Intesa Sanpaolo SpA

MIL:ISP

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Conference Call of Intesa Sanpaolo for the presentation of the 2022 first quarter results. Hosted today by Mr. Carlo Messina, Chief Executive Officer.

My name is Mary, and I will be your coordinator for today's conference. [Operator Instructions] Today's conference is being recorded.

At this time, I would like to hand the call over to Mr. Carlo Messina. Sir, you may begin.

[Carlo Messina, executive]

Good morning, ladies and gentlemen, and welcome to today's Conference Call on our first quarter results. This is Carlo Messina, Chief Executive Officer; and I'm here with Stefano Del Punta, CFO; and Marco Delfrate and Andrea Tamagnini, Investor Relations Officers.

I want to start by thanking our shareholders, especially the foundations and our international investors for supporting my reappointment as CEO for another term. I guarantee that I will work non-stop to lead ISP through the current challenging environment and that we will emerge stronger than before, just as we did in all the previous crisis.

This is the first quarterly call since the launch of our new business plan. And I'm proud to say that the plan is proceeding at full speed with our people working hard to deploy the key industrial initiatives which are well underway. The new plan moves us into the future and creates a bank for the next 10 years.

Before diving into our Q1 results, I want to express my personal sadness for the devastation caused by the invasion of Ukraine, and I hope that we will soon see an end to the war. As a group, we immediately activated the crisis unit to oversee activities in Russia and decided to end all new financing and investments in Russia.

These actions are in addition to the group's [ Street ] compliance with sanction regimes. We are very close to our colleagues at Pravex Bank in Ukraine. Most of them are still there, even if ISP has helped many of them move to other countries, including Italy. In a few minutes, I will give you more details about our actions to help our colleagues, the families and other people affected by the war.

I would have been very happy to avoid another demonstration of ISP ability to overcome difficult global challenges. But here, we are and ISP is demonstrating once again that is solid, resilient and well equipped for future challenges. You can see the proof in our Q1 results.

We delivered a EUR 1 billion net income while provisioning EUR 800 million for the Russia-Ukraine exposure. Excluding these provisions, we would have delivered our best quarterly net income since 2008. In light of the Russia-Ukraine conflict, we revised the outlook for 2022 on a prudent and conservative basis, that's how we always manage ISP.

This year, we will deliver more than EUR 4 billion net income, assuming no critical changes to commodity supplies, even in a very conservative scenario of posting a 40% coverage or Russia, Ukraine exposure, we will deliver well above EUR 3 billion net income.

We remain committed to our EUR 6.5 billion net income target in 2025, and the same goes with -- for the buyback and for our 70% payout ratio for each year of the plan. Strong value creation and value distribution will continue to be our priority. Intesa Sanpaolo and its long-standing [ employees ] management have always delivered on their commitments and they will do so this year and in the coming years.

Slide #1. In Q1, we delivered solid operating performance in a challenging environment, thanks to a well-diversified business model. We delivered net income of EUR 1.7 billion, the best quarter since 2008 when excluding provision for the Russia-Ukraine exposure.

Operating income and operating margin strongly accelerated versus Q4. Net interest income grew over 1% on a quarterly basis when adjusting for the different number of days. Second best ever Q1 for commission and insurance income. We delivered significant growth in revenues from financial market activities, which once again represented a natural hedge to the impact of market volatility on our fee-based business.

We confirm our high strategic flexibility in reducing costs, down 3.2%, massive deleveraging has allowed us to reach one of the lowest NPL stock ratios in Europe. And overall, the excellent performance in Q1 was fully in line with our EUR 5 billion 2022 net income target when excluding the provisioning on the Russia-Ukraine exposure.

More than ever, I want to thank all Intesa Sanpaolo people for their hard work in helping achieve these excellent results in this very difficult moment.

Let's now move to Slide 3. In February, we presented our 2022-2025 business plan based on 4 pillars: one, massive upfront derisking slashing cost of risk; two, structural cost reduction enabled by technology; three, growth in commissions, driven by Wealth Management Protection and Advisory; four, significant ESG commitment with a world-class position in social impact and a strong focus on climate.

The plan is proceeding at full speed with all our people working across all key industrial initiatives, which are well underway as you can see in the next 3 slides that give you an overview of what we have done in only 2 months.

For the sake of time, I'll give you some color on some of the most significant industrial initiatives underway, moving directly to Slide 7. Looking at the first pillar of the plan, massive upfront derisking, we achieved almost EUR 5 billion gross NPL stock reduction in the first 4 months of the year. So this is equivalent to the impact of dimension of volumes of Russia-Ukraine exposure.

So we reduced nonperforming loans in 4 months for an amount equivalent to our exposure to Russia and Ukraine. We have delivered these results, and we have deleveraged for 26 quarter in a row for a total NPL reduction of almost EUR 55 billion since the peak of September 2015, and we reduced EUR 10 billion in 1 year time in the last year.

The NPL stock is now lower than EUR 6 billion, and the NPL ratio is at just 1%. So due to the fact that we have a very limited level 2 and level 3 asset, we can consider -- we can be considered really one of the best bank of Europe.

Slide #8. As a result of this impressive deleveraging NPL stocking ratio are now among the best in Europe, and our underlying cost of risk is already in line with being a 0 NPL bank. Practically speaking, we are similar to a Nordic Bank.

Slide #9. Moving to the second pillar of our business plan, structural cost reduction accelerated in this quarter with operating costs down 3.2% on a yearly basis while investing for growth. Cost-income ratio improved further at 46.3%.

Slide #10. The setup of Isybank, our new digital bank and the digitalization of the group are well underway.

We created Isy Tech, the new delivery unit for Isybank development with 190 dedicated specialists. We hired the new head of Isybank and the new head of sales and marketing digital retail who are both already fully operational. And we are quickly developing the new Isybank cloud-native technology platform in partnership with a leading Fintech company.

Slide #11. The new tech infrastructure will be progressively extended to the entire group, including our international network, and we are all working on that. So technology is becoming one of the strongest part of Intesa Sanpaolo.

Slide #12. Looking at the third pillar, growth in commissions driven by Wealth Management, Protection and Advisory, we can count on more than EUR 1.2 trillion in customer financial assets, growing almost EUR 50 billion on a yearly basis.

Short-term direct deposits saw a EUR 28 billion increase on a yearly basis, which will fuel our Wealth Management engine in the coming years. In Q1, we reduced an increase of EUR 5 billion in retail short-term deposits. The decrease in assets under management and assets under administration in Q1 was entirely due to market performance.

In fact, even in a challenging environment, we continue to have positive inflows. In Q1, we recorded EUR 3.8 billion positive net inflows to asset -- into assets under management and net inflows were positive by EUR 16 billion on a yearly basis.

Slide #13 Several key initiatives to fuel our Wealth Management engine in the coming years are well underway. We fully implemented a new dedicated service model for exclusive clients with over 4,000 relationship managers deployed in almost 500 advisory centers.

We strengthened our service model for ultra high network clients, introducing new features for their advisory tools. We leveraged our own asset management and insurance product factories to enhance our [ commercial ] proposition with the development of multiple new products and continuous enhancement of the ESG offering.

Slide #14. Looking at ESG, our social commitment remains strong, and we are accelerating our support to address urgent needs, including mitigating the potential impact of the Russia-Ukraine crisis. In particular, we are signing new partnership to double our intervention to support people in need and we increased its support for youth education and the setup of our social housing projects for youth and seniors is underway.

Slide 15, as a demonstration of our capacity to quickly respond to urgent social needs, we immediately implemented multiple projects to support Ukrainian population and our Pravex bank colleagues. We donated EUR 10 million to support humanitarian initiatives in favor of the Ukrainian population and almost 300 colleagues have been welcomed by the international subsidiary banks division outside Ukraine, and we arranged to host in apartments in Italy, more than 200 colleagues and their family members.

Slide #16. Last, but not least, our people are our most important asset. We have planned significant investments in our people and many initiatives are already well underway. In particular, we are proceeding at full speed with the renewal of our workforce with 700 people hired since the beginning of 2021 and almost 400 people were skilled in this quarter alone.

Slide #17. In this slide, you can see a reminder of the 4 pillars driving our strategy to take the unique ISP model to the next level.

Our commitment to shareholders distinguish ISP and we remain committed to our EUR 6.5 billion net income target in 2025. We can do this even in the current challenging environment for multiple reasons, our target was not factoring in any potential upside from an interest rate increase, which is now much more likely to happen.

We have a very high flexibility in reducing costs as we continuously demonstrated in the past, and we have already achieved 0 NPL bank status with a very low underlying cost of risk.

Slide #19. On this slide, you can see the highlights of our strong performance. Let me give you some color on the following pages.

Slide #20. In Q1, we delivered the highest quarterly net income since 2008, a net income of EUR 1.7 billion when excluding provisions and write-downs for the Russia-Ukraine exposure.

Slide #21. Once again, despite the challenging environment, we delivered solid performance driven by high-quality earnings. Net interest income grew by 1.3% on a quarterly basis when adjusting for the different number of days in the 2 quarters. Commissions grew by 1% on a yearly basis when excluding performance fees and growth in insurance was solid, driven by the P&C business.

Profits on trading was very solid and fully realized. Revenues grew by 8% and operating margin by almost 50% versus Q4. Let me highlight that in Q1, as usual, we managed revenues in an integrated manner. Operating costs continue to decrease, more than compensating the slight decline in revenues on a yearly basis.

We have been very conservative in provisioning and booked more than EUR 800 million for the Russia-Ukraine exposure. Net income was more than EUR 1.9 billion when excluding costs concerning the banking industry and the provision for the Russia-Ukraine exposure.

Slide #22. In this slide, you can see that the net interest income was up over 1% on a quarterly basis when adjusting for the different number of days, also due to positive dynamics on spread. After many quarters, net interest income is also up on a yearly basis, thanks to the commercial component and hedging.

And despite the impact from the NPL stock reduction and from the strong increase in retail, direct customer deposits, which impacts net interest income in the short-term, but boosts our Wealth Management engine in the coming quarters and years. Short-term retail deposits increased by almost EUR 15 billion on a yearly basis, of which EUR 5 billion in Q1.

Let me remind you that an interest rate increase is a strong upside for us because for every 50 basis points rate rise, net interest income can increase by more than EUR 900 million.

Slide 23. We have continued to be very effective at managing costs with the best in class reduction in administrative expenses down 6%. Depreciation is up as we keep investing for growth.

Slide 24, we are proud to have one of the best cost income ratios and this slide illustrates our leading position in Europe.

Slide #25. NPL inflows were very low, down more than 40% compared to the fourth quarter with nearly all moratoria already expired and only EUR 600 million still outstanding.

Our underlying cost of risk stood at 18 basis points, in line with our 0 NPL bank status. Loan loss provisions were down in Q1 compared to last year when excluding the additional EUR 800 million in provision for the Russia-Ukraine exposure. In Q1, we released EUR 300 million in generic provisions, a portion of the residual EUR 700 million conservatively booked in 2020 for COVID, which leaves us with EUR 400 million still available for the future.

Russia. On this page, you can see an update on our exposure to Russia and Ukraine. As you can see, the exposure is limited. It represents just 1% of group customer loans. Furthermore, exposure is decreasing and is already down by EUR 200 million since the beginning of the conflict by EUR 1 billion when considering the provisions booked in Q1.

Slide #27. Apart from being limited and decreasing, let me recall some highlights on our Russia-Ukraine exposure. Only EUR 400 million in loans are [ inventory ] under sanctions. Over 2/3 of loans to Russian customers refer to top-notch industrial groups, featuring long-established commercial relationship with customers that are part of major international value chains with a significant portion of their proceeds coming from commodity exports.

Our footprint in Russia is small with just 25 branches that our lending to Russian clients is very limited, below 0.2% of our group customer loans. Nevertheless, we have been very conservative in provisioning. And in Q1, we allocated over EUR 800 million for the Russia-Ukraine exposure with almost EUR 650 million on the cross-border exposure, which is entirely performing a classified in stage 2.

And I repeat, we have stopped any new investments and financing in Russia since the very beginning of the conflict.

Slide #28. ISP fully phasing common equity Tier 1 ratio is 13.6%, not including 110 basis points of additional benefit from DTA that we will recover in any case. So these are something like a capital increase that will have for sure in the next years and do not considering the impact from the buyback to be approved by the ECB.

And then I will elaborate on this point, I think during the question-and-answer session. In Q1, the common equity Tier 1 ratio was impacted by 10 basis points of regulatory headwinds out of a total of around 60 basis points expected in the business plan horizon and by 20 basis points from Russia-Ukraine risk-weighted assets inflation.

The impact from Russia, Ukraine risk-weighted asset inflation will be recovered if the crisis is positive resolved or if we move the exposure to Stage 3.

Slide #29, contributing to society has always been a key part of our DNA. You can see this in our robust support to the real economy and our strong ESG focus.

Slide #30, we are accelerating our strong ESG commitment with a world-class position in social impact, a strong focus on climate and the leading position in the main sustainability indexes and rankings. You can go through the details in the next 3 slides, but for the sake of time, let's move to the final remarks.

Slide 34. Before looking at the future, it is worth recalling that we are far better equipped than our peers to take the challenges ahead and to capture growth opportunities. We have a best-in-class risk profile also including our exposure, Russia and Ukraine. We have one of the highest capital buffers and we are one of the cost income leaders in Europe.

Slide #35. The Italian economy remains resilient and is expected to continue growing at a sustained pace. Thanks to positive fundamentals, baked by strong government intervention and significant EU financial support. In particular, the wealth of Italian households stands at EUR 10 trillion and the amount of debt held by Italian families remains very low. Both households and companies hold a high level of savings since the start of the pandemic.

Italian SMEs quickly recovered after the COVID emergency with historically low default rates maintained even after the end of moratoria. And the banking system is far stronger than in the past and played an important role in mitigating the impact -- the economic impact of the COVID emergency.

Slide 36. Let me now recap the key points that demonstrate the sustainable strength of Intesa Sanpaolo. Our resilient and profitable business model over delivered even in Q1 with the best ever quarterly net income when excluding the provisions for the Russia-Ukraine exposure.

Operating income and operating margin accelerated strongly versus the previous quarter. Costs were down sharply, and cost income is best-in-class. Massive deleveraging continued, reaching around EUR 5 billion in the first 4 months in the new -- of the new plan.

NPL stocking ratio are at record lows, and ISP is now a 0 NPL bank with very low underlying cost of risk. We maintain a very solid capital position with low leverage. We already allocated over EUR 800 million for the Russia-Ukraine exposure and we still hold EUR 400 million in generic provision related to COVID.

Slide #37. In conclusion, in February, I outlined a strategy to take the unique ISP model to the next level and create the bank for the next 10 years.

At the core of this strategy is value creation and distribution, guided by a strong sense of purpose to benefit all our stakeholders and society more broadly. So taking into account the impact from the Russia-Ukraine conflict for 2022, we will continue to deliver best-in-class profitability.

With more than EUR 4 billion net income, assuming that there will be no critical changes to commodities and energy supplies and well above EUR 3 billion net income, even with a very conservative assumption of posting 40% coverage on all Russia-Ukraine exposure. We remain committed to our EUR 6.5 billion net income target in 2025 and to a 70% dividend payout in each year of the plan and an additional EUR 3.4 billion capital return through buyback with additional distribution to be evaluated year-by-year starting for 2023.

As proven in the past, Intesa Sanpaolo is an unstoppable delivery machine, and we will over deliver once again on our promises even in a challenging environment. This, thanks to all our people and to a strong long-standing and cohesive management team.

Thank you for your time and attention. And now I'm happy to answer your questions.

[Operator]

[Operator Instructions] We will now take our first question from Antonio Reale of Morgan Stanley.

[Antonio Reale, analyst]

It's Antonio from Morgan Stanley. Three questions, please. My first one is on the share buyback approval. If I'm not mistaken, the ECB process should be up to 90 days, and I assume you must have submitted your request immediately after the presentation of your business plan on February 4, which means we should be really a few days away from the deadline.

So I'm wondering what's going on -- last time we spoke, I think it was mid-March. You were confident buybacks will go ahead. And so my question is, has anything changed? Do you foresee any issues with the buyback approval? So that's my first question.

My second question is on costs and IT investments for which you seem to retain some flexibility as we've seen in this quarter. I realized that some of the investments, and you've talked about it, are to position the business for the medium run. But I wonder to what extent does the visibility of returns on such investments change enough for a bank like yours to reconsider, resize or delay some of these investments.

I think you had something like EUR 5 billion of IT investments over the plan horizon. Can you remind us the phasing of these investments and how much flexibility would you have eventually?

My last question is on your Slide 37 on the outlook. Could you please talk a bit more about the assumptions and the delta between the different levels of profitability for 2022 particularly the driving assumptions in each of the scenario? And what do we need to see for you to pitch the gap between the well above EUR 3 billion and above EUR 4 billion net profit.

[Carlo Messina, executive]

So thank you very much. So after my answer to your question, I think that we can stop the question announcement session because I think that these are really the most important part of what I can elaborate. So starting from share buyback.

We submitted to the ECB, the proposal for the approval in the April 1 of this year. So it was not the day after the presentation of the business plan, but was the 1st of April. So we need to have 90 days to receive the ECB approval, so within 90 days. And so we are waiting for an approval that we should receive in -- within June.

So that's the timing for the share buyback. I have to tell you that considering the very low risk profile of the group, I think that we are in a very good position to be considered in any case, we are one of the best player in Europe because after the completion of the disposal of the EUR 4 billion nonperforming loans.

And as I told in my previous point on the presentation, we reduced by EUR 5 billion in 4 months, the stock of nonperforming loans. And today, we have a stock of nonperforming loans that is comparable to the real best-in-class in Europe. And due to the fact that we have 0 level 2, 0 level 3, we are really risk adverse company. So we can confirm that a 12% fully [indiscernible] capital ratio is well exceeding our need of capital considering the risk profile of the group.

So my expectation is that in the next months, we should receive the -- an approval. And as soon as we receive the approval, we will start with share buyback. But in any case, we have to wait until the ECB approval. But that's the real position on share buyback.

Looking on cost and IT, it is true we have a significant number of investments to be realized during the next business plan. The run rate of this capital budget could be in the range of EUR 1 billion, EUR 1 billion [indiscernible] year relating to the IT investments. We do not need for the time being to make any kind of postponement of delay or investments. We have a number of other significant contingency plan on the cost base, so we can continue to reduce the cost base without touching in any case what we consider strategy for the future of the group, because as I told during the presentation the technological improvement in Intesa Sanpaolo in this set up all the Isybank and believe me we are really creating something special in this world with top machine is fundamental also to upgrade the technology of the IT system of Intesa Sanpaolo, and this will happen in 2023.

So I don't want to stop this area because this is fundamental to realize industrial upgrading of Intesa Sanpaolo moving into a Fintech company and transforming Inter Sanpaolo from an incumbent into a challenger. So that's -- and that remains my industrial focus. So just to complete and moving into the outlook, I want to tell you that the Russia-Ukraine situation is really dramatic.

It is an humanitarian tragedy is something unbelievable -- but my job as CEO is to move into the industrial action to find solutions and to deliver a business plan and it is what we are doing in the bank only 200 persons are working on our Russia-Ukraine situation in my organization. The other 90,000 people are working hard in order to deliver the business plan, and that's what I consider really fundamental for the bank.

We have an exposure of gross pre-provision lower than EUR 5 billion. This is a credit exposure for me. That's my job as CEO. I'm dealing with credit exposure, we reduced EUR 50 billion of nonperforming loans in the last year. We reduced EUR 5 billion of nonperforming loans in 4 months. We are now moving into managing EUR 4 billion with some reputational implications. So that's something that we have to consider, some compliance. So we have to move according to sanction, but my job is to recover money. And that's what I'm doing.

So coming back on the outlook, the outlook is that starting from an outlook confirmed of more than EUR 5 billion because we exceeded our expectation in terms of net income in comparison with the original budget, delivering EUR 1.7 billion of net income. So -- the run rate of the group is well above EUR 5 billion in terms of net income pre Russia situation. Now we have a clear provisioning that we made in the first quarter.

So you have to move a EUR 5 billion minus the amount of net income that is related to the implication of Russia. We can consider some minor provisions if the trend could be more or less stable, continuing what's happened in this month. And due to the fact that we decided not to have in our forecast, any benefits from Euribor increase that can, for sure, happen in the second part of 2022, we can have some minor slowdown in terms of commissions performance fee.

So that's what we have elaborated to create EUR 4 billion, above EUR 4 billion outlook. Then could be EUR 4.2 billion, EUR 4.4 billion, EUR 4.5 billion, we will see that's implication. The cost of risk embedded in this outlook is for the run rate, excluding Russia and Ukraine, and considering that now we have 0 nonperforming loans and those the nonperforming loans has been provisioned in 2020 and 2022 in a significant way, we will have very limited cost of risk rated on the stock.

We will remain with the cost of risk embedded with the new inflows, but not exceeding 25 basis points. So that's the reality for Intesa Sanpaolo. The real economy in the country is not so bad because there will be impact on poverty, on inequality, and that's for sure, but the majority of the Italian companies are with a strong liquidity cash flow position, and I'm not worried at all for a possible significant deterioration of real economy environment in my country.

Moving to the second part of the outlook, so the more conservative one. I want just to tell you that our exposure to cross-border in Russia, you know that on local presence, we have negligible figures, and we are considering in a different way to other peers, the total amount of loans in the country and not only the amount of equity that for us, again, is absolutely negligible when considering the exposure to the country.

And the total amount of loans in Russia, local presence is EUR 600 million. On the other side, we have a cross-border exposure, cross-border exposure that is EUR 3.8 million -- these cross-border exposure, if you consider the amount of provision already done, it is EUR 650 million, it is net EUR 3.2 billion, EUR 3.2 billion and out of this exposure, more than 80% of this exposure is related to the #1 company in gas the #1 company in palladium and nickel.

So all the strategic needs that Europe continue to have and will continue to have. So our expectation is that moving into a 40% coverage on all these cross-border exposures needs to be in a real worst-case scenario because it is unbelievable that Europe can avoid to receive gas, palladium and nickel from the most important player in Russia. And that's the evidence that they will continue to give us, and they will receive cash flow.

And in any case, these companies will have a lot of intrinsic value because we remain the provider of gas, palladium and nickel for all the world. Not Europe, will be India, will be China. So expiring in 2027, our loans, believe me, we have been really conservative in all our figures because we do not want to sell marketing to our investors, to our shareholders. We want to remain on the conservative side in all our analysis, and I think that the position of Intesa Sanpaolo is that we will be ready to make the share buyback as soon as we receive the authorization of ECB and we will pay 70% dividends on a significant net income.

And as I told you, our exposure in Russia, it is not an exposure that can be considered a significant risk exposure apart from the decision not to receive more gas, palladium and nickel in the next 2 years from Russia. And that's the fundamental of the group is moving in terms of cost of risk at the run rate of 25 basis points because we have between EUR 5 billion and EUR 6 billion net nonperforming loan. So theoretically and practically 0 this impact.

So what I can tell you, these are the outlook that I consider really conservative, and we can do much better than our outlook in the next months.

[Operator]

And we can now take our next question from Andrea Filtri of Mediobanca.

[Andrea Filtri, analyst]

One question on fees and one on capital and further remuneration. On fees, why do [ negative ] the light fees in the quarter? What drives the growth in the other net fee and commission income line in the quarter and year-on-year.

And then on capital, do you think that the current uncertainty is commanding a CET1 above the 12% target of the plan on a temporary basis? And are you considering to potentially postpone the share buyback until we have more macro and geopolitical visibility. And will you pay dividends or reported profits or excluding the impact on Russia and Ukraine?

[Carlo Messina, executive]

So Andrea, we will pay dividend on the net income of the group. So the stated net income. Looking at capital, I do not see any kind of reason to change our perspective. So all the -- as I told in my previous answer -- I consider the exposure to Russia as an amount of performing loans that can become Stage 3 loans and believe me only for a marginal part because the majority of this exposure is much better than a significant part of loans being placed in most of the European banks. So having in mind is, this is an amount of loans.

Our nonperforming loans is at the level, if we used to be at 13% fully loaded, so 12% fully phased in, in an environment in which we add EUR 60 billion of nonperforming loans. Believe me, I can say at 12% with EUR 6 billion of net nonperforming loans. So I do not see any kind of reason from a managerial point of view to maintain extra buffers in excess of this 12%.

Then the excess capital is also to be considered as the elements that you can use in situations like this. So we used to have 14%, now we have 13.6% and remaining with -- do not forget with more than 100 basis points in DTAs, and we have a unique case of DTAs due to the different merging process that we made the integration of Italian banks, we remain with a significant buffer in terms of capital position.

So no need to change the position of the capital target from a managerial point of view. Then from a regulatory point of view, there will be something that will be applied on all the banking system. We will respect the indication of the supervisor. In terms of fees, sorry, Andrea, but if you can repeat your question because the line was not so good, and I didn't understood -- and I didn't understand very well your point.

[Andrea Filtri, analyst]

Just if you're seeing any specific slowdown given the tailwinds from last year, I was expecting even stronger fees. And I wanted to ask you the detail of what is driving the material growth in other net fees and commissions income, the line that you give in terms of breakdown on a quarter-on-quarter and year-on-year basis because that is the part that is growing the most within the fee income line.

[Carlo Messina, executive]

At this point, are you meaning from EUR 58 million to EUR 73 million. This is the line that you are considering?

[Andrea Filtri, analyst]

I'm looking -- and I'm talking about the line $263 million in the quarter. From Slide 77.

[Carlo Messina, executive]

Okay. Let me -- on this point, I have not with me the specific figures, but Marco Delfrate and Andrea Tamagnini will give you all the details on this point. But let me give you some point on this element of fees and commissions because the -- it is clear that we are a Wealth Management company.

So in a Wealth Management company, you have no performance fee and you compare the situation of the fees with the quarters in which you had the performance fee, you can see a slowdown or a reduction of fee and commission production.

But if you look at the same quarter, so the first quarter of last year in terms of generation of fee and income from Wealth Management, we are increasing the dimension of the fee and commissions. But there is also another point that I want to stress for you and for all the analysts that are with me in this call is that we decided to place during the first quarter, products that are more related to liquidity and protection because we started the beginning of the year with some uncertainty on the appointment of Mattarella, Draghi, you remember the first months of [ 2000 and 2002 ].

And so we decided to maintain for our client an approach that could have been conservative in order to allow them to move in something more positive having a clear view on what could have been the structural condition of the country with Draghi remaining the head of government. I have to tell you that at the end, also, we decided to continue also during the period of the war starting from the end of February.

So also during March, we continue the placement of product with very low commissions in order to maintain protected our clients. At the same time, in our budget, I thought to rely also on performance fees. So that was the original forecast in the budget. But during this quarter, we decided to maintain an approach conservative in order to allow our clients to make decision not under uncertainty.

In April, we continued to have positive net inflows. We continue to have an approach that is conservative towards our clients. And I have to tell you that what I consider important is to maintain the pool of wealth of our clients with us -- this wealth continue to increase. And so we are ready in case of a stabilization of condition and the change of uncertainty to move into something that can be more positive for the clients and also for the bank.

Not forgetting that maintaining retail deposits in an environment in which there will be, for sure, an increase in interest rate will not prove to be negative for the bank, and you will see in the next months and probably in the last 6 months of 2022. Then for the other point, Marco and Andrea will give you all the details.

[Operator]

And we can now take our next question from Britta Schmidt of Autonomous Research.

[Britta Schmidt, analyst]

Could you perhaps provide us with a little bit more color on the -- how you arrived at the amount of provisions that you booked for the Russia and Ukraine exposures. And also whether you are looking at any exit strategies from this book, how difficult is it to deliver it. And does the level of provisioning or exposure has anything to do with any ECB approval of a buyback?

And the second question will be on the provisions ex Russia, which are running at 18 basis points, which is far below your initial guidance. What IFRS 9 scenario macro scenario update impact do you expect for the rest of the year? And is there any sort of leeway to end the year a little bit better than the initial 40 basis points guidance.

[Carlo Messina, executive]

Sorry, I lost the second part of your question. Could you repeat, please? Because the line is not good.

[Britta Schmidt, analyst]

Sure. It was around the provisions ex Russia, which are currently running at only 18 basis points. What do you expect here for the full year? And also specifically, what do you expect for the IFRS 9 macro scenario update throughout the year?

[Carlo Messina, executive]

Yes. Okay. So looking at the Russia, Ukraine and the provisioning, there's nothing related to the share buyback. We decided to do this because we consider this as country risk. So that was the analysis that we decided to do because if we go line by line and especially on the cross-border client by clients, the quality of this client, the generation of cash flow and the fact that they are performing and the expiring date is in some years' time, we probably could also have considered not to make provisions.

We decided to move into a country risk approach. So moving into loss given probability of defaults. And so related to the situation. And so we decided to make theoretical analysis. Now we have -- we are in a position to understand what will happen in the sensory framework because this will be very important to understand the next steps. And we will enter into a case-by-case approach. But the fact that, as I told you, the majority of our exposures in cross-border is mainly related to gas, palladium and nickel can leave us in a position of considering a very limited need to increase provision or in case of significant disruption of acceleration of the sanction framework to move into a 40% coverage ratio moving a portion of these clients into Stage 3.

Looking at the local presence, I don't know if I have to move into an approach like other peers, I have only to consider the equity that for us is really limited and with significant devaluation that we made in this quarter. If you move looking at loan to customer, we have EUR 600 million and EUR 150 million in Ukraine, and we decided to post EUR 150 million of provision related to country risk exposure. Then we will see what can happen.

The real target is, as I told you, to manage these loans as all the loans that we have in our portfolio in -- especially in Stage 2, when we put credit in Stage 2, we try to accelerate for recovery of smart solution in order to reduce. There is a clear limitation in terms of counterparties with whom it is possible to work because the majority of this counterparties could be under suction. So we are working and the expectation is that this amount can be reduced in the next quarters. But maintaining this approach of significant looking -- not in a negative way to this exposure because I think that at the end, we are used to manage significant exposure. And this is, in my view, not so significant, especially for the quality of the names that we have and especially related to the fact that Europe needs to have gas, palladium and nickel. That's my point on this exposure.

Coming back on the cost of risk, excluding the Russia exposure, the underlying cost of risk maintaining this trend of real economy dynamics and also moving until a possible reduction in terms of the speed of GDP in the country but remaining with a positive GDP in the range of 1.5%, 2% GDP positive. I can tell you that our expectation is that we can have a cost of risk that could be only related to the inflows and this can be part of 20, 25 basis points. That's our expectation on the basis of our information as of today. That's the reason why I'm really confident on the possibility in case of need to make provisions in case of reclassification to Stage 3 of a portion of our cross-border exposure to have significant room to maintain significant profitability.

The expectation of the group is looking at the quantity of corporate deposits that we have, the dynamic of the corporate deposit, the money that is a significant part of the owner of SMEs companies as with our banks that the situation in the country apart from, as I told, the need to be ready to work for poverty in a quality from a portion of Italian families like in all the country in Europe and the [ U.S.A ] because the working pools are affected by inflation. But the majority of the corporates can reduce cash flow, can reduce profit, but they will remain with positive cash flow and with a significant amount of deposit placed with the banking sector.

So my expectation is that we can remain in a safe position, looking also the embedded cost of risk that we have in our country.

[Operator]

And we can now take our next question from Delphine Lee of JPMorgan.

[Delphine Lee, analyst]

So I just have 3 quick ones. Just first one on -- to come back on the share buyback. Just wondering if you could explain why you waited until April to ask for the approval? Is that just because of the uncertainty of what's going on with Ukraine and Russia? And can you just confirm that you don't need to see a decline in the Russian exposures or clarity on the Russia losses to get the approval for the buyback?

And secondly, on -- could you just to come back on the interest rate sensitivity, just provide a bit more color on what happens once the ECB deposit rate goes above 50 basis points. Does the sensitivity materially declined? And also if you could provide also the sensitivity for your capital, what happens on the OCI side with rates? And then just lastly, do you have any kind of sensitivity on provisions, on cost of risk to different GDP assumptions that you could just provide?

[Carlo Messina, executive]

So sensitivity on GDP, I have to tell you that the only moment in which we can be affected by a spike in the cost of risk would be a recession. So if we enter into something that is unbelievable for the time being. We can have a spike in terms of cost of risk. And so the cost of risk apart from Russia can have a spike and can move above 40, 50 basis points. This can happen only in case of recession in the country.

Coming back on the share buyback, we decided to submit on April, the share buyback request because we made a number of analysis for the Board of Directors of the bank related to the impact of the Russia and Ukraine exposure and so demonstrating that the situation of the bank was absolutely in line with the expectation that the only point for us would have been a reduction in terms of net income generation only in the case of a significant reduction in net income generation. So moving from above EUR 5 billion to above EUR 3 billion, only if there could have been a stop to the gas, palladium and nickel to Europe that is something that I consider absolutely not likely. Then we decided to present the approval. We do not need to make any kind of reduction to receive the approval reduction of exposure to receive the approval from the ECB. And if you consider also the reclassification that will not happen, but of EUR 5 billion in Stage 3, we will move to the situation of the end of 2021 for Intesa Sanpaolo. So before reducing by EUR 5 billion, the nonperforming loans in the last 4 months. So this is a reality for Intesa Sanpaolo.

And now -- and if you consider this, we will have the same nonperforming loans ratio as the best player in Europe, but without having the level 2 and level 3 exposure. So we remain, in any case, one of the best bank and very low risk profile in Europe.

Looking at the -- your second question, we have -- we will not have any kind of impact to our reserve when ECB will increase the interest rate because there is a hedging on this portion. And so we will not have any kind of impact on the capital position. And we can confirm that the sensitivity is EUR 900 million for an increase of 50 basis points and the reality is that the position of -- sorry, sorry, and the position of the group is that for an increase of 100 basis points, we will have an increase in terms of net interest income between EUR 1.7 billion and EUR 1.8 billion. So it's an amount that looking at the acceleration in terms of increased in Euribor that we are seeing from forward expectation, I think that will happen sooner than our expectation.

[Delphine Lee, analyst]

And when rates -- ECB deposit rates goes above 50, 100 basis points, does that sensitivity start to decline materially?

[Carlo Messina, executive]

So are you meaning a happy problem. So do you think that this could be a happy problem. I don't know if -- we will have to check because we will have to make the calculation in the new situation, looking at the reaction of the different clients.

If you look at the past, so looking at the situation of some years ago in which we used to have interest rate well above 1% in terms of ECB interest rate, the sensitivity more or less was at the same level. But on this point, I cannot be so sure so we need to wait until the first spike in terms of interest rate, and then we will be more precise on this point.

[Operator]

And we can now take our next question from Andrea Vercellone from BNP Exane.

[Andrea Vercellone, analyst]

I just have one question left. It's on Russia. Can you make any comment on your off-balance sheet exposure. Do you see any risk associated to that exposure? Or you have [ MAC ] closes that would prevent those credit lines to be drawn anyway. Just to give us a bit of visibility on that point as well.

[Carlo Messina, executive]

Zero risk.

[Operator]

We can now take our next question from Alberto Cordara of Bank of America.

[Alberto Cordara, analyst]

Just a clarification. When in the outlook you are talking about EUR 4 billion of earnings or EUR 3 billion in the extreme case, you write off 40%. Do you include any assumption on rates or not? So just to be absolutely clear. Also another couple of questions on capital. I don't know if you answered to this question, but if you can provide us the sensitivity of capital to a change in the BTP to bond spread. And also, what capital benefit should we expect from the long-term incentive plan?

[Carlo Messina, executive]

Yes, Alberto. So the sensitivity on capital is for each 100 basis points increase, 25 basis points sensitivity. That's a sensitivity on the BTP bond spread.

The second question on capital was [indiscernible] should be between 25 and 30 basis points. That should be the increase that we can have due to [indiscernible] And looking at the outlook, it is above EUR 4 billion and well above EUR 3 billion, so it is not EUR 4 billion or EUR 3 billion, it's above EUR 4 billion and well above EUR 3 billion. There is no contribution from rates. So 0 contribution for rates.

[Operator]

We can now take our next question from Giovanni Razzoli of Deutsche Bank.

[Giovanni Razzoli, analyst]

Two quick questions on my side. I was wondering whether you may consider an additional utilization of the receivable amount of provisions overlays in the next few quarters? And the second question relates to the interim dividend. Can we assume that if the situation does not deteriorate in the next few months, so there is no ban to the energy supply, the core revenue generation of the bank remains stronger than the first quarter. Would you be in favor of as a CEO to propose to the board the payment of an interim out of the 2022 earnings?

[Carlo Messina, executive]

Yes, I will propose an interim dividend. And looking at the overlays in the figures that we have considered to the market, there is no usage of the overlays. So in the outlook at 0 usage of overlays in the next few quarters.

[Operator]

We can now take our next question from Benjie Creelan-Sandford of Jefferies.

[Benjie Creelan-Sandford, analyst]

Just a quick follow-up on the net interest income outlook. So in terms of the guidance for this year, you're not embedding anything for higher rates. So I was just wondering whether that's a conservative approach in terms of the guidance or whether you think just because of the lag effect in terms of how the rate increase feeds through that there will be no material benefit to net interest income this year. So maybe just give a bit more color about in terms of that sensitivity, the EUR 900 million, the timing of how that feeds through. And also, just around that EUR 900 million sensitivity on the 50 bp move. I mean that looks to have come down versus last quarter, which was lower than the guidance in terms of sensitivity at 3Q as well. So I was just wondering whether there's anything particularly behind that is, are you changing something in your positioning of the balance sheet, which is reducing that sensitivity? Or is it just sort of refining the models, the outlook? Any color there would be useful.

[Carlo Messina, executive]

So it used to be EUR 1 billion now is more than EUR 900 million. There could be a limited component of the medium-term sensitivity related on the fact that we had positive on -- we can have a positive on the hedging side. So you can see a portion of improvements on the hedging side, and we will have also positive forecast on the hedging side that will be added on the sensitivity that you are considering of EUR 900 million. Because if you look at the hedging, you see a positive on EUR 33 million. And on an annual basis, our expectation is that figures can be increased quarter-by-quarter. And if you add this with EUR 900 million, you can come back at EUR 1 billion sensitivity. The hedging facility is more related to the medium-term interest rate than on the short-term interest rates.

Looking at the outlook, not considering the positive coming from the Euribor on the short term our expectation is that we can remain on a flattish net interest rate, probably with some probability to have an increase of net interest rate due to different dynamics because we will remain with a negative coming from TLTRO, a positive coming from volume, a positive coming from medium-term spread on liability side, a positive on the hedging facility, a positive coming from the financial portfolio and the negative coming from the reduction of nonperforming loans. This is all not considering the Euribor increase.

If Euribor will increase in the second part of the year, we can have a clear increase in interest rate that could be the starting part of what we can have in a significant way starting from 2023.

[Operator]

[Operator Instructions] We can now take our next question from Andrea Lisi of Equita.

[Andrea Lisi, analyst]

Just 2 quick questions. The first one is on the COVID portfolio, given the movement in interest rates and in the spread, are you considering to increase the size of your portfolio?

And the second one is, if you can provide some color on the trading revenues in the quarter, which were really robust. And if you can provide some more indication of a sustainable level for them.

[Carlo Messina, executive]

So thank you very much. This is a good question because trading has been considered as a very low quality income for this quarter. I can confirm you that all is realized, but also we are continuing to deliver very good performance because there is an industrial machine that is set in Banca 5 that is devoted to realize this trading income, especially when during the commission side, we are not working for and we cannot receive a performance fee on the commission side. So trading is -- will remain a significant contributor to our figures and not at the same level of the first quarter, but we expect also a good second quarter and a good contribution for the full year coming from these figures.

In terms of dimension, the expectation is that difficult to increase the amount of Italian government bonds. We have the possibility, as you know, to move into 50% of the total portfolio being of the Italian government bond today, we are below 40%. But our expectation is to remain more or less at this level in terms of percentage.

Then in Banca 5, they will move according to the need to realize revenues considering the combination of net interest income and trading. So -- but marginal movements in our expectation for the time being.

[Operator]

This does conclude the Q&A session. I would now like to hand the call back to Mr. Messina for additional or closing remarks.

[Carlo Messina, executive]

Yes. Sorry, just a clarification of Andrea question was the amount of commission was due to corporate loans. So there are classified in the other commissions, the commission related to corporate loans.

Now just in conclusion, I want to reaffirm my position that I'm managing this organization for the next 10 years' time, transforming the bank into a leader in technology, and I'm devoted to realize the industrial plan and the 90,000 people of Intesa Sanpaolo are devoted to realize this.

We are very sad for the tragedy of the war. But from a managerial point of view, the impact of this crisis is something related to loans -- exposure to loans, and we reduced in the last year's EUR 50 billion of loans and just in the last 4 months, EUR 4 billion of loans. So believe me, we will be able to manage this situation and we will exit as usual, stronger and stronger from this situation generating net income and a lot of dividends and share buybacks for our shareholders. Thank you.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.