulting activity. We reduced the number of contract with the outsourced company also in terms of software and this mainly in the IT area. We reduced significantly also the maintenance in terms of building by reducing some locations and buildings because, after reducing the staff by 20%, we have several situations where we had half of the building occupied by employees -- so with employees. So we decided to make empty some of them. Some of them are on the process of selling.But anyway, we are seeing a lot of energy, especially now that it was quite expensive. And so, clearly, all the costs connected with the legal cost, the cost of recovering in NPE, that practically the process started already in 2022, is giving some results in '23, but will give even additional results in 2024.It's a never-ending process, and I believe that the cost saving is not just to cut on paper purchase, but is much more a matter of processes, try to do the things fast, having less levers, managing the decision. And this automatically is bringing benefits. So we achieved an important result this year, and we believe that on non-HR cost, we can be even continuing this very, very efficient process.Different is on the side of HR where practically, we have to face the increase of salary connected with the labor cost. But we are quite confident that, at least, we are going to have a process where we will have much more people towards commercial activity, shifting the people from the [indiscernible] activity. So if we don't reduce completely the cost, we are going to increase the revenue by utilizing these people.Now in terms of strategy, honestly, the capital is not needed to make restructuring because we can finance the restructuring without utilizing capital. As I was mentioning, we could have a different opportunity looking of what we can do with our partners and then ready to capture opportunity for any potential transaction combination on the market.
Then on [ CR 3 ], actually, for us, this is to the best of our current knowledge, at least, expected to be a tailwind rather than a headwind, mainly for the impact on operational risk [ RWAs ], which is, by the way, further confirmed by the recent sentences, but regardless of that. And the amount of the tailwind actually is being quantified. Then on litigations, I'll let Luigi comment.
No, I think -- in some way, I think we answered already earlier. We are keeping a very conservative approach. It's clear that we reported a very positive trend with all the [ verdicts ] in the last months. I was mentioning that just, if we look at this matter, we had more or less 12 decision of the court in favor of the bank. And I think all 12 are related -- also our only [ 2 ] NPEs matter. So we believe that also this topic will be going in the right direction. We are not making disclosure what much -- how much we are keeping for this kind of legal risk. But as I mentioned, we are very well equipped to face any scenario. And hopefully, we will enjoy another positive impact soon or later on our P&L.
The next question is from Fabrizio Bernardi Intermonte.
I have a couple of questions. The first one is on -- double check on, let's say, the payout. If I look at Page 22 of the presentation, you say that you are going to pay out 50% of deferred tax profit, which I guess will be adjusted for provision. So if I look at Page 25, it's EUR 1.7 billion and there are more or less EUR 500 million of provisions, more or less, which means EUR 1.2 billion, 50% is EUR 600 million that on the current market CapEx is more or less a yield of 15%, which is, let's say appealing, I would say. That said, I would ask if you can give us any color about the willingness of the government of reducing its stake in the bank even further, considering that you have a 18% common equity and probably you can have a dividend policy that can reward the government in a very effective way?
I will start from the second question. It's clear that we are not yet there [ see ] what the government can do. And really, I wouldn't like to discuss on that. On the payout, yes, we said that the pre-tax profit will be almost at the level of -- this year if we exclude the reversal of provision, yes, it's quite easy that -- your calculation is broadly right.
The next question is from Corinne Cunningham, Autonomos.
Congratulations on the results. Can I ask a couple of questions, please. First one on MREL. If you could just provide the positioning now and against your targets? And then the second one is on ECB reliance, 11% of your funding coming from the ECB is still pretty high compared with peers. So can you give us an idea of what the intention is there, if and when you're likely to actually redeem the ECB reliance?
So on your first question, I give you, let's say, the most relevant KPI for us. Our MREL capacity on overall [ TREA ] as of 1st of January '24 is 28.17%, including, of course, net profit and excluding dividend, while our target as of 1st of January '24, including CBR is 26.59%. So actually, we have a quite good buffer. As regards the overall funding strategy, as mentioned, it is part of our funding strategy to progressively decrease our reliance on ECB funding, and we have defined a funding plan for '24 and then a funding strategy for the next 3 years. Accordingly, this year soon, I would say, we will reassess the covered bonds market. And then we will diversify also in other ways our funding, I mean stated at -- let's say, the usage of [ this ] funding is not a big issue per se, but we appreciate that it is good to further diversify.
The next question is from Alexei Lougovtsov of Bank of America.
To follow up on the MREL and covered bonds. What are your bond issuance plans overall across the cap stack?
For '24, we have roughly EUR 3 billion funding plan, out of which only EUR 1 billion is MREL relevant, and will be senior preferred basically. And slightly above EUR 2 billion will be instead covered bonds. On top of it, in the second half of the year, we might look at maybe some liability management, but it is early to say and we will see. And we will give you an update in -- say, in the following calls -- in the next calls.
The next question is from Hugo Cruz, KBW.
I have a few questions around capital and asset quality. On capital, I see a lot of optionality, your [ CET 1 ] ratio is very strong. You could still issue an AT1. There might be further legal claims releases. You said Basel IV could be a tailwind. So is there room to also announce at some point in [indiscernible] distribution, either a dividend or a buyback? How do you think about that? Then on the asset quality, I've noticed you've done some NPL disposals, but the stock is still not coming down materially. So is there -- is that you're just being conservative with the reclassifications of loans ahead of the year-end? Or is there any underlying deterioration? Is that something we should worry about?
Let's start from the first question. Now for the time being, as you see, we are thinking about dividends. It's too early to make a discussion now also about buyback. So dividend is for us at the current stage priority or the preferred adoption. Regarding asset quality, as I was mentioning, we think we are quite conservative on that [indiscernible], that the stock is practically flat, it's not decreasing. As I was mentioning at the beginning, you have to take into consideration the significant portion of the last inflow, is coming from [ retail ] mortgages where for some part, we have also some guarantees for a special program that has been issued by the government.So we want to be conservative. But despite that, my personal view -- and the personal view and the view of the management that is dealing with the asset quality is to try always to reduce the stock. And you can reduce the stock by being quite careful to avoid new inflow, having in mind that the bank in the last years was not particularly active in [ lending ] loans.And the second one is to optimize the [indiscernible] of some unlikely to pay or to decide for additional sales. I can say that we are equipped for all this option. So 2024, we will consider what -- which one -- the option I was mentioning would be much more effective. The goal is to keep this stock absolutely under control. To avoid any doubt, it just is not a matter of deterioration of our portfolio.As I said, we used to have and we will -- we have and we will keep a very conservative approach in classifying, and I believe we know quite well our portfolio for the simple reason that since also I'm here, I'm receiving regularly each month a report form the Chief Lending Officer, where really we keep absolutely under control or the migration of which position we have from high risk that is a classification that we put inside in order to better understand the behavior of companies that have already some early [ warning ] seniors. This is a particular and quite effective system we have in the bank and trying to prevent deterioration knowing better the customers. So like to conclude, yes, we want to decrease the stock. And hopefully, this is something that we'll try to achieve during this year.
The next question is from Andrea Lisi, Equita.
Still on cost of risk and deposits and so on, what default rates have you embedded in your guidance for next year? And if you can remind us the amount of overlays you still have? And the second one is just if you can briefly provide us a comment on what do you expect on the [ M&A ] scenario in Italy in the current environment?
I'm not sure I got all the questions, sir. I mean, as regards to the cost of risk, for next year, I mean, we gave a guidance which is conservatively -- I would say, considering also the macro scenario in line with this year. Then you asked about the overlays. Actually, also in this case, conservatively, we have a factor in our models, some additional prudence and then shifting from overlays to risk provisions some amounts so that the overlays are currently below EUR 100 million. And the last question, I'm not sure I got it.
The last question was just if you can provide us a comment overall on the scenario -- [ M&A ] scenario you expect in Italy in the current environment?
On this, I think we will launch a takeover of UniCredit, but -- no, I'm joking. No, I mean, we do not have an update on this. This is, of course, something that our shareholders probably will discuss.
The next question is a follow-up from Giovanni Razzoli, Deutsche Bank.
My questions have already been asked.
[Operator instruction] The next question is from [indiscernible], Octo Finances.
I have just one question on the legal risk. Regarding the 2 positive judgments that you had in November, December, can we consider that these cases are definitely closed or can the Plaintiffs bring the case to another court? And just on the cost of -- so one clarification. You guide for a stable cost of risk versus 2023. I was wondering if this includes overlays or it's ex-overlays?
Sorry, can you repeat your second question? Yes. I mean on -- the second question is whether the cost of risk includes the overlays. The answer is yes. Yes. And on your first question, Luigi will comment.
Yes, I will answer. So practically, as I was mentioning for Alken, we have the second verdict, just confirming the first one. So clearly, there could be the last stages in the Supreme Court, but normally -- and looking at the contents of the ruling, the Supreme Court is just entering -- is not entering exactly in the matter relating to the decision that was taken by the court of appeal. It's just analyzing the consistency of the scenario with the compliance of the law. So hopefully, this is what we are -- our lawyers -- [ standard ] lawyers are telling us. It's just a matter of time and then will happen what happened also with the case [indiscernible]. So the final decision of the Supreme Court will confirm the decision of the appeal court.
The next question is a follow-up from Corinne Cunningham with Autonomous.
Just a clarification again on litigation on Slide 19. So the criminal proceedings have gone from [ EUR 0.2 billion ] to [ EUR 0.66 billion ]. Has that moved from extrajudicial -- I guess I'm asking where has that increase come from?
Sorry, I think, we were mentioning that this amount are the criminal proceeding relating to the NPE -- most of them relating to the NPE that is still at this preliminary stage. And in a conservative way, we already consider some request, even if -- as I was saying, the court, hopefully next year has still to decide if the request will be admitted or not. In a conservative way, we already incorporate all these civil claims, but it's for something that still is at very preliminary stage.
So it wasn't any -- it wasn't extrajudicial before? This is just kind of a new proceeding?
Sorry. Can you repeat it because I -- I'm not sure I follow?
Yes. So it wouldn't have been included in the EUR 1.9 billion extrajudicial? This is a net new addition?
No, most of them are new. Then there are some that change the nature of the request, and they gave up what was as extrajudicial, and just -- because there is a very simplified procedure, they decide to go to the civil part. But practically, it's not -- nothing new compared to what we already knew, all of us, 3 or 4 months ago, and we were already mentioning in our balance sheet that is something that is a process that is ongoing, but is subject -- still subject to the decision of the court to accept the request of the claim.
Mr. Lovaglio, there are no more questions registered at this time.
So thank you very much. So see you next time.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.