Intesa Sanpaolo SpA

MIL:ISP

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Conference Call of Intesa Sanpaolo for the presentation of the Half Year Results 2023 hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Razia and I'll be your coordinator for today's conference. At the end of the presentation there will be a question-and-answer session. [Operator Instructions] I remind you that today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Carlo Messina CEO. Sir, you may begin.

[Carlo Messina, Managing Director and Chief Executive Officer]

Thank you very much. Welcome to our first half 2023 results conference call. This is Carlo Messina, Chief Executive Officer. And I'm here with Stefan Del Punta, CFO; Marco Delfrate and Andrea Tamagnini, Investor Relations Officers; and Luca Bocca, Head of Group Planning and Control. Also with us today are Massimo Proverbio, the Group Chief of our Technology and Data together with Paola Papanicolaou, Head of Transformation; Stefano Barrese, Head of the Banca dei Territori, together with Virginia Borla, Head of the Division Business Governance; and Tommaso Corcos, Head of our Private Banking Division.

They are here with us today because I'll not only walk you through a very high-quality set of results, but we will also give you a preview of our tech transformation that is moving quickly thanks to significant investments. Massimo, Paola, Stefano, Virginia and Tommaso will help me to answer all your questions on technology and the two important digital business initiatives we launched recently, IsyBank and Fideuram Direct.

We have just closed the best six months ever with net income reaching EUR4.2 billion, of which EUR2.3 billion in Q2. They were the best six months and the best quarter since 2007 for net income and they were also the best six months and the best quarter ever for operating income, operating margin and gross income. Strong results means that we can raise our full year net income guidance to well above EUR7 billion. And looking ahead, 2024 and 2025 net income will be higher than in 2023.

Rewarding shareholders while maintaining a solid capital position is embedded in our DNA. Our dividend yield is the highest in Europe at 11%. In the first half, we accrued cash dividends of EUR3 billion and completed the EUR1.7 billion buyback. In November, we will pay an interim dividend of at least EUR2.45 billion to shareholders. We remain committed to a 70% cash payout ratio and any additional capital distribution will be evaluated year-by-year. We are highly profit profitable, liquid and CapEx solid. Russia exposure was down even more close to zero and we further strengthened our zero NPL status.

The common equity ratio is at 14% before the Q2 impact from the voluntary deduction regarding calendar provisioning that will give us benefits in the future in terms of Pillar 2 requirements and cost of risk. Considering DTA, common equity stands above 15%. Taking into account our very low risk profile, it is clear that we have a significant excess capital that can be returned to our shareholders. In Q2, customer financial assets increased by EUR37 billion to EUR1.3 trillion, with an increase of EUR20 billion in direct customer deposits.

After these set of excellent results, let's turn to our digital journey. We are going all in our tech transformation and evolving fast. We see a need for speed that is all about building the bank to succeed in the next decade. We have already invested EUR1.8 billion in technology, while building Isytech, the tech backbone of our group. Leveraging Isytech in June, we launched in less than one year our state-of-the-art digital bank, IsyBank, based on cloud technology. Also, in this case, we demonstrated to be a delivery machine like in wealth management protection, like in NPL, and now in technology.

By Q1 next year, we will already have more than EUR2.5 million Isybank customers. In addition, two weeks ago, we launched Direct Advisory as part of our Fideuram Direct digital offering, creating Italy's first network of wealth advisors working exclusively through online channels. We are also investing heavily in artificial intelligence. All these initiatives will generate an additional EUR500 million gross income in 2025 on top of what is already included in our business plan. So these are in addition of what is already included in our business plan. We are here not only to deliver strong results in the short-term, but also to build a Bank that can continue to be a leader in the future, the leader in the future.

Now, let me say a few words on the macro situation. The economy is already showing better-than-expected growth this year and I remain positive. As inflection is going down and this will help the Italian economy to continue growing. Of course, we are very sensitive to the fact that many families and businesses are struggling due to inequalities and we remain committed to supporting them. We are also stepping up our many social and climate initiatives. All our stakeholders, not only shareholders, but also ISP people, the public sectors, 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 Slide 1 to see the highlights of our first half results. Slide 1. In a nutshell, we delivered the best six months for profitability and NPL inflows. Stock ratio remained at historical lows, driving the cost of risk to just 25 basis points. Capital remained rock solid despite the impact of the vast majority of the expected regulatory headwinds.

Slide number 2, in this slide you can see the positive evolution of net income, up 80% on a yearly basis and 10-year increase in terms of delivery of profitability and net income.

Slide number 3, the all-time high results achieved in these six months means that we can comfortably improve our guidance for this year to well above EUR7 billion and when I say well above, I really mean well above.

Slide number 4. Our excellent six months performance confirms the success of our business plan formula based on a full range of concrete industrial initiatives. More than 80% of these are ahead of schedule.

Slide number 5, very important. Looking ahead, we expect net income of the next two years to be higher than 2023. So 2023 is -- can be considered as a floor given further growth in net interest and insurance income coupled with recovery in commissions and profits from trading, cost reduction enabled by technology, already agreed voluntary exits of people and easing inflation, low cost of risk thanks to low NPL stock, existing high-quality overlays and no one of these are related to Russia because we have zero exposure, just EUR100 million in the local bank exposure to Russia. And voluntary reduction from common equity of the impact of calendar provisioning. And then you can add also lower levies and other charges concerning the banking industry. We have always over-delivered on our promises.

Now let's move to Slide 7 for the details of the first half results. Slide 7, very briefly in the first six months, net interest income was up almost 70% yearly. The total contribution from net interest income, commissions and insurance was up 28%. Provisions declined significantly and net income reached EUR4.4 billion when excluding the final contribution to the resolution fund.

Slide number 8. In Q2 net interest income increased 10% quarterly. Commissions started to recover and insurance income was up 16%. Net income was up 16% quarterly and 74% yearly.

Slide number 9. In this slide, you can see the strong acceleration of net interest income. Net interest income is expected to exceed the EUR13.5 billion this year and further growth is expected in the next two years.

Slide number 10. Net interest income growth was driven by the spread component, which is benefiting from the increase in market rates.

Slide number 11. In Q2 commissions were up 4% and insurance income reduced the best quarter ever with the growing property and casualties contribution expected to reach EUR800 million in 2025.

Slide number 13. Costs are down when excluding depreciation for tech investments and the increase in energy prices. In particular, administrative expenses were affected by a EUR44 million yearly increase in energy cost and will be down net of these components. With energy prices now well below pre-war level, administrative expenses can revert to the usual downward trend. Obviously, expenses are also impacted by the strong investments that we are delivering on technology.

Slide number 14. Our cost-income ratio stands among the best in Europe.

And please turn to Slide 15 to see how Intesa Sanpaolo asset quality continues to be strong. The net NPL ratio is at 1%. Net NPL inflows remain at historical low and Stage 2 loans are down 11% quarterly and more than 30% yearly, reaching only EUR37 billion and compare our Stage 2 with the Stage 2 of other peers in the market.

Slide number 16. NPL stock and ratios are among the best in Europe. So really impressive the figures of the net NPL stock that we have. Only Nordic Bank are better than Intesa Sanpaolo.

Slide number 17. Our annualized cost of risk stood at just 25 basis points and NPL coverage increased to 49%. We are not seeing signs of asset quality deterioration.

Now let's move to Slide 18 for an update on Russia. In Q2, we further reduced our Russia exposure, which is rapidly approaching zero.

Slide number 19. The common equity ratio is at 13.7% despite absorbing the vast majority of expected regulatory headwinds and after 30 basis points impact in Q2 from the voluntary reduction related to calendar provisioning, thus reducing Pillar 2 requirements and lowering future cost of risk. Considering DTA, the common equity ratio stands above 15%. As you can see, we clearly have significant excess capital in each year of the business plan and this excess capital will be evaluated year-by-year to be redeployed to our shareholders.

Slide number 20. We maintained a best-in-class liquidity position. The liquidity coverage ratio and net stable funding ratio and well above regulatory requirements and our business plan targets. We have a very diversified and sticky deposit base.

Let's move to Slide 21 for more detail on the liquidity position. Liquid assets and unencumbered eligible assets increased in Q2 and cash with the ECB is significantly higher than the remaining TLTRO.

Slide number 22. I'm very proud that our excellent results allow us to support all of our stakeholders in a significant way, guaranteed talks with banking sector trade unions are taking place regarding a new national contract. I fully support paying our people more to compensate the impact of inflation. In technology and efficiency we'll offset this cost, but ISP people truly are our most valuable asset. Let me remind you that we have the highest dividend yield in the industry, an increase in net income and sustainable net income, not short-term net income. And so, in cash dividends, sustainable cash dividends is also favoring an increase in tax revenue for the state and 40% of cash dividends go directly to Italian households and to foundations to support their charitable programs for local communities.

Slide number 23, Intesa Sanpaolo has a duty to leave a positive mark on society and to support the transition toward social, cultural and environmental improvement. In this slide you can see our leading ESG position in the main sustainability indexes and rankings. And we remain committed to begin the world number one in -- to being the world's number one impact bank. Some companies are backing down on ESG, we are moving ahead. At the end of this presentation, you can see the slides on our many social and climate initiatives.

Let's move to Slide 25. I strongly believe that to remain a leader in the next decade, you need two things. The first is a well-diversified and resilient business model, mainly based on wealth management and protection. And the second is to best serve customers. Today, this means meeting their demand for digital services. And so, we must position the bank to be a tech leader. ISP is already moving ahead, and we reinvented our IT core to lead the market today and tomorrow. That is why I want to spend a few minutes on our digital journey. This really sets Intesa Sanpaolo apart from our peers. So we are on a different planet.

Our digital strategy relies on three pillars. First of all, Isytech, which will become the technological backbone of the entire group. Then our new digital channels, like Isybank and Fideuram Direct, attracting new clients and better serving our customers. Third, artificial intelligence to further unlock new business opportunity, increase efficiency and manage risks. This action will generate already in 2025 a benefit of EUR500 million additional gross income mainly coming from cost on top of what is already included in our business plan.

Now I want to leave the floor to Massimo Proverbio, Paola Papanicolaou, Stefano Barrese, and Virginia Borla and Tommaso Corcos, to walk you through the pillars of our digital strategy, starting from Slide 26. So, Massimo?

[Massimo Proverbio, Chief Data, AI, Innovation & Technology Officer]

Thank you, Carlo, and good afternoon to everybody. Starting from the fifth pillar. Isytech is our cloud technology backbone that we developed together with Thought Machine, the innovation leader in this space, leveraging the cloud partnership with Google and team that we set few years ago. Isytech is up and running and is already being successfully deployed for our mass-market retail client through the digital bank, Isybank, which Stefano will discuss in a moment. Isytech will be progressively extended to the entire group across clients, segments and countries. We have already significantly invested in technology with EUR1.8 billion already deployed and more than 1,200 IT specialists hired since the beginning of the business plan. We will keep investing.

Please turn to the next page, Page 27. On this slide, you can see why Isytech is a new unique and distinctive platform. It is cloud-native with flexible cost, modular with fast time-to-market, secure and resilient by design, scalable across segment, product and geographies and real-time with instant response. It is important to notice that we are the first leading bank to migrate the entire core banking system to the cloud. As said, Isytech was the foundation for the launch of Isybank.

And now I leave the floor to Stefano Barrese for a brief overview of our new digital starting from Slide 28.

[Stefano Barrese, Head of the Banca dei Territori Division]

Thank you, Massimo, and good afternoon from my side. It is a pleasure to be here with you to talk about an initiative, which is a landmark from an industrial and strategic point of view. I'm really proud of the launch of Isybank. Our people did an amazing job. Even Thought Machine's CEO said, we have never seen a digital bank launched so quickly.

In less than one year, we were able to develop a top-notch solution, strongly appreciated by the market, with more than 10,000 accounts already opened. Opening a new account is very fast and easy, requiring less than three minutes. The user's PNCs are matched using the app is simple and intuitive.

Slide 28 -- 29. As you can see on this page, we have not only developed the most innovative banking platform in comparison with our traditional competitors, but we can also proudly say that Isybank stands out among digital challenges with the most complete and innovative offering on the market. This makes us ready to win against fintechs. They will not have a chance to erode our revenue base and this is not the case for most of our competitors. This will generate important benefits for our group. By Q1 next year, Isybank will have over 2.5 million customers and around 5 million in 2025. This is an additional 1 million versus our business plan and Isybank will drive around EUR200 million additional gross fee income versus the business plan.

Slide 30, on top of its tech leadership, Isybank enjoys a unique service model. Even without physical branches, we will always give our customers a human touch with more than 2,000 people dedicated in our digital branch. Thanks to its branch free service model, coupled with could technology, Isybank enjoys best-in-class efficiency, driving cost income below 30% with serving mass retail customers, a segment that normally has a high cost to serve, it is much lower than the already-low 42% cost/income that we have at a group level.

Now let me move over to Tommaso, who will explain starting from the next slide, how we are using digital in wealth management.

[Tommaso Corcos, Head of the Private Banking Division]

Thank you, Stefano, and good afternoon to everyone. A couple of weeks ago, right after Isybank, we also launched our sophisticated Fideuram Direct platform for wealth management customers who want to invest online. As a three pillar strategy, Fideuram Direct offers a team of financial advisors working pool and available online anytime anywhere and empowered by BlackRock's Aladdin the best-in-class Robo4Advisory platform.

Second, the possibility to self-invest in a broad range of ESG products selected by Fideuram Asset Management from among the best funds of international asset manager and a top-notch platform for heavy traders. Thanks to Fideuram Direct, we will strengthen the leadership of our Private Banking division, targeting 150,000 clients by 2025, capturing a new segment of digital investor, representing a potential market of around EUR150 billion in 2027 and also exploiting the full potential from the existing customer base. This is a significant growth because these new clients represent 20% of the customer base of Fideuram that is by far the Italian market leader. More than 1,000 private banking customers have already subscribed to the new advanced trading services.

The message that I want to convey is that this is a compelling story of future growth in wealth management that combines the strength and competencies within Fideuram and the technological acceleration of Intesa Sanpaolo Group.

I now hand back to Massimo for a brief overview on Slide 33 of the third pillar of our digital strategy, artificial intelligence.

[Massimo Proverbio, Chief Data, AI, Innovation & Technology Officer]

Thank you, Tommaso. This is a very important topic. On this page, you can see a snapshot of what we're doing on AI. Artificial Intelligence has huge potential and at the same time, its responsible and ethical adoption is critical. That is why we are embedding this responsible approach into all the work that we're doing in artificial intelligence. We are developing our AI program acceleration in-house and we leverage more than 300 internal specialists that we add -- and that we add on the market as well as our research center CENTAI and several partnership that we have with selected leader like Google and academic institution in Italy and abroad. We have already deployed 35 artificial intelligence use case and will reach 140 use case in the next couple of years. Generating EUR0.5 billion benefiting gross income at rate of which EUR100 million in 2025, on top of our business plan.

I now leave the floor to Carlo for the conclusion and outlook starting from Page 35.

[Carlo Messina, Managing Director and Chief Executive Officer]

Thank you, Massimo. And I think it was really important to take some time to look at our tech evolution because this is where the ISP of the future begins. And remember, my people are at your disposal to make any kind of drill down you want on these items that I consider really strategic for the future and the differentiation of the Bank. Because through these initiatives, we are taking an absolute competitive advantage moving into cloud and using the best digital bank that you can have not only working in Italy, but then working outside of Italy. So that's really part of the strategic story of the bank and it is one of the most important lever to reduce costs for the future, not only in Italy, but also working with our international subsidiaries. So we are talking about really one of the most important step that we are taking in our history.

Now, let me say a few words about the Italian economy, which is strong. Thanks to solid fundamentals, world-leading household wealth and very resilient SMEs, growth for this year will be higher than previously forecast and lower-than-expected energy prices will help ease inflationary pressure and as inflation slows the economy is set to continue growing. As you can see in this slide, Intesa Sanpaolo is far better equipped than its European peers, thanks to our rock-solid capital base and well-diversified and efficient business model.

Slide number 37. This slide recaps how ISP is well equipped to further succeed in the future. I will not go through all the points. But let me highlight that we remain a wealth management protection and advisory leader with fully owned product factories, EUR1.3 trillion in customer financial assets and zero NPL. So, we are set to succeed in any interest rate environment. Let me emphasize that our management team is strong longstanding and cohesive. And today, you had the opportunity to hear from some of them.

Slide 38. And just let me add that today at this table Luca Bocca, Paola Papanicolaou and Virginia Borla has an age that is in the range of 40 years. So, we are talking about people that can remain in the organization minimum in the next 20 years. This slide recaps how ISP is well equipped to further succeed in the future. I will not go through all the points, but let me highlight that we remain a wealth management and protection company. So just to emphasize, wealth management and protection company because I consider this: the most important part of the story of Intesa Sanpaolo adding now the technology. So wealth management, protection and technology are the key basis of Intesa Sanpaolo.

Slide 38. To finish, let me turn to the outlook. After delivering the best ever six months, we can upgrade our 2023 net income guidance to well above EUR7 billion and this is a floor for the coming years. Record net income will enable us to reward in a significant way our shareholders. At the current share price for this year -- the next two years, we will deliver a dividend yield of at least 11%, taking into account a payout ratio of 70% and also taking into account the sustainability of our net income. So today, due to the sustainability of net income and due to our current market cap and due to the payout ratio, our dividend yield is and will remain 11% apart from strong increase from market cap that in any case, will leave the dividend, the cash dividends of the Bank at the peak of the sector.

Then additional capital distribution will be evaluated year-by-year, but also on this point coming at the end of the year and increasing our common equity and also the portion of capital ratio that is exceeding the minimum level. We are increasing also the feasibility of potential capital distribution at the end of the year.

In closing, I want to repeat, we are going all in our tech transformation while delivering excellent performance. This is what it takes to build a bank that continues to succeed over the next decade. Intesa Sanpaolo is a dividend tech delivery machine. So, thank you for your attention and we are now happy to answer your questions.

[Operator]

Thank you. [Operator Instructions] We are now going to proceed with our first question. And the question comes from the line of Antonio Reale from Bank of America. Please go ahead with your question.

[Antonio Reale, Bank of America]

Hi. Good afternoon, everyone. It's Antonio from Bank of America. I had two questions, with of course the entire team available, it will be a shame not to ask one on Isybank. So one on your online Bank, one on capital distribution and very quickly, just on the NII outlook, if I may. Don't take it the wrong way, I don't really mean to be proactive on this, but we've seen a myriad of online banks being launched globally in the last few years, large parts of investments thrown at some of these platforms with mixed and clear returns on some of those investments. So my question for you and your team is what makes Isybank different versus the other online banks we've seen? Why the launch now and is this going to have positive contribution to the group cost-to-income ratio of Intesa Sanpaolo? That's my first question.

The second question is on capital distribution. Your capital ratio is back at 13.7% and that's including regulatory headwinds fully booked until Basel IV, if I understand correctly. You now have strong organic generation as you've pointed out in your guidance, and you are going to continue to grow your excess capital to 15% and above, if we include the DTA absorption. You've stated that you will assess distribution on an annual basis, which I think suggests you want to continue pay some of the success to your shareholders. So my question is, how should we think about your dividend or capital distribution policy going forward? Do you have a goal to CET1 ratio level in mind, which you want to run the Bank?

And lastly, on your NII guidance beyond 2023, you are telling us that NII is going to be above EUR13.5 billion this year and that it will continue to grow further in 2024 and 2025 and, look, that's -- obviously that's a powerful statement. And so, can you talk a bit more about the outlook for NII beyond this year and what you expect the key growing drivers to be? Thank you.

[Carlo Messina, Managing Director and Chief Executive Officer]

So thank you very much. Just a point and then I will leave the floor on Isybank to Stefano Barrese, but just to give the difference between Isybank and the other banks, and there is a specific slide on the support coming from the digital branches, but then Stefano will give you this point and for this part and I'm explaining if Massimo want to add something Massimo is free to do this point. But the real point for this strategy of the Bank -- for the technological strategy of the Bank is not Isybank, is Isytech. Sorry to make this point, but what we consider really strategic is Isytech.

So working with Thought Machine and Cloud we prepared the system for the future and we are testing in Isybank. Then this kind of exercise is not easy. So I have to tell you that absolutely not easy, but the very important positive point is that is working. And it is working in Isybank that will have the possibility to test until 4 million, 5 million of clients. So what we want is to prepare Isytech to be the cloud base for the group. This will reduce all the majority of the -- in the medium term, in the next two year, but of the mainframe, the legacy, the procedure, all the costs that it is difficult to reduce and in this way, we will have the best system for all the segments of the Bank.

So it is not only a matter of Isybank. So the exercise that we are doing through this best-in-class, and it is really similar to only one bank in the world that is JP Morgan, is to work for something that could beat the system of the Bank. So Isytech is the real point of difference in the strategy of the Bank. Then digital bank is fundamental for us, because it's the way in which we are able to defend the revenues of the mass market in Intesa Sanpaolo and at the same time attacking because at the end we will move to make the acquisition of clients.

And in this slide, you see that there is 1 million clients that we are considering as a target. And this will be the way in which we are making the job of the fintech. So this will be also the instrument in which we can tap different European markets. So working in our international subsidiary, but also outside from our comfort zone. So this project is really strategic by moving from Isytech, so from the platform. I don't know. Massimo, if you want to add something on this point. And then I will leave on Stefano on the commercial part of the story.

[Massimo Proverbio, Chief Data, AI, Innovation & Technology Officer]

Yes. Thank you, Carlo. First of all, Isytech has a new modern design with user experience and as Stefano described before, it enables us to open an account in less than five minutes and this is pretty much unique as well as a -- of a support full fledge offering, it's fintech like, but it's much more than fintech. The additional part is that it's designed to be international. Not only cloud native, but also international. So this unlocks the potential of Intesa to exit from Italy. Another key point is that enable full visibility of data. As part of the Isytech platform, we are envisaging a cloud-based full visible data that will enable also the AI approach that we just described. In addition, I would say, it will support both more digital and more physical clients and this is also pretty much unique. Please, Stefano.

[Carlo Messina, Managing Director and Chief Executive Officer]

Before leaving the floor to Stefano, the slide in which we represented the products of the Bank is unique is because this product will be the product of Intesa Sanpaolo. So it is not only the product of Isybank. This must be the product of all the segment of Intesa Sanpaolo. So we are creating a Bank that at the end should be the backbone, the IT system of the Group. That is really the most important step that we are creating with these investments. Then, Stefano, if you want to elaborate on?

[Stefano Barrese, Head of the Banca dei Territori Division]

Thank you and thank you, Carlo. Just summarizing the point. So clearly, Isybank is something that is considering another layer into the Bank, new layer completely because it is based on this platform that is state-of-art and the best in the market. So clearly cloud native and something that is not replicable today in the banking industry in the side that we are now using in Intesa Sanpaolo. On the other hand it's clear that in the market we have lots of possible potential customers that are not clearly the same that we had in the past. So customers that are comfortable in using principal, the physical channel. And so, we now are launching and now is still in the market Isybank that is working with the type of cash that they do not want to use the physical channel.

We provide them the possibility to have, if they want, the digital branch. So lots of colleagues that are there ready for not adjust only information, but only to support their commercial journey. And the other point is that have you listened that we are leveraging the offering of the group. So it's clear that we started with transactional operation and for the moment few type of products on lending. But we have the target to extending the offer not just only on this product, but also to investments and insurance.

So we are now building probably from my point of view, but is clear because we are now also collecting lots of positive feedbacks that the best digital bank commercial in the market. So not just only as most of the cases that we are now in the market banks that are just only transactional, but something that is very broad in terms of the offering. So the chance is very big and as you listened, it is not just only concentrating in the Italian market, because the engine, so the tech, so the Isytech is a platform that is multi-currency and multinational. So will be also used for the internationalization starting by for example our foreigner banks.

[Carlo Messina, Managing Director and Chief Executive Officer]

Okay. So just to give this point to you and to give the evidence that through these technological instruments, we are not creating a trust for the person we did the organization, but also opportunity in the Bank that is fundamental if you want to maintain motivated people in an organization of 100 people like Intesa Sanpaolo. Coming back on capital distribution and net interest income that I know that are the key point of the interest of the analysts, but also of the investors in this moment.

Looking at capital distribution, the minimum capital that we are considering remain 12%. And 12% has already embedded a portion of excess capital because our real condition in terms of risk profile is below 12%. But in any case, considering 12%. So this is the level -- the minimum level of capital that I can confirm Intesa Sanpaolo wants to maintain. Then, this does not means that all the capital in excess of 12% will be given in one solution as redeployment of capital. But just to have the idea 12% is the minimum level of capital that an organization like us should maintain in my position and also according to the rule within the organization approved by the Board of Directors.

Today, the capital is 13.7%, but the expectation in terms of growth due to the fact that looking at net interest income, so the position and I will elaborate on the point on net interest income, looking at net interest income and dynamics that will remain significant for the group. And also looking at the fact that in an environment in which, in the next two years, interest rate can have a reduction. Then, in my opinion, not a significant reduction because interest rate will remain at a level that could be between 2.5% and 3%. So I don't see world that can come back to interest rate very low.

But with this reduction of interest rate, all the areas of assets under administration will become profitable. And the history of Intesa Sanpaolo is to move the gross inflows, not the net inflows. And the gross inflow is embedded significant portion of portfolio that are positive for our clients. And in this situation, we will start again to make a lot of money in terms of commissions, both in the banking territory and in private banking division with some more sophisticated approach from the clients. But in any case, the environment in which interest rate can have a potential reduction is the perfect environment for the increase in terms of commissions. Then, we have the profit or trading that intentionally. So giving specific target not to be increased during this year, because we do not need to have some low-quality revenues this year, but coming in the next few years, these will become a source of revenues.

And then, the property and casualty business. That is a business that is counter-cyclical, but will continue to grow because the penetration is accelerating and we are already at 11%. So we have room until 30% that is the penetration of the mutual funds. So the amount of revenues could be really significant. And this is another area in which we can have sustainable revenue generation. So that's the reason why we decided to put a floor. So 7% is, by definition, a floor and in my expectation would be exceeded in a significant way. So if you put this with a 70% payout ratio you have a capital generation embedded that is significant and these are risks with a very low risk-weighted asset absorption. So this is real excess capital generation.

So just to make long story short, excess capital is there. We will redeploy excess capital because I do not see any kind of M&A transaction that could be in a condition to generate value for my shareholders. What we have to need is to wait and follow the formal procedure of the bank that request to ask and to wait for the final figures and for the expectation for the futures in terms of ratio, but my view is absolutely positive on this point.

Net interest income. Net interest income is something that is correlated with, I don't want to say the level of the market share because probably can sound not so positive in a public speech, but it is clear that the evidence and what other player are seeing in the market for us can have three times the value of the possibility to have positive coming from this area. Our, what you called beta, that is something that is difficult for me to understand from a scientific point of view, but I understood the easy way of understanding for us is below 10% today, and I don't want to say we're below, but it is below 10%. So this means that also considering an acceleration. And in our figure, we are considering for 2024 something crazy that is not the bottom-up approach from the business, because the bottom-up approach is that we can reach 20%, 25%. But not more than this in our forecast, we have considered 40% because other players are talking about 40% for 2024 and remain in any case, with an increase in net interest income due to the fact that the average that we will reach in terms of Euribor this year will be much higher than Euribor average of 2024 also in case of a reduction of interest rate in the last part of 2024.

And in 2025, we will have -- in which we expect to have farther reduction of interest rate again maintaining a level above 2.5%. We will have positive coming from the hedging. So this bringing positive on net interest income. At the same time, this will be the timing in which commissions will have the potential to generate something that you can have the occasion to see in -- you had the occasion to see in the past. So it's the strength of Intesa Sanpaolo to create a model in which commissions are the base for the succession and also the base for the succession, the base for the diversification of our revenues.

So my expectation on the basis of this analysis and not considering a recession, so only if the GDP can become negative, this can change at some point of analysis. But I'm pretty confident that we can continue to deliver significant net income, significant excess capital generation and especially if capital market cap remain at this level, a dividend yield of 11%.

[Antonio Reale, Bank of America]

Thank you.

[Operator]

We are not going to proceed with the next question. [Operator Instructions] We're now going to take our next question and the questions come from the line of Delphine Lee from JP Morgan. Please ask your question.

[Delphine Lee, JP Morgan]

Thank you. Good afternoon. Thanks for taking my question. So I just wanted to just follow-up on the previous question, just on NII, can you just like specify your deposit beta assumptions for this year? So it's 40% in '24, but also in '25 and also the rates level, and also maybe if you could just quantify the contribution from the replicating portfolio for that? And then just returning on the excess capital, what prevents you from doing maybe returning capital to shareholders a little bit earlier, given where your capital ratio is? Or is the objective to be at 14% in any case and -- or is that before the additional capital distribution? Just trying to understand a little bit your thinking here. And if we could see -- I mean, there is obviously that interim dividend if you could see anything else ahead for your results? Thank you very much.

[Carlo Messina, Managing Director and Chief Executive Officer]

So I want to start from the second question and then I will elaborate more on net interest income and then I will leave the floor to Stefano to talk about replicate and hedging facility, but -- Stefano Del Punta. But looking at the return to shareholders of excess capital, we have a formal procedure within the organization. So as we have a formal procedure that can allow us to give an interim dividend, cash dividend interim, we have a formal procedure that can allow us to evaluate distribution of excess capital at the end of the year. So it is not possible for us to consider about forcing the Board of Directors. But I do not see any kind of need to force the Board of Directors to take some decision out of the common procedure. We are not in a hurry to demonstrate any kind of acceleration of our market cap.

We are a leader apart from the short-term dynamics of the market cap and the industrial story that we are presenting today on tech investments is just safe to say we are industrial, not financial. Other players play the game or the financial story. We are playing a different story, industrial story with significant net income generation, but we are an industrial story. So having said that, we want to follow the rule of the game within the organization and the rule of the game within the organization is that the deployment of excess capital has to be evaluated at the end of the year in which you have the final figure, you have the projection for the next years and in that case, you are ready to make any kind of evaluations.

So our decision to have the calendar provisions deducted by the common equity is a part of the story that is created conditions to prepare a proposal for the Board of Directors that can be in this sense. So preparing all the conditions that can allow to say from a regulatory purpose, we have no more possibility to have challenge on a portion that only from a regulatory point of view because from an accounting point of view is a stupid rule of the game, but from a regulatory point of view is something that it is considered an important. Stupid for an Italian bank that has an average time of recovery, that is completely different from a German one. But if this is the rule of the game, we respect the rule of the game.

So having said that, we decided to maintain a strong capital position, demonstrating that we have strong excess capital also with a deduction something that is considered important by the supervisor. So, at the end of the year, we will present the analysis of the excess capital that can be redeployed without any kind of point of weaknesses also from a supervisory point of view. So we are preparing a story, but we need to follow a procedure. So the organization, we are at best practice in terms of all what we do, because we are not moving according to the fact that we want a short-term consensus from the investors. We want to follow a procedure and this procedure need to have all the fundamentals for the Board of Directors to take this decision.

As a CEO, so in my position, I can tell you that I see a clear excess capital for this organization. And at the same time, I do not see any kind of target in terms of the acquisitions that can create value for shareholders, but not because making a share buyback can create more value than making an acquisition because the value that you can create through long-term generation of net income is much higher than the short-term redeployment of capital, but in our case, we cannot create value through this kind of levers.

So my position is that we have an excess capital, we are ready to make an evaluation of a potential distribution. This evaluation will be done at the end of the year. But we are creating conditions through the matching of an expected negative impact coming from regulatory headwinds as we made last year. This year, we are generating capital. We are a clear excess capital and also considering Basel IV and considering the DTA, I don't think that there are a significant number of banks that in three, four years can stay at 15% after deduction of Basel IV and a portion of recovery of DTA. So we are in a unique position to have excess capital, but we are also in a condition, not to have in a hurry to generate an increase in market cap through share buyback.

So we want to say, today, our dividend yield is 11%, our organization is creating sustainable net income and with the right provisioning, the right approach in term of sustainability of results, these are our main conditions. In term of fixed capital will be decided at the end of the year. My personal position is that we have excess capital. So it is a right point for the Board of Directors to make an evaluation of potential distribution of excess capital, but we will decide at the end of the year. For the time being, we are increasing the probability to have real excess capital for the end of the year and then do not see any kind of threats in this analysis.

Looking at net interest income. So, net interest income is something that it is clearly depending on a number of assumption. But having received the last increase just yesterday, so, reaching 3.75% in terms of Euribor and our Euribor that we have considered, the net interest income increase that we had until June had not the full impact from the previous increase because on average you have another part. This 25 basis points and the beta is really negligible. It is clear that we will end this year with a super excess in terms of net interest income comparison to EUR13.5 billion. So having said that, we will have to consider what kind of average Euribor you are considering for 2024. Our consideration of this average Euribor is that it is likely that would be similar or much higher than Euribor that you had in 2023.

In this case, for a bank like us, and I remember you that we have a 30% market share in the areas in which we have deposits, it is likely that this can allow us to have a significant increase in terms of revenues and especially an increase in terms of net interest income. In 2025, when interest rate will have on average. So, with the rebound on -- in a nominal point, in a [prudential] (ph) point of view at the end of 2024 and then on average in 2025 you can benefit from the hedging facility in a significant way because we have and Stefano will elaborate EUR160 billion of facility that is hedged. So this means that in case of a reduction of interest rate, this will give us a contribution that came maintain a strong contribution with a potential increase depending on the reduction of interest rate of our net interest income base. But I will leave the floor to Stefano so he can elaborate.

[Stefano Del Punta, Chief Financial Officer]

Yes, I mean, I think, you're all familiar with the concept of hedging portfolio, replicating portfolio, how some banks cope with the core deposit, for us EUR160 billion, which is -- has to be considered as a fixed rate liabilities and therefore you put against it a portfolio of fixed-rate assets. Currently, this portfolio, the portfolio's duration of about four years. Currently, obviously, the investments of this portfolio has been done in the last years. So very low-interest rates. So the average yield on this portfolio today is slightly in excess of 60 basis points, 60. And, of course, every month we are reinvesting the maturities. The asset or the swaps comes to the maturity, which is about EUR2.5 billion per month.

So these, I think, you can make your own calculation, of course, the contribution will depend on the future level of interest rate. But today for an average duration of four years, the level of the interest rate is in the region of 3.7%. It means that next month, we will have EUR2.5 billion of assets yielding 60 basis point that mature and we will enter into investments for EUR2.5 billion at 3.7%. Then, of course, what will happen in the next months, depends on the level of interest rate. But clearly, when we get to 2025 means that we have rolled over about EUR60 billion of the portfolio and therefore this year, this is going to be much, much higher than the 60 basis point we have now. Of course, the level will depend on where the level of interest rate is going to be in the next 24 months.

[Operator]

Thank you very much. We are now going to proceed with our next question. The question come from the line of Christian Carrese from Intermonte. Please go ahead with your question.

[Christian Carrese, Intermonte]

Hi, thank you for the presentation. My first question is on, again, the Isytech. I would like to look at it also take into account the recent speech by Mr. Reale on M&A in Europe and asking European banks to be more, how can I say, to look at potential cross border deals. The Isytech platform together with also the -- today with direct, do you think that could be a lever to accelerate or to look also at M&A in Europe? I have clear that today you don't see any kind of deal as you prefer to pay the excess capital back to shareholders, but in a few years' time do you feel that this could be a good way to look at M&A to exploit synergies.

The second question is on cost of risk and the guidance you gave on 2024 and 2025, you've been managing the Bank for several years. It looks quite strange the evolution of the NPE inflows to me. So this credit cycle seems to be very different from the previous ones. What is your idea? Why so low inflow NPE? What do you think for 2024 will be the picture and the assumption you have in mind in terms of cost of risk for 2024? Thank you.

[Carlo Messina, Managing Director and Chief Executive Officer]

So looking at the M&A environment it is clear that if you have a strong platform in terms of backbone for the IT system, and especially if you move to cloud, you have a point of advantage in comparison to other peers. But at the same time, you can also consider to enter different market not paying goodwill. So the real point, the target has to be with a bad will, because through the tech instruments, and through digital banking, you can try to top market like JP Morgan is trying to do without making something that has an involvement of million of people, thousands of branches. So I think that there is the need, in case of working like us on something really state-of-the-art in terms of technology, what could be the real advantage in using your own technology or making an acquisition.

At the same time having a very good system, you can create conditions to have synergies in case of an acquisition. So there are also another part of the story that if you are state-of-the-art and we need probably another couple of years to become state-of-the-art on all the system of Intesa Sanpaolo. So we are state-of-the-art Isybank, on mass market clients, but if you want to use on all the different segments of Intesa Sanpaolo, we need to have another couple of years to be sure to have a complete transformation of our IT system. But for sure in making evaluation on M&A, there will be the need for the future to add another way of looking at acquisitions.

So this can be another way in which we have to consider benefit in terms of synergies, possibility to make closure of branches. So, there are a number of items that can be correlated with this evolution that we are creating within the Bank. I have to tell you that for the next year, I will be and my people who will be concentrated in setting the machine in order to be sure that the Bank can have a state-of-the-art, Isytech system that can allow us not only to have mass-market, but to have affluent private, corporate, and international banking divisions being part of a unique organization with a potential of creating significant savings in terms of cost, but this could be a possibility. You told me that I prefer to pay capital instead to make acquisition, it is true but provided that making acquisition cannot create value. So you know that through the acquisition of UBI, we created significant value for our shareholders.

So it depends on the kind of targets, due to our market share in our country, we are totally prevented to make other deals, but other players in the market can consider other deals. And so for us, it is true that today we have -- we can create value for shareholders through redeployment of capital if all conditions are positive to make this. Looking at the inflows in Italy. So, Italy is -- has to be considered probably also by us by the Italian people in a completely different way. So we have a country in which GDP is growing more than Germany. So in the last two years, the increase in Italy has been 5%, in Germany has been 1.5%.

So look at Italian condition, we are talking about a country and if you compare with France is 3%. So we are talking about a country in which we are number one in Europe. So we are not talking about the Italian system, real economy system with SMEs 10 years ago. So we are talking about something that is state-of-the-art. If you look at the financial conditions of the company in Italy, we are talking about companies with more than close to EUR400 billion of deposits. So we are talking about companies that are strong, that can use their liquidity to make investments, that can make export-related activities with a significant diversification. So we are not talking about the Italy of 10 years ago, we are talking about Italy that is competing with the best players in Europe.

So in terms of inflows, you have the clear evidence that today Italy is a different story. Then it is clear that you can have some specific position that can have a problematic situation, so we will need to have another 10 basis points, 20 basis points, 30 basis points because inflows can create for sure that some position of cost of risk. But all the situation in the country, provided that we will not enter into recession and with some block for the export-related companies, I can continue to see an optimistic view on my country. Then, the cost can be between 30 and 40 basis points, we will see it, but not more than this. So we are talked about a country that is completely different from the past, provided that we remain with positive GDP and with potential of being a counterparty of export-related countries.

[Christian Carrese, Intermonte]

Thank you, very clear.

[Operator]

We are now going to proceed with our next question. And the question comes from the line of Andrea Filtri from Mediobanca. Please ask your question.

[Andrea Filtri, Mediobanca]

Good afternoon. One question to complete the picture on the assumptions behind your NII outlook. And the other one is on the tech transformation. What deposit beta are you assuming in 2025 and what volume growth? This is to feed our Nemo module. And on the tech transformation is to understand the return on investment and the net impact to P&L, how much of the EUR500 million cost savings from the tech transformation could be absorbed by higher salary during the renegotiation process? And will you need to write-down any legacy structures? And if so, what magnitude and over what time should that be done? Thank you.

[Carlo Messina, Managing Director and Chief Executive Officer]

So we think that the portion of this amount can be reabsorbed by this salary negotiation. So the reason why we are talking about the possibility to have extra profit, but we are not talking about putting you in EUR10 billion net income generation for 2025. There will be a component that can mitigate the impact coming from this renegotiation. But I'm convinced that being an organization structurally can move between 42% and 45% cost-to-income ratio and accelerating on investments. We are talking about a company that is best-in-class by definition.

So the cost base is a value, but it is a value if you are included into something that is a new business model and in this environment this is something that can allow us to have a negative trend of cost base in comparison with 2023, that's for sure. The dimension will be analyzed looking at the implication on personnel cost. But for sure the benefit will not be the EUR500 million net on the net income. If you look at the loan book, there could be an increase between 0.5%, 1.5% at 2025, so for 2024 would be between 0% and 1%. And the beta that we have to considered in 2025 is 30% and in 2024 is 40%. But again, if you look at the bottom-up analysis, we are talking about 20%.

So we have inserted the amount, and we consider very conservative in order to be sure to process something that is absolutely achievable. But if you want the real position of the people that are dealing with clients, the sensation is that it is possible to exceed by a significant way this number, and it is the reason why we are generating a significant interest income, much higher than all the expectation by the market.

[Andrea Filtri, Mediobanca]

Thank you. Sorry, could you repeat the 2025 beta assumption?

[Carlo Messina, Managing Director and Chief Executive Officer]

Is maximum 30%.

[Andrea Filtri, Mediobanca]

Thank you.

[Carlo Messina, Managing Director and Chief Executive Officer]

After 40% in 2024, because interest rate would be -- will be disrupted. So, the assumptions are obviously correlated with interest rate. So interest rates remain high in 2024, but we will have a reduction on average in [indiscernible] average in 2025. So you will have, by definition, a reduction also in terms of beta.

[Andrea Filtri, Mediobanca]

Thank you.

[Operator]

We are now going to proceed with our next question. And the question comes from the line of Britta Schmidt from Autonomous Research. Please go ahead with your question.

[Britta Schmidt, Autonomous Research]

Yeah, Hi, there. Thanks. Two quick questions from me. On the calendar provisioning impact, the voluntary deduction, is that already at 100% coverage or could this number still increase? And maybe you can provide a bit more color as to why you decided to do that? It seems to be to convince regulators of your excess capital position. And then the second one is just a clarification, are there any other regulatory headwinds left now? Thank you.

[Carlo Messina, Managing Director and Chief Executive Officer]

So, we have no more significant point, apart from the model change in which we have between 20 and 30 basis points still remaining, and we will have in the next two quarters of this year, but will be more than compensated by the retained net income. And this calendar provision is related to something that we have more or less between 70% and 80% coverage. And if you look at the rules of the game as stated by the supervisor, we should reach a level of between 90% and 95%. And so that's the reason why we have considered in the business plan to have these provisions in economic figures because we wanted to make disposal of these non-performing loans. So we need to reach a significant level in order to make disposal. But now having considered on calendar provision, will be more relaxed and waiting for the potential recovery that we will have according to our usual time of recovery of these kind of loans. We are talking about, in any case, the total amount of non-performing loans is EUR5 billion net. So we are talking about a negligible amount.

[Operator]

We are now going to proceed with the next question and the question come from the line of Hugo Cruz from KBW. Please ask your question.

[Hugo Cruz, KBW]

Hi, thank you very much for your time. Related to NII, I've noticed your deposits, current accounts and deposits from Slide 26. It's been coming down quite quickly over the last few quarters, I think you're obviously not worried about it. But I think it would be helpful to have a bit more color here. How much of this decline has been in the wealth management space? When do you expect the decline to stop? And also are you replacing these deposits with any retail bond issuance? And if so, at what yields? So that's my first question. My second question is around guidance for levies, I think it should be coming down next year, but I wonder if you could give a firm number? That's it. Thank you.

[Carlo Messina, Managing Director and Chief Executive Officer]

So levies, we have -- we are just waiting to understand better the DGS, but our expectation is that would be close to zero. So that's our expectation. We will see what will be the final position, but that's our expectation. We have considered the lower zero and lower, just to be sure to have considered all the different implication on this area. In any case, we will remain with a significant excess to our floor of EUR7 billion. If you can see the net interest income, if you look at retail activity, retail deposits, we had a fiscal need for the retail clients to pay taxes just at the end of June, we are talking about EUR6 billion. But at the beginning of July, we have already EUR5 billion increase in the current accounts.

So it's something that is really a physiological trend in our figures. Then at the same time, we had EUR4.5 billion BTP Futura subscription by our clients and assets under administration. And as I told, is the fuel for the future conversion in terms of wealth management. So we are completely happy to have this kind of situation because in the next six months, as soon as interest rate we can have a different trend. This will become all potential commissions that we can have in terms of wealth management.

[Hugo Cruz, KBW]

Well, thank you.

[Operator]

We now going to proceed with our next question and the question comes from the line of Giovanni Razzoli from Deutsche Bank. Please ask your question. Hello, Giovanni Razzoli, your line is open. We can't hear you. We are now going to take the next question and the questions come from Giovanni Razzoli from Deutsche Bank. Please ask your question. Your line is open. We are now going to take our next question and the next questions comes from the line of Chris Hallam from Goldman Sachs. Please go ahead with your question.

[Chris Hallam, Goldman Sachs]

Yeah, good afternoon, everyone. So, just one question about the tax strategy and how that -- what that means for the medium outlook for returns. So, clearly, profitability and capital generation are increasing. That's giving you additional capital flexibility and you're choosing to reinvest some of that upside from rates in Intesa's technology plan. So the new disclosure around the Isybank cost-to-income ratio today is great and you've talked about sustained net profits across '23 to '25, but what improvement do you expect to see on the level and predictability of Group returns beyond the plan from these tech initiatives and other initiatives? I.e., how is all of this moving longer term through cycle returns and what's the right, medium-term ROTE figure for the future Intesa?

[Carlo Messina, Managing Director and Chief Executive Officer]

So thank you for this question, because it was considered this quesiton very, very important for us. It is something that we are really working on for the next business plan because it is clear that the target of this business plan is to set the Isytech, Isybank, Fideuram Direct, all the areas in which we are working. Within 2024, we will have a significant upgrading of our IT system working on the cloud, working and simplification of our IT system. 2025 could be the year in which we'll have other segment moving into the platform and we will start with international -- our international subsidiary. But the future of this story has to be considered in the real medium term. So it is not an item of two years time, but this is really the bulk for the next five years of the organization.

So within the next five years, all the kind of procedures, legacy, mainframe that is already the one that we are using within the organization must be completely analyzed in order to be sure what could be the solution moving to the cloud. So, we are talking about billion of costs that are related with this kind of situation. I cannot tell you that we will have a saving of EUR2 billion because it is not serious. So I cannot tell you this, but believe me, we are working on different -- all the different items that are involved in the current level of our IT system and the implication that we can have in terms of saving through these significant investments that we are creating.

We are talking, in any case, of significant amount because the level of the transformation of the organization and the possibility to leave a significant part of the story that is on what can consider -- we can be considered from our side. So for a Bank that is already moving into the cloud, so mainframe, legacy procedures is really massive. So for us, this story could become really a transformational story in terms of cost. Then it is also related to branches because it's also the way in which you serve your clients. So in the future, we will maintain for sure the most part of the private banking branches. So branches in which you need to receive clients that want to look you in the eyes. So giving you a lot of money, they want to be sure that there could be something emotional and relational.

But the other part of the clients can be really part of different story on the branch within the organization. And having in mind this digital branch is the real creation of cross between the physical branch and a digital branch. So you need to be sure to have your people onboard when you make this transformation. So having an head of physical branch that can become an head of a digital branch could be a way to maintain dignity, the possibility to maintain the status of people within the organization. Then, we will have a portion of people that will mature their pension scheme and so possibility to have some exit between the organization. But it is clear that the real game that we want to play, it is not this short-term game, is the real game for the next five years time, and in the case we can really work for a reduction of cost that could be minimum hundred of million euros, then could be billion we will see could be EUR1 billion. We will see what could be the implication for all the organization, but we are talking about really significant cost base.

At the same time, we are defending our revenues. So the pool of revenues today, that for the majority of our competitors could be under attack from potential attack from the fintech could be in a range of EUR500 million. So we are talking about something not negligible in terms of revenue. So the possibility for us to say just now that we are defending EUR500 million is something that from a competitive point of view is really in my view impressive, if you really know the situation of the generation of revenues in different clients within the organization and the clients that are not more entering in your branches, so our clear target for fintech. So this amount for us is completely safe. So we can be sure that this amount can remain with us. Then, we have all the possibility to be ourself fintech. So why, because while you can have Revolut or Amazon rather being the challenge of the banking system. If we are one of the best fintech, we can become the real challenger and we can become the one that can create a real condition to increase the revenue base. So we have a lot of potential coming from this, this should be part of the new business plan.

But what I want is that you can have clear and investors can have clear that we are the unique Bank that we are already moving with something already deployed. So we're not talking and it is not a digital Bank, is a system. So Isytech is something that is already within the organization. So, this is fundamental for me to be clear that we are already moving into a fintech approach. So we can be considered a commercial Bank, but with a fintech approach.

So that's fundamental for us. Then, it is true that the next part of the job should be your question. So, what could be the implication for the future? It is something that, to give you a specific number, we need to prepare a specific plan, but believe me, could be really massive the implication of this transformation within the organization.

[Chris Hallam, Goldman Sachs]

Okay Thanks very much.

[Operator]

We are now going to proceed with our next question and the question comes from the line of Marco Nicolai from Jefferies. Please ask your question.

[Marco Nicolai, Jefferies]

Hi, thanks for taking my question. I was wondering, I saw you printed a good number in terms of CIB fees this quarter, can you give us some color on the quarter, as well as some outlook for CIB fees and commissions in Italy? Another question on deposit beta, I understand your assumptions, but I'm wondering why do you think beta is so low in Italy right now? Because on one side, as you mentioned before, we saw the demand for BTP Valore was pretty high in Italy, which shows that there is an appetite obviously from households for yields that still deposit remuneration remains pretty low. What's the reason in your view? Thank you.

[Carlo Messina, Managing Director and Chief Executive Officer]

So thank you for your question. So just starting from the second question in Intesa Sanpaolo, we decided not to have any negative interest rate. So, -- and it is for the Bank also a significant portion of Italian banking sector. So if you compare the Italian banking sector with other sector, with a significant contribution in any case from net interest income coming from net interest income, you have to make such a distinction and try to elaborate what would be the differentiality. So in a system in which I had all the negative coming from the negative markdown you now have all the positive coming from the positive markdown.

This means that the beta can be an approach that could be considered fair with our clients. Because if in a condition of negative, I was not having advantages in a position of positive. We can have the fair approach with our clients. So this is typical of the Italian banking system. Therefore, Intesa Sanpaolo, you have also something that you have to consider it is the market share. I know that you consider all Italian the same, you consider us like BPM, like BPER, UniCredit. But if you look at the Italian position of all these peer so BPM, BPER, UniCredit we are three times the dimension of all these peers that UniCredit has Germany, Austria, all the other.

But if you look, Italy, you cannot compare Intesa Sanpaolo with a peer that is three times lower than our in terms of dimension. This means that our correlation with all the activity of the clients is completely different. So with clients you have -- and having the ownership of the product factories, you have such a strong correlation with clients, so our depositors has also with us mutual funds, insurance product, mortgages, pension funds, so all the kind of instruments.

So the correlation that you have with clients is so high that you cannot compare Intesa Sanpaolo with other peers with 7%, 5%, 10% market share in Italy or outside of Italy. So that's the reason why we have such a strong beta and such strong potential also for the future. So it is not a matter of short-term. So I'm afraid that the number of analysts can try to consider this as the peak for our net interest income. But I'm afraid that you are making a wrong analysis. So for us this is the starting point of a significant trend of further increase in terms of net interest income.

Then for me, the real value that I want to tap from my client is from wealth management. So this is something that can derive from the market, from the action of my people, of the relation that we created with clients during this year, but it is clear that we want to continue to be a stronger wealth management company. Today, being a strong wealth management company means to maintain strong relation also in terms of deposits and not only in terms of mutual funds, insurance products, pension funds, all the other instruments that are part of the relation with our client.

Looking at corporate, we are working on as all the corporate investment banking divisions in a number of deal that are not only loans, but are also M&A, possibility to structure investment banking structure in Italy and outside of Italy. So this trend is something that it’s depending by the deal, but it is something that is structural for our division that cannot be -- I cannot be sure EUR40 million per quarter, but it is clear if it is not EUR40 million, it could be EUR35 million or EUR45 million. So, I'm talking about something that structurally is part of the activity of our Corporate Investment Banking division.

[Marco Nicolai, Jefferies]

Thank you.

[Operator]

We are now going to proceed with our next question and next question comes from the line of Andrea Lisi from Equita. Please ask your question.

[Andrea Lisi, Equita]

Hi, thank you for taking my question. Just a simple one. You said that the environment in terms of asset quality is proving benign. And so just to understand if it is reasonable to imagine our cost of risk below 30 bps for the following year, considering also the step out you've made on calendar provisioning and the reason you made so far. Connected to this given that you did not utilize overlays amounting for EUR900 million, if it is the reason at one point [indiscernible] will have been released and contributed to the bottom line. Thank you.

[Carlo Messina, Managing Director and Chief Executive Officer]

So thank you very much for this question, because I want to -- just to elaborate on this item of overlays because there is a lot of emphasis and marketing in my view on this item of overlays. So overlays are something that you have to compare with the Stage 2 dimension of the portfolio of the different companies. So it is not a value in absolute term of Stage 2. It is a value in comparison with the amount of risk that you have within your portfolio. So in our case, we have EUR37 billion of Stage 2 with significant reduction across the different years, quarters. Other banks maintain significant amount of Stage 2.

So the kind of degree of considering this as something that can be usable depends also on the amount on the Stage 2 portion of your portfolio. At the same time also some risky area that you can have. In our case EUR100 million loans in local Bank of Russia. So overlays are not only Italian, are international. In our case overlays are mainly concentrated in Italy. So the majority of the EUR900 million are in Italy, zero in Russia. So this is overlays theoretically usable in the future. Then the quality of your inflows, the quality of the nonperforming loans, there are a number of factors that you can consider. So looking at our overlays, my view is that, we have strong quality of these overlays.

Then, we want to use overlays during next month, six months, 100 year, we will see. The figures that we are considering are without usage of overlays. So when we talk about the cost of risk within 30 or 40 basis points, reduction of cost of risk during 2024, 2025 is without using overlays. But at the same time, from an accounting point of view, it is unbelievable that you can maintain overlays in your balance sheet. So overlays are something that are not there to remain, because otherwise, our reserves are not overlays. So there will be a moment in which an analysis should be made and then should be decided what could be the right allocation of these EUR900 million. For the time being in the kind of information that we are giving to the investors and to the market, there are zero usage of these overlays.

[Andrea Lisi, Equita]

Thank you.

[Operator]

We have no further questions at this time, I will now hand back to Mr. Carlo Messina for closing remarks.

[Carlo Messina, Managing Director and Chief Executive Officer]

So, thank you very much. I'm really happy to have the occasion to have not only a usual, a common presentation, but also a presentation in which we were able to demonstrate what we are doing from an industrial point of view. In my view, there is too much emphasis on financial presentations from a significant number of peers and now we decided to change completely the story. So industrial is fundamental, delivering significant net income, but with a clear view that we are here not for quarters. We are here for years. And the next years we need absolutely to create a bank that from a technological point of view can be a clear leader in Europe. That's fundamental for us. So thank you very much. And have the occasion to see together the next results in November.

[Operator]

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