Intesa Sanpaolo SpA

MIL:ISP

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the First Quarter 2020 Results, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Raziel, and I will be your coordinator for today's conference. At the end of the presentation, there will be a question and answer session. [Operator Instructions].

I'll remind you all that today's conference is being recorded. At this time, I would like to hand the conference over to Mr. Carlo Messina, CEO. Sir, you may begin.

[Carlo Messina, MD, CEO, GM & Executive Director]

Thank you. Welcome to our first quarter 2023 results conference call. This is Carlo Messina, Chief Executive Officer; and I'm here with Stefan Del Punta, CFO; and Marco Delfrate and Andrea Tamagnini, Investor Relations Officers. Today, I'm going to walk you through a very high-quality set of results. We delivered the best ever start to the year. We are highly profitable, liquid and capital solid. Russia exposure is approaching 0, and we have further strengthened our 0 NPL status. Net income at €2 billion was the best quarter since 2007. Q1 was also the best-ever quarter for operating income, operating margin and gross income. Costs were stable with the lowest ever cost income ratio.

These strong results mean that we can raise our net income guidance for the year to €7 billion. Rewarding shareholders while maintaining a solid capital position is embedded in our DNA and remains a priority. In Q1, we already accrued cash dividends of €1.4 billion and executed the €1.7 billion buyback. Common equity ratio increased to 13.7% despite absorbing the vast majority of expected regulatory headwinds. Considering DTA, it stands at 15%. Asset quality is excellent with NPL inflows, stock and ratio at an historical low. The cost of risk is the lowest ever with no release of overlays and a further increase in NPA coverage. We are a European leader in terms of asset quality.

Our strong liquidity position remains sound, thanks to a very diversified and sticky deposit base and more than €100 billion in excess medium/long-term liquidity. Customer financial assets increased by €11 billion. Looking ahead to 2025, the final year of our business plan, we expect to comfortably exceed our €6.5 billion net income target. This is thanks to the boost from interest rates. Our resilience has a 0 NPL and 0 Russia exposure Bank, our flexibility in cost management and our leadership position in wealth management, protection and advisory. As we have proven again and again, we will over-deliver on our promises. Our common equity ratio is expected to be close to 14% post Basel IV in 2025 and 15% including DTA absorption. This does not take into account any additional capital distribution that will be evaluated year-by-year. We confirm our business plan target of a common equity ratio above 12%.

We clearly have significant excess capital. Execution of the business plan is proceeding at full speed. In particular, our technology evolution is moving quickly, and our digital bank, easybank, will be launched by the summer. Now, let me say a few words on the overall macro situation. The economy is already showing better-than-expected growth this year. I remain positive as lower energy and commodity prices are easing inflation, and this will let the Italian economy recovered quickly from the slowdown experienced in Q4 last year, as shown by the positive higher-than-expected growth registered in Q1. Of course, we are very sensitive to the fact that many families and businesses are struggling due to the inequalities and we remain committed to supporting.

We are providing €400 billion in lending to the real economy, not to mention our many social and climate initiatives, which are stepping up. All our stakeholders, not only shareholders, but also employees, the public sector, households and businesses benefit from our excellent performance. I'm proud of our results and thank our people for their hard work. Now, let me turn to the details of our Q1 results. Slide #1. We had the best-ever start to the year.

We delivered the best quarter for profitability since 2007. Our attrition is and will remain rock solid. We achieved the best-ever quarter for revenues, operating margin and gross income even without any contribution from TLTRO. Costs were stable despite inflation and strong investments in technology. NPL inflows remained at a historical low, driving the cost countries just 17 basis points. NPL coverage further increased and we reached one of the lowest NPL stock and ratios in Europe. Liquidity coverage ratio and net stable funding ratio are well above regulatory requirements and business plan targets. Please turn to Slide #2. In this slide, you can see the impressive and positive evolution of net income, up almost 19% on a yearly basis.

Slide 3. Capital ratios are and we remain well above the 12% business plan target, which we confirm not considering any additional distribution that will be evaluated year-by-year. As already said, we have significant excess capital in each year of the business plan versus the planned target of 12% . At the end of March, excess capital was €5 billion. But if you look at Basel IV, and especially better IV after DTAs, because our DTAs in that period will be transformed into reality in 3 years' time. So we will have possibility to be really at 15%. This means that we have significant structural medium, long-term excess capital. Please turn to Slide 4 to provide some color on our liquidity.

Slide 4. We have a best-in-class liquidity position with a very sticky and granular deposit base. Retail funding represents 83% of direct deposits, of which 70% is households. A very large portion of deposits is guaranteed by the Deposit Guarantee Scheme. The average size of deposits is only €14K for households and €69K corporates. Liquidity coverage ratio and net stable funding ratio are more than adequate, higher than peers. Liquid assets are more than €270 billion. In a nutshell, we are in a very comfortable position and ISP is considered a safe harbor by clients. Slide 5. The record start to the year means that we can improve our net income guidance for 2023 to €7 billion.

Let me take you to Slide 7 to provide some color on the P&L. Slide 7. In Q1, net interest income was up almost 70% yearly and 6% on a quarterly basis, but almost 20% and not considering the net contribution of TLTRO in Q4 and when adjusting for the different number of days in the two quarters. Insurance income, both on a yearly and quarterly basis, also thanks to double-digit growth in non-motor property and casualties revenues. The total contribution from net interest income, commissions and insurance income was up 25% on a yearly basis and 2% quarterly. Operating costs were stable on a yearly basis. We had the lowest ever cost of risk. Net income reached €2.2 billion when excluding the final contribution to the resolution fund.

Slide 8. Here, you can see the strong acceleration of net interest income, up almost €500 million compared to Q4 last year when excluding the net contribution from TLTRO. On a yearly basis, we recorded the highest growth among peers almost 70% versus a peer average of around 25%. Net interest income is expected at more €1 billion in 2023.

Slide 9. Net interest income growth on a quarterly and yearly basis was driven by the spread component, which is benefiting from the increase in market interest rates.

Slide 10. Customer financial assets increased by €11 billion in Q1 due to assets under management and administration. Wealth Management will continue to be an important driver for growth in the future and our well-balanced and inefficient business model gives us a clear competitive [indiscernible].

Slide 11. The slight decline in direct deposits [indiscernible] than the reduction in customer loans that was mainly related to the rationalization of position that were EVA negative or no long efficient capital-wise due to the unusually high liquidity of corporate clients who used their own resources for investments and at the same time, indirect deposits increased. It is important to note that the trend reversed in April with €4 billion growth in direct customer deposits. Customer loans, net of [indiscernible], continued to decrease in Q1, mainly due to the use of excess liquidity buffers by client, while the trend of corporate deposits became positive again in April. The Loan to Deposit ratio improved compared to the [indiscernible] of 2022.

Slide 12. We continue to be very effective at managing costs, which are down excluding depreciation. Administrative expenses were affected by an increase in energy cost of over €20 million and will be down net of these components. Depreciation is up, and we keep investing for growth, especially in technology.

Slide 13. Our cost/Income ratio is among the best in Europe. Now, please turn to Slide 14 to see how ISP asset quality continues to be strong and one of the best in Europe. The net NPA ratio is at 1%, already achieving the business plan target and NPL inflows are at a historical low. Keep in mind that we have reduced NPL stock by €54 billion since the peak in 2015.

Slide 15. NPL stock ratio are among the best in Europe. And believe me, it is impressive to look an Italian bank to be the best-in-class in terms of net non-performing loans in Europe.

Slide 16 now. Our cost of risk stood at 17 basis points, in line with being a 0 NPL and 0 Russia exposure bank. €0.9 billion in overlays is still available with no release in Q1. Slide 17. As you can see on this slide, NPL coverage continued to grow and reached 50%.

Slide 18. In Q1, we further reduced cross-border exposure and total Russia exposure is approaching 0. Let me take you to Slide 19 to give you some color on the capital position. The common equity Tier 1 ratio is up to 13.7% after a [indiscernible] point impact from regulatory headwinds and a €1.4 billion deduction of accrued dividends. As you can see, we clearly have significant excess capital even when taking into account the remaining close to 30 basis points of expected regulatory headwinds.

Slide 20. Our excellent performance allows us, once again, to create sustainable benefits for all stakeholders and not only for our shareholders. Our people, households, business in the public sector clearly benefit from our increasing profitability. For example, in Q1, we registered €1.4 billion in taxes, €300 million more than in Q1 last year as net interest income drove increase in net income. In 2022, we gave €80 million to ISP people to help with inflection. In Q1, semis businesses received €15 billion in new medium/long-term lending, of which 10 in Italy. Furthermore, in Q1, we helped more than 900 Italian companies to reforming status, preserving around 4,500 jobs. Since 2014, we have helped more than 138,000 Italian companies. Finally, let me remind you that almost 40% of cash dividends go directly to Italian households and two foundations to support their charitable programs for local communities. Increasing cash dividends will also favor an increase in tax revenues for the State.

Slide 22. The business plan. In addition to delivering excellent results, the people of Intesa Sanpaolo are working across all the industrial initiatives of the business plan. Technology is the key accelerator of our business plan and our technology evolution is moving quickly with significant investments. In particular, let me underline the strong progress of two key pillars. Isybank, our digital bank is already running its pilot phase of selected clients and we launched commercially by the summer. Our artificial intelligence program was launched with more than 60 dedicated IS people and a target of around 160 use cases to support the business plan initiatives. Thirty are already [indiscernible] and other 40 operational by the end of the year. Both Isybank and Artificial Intelligence solution will leverage the two cloud regions in Turin and Milano built as part of the Sky Rocket deal with Google and team. You can go through the details of the plan initiatives in the next 11 slide and on Slide 32, you can see our leading ESG position in sustainability indexes and rankings.

And on Slide 33, you can see what we are doing for our people. I want to highlight that diversity and inclusion is a priority for Intesa Sanpaolo. The largest private employer in Italy. The key international diversity inclusion rankings place our group in leading positions in Europe and worldwide. But for the sake of time, let's move to Slide 36 to see how ISP is well equipped to succeed in a challenging environment. Slide 36. The Italian economy is strong, thanks to solid fundamentals, world-leading outsold wealth, and very resilient SMEs. Growth for this year will be higher than previously forecast and lower-than-expected energy prices will help easy inflationary pressure. And as inflation slows, the economy is set to [indiscernible].

Slide 37. As you can see here, we are far better equipped than its European peers, thanks to our rock-solid capital base, strong liquidity position and a resilient, well diversified and efficient business model. Slide 38. Let me recap the key points demonstrating how ISP is well equipped to further succeed in the future. Our resilient, diversified and profitable business model is over delivering. Our capital position is and will remain strong. ZNPL bank status has already been achieved, and our Russia exposure is approaching zero.

Net interest income provides a strong tailwind. We remain a wealth management, protection and advisory leader with fully owned product factories and more than €1.2 trillion in customer financial assets. We are set to succeed in any interest rate environment. We have high strategic flexibility in managing costs. Our liquidity position is strong, and the execution of the business plan is proceeding at full speed.

To finish to Slide 39 for the outlook. The best ever start to the year means we can comfortably upgrade our full year net income guidance, allowing us to reward our shareholders in a generous way, always a priority for ISP, and me personally. This year, we will return at least €5.8 billion, taking into account the dividend we will pay in May, the second tranche of buyback completed in April and the interim dividend that as usual, will be paid in November based on the full year net income guidance. Additional capital distribution will be evaluated at the end of the year.

I want to highlight that all our stakeholders and not only shareholders will benefit from our performance. Thank you for your attention, and I'm now happy to answer your questions.

[Operator]

Thank you, sir. We are now going to proceed with our first question. And the questions come from the line of Antonio Reale from Bank of America.

[Antonio Reale, Bank of America Merrill Lynch]

It's Antonio from Bank of America. I have two questions, please. One on the use of capital. And secondly, on deposits betas net interest income, please. So the first one, you've restored your capital in a couple of quarters with capital back above 14%. And the organic generation that we expect to come, I mean more than a funding or dividend distribution going forward.

So your capital is inevitably going to move further away from your 12% target that you had. The question is what your strategic priority stand as you already had the largest [indiscernible] just completed, share back what's the best way for bank data to look at this capital? Second question is really on NII. Second question is really on the NII. What have you assumed for the possibility you are above [indiscernible] billion for this year? [indiscernible] -- we have a large share of accounting coming from retail, which has proven to be most resilient in terms of possibility. So I wonder what you've assumed as your end of year deposit beta? So in Q4 -- and if you can share a sensitivity of AI changes from different level of possibilities that would be very helpful. I'm trying to understand how close we are to peak and NII and what part of this is sustainable also in 2024. Thank you.

[Carlo Messina, MD, CEO, GM & Executive Director]

So thank you very much, Antonio. I want to start from capital. Just to give you and all the other analysts and investors, my view on the capital position of Intesa Sanpaolo. As you know, we last year were surprised by the potential figures of the regulatory headwinds. And we decided to move in acceleration of some actions that was already considered in our business plan. Then we delivered a very good performance. Also in this quarter, we continued in the action through a reduction of loans and exposure towards banks and optimization of kind of guarantees, what we call accuracy in our risk-weighted assets.

So in a sense, more than compensated the impact of the regulatory headwinds. We remain with a portion of this impact that could happen in the next quarters as soon as our model will be reviewed and the probability of the fault of our clients will be moved in the different files in the next quarters. But on looking at capital position, also for 2023, we remain in a very comfortable position, and we can talk in a figure that could be within 13.5% and 14%.

So we remain in a number that can allow us in 2024 and 2025 to have significant real excess capital in comparison to our risk profile, especially if you look post Basel IV because now we are approaching and all the other banks will have to make a clear disclosure on this point of post Basel IV for now our our way of looking at medium-term excess capital is to consider the impact of Basel IV but at the same time also considering the impact of the EPAs that are fully phased in and not considered but are fully loaded, we are going to consider.

Within 2028, so in 3 years' time from the adoption of Basel IV, and at the end, we will have the recover of another 100 percentage point that is equivalent to a capital increase. And so we can spend easily at 15% during the period of Basel IV. This means that looking at our risk profile with 0 NPL very low Level 2, Level 3 assets, a very low risk profile in our group give us with a significant excess capital in 2023, but even more in the next years, looking at the future of Intesa Sanpaolo.

So in terms of capital allocation, 12% is already considering a portion of capital that we have to consider not only for the business mix, objectivity, but also to be part of a company in a country with a significant public debt with a number of point of strength that are, in my view, underestimated by the market, by the majority of the international community because in Italy, households and SMEs now are probably the best in Europe. And in Italy, you cannot find a place in a hotel.

So also the levers of tourism is totally underestimate in the potential that we have in GDP growth for the future in our country. But in any case, 12% is something that for us is already with a significant portion of capital to face unexpected losses. So the point of usage of capital could be the usage in terms of an acquisition or redeployment to the shareholders. In terms of usage for the acquisition, we do not see any kind of acquisition that can create value for our shareholders.

And I want also to remain strongly concentrated in executing the business plan because I'm convinced that our business model is the right business model to remain in an environment of interest rate that could be between 3% and 4% and then with a decrease in interest rates. But in any case, now the environment is an environment in which interest rates will not move more to 0. So it could be 2%, it could be 3%. But in this environment, a wealth management and protection company will be the winning business model. So starting from 2024, again, we will be a clear leader in terms of business model. So having said that, remaining concentrated on business plan is a priority. So we have an excess capital that could be redeployed to our shareholders. The real point is to make the right check in the right timing. In this year, we are already giving a significant amount of cash dividends to our shareholders.

So for the time being, I do not see any kind of need to make a clear disclosure of a further capital that can be redeployed. But at the end of the year, it is clear that we will have to consider a portion of excess capital to be redeployed to the market in some form. Then for the timing, we will have to evaluate our position in terms of price to book because the price to book above 1, in my view, it is not so in favor of share buyback, but could be more in favor of distribution of reserves. But we will see what can happen at the end of the year. But it is absolutely clear that now we are in a mood of excess capital position. From the other part of the story, that is net interest income, the short-term subsumption is -- today, we are in a unique condition looking at net interest income, but was not a surprise for the manager of Intesa Sanpaolo.

We had such a negative markdown during the negative interest rate that for us to have this benefit in case of rebound of interest rate is something that we can consider normal. And in the last 2 or 3 years, we increased our market share in a country reaching in the real region a position in the real region in which there is a lot of wealth. A position close to 30%. So we are, by definition, a player in the retail deposits and wealth management in the local field. So this means that you can benefit from an increase in terms of net interest income that is much higher than all the other peers in Europe. This increase will continue.

We have no pressure to increase our cost deposits. We remain with a very low bit below 10% and in a mix between retail and corporate deposits, and the mix, the medium is below 10%. Having said that, and having listened to other peers talking about a beta of 40 basis points, we decided to try to use the same approach of other peers, not because it's our estimate, because, April, we continue to be in the same position of beta and May starting in the same way. So there will be a timing in which there will be a pass-through of this increase to depositors that are not penalized from this decision because depositor can decide to ask for bonds, for medium-term instrument to move into liquidity products.

So also this pressure to say, yes, you are penalizing your clients in my view, is something populistic. So there is a clear proposition for the bank that is -- you have a service in current account, but if you want to have something different, you can ask and you have a lot of product that can be used. The position of 40% beta is moving from -- at this point from May at the end of the year is to consider there could be a request to have some more remuneration for medium, is an assumption that in my view is really conservative. But it is what we have considered to reach the €7 billion net income forecast that we have disclosed to the market.

[Operator]

We are now going to proceed with our next question. The questions come from the line of Delphine Lee from JPMorgan.

[Delphine Lee, JPMorgan Chase & Co.]

My first one is just to come back to NII. Because I don't think you've answered the question. I mean is the deposit beta assumption for your €13 billion, 40% by year-end? And as a result, I mean is it still 35%, 40% for the average of the year? Or has that come down a bit towards 30%? And then also, what's the sensitivity in terms of deposit beta to 1 percentage point higher or lower from here? And then my second question is on fees and commission, which were quite weak this quarter. Could you maybe just give us a bit of flavor of what kind of runway we should expect for the full year? I think previously, you were talking about something that could be stable, but are you seeing some improvement so far in the quarter in terms of the trends? If you could just give us some color, that would be helpful.

[Carlo Messina, MD, CEO, GM & Executive Director]

So net interest income. So deposit beta starting from May 40% means that we will have, on a yearly basis below 30% beta on the total amount of deposits. This figure, as I told you and I told to all the investors is, in my view, really conservative. So that's my view looking at the position of the bank. And so I think that at the end, the expectation on this figure could give us a positive surprise also considering this forecast. The 1% sensitivity should be more [indiscernible] between €35 million and €40 million per 1% beta. But again, the -- what I consider really important on this analysis on net interest income is also the correlation with the asset under administration and with the loan book of our clients.

So if you allow me, I want to give you my managerial view on net interest income and on deposit base. At the end, what we are seeing today in Italy is a phenomenon of a number of corporate counterparties, so not only large corporate but also a medium-sized company. That during the period of the pandemic decided to increase their request of loans and in a different way from the past, receiving loans with some guarantee with some form of positive coming from the government, from the bank. They decided to redeposit not the usual 20% that was the historical way so receiving 100 of loans in deposit 20. But receiving €10 million of loans, you deposited the €60 million. So the point today is that these companies that are good companies, good so-called a portion of this extra deposit to finance their needs. So this reduced the loan book demand [indiscernible] improving the quality of the system of the SMEs in the market.

So this we reinforce the quality of the cost of risk in our country. And at the same time, in the movement of the -- some part of the savings of the Italian families into assets under administration, we are creating the condition for -- in 2024 as soon as the interest rate will have a trend of reduction to realize -- to make in evidence capital gains in this portfolio of clients. And this will be the perfect environment for a wealth management company to move these funds or to work with the clients in order to have the movements of these funds into asset under management, that was the original delivery [indiscernible] San Paulo in moving the movement.

So to look only to a line of economic figures is, for sure, important in this phase in which you have a clear dominant position of the net interest income. But I ask you and all of you to not forget the correlation that you can have between deposits, loans, assets under administration, and the business model of an organization. In terms of fee and commission in this quarter, some point of attention of the strong derisking that we realized in the fourth quarter and a portion of the revenues that were related with this amount of loans are in the commission side, especially in the corporate and investment banking division.

So we had something like a pitstop in the commercial revenues. And then at the same time, we decided to reduce the contribution from the upfront commissions that in this quarter are the minimum level -- absolutely at the minimum level and €100 million below than the second quarter of 2022 because we do not need to increase the revenue [indiscernible] to something that is substantial anticipation of revenues. So we are working in order to be sure not to create an environment of upfront fees but to create an environment in which we can have a significant rebound in 2024. That's the position.

[Operator]

And the next questions comes from the line of Giovanni Razzoli from Deutsche Bank.

[Giovanni Razzoli, Deutsche Bank]

And the first one is related to the deposits. So basically, what you are saying is that you are incorporating a 40% deposit beta at year-end that by the way was the same assumption of the last quarter, if I'm not mistaken, but you don't see any pressure to increase the pass-through on the deposit. I was wondering whether sooner or later, do you think that as a bank or given your funding structure, you will be reverting your commercial policy and start offering also in effort to your clients or bonds, and this may inflate the cost of funding. So it's more an issue of mix effect and not an issue of pricing per se in terms of inflation of cost of funding. My understanding is that given the loan deposit ratio is so low, this may happen later in '25 or even further in time. So I was wondering whether this understanding is correct because in that case, you still have a strong tailwind in NII also in '24 regardless of the evolution of your funding base. And the second question, allow me to ask again about your dividend start because the line was quite bad. You said that if you were now at year-end, you would be in favor of returning part of your excess capital to shareholders, right? Did I get it correctly?

[Carlo Messina, MD, CEO, GM & Executive Director]

So I'm always in favor of award measure. The real point is to be sure not to make actions that can reduce the sustainability of results of the . For time being, we remain concentrated in increasing the cash dividends to the increase of net income. We are working at the same time to increase the excess capital and the evidence are the last two quarters. But the real excess capital because with 0 NPL plus 0 Level 2, Level 3. So excess capital is a real excess capital and to make analysis considering also the evolution of 2024. But looking at the trend, so positive GDP in 2024, I think that the evaluation could be to make analysis in favor of potential distribution. But we will see at the end of the year, and we will take the decision also with the Board of Directors. For the time being, our position is that each year will redefine potential redeployment of excess capital, but at the end of the year. It is clear that the acceleration in terms of excess capital generation is really significant, but we will take decision at the end of the year.

My personal point is that I'm positive. You see the deposits and the composition of our deposits. So today, we have 0 medium-term instruments in our deposit base, close to zero. So when we talk about 40%, we are talking about using some -- in some way, a mix effect.

So not increasing the current account remuneration, but to move a portion into 1-year or 2-year certificate of deposits or to make -- to allow our clients to have bonds and something that could be medium, long-term instrument. But our perception is that in an environment in which we remain with interest rate with a reduction, but not significant reduction in 2024, interest rate and net interest income could be again a tailwind.

So not a reversion of a positive trend. If reduction will be moving close to zero, we will have a clear benefit in terms of commissions due to our wealth management and protection strong base. And we maintained, as you can see from our figure, the amount of asset under administration management and insurance. And so we can be ready also to reaccelerate in terms of fee and commission. But if interest rate will remain in a positive territory and not reducing below 3%, 2.5%, my expectation is that we can have a benefit also in 2024. Then we will check during 2023, if you ask me today, that that's my view for 2024.

[Operator]

We are now going to proceed with our next question. The questions come from the line of Andrea Lisi from Equita.

[Andrea Lisi, Equita]

My first one would be on the capital with regards to the RWA management actions that you have undertaken in Q4 and also continued in Q1. Is there any more thought to come that could benefit and offset the remaining 30 basis points of regulatory headwinds to come? And my second question would be on the cost of risk this quarter was very low. I was wondering whether you could give us any color on the Q1 as well as the outlook for the full year?

[Carlo Messina, MD, CEO, GM & Executive Director]

Yes. Starting from cost of risk. Our expectation is that the run rate for the cost of risk for this year could be 30 basis points. we can add less than 10 basis points in terms of the potential needed to make some of non-performing loans in order to maintain 1% NPL ratio. But in any case, in our forecast, we have a cost of risk that is between 35 basis points and 40 basis points.

So this is the cost of risk embedded in the €7 billion forecast for the market. The evidence today, so if we make an inertial trend of what we are seeing in terms of new inflows is absolutely to be in a position to over deliver in comparison to this 35, 40 basis points and maintaining the €900 million in terms of overlay. So the condition in Italy, looking at our portfolio, so the quality of portfolio is really, really positive.

And we do not see any kind of strategic threats in terms of cost of risk, maintaining this kind of dynamics in terms of positive GDP. And because we think that there will be an acceleration in the GDP in 2024 for instance for the future can remain very positive. And do not forget that having reached a total amount of net non-performing loans of €5 billion.4 billion. You can have significant threats in terms of further provisions that you have to add. Russia is no more an issue. So at the end, this is the run rate of the company with the very low level of net non-performing loans that we have today and with a positive GDP in the country.

Let me add on this point. I made some statement at the beginning, but also there is a lot of attention in our country and outside the country on next-generation new funds. So on acceleration of investments that are fundamental then you can call next generation. You can call investments in by yourself within the country, but we need investments as all the other European countries. But in Italy today, we have this boom in terms of tourism that is really unbelievable.

So it is impossible to find a place in Italy in 5-star hotel if you want to find and if you want to make a vacation. So that's not only from the Italian people, but also from international people. So the country is in a unique position, in my view, to have and to continue to have a positive GDP. This transforms into a cost of risk that will remain very low. Looking at the capital position, the -- what we realized during this quarter is to work on -- we had a reduction in terms of loans with corporate and with banks. So we had the benefit from this area. Then we have also retained earnings 30%, so 70% pay, 30% return earning. We had a positive contribution from actions that we made in recovering collateral within all our loan book.

We have room to have further actions during the second part of 2023. I cannot tell you if we will be in the position to totally compensate the 30 basis points, but our target is to work in order to minimize the net impact of these regulatory headwinds that are still remaining. What we will have is, in any case, a positive then in the Basel IV environment because at that point, we will be in a unique position to have the impact in a number of areas of our portfolio that can be positive for the Basel IV impact in 2025.

So net-net, we think that we can continue to have positive results in our common equity. Then if there will be 1 short 30 basis points in the second quarter, difficult to say that we can be in a position to have a growth in terms of common equity. But if we have the 30 basis points in the second quarter, then we will have a recovery in the third and fourth quarter. We will see dynamics during this quarter.

[Operator]

We are now going to proceed with our next question. The questions come from the line of Andrea Lisi from Equita.

[Andrea Lisi, Equita]

The first one is on the N10 million of overlays you have. If in the next years, this year or next year, you don't see an acceleration [indiscernible] of asset quality, which are your plans for these overlays? Are you planning to release them? And the second question is on -- if you can provide us some update for the following 2 years, 2024 and 2025. So if the 7 billion guidance you see for 2023 can be considered kind of a floor for the following year?

[Carlo Messina, MD, CEO, GM & Executive Director]

So I didn't understand -- the second question was if we can consider €7 billion floor and then this means that in 2024, 2025, we can deliver more than 7 billion?

[Andrea Lisi, Equita]

Yes.

[Carlo Messina, MD, CEO, GM & Executive Director]

Okay. So I want to start from overlays, then I will elaborate on the trend in profitability. So looking at overlays, our estimates is that we will not use in 2023, and we will not use in 2024. It's a way of maintaining a very conservative approach, then we will see. Because if you have a specific area of need in which you have to face some negative trend in a position we can use also in 2023. So overlays are there because if there are unexpected events you can use. But in our forecast, we have not considered to use.

And also in this kind of brainstorming that I can make with you on the future profitability, our expectation is that we will not use these kind of overlays. Then reality could be completely different because it is impossible that you can have not a deal in which you need to have some usage of these overlays. €7 billion is an amount in which we will have, for sure, a significant contribution from revenues, significant contribution from net interest income.

So that's for sure. This will be the main driver, and probably we can exceed also our expectation in terms of trend of net interest income. On fee and commission, we will remain in an approach that is -- we do not need to increase fee and commissions in a year like the 2023, in which we have a boom of net interest income. So what we need is to create conditions in the structural portion that can generate commissions, so assets under administration, the different mix of assets under management. So increasing liquidity in order to move into equity.

So a number of actions that we are creating in order to have a clear acceleration of fee and commissions during 2024. In insurance business is a machine that can generate cash quarter-by-quarter, and can accelerate mainly due to property and casualty. So our expectation is that we can have increasing contribution during 2023, and we can continue to have increasing contribution in 2024 and '5 and for the future, like is for wealth management. At the same time, trading income.

Trading income for 2023, we do not need to have significant contribution from this item. And we are not considering in the €7 billion. Then there could be some potential acceleration in this area, but we think that the normal rate would be much higher than the one that we are having in 2023, and we can accelerate then in 2024 and other years. On the cost base, this year, we will remain a strong discipline on the cost base, and we can have a slight increase in the cost base, but 2024 can then move into a reversal of this increase with a point of attention that is the negotiation with trade unions for the renewal of the contracts with people working in the banking sector. But in any case, we will deliver a reduction then in 2024 and for the years 2025 and in the future.

Looking at loan loss provision, 40 basis points can be considered at the maximum in a GDP positive environment. So at the end, it is clear that what we can consider for the future could be a very positive profitability for our shareholders. The real figure, we need to have more information about the dynamic of the Euribor, and the dynamic of the market in order to better understand the rebound in terms of commissions, but I'm totally confident we can continue to deliver very strong net income and that €7 million could be a trigger that it is absolutely something that we can improve year-by-year.

[Operator]

We are now going to proceed with our next question. The questions come from the line of Christian Carrese from Intermonte.

[Christian Carrese, Intermonte]

Just a few clarification. First of all, on net interest income, if you can elaborate on which kind of assumption on 1 month [indiscernible] you changed the guidance for 2023. And in terms of loans, I would expect a reduction in the year. So if you can give us an idea? Secondly, on capital ratio, the evolution of the quarter, flattish risk-weighted assets. I was wondering if the regulatory headwinds included the IFRS 17 impact in the quarter? Third, on costs, I understand that there could be a slight pick up in 2023. But what kind of assumptions have you done in terms of renewal of the labor contract in terms of inflation cost? And finally, on your thoughts, if you can share with us your thoughts on the hypothesis of a windfall tax that we read on the newspaper.

[Carlo Messina, MD, CEO, GM & Executive Director]

So starting from the tax. I made a statement just before the presentation in which I was considering the real situation that we have in, not only in Italy, but all over the world. So you have a lot of in quality, a lot of increase in poverty, and then at the same time, a lot of concentration of positive impacts in a number of players and increasing inequalities.

So this means that we are a player that can look at corporate social responsibility like Intesa Sanpaolo because we are the player that is managing the most important plane for inequality in the country through increasing our support to poverty, giving food, shelter, so giving a lot of money for people that are [indiscernible]. We are the most important player today in investing in social housing. We are the most important player investing for young people in terms of education. We are the player that is investing a significant amount of money also for women and for programs that can [indiscernible] young women to have education and to be of the world in which you can work with a good position. So we are involved today in something that are the most important part of the intervention in our country in order to reduce inequality.

So if the government will decide to have a new form of taxation, extraordinary taxation obvious, that could be only limited in one year's time, Intesa Sanpaolo will respect the decision of the government. So we will -- we are in a position of respecting any kind of decision from government. What we ask is to have a finalization of this task in order to work for inequalities within the country.

So to be sure that the money is not used to cover the public debt of the country, but to work in order to improve the conditions of people that are in difficult situation within the country. If this is the task and the purpose of a taxation that I'm not sure that they are working on taxation, but just on a brainstorming basis, I have to tell you that in Intesa Sanpaolo, we'll be in a position not to oppose to a taxation from the government, but should be finalized in order to help the people in need in our country. Having said that, in Italy, we have already the taxation that is at a level not comparable with the other countries.

So that's the reason why taxation in case of a decision should be an exceptional taxation. And also the situation of increasing net interest income is bringing already the possibility of the State to use money in order to help people in a difficult situation. Because if you look at our figure with an increase of roughly €1 billion in terms of net income, mainly coming from net interest income and then provision mainly from net interest income, we will have to pay in March, €300 million more in terms of taxes. So due to the fact that interest rates increased, the State is receiving €300 million more in terms of taxation.

So they can use this money in order to help people in need. At the same time, our approach of paying cash dividends and not share buyback is an approach that is creating benefit in terms of retail investors and foundation. And foundation are giving money for the social need and retail receive money they can use for their needs. At the same time, on dividends states, increasing dividend states received taxation. So there are a lot of correlation in an improving profitability for a company that also without a taxation can create and is creating benefit for the figure of our State.

So just today, Intesa Sanpaolo is increasing by €300 million. So from stretch, the government can have €300 million in terms of taxation that they can use for the purposes of improving condition of people that are in difficult situation. Now, moving to the cost and the dynamic of the cost within the company. We have considered in our €7 billion worst-case scenario in terms of impact deriving from the negotiation with trade unions. But I will not disclose the figure because there will be a negotiation. And so much better to remain with possibility of making a negotiation. So that's my point. But we have been really conservative. And also because I have to tell you that if my people will receive increase in their salary, I will be happy.

So that's my personal view. The right mix should be the right combination for the medium term of the organization. But we have to realize the negotiation with trade unions. Looking at capital evolution, IFRS 17, the impact is already embedded in [indiscernible] March. So that's the impact -- and you can find in our figures in March. So that's already embedded. In terms of net interest income -- your question was, sorry to be sure to have -- Yes, we have considered an average Euribor between 20 and 30.

[Operator]

We are now going to proceed with our next question. And the question comes from the line of Benjie Creelan-Sandford from Jefferies.

[Benjie Creelan-Sandford, Jefferies]

Just a couple of quick follow-ups from me. The first one was on net interest income. Just a couple of figures, if you have some to hand. I was wondering whether you could tell us where the average loan or asset yields to that in the first quarter. I think it was 2.2% at the end of 2022. And also just what the average customer deposit cost was in the quarter as well, just to get a sense of the pass-through to date. The second question was just another follow-up on fee income. So I think you said earlier that the measures you've taken on RWA in 4Q had a bit of a drag on fee income this quarter, given that you're continuing to take some additional measures during this quarter and potentially next should we expect another sort of follow-on drag on fee income going forward? Or I guess the simpler way to ask the question is, I think last quarter, you guided to fees being flattish to slightly up for this year. Does that guidance still stand?

[Carlo Messina, MD, CEO, GM & Executive Director]

Sorry, could you repeat the question related to net interest income? Because I'm not sure to have understood your question. So if you can repeat the question.

[Benjie Creelan-Sandford, Jefferies]

Yes. So it was just what the average -- the level -- the absolute number in terms of average loan rate in the quarter and also the average deposit cost in the quarter just in terms of the absolute numbers.

[Carlo Messina, MD, CEO, GM & Executive Director]

So looking at the figures on our liability side, we are in a range of looking at the cost base in our retail network, we are talking about 10 basis points. And all the average, considering all the different items is close to 30 basis points. And on the asset side, is close to 3% today. So looking at this figure, you can have the clear evidence of what can be the acceleration that we can have in net interest income also in the next quarters.

Looking at fee and commissions, -- so we do not expect to continue to have a negative impact. So when we are talking about a negative impact, we are talking about something like €30 million, €40 million. So we are not talking about something that can move all the level of fee and commissions in [indiscernible] in '23 in comparison in 2022. So the reduction here is with the assets can have some further impact on fee and commissions. But the main reason is that we changed the policy of having some form of contribution from upfront fees into recurring fees.

So as I told in the previous answer, in March 2022, we used to have more than €200 million upfront. Now we are on a run rate of €100 million. So this means that this is a reduction in terms of contribution. And when we gave the guidance of flat of -- with not significant increase in terms of fee and commissions. We were considering from fees in a normal trend that could be more or less €200 million. So this reduction of policy that is justified by the fact that we have already a significant amount, and we have not to demonstrate to the investors that we are able to increase our commission base because it is clear that we are a wealth management and protection company. So the need to work for commission for us is not a priority in terms of marketing messages.

At the same time, what I was expecting in this first part of the year was to have a much higher contribution from wealth management product. But the majority of the attitudes from our household clients was to move into asset under administration product. But as I told you, this means we had an increase in this quarter of more than €8 billion in terms of net inflows for assets and administration products.

So this means that during 2023, you can have a lower contribution, but these are fuel for 2024 because if interest rate will have a trend in terms of reduction, these clients will have a capital gain in this product, and it is typical for us our client can have a capital gain, the attitude of this client is to be more in favor of moving is saving portfolio. So we are in a position of creating condition to improve 2024 commissions. And also if we have some slight reduction, I have to tell you not think that I consider something that can create some negative position for the group.

So at the end, we are working for staying in sustainability for the results in the next 10 years, like we delivered in the last 10 years. So it is not €100 million of fee and commission that can change the position of Intesa Sanpaolo.

[Operator]

We are now going to proceed with our next question. And the next question comes from the line of Azzurra Guelfi from Citi.

[Azzurra Guelfi, Citigroup]

Two questions from me. One is on the regulatory environment about the potential review of the LCR or the government guarantees. I've seen the disclosure that you've given on your deposit and the level of guarantee deposit that you have. But how do you think about the potential development at the industry level? And would this potentially impact the assumption that the phaseout of systemic charges over 2024 and 2025? The second one is on cost.

You are continuing to surprise positively the market on your progression on cost. I hear you about the negotiation with the Trade Union and everything that you mentioned. But when we look in the -- for a couple of few years, do you expect your target for 2025 to be not ambitious there enough in a way in terms of savings because you are continuing to make progress on this? And if you can share with us what are the main actions that are still pending and could result in better cost because your cost income clearly is benefiting a lot from the revenue environment, but I think we should acknowledge also the that you are doing on controlling your cost base.

[Carlo Messina, MD, CEO, GM & Executive Director]

Yes, Azzurra. Your point on cost is absolutely a strategic one. And then I will leave the floor for the regulatory implication to Stefano. But on the cost side, your point is one of the consideration that we are working on within the group because at the same time, working with this environment in 2023. I'm in a process of redefinition of all the most important part of the levers that we had in our original plan in order to improve the acceleration in terms of levers or sustainability of these levers for the future. That reason why on capital we started to look at 2028.

So the timing in which we can have this stronger contribution in terms of DTAs that can increase by 100 basis points, our capital base. So moving [indiscernible] not concentrated on 2025, but looking for the real future. So it is clear that -- the real point of attention is the technological improvement for the organization and the possibility to accelerate also what we are doing with Isybank and with all the technological improvement of the organization. So this means that we will have to probably to pay some deal in terms of depreciation. And in this quarter, you have the evidence of the acceleration in terms of investments.

And as I told in the previous question, we are here to stay for the next 20 years sustainable for the future. So we want to create a bank that can be a clear leader in the market.

So there are two points to have a leader in the next years. One is the wealth management protection and advisory proposition. And in Wealth Management, I consider also the retail franchise for deposits. If you are a leader in this area, you can be a winner in the next 10 years' time. But at the same time, you have to be a winner in terms of technology. So that's absolutely what we are working on. So not easy to say what could be the real implication in the next year, in the next two years in terms of cost reduction. For sure, we are creating [indiscernible] see significant reduction in terms of IT cost for the future, and also the branch network can be absolutely under scrutiny for the next year. That's the reason why when we are now working in this approach of medium, long term, we are not only looking at 2025, but we are working for another 2 or 3 years' time in order to be sure to create conditions to have the perfect organization.

Revenues are, by definition, an area that can have a lot of volatility, as you told. Cost base is something that is strategic. We have a number of contingency plan. But if you look in this perspective of 3-, 5-year times, you need to have structural actions.

And the improvement in technology that we will have to test in this 2023 will be a key point to check if this proposition to move then the system of total machines or just to make it easy. But the implication of the improvement in our technological framework that we will realize through Isybank can be moved with acceleration within all the organization, then we'll have the possibility to reduce in a strong way of the cost base with a significant improvement in terms of technological cost base for the organization. If this is the case, it is possible to continue to have cost reduction within our cost base.

But in any case, also looking at volatility in our cost base, if you look -- if you are -- and if you will remain in environment between 2% and 3% Euribor interest rate, in any case, the bulk of revenues that we will have will be really significant. Then if you add the Wealth Management and protection proposition and the acceleration in that area, you will be in a cost income proposition that will be really destructive also in the medium, long term. But on this point, I will be more precise close to the end of the year because for the timing, we'll be in a position to evaluate or a review of our business plan with some extension of some years or a redefinition of 2025 targets.

[Unidentified Company Representative]

Okay. On LCR, I mean to be sincere we don't expect any regulatory change on LCR. You know that LCR is already a very strict and distressed measure of liquidity. You will see on our third pillar of the balance sheet that are all the numbers. You see that in our LCR, the calculation takes into account an outflow of deposits of more than €80 million. So I mean this is a very, very strong measure of liquidity loss in foreign retail bank.

So I don't think that they will change. Of course, there will be a strict application that unfortunately didn't happen with the U.S. regional banks. Otherwise, probably we will not be talking about this today. Don't forget that the repayment of TLTRO doesn't change the structural liquidity of a bank because TLTRO is financing that we get against collateral.

So on the one hand, we will give back cash to ECB, but we will get back the collateral. And so even though you would see an optical effect on the LCR because let's say the arbitrage of taking money to from ECB are deposit will finish, but the collateral is with the banks. And banks can use this collateral in-market transaction, collateralized transaction to manage any potential outflows of liquidity.

So I don't see TLTRO to be into repayment as a driver of any change in the structural liquidity of banks remains very solid in Italy and in Europe in general.

By the way, the usage and the participation to main refinancing operations, so the weekly auction called MRO, OCB will go back being a standard practice as it has always been in the past. Of course, with TLTRO, MRO usage has been finished, but it will go back. And this has been clearly stated by Mr. Lagarde yesterday in the conference call. It doesn't seem that they are at all worried about the liquidity of European banks, because as you have seen no special instrument has been created or announced to manage the repayment [indiscernible]. So all the banks seem to have enough reserves. So the answer is no, we don't expect any regulatory evolution.

[Operator]

Due to the time constraint, we are going to stop the question-and-answer session here. I will now hand back the conference to Mr. Carlo Messina for closing remarks.

[Carlo Messina, MD, CEO, GM & Executive Director]

So I want just to put the emphasis on what we consider the hard job of all the people within Intesa Sanpaolo. I think that we are -- we demonstrated in the last years to be really committed to execute our plan to create value for our shareholders, but also to be part of a community and corporate social responsibility is part of our DNA. So we think that in an environment like this, in which it is absolutely likely that we can deliver €7 billion, 2023. And in the next few years, we can also accelerate our performance and giving significant cash dividend payout and evaluating further excess capital redeployment. It is also a responsibility for a bank like us to do something that it is very important for the inequality within the country. So I can confirm my personal commitment to shareholders to increase profitability, but also my personal commitment towards the community in Italy to allow that Intesa Sanpaolo can be close to people in need in this country. So thank you very much, and see you next conference call.

[Operator]

Thank you. Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.