Intesa Sanpaolo SpA

MIL:ISP

Earnings Call Transcript 2019-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Conference Call of Intesa Sanpaolo 2019 Third Quarter Results, hosted today by Mr. Carlo Messina, Chief Executive Officer.

My name is Diana, and I will be your coordinator for today's conference. At the end of the presentation, there will be a Q&A session. [Operator Instructions] Today's conference call is being recorded. And at this time, I would like to hand the call over to Mr. Carlo Messina. Sir, you may begin.

[Carlo Messina, executive]

Good afternoon, ladies and gentlemen, and welcome to our results conference call for the first 9 months of the year. This is Carlo Messina, Chief Executive, and I'm here with Stefano Del Punta, CFO; Marco Delfrate and Andrea Tamagnini, Investor Relations Officer.

Before diving into the details, let me say that ISP continues to deliver strong results despite an external environment that has been less supportive for revenues than expected. Low interest rates, while penalizing net interest income, are very favorable for our Wealth Management business, as is the declining sovereign spread. So our Wealth Management & Protection business is revamping and working at full speed to convert into assets under management part of the EUR 172 billion of assets under administration and the EUR 65 billion of households sight deposits collected in the past few years.

The first positive results were already visible in Q3, and the outlook is even more positive. Having said that, net income for the first 9 months reached EUR 3.3 billion. While increasing profitability, we have also further strengthened our balance sheet, improving our already solid capital position, continuing NPL deleveraging and increasing NPL coverage. Fully loaded Common Equity ratio increased further to a rock-solid 14.2% and the application of the Danish Compromise has increased our fully phasing ratio to more than 13% and represents an important additional buffer in view of the next EBA stress test.

During these past 9 months, we have also triggered new actions that will accelerate business plan execution and further enhance our very resilient and well-diversified business model, our high strategic flexibility in managing costs and our excellent derisking capabilities. For all these reasons, we are firmly on track to deliver a 2019 net income higher than the EUR 4 billion booked last year.

We confirm a payout ratio of 80% for this year, with a very good cash dividend once again. Let's now go through the presentation, and at the end, I will be glad to take your questions.

Slide #1. Let's now look at the key highlights. So the best 9 months net income since 2008; the best Q3 net income since 2007; the best-ever Q3 for commissions; 2.5% decrease in operating costs, with cost/income down to 49.8%, among the best in Europe; decrease of 18% in loan loss provisions, driven by a lower NPL stock and by NPL flow at historical lows.

We have deleveraged around EUR 7 billion of NPL in the past 12 months, already achieving 80% of the targeted 2018-2021 NPL deleveraging at no cost to our shareholders. Our Common Equity ratio increased to 14.2%. And as always, I want to thank all Intesa Sanpaolo people for their hard work in helping achieve these excellent results.

Slide #2. I'm even prouder of these results since they were achieved in a challenging operating environment for revenues. The eurozone and Italy experienced a slowdown in GDP growth, with Italian GDP almost flat since the beginning of 2018. The 10-year BTP-Bund spread remained at around 250 basis points in the first semester and started to decrease only in Q3.

Slide #3. Let me bring your attention once again to the pillars of our top-performing delivery machine. We proved our excellent derisking capabilities, thanks to the partnership with Prelios, ISP is now focusing its internal capabilities on proactive credit management, mainly the Pulse project, while leveraging a best-in-class external platform for late stage. We enjoy strategic flexibility managing costs. We will have 3,300 additional exits by June 2021, and we received 1,000 further applications for voluntary exits.

Also the partnership with SisalPay allows a potential reduction of 1,000 additional branches on top of the 1,100 reduction already included in the business plan. We are a Wealth Management & Protection company with sound and strong financial market activities that we decided to strengthen to both take market opportunities and hedge the impact of volatility on our fee-based business.

This is one of the reasons for the strong growth in profits from financial assets in these 9 months. Our Wealth Management machine is working at full speed to convert into assets under management part of the EUR 172 billion of assets under administration, and 65 billion of household sight deposits collected in the past few years, of which EUR 11 billion in the first 9 months.

Slide #4. Let's now deep dive into our results. Net income for the 9 months was our best since 2008, thanks to solid operating performance, and we have already achieved more than 80% of the 2018 net income level.

Slide #5. During the first 9 months, we continue to improve across all key indicators. In particular, net income was 10% higher than last year. NPL stock and NPL ratios reached the lowest level since 2009, and our Common Equity ratio improved significantly in Q3, and we have a positive buffer of 480 basis points versus regulatory requirements.

Slide #6. Shareholders are not the only one benefiting from our strong performance. During the 9 months, employees received EUR 4.2 billion in salaries and all our excess capacity of around 5,000 people is in the process of being reskilled, of which around 2,700 have already been redeployed to priority projects. The public sector received EUR 2.2 billion in taxes. Households and businesses received EUR 39 billion in medium- and long-term financing. In addition, over the same period, we helped 15,000 companies to get back on track. Besides supporting the real economy, we are also a leader in the social economy. And on the next slide, I will give you a sense of what Intesa Sanpaolo does to support Italian society and promote culture.

Slide #7. As set up in our business plan, Intesa Sanpaolo is committed to becoming a global reference for ESG. In this slide, you can see just a few examples of our work to support Italian society, and let me comment on the most recent developments. Our EUR 5 billion Circular Economy credit Plafond is evaluating more than 210 projects, of which around 50 have been financed with EUR 750 million already approved.

Our partnership with Generation, a global project to reduce youth unemployment, is already delivering and around 90 companies are committed to the program and 500 students were interviewed and around 200 were trained during the 9 months.

We are the engine of Italian social economy and in addition to our direct support to Italian society, the about EUR 700 million in dividends we paid out in 2018 to the banking foundations that make up part of ISP shareholding also provide support to social and cultural projects. In fact, these foundations alone contributed more than half of the total charitable funds donated by all Italian banking foundations.

Slide #8. As a result of these efforts, ISP has been ranked first among its peers in 3 of the top ESG international assessments.

Slide #9 -- on Slide #9, you can see the key highlights of our strong performance in the 9 months, and let me take you to Page 10 and give you some color on the P&L.

The first 9 months of the year were very strong despite a challenging environment for revenues. In this period, we delivered growth in profitability, driven by a reduction in operating costs and lower loan loss provisions. Operating income was up 1.2% when excluding the positive impact in 2018 of the NTV stake disposal, and despite the decline in net interest income, driven in part by the strong NPL reduction and the reduction in commission affected by less supportive market conditions in the first semester of this year.

Profits from financial assets were up 24%, confirming that our business model is naturally hedged because our financial market activities offset the impact of market volatility on our fee-based business.

We have continued to be very effective at managing costs, with personnel expenses down by 1.6%; administrative expenses down by 5.7%. Depreciation is up slightly as we keep investing for growth. Our loan loss provision decreased by 18% on an annual basis, and gross income was up 14% when excluding NTV. Net income comes to more than EUR 3.6 billion when excluding costs concerning the banking industry.

Slide #11. This past Q3 was the best third quarter for net income since 2007, and it is the best-ever Q3 for commissions. In comparison with the same quarter of last year, operating income was up 6%, with commission up 2%. Operating margin was up double digits and loan loss provisions were down 9%. Net income was up 25% to more than EUR 1 billion.

Slide 12. On a yearly basis, the net interest income decreased mainly due to the impact on financial components of accelerating NPL deleveraging, the effect of hedging and the reimbursement of an acquisition financing loan in September 2018.

Net interest income was also affected by strong growth in direct deposits of around EUR 24 billion in the first 9 months, excluding repos. Debt in a low interest rate environment impacts net interest income in the short terms, but boost our Wealth Management engine for the coming quarters. We will continue to work hard to improve the commercial component, while continue to manage our revenues in an integrated manner with a positive EVA strategy. The quarterly reduction in net interest income in Q3 is largely due to the impact of the NPL stock reduction and the spread component as a result of the increase in customer deposits.

Slide #13. Despite this challenging environment, customer financial assets increased by EUR 52 billion in the 9 months, excluding repos, to more than EUR 950 billion. We are near to the EUR 1 trillion mark. Assets under management increased by EUR 21 billion in the 9 months and in the same period, family sight deposits increased by EUR 11 billion, of which EUR 3 billion in Q3.

This so-called sleepy money collected in past years, together with the EUR 172 billion of assets under administration, will become the fuel of our Wealth Management engine, and we have seen the first sign of a switch, with EUR 2.5 billion of assets under management net inflows in Q3, and our Private Banking division, Banca dei Territori division are fully committed to deliver significant growth in Wealth Management and in commission deriving from Wealth Management.

Once again, in Q3, all our divisions made a positive contribution to group results. Slide 14. Almost half of our gross income comes from the Wealth Management & Protection business, making ISP a clear European leader in Wealth Management. This sits alongside the excellent performance of our Corporate and Investment Banking divisions.

Slide 15. Operating costs declined by 2.5%, while we continue to invest for growth in key areas such as training, IT, digital protection and Wealth Management, and in incentives to [ trigger growth ]. The main sources of savings were workforce reduction, optimization of real estate, reduction of legal entities and reduction of other administrative costs.

We reduced head count by 3,500 people on a yearly basis, with room for further cost reduction. We have already agreed and fully provisioned 3,300 additional exits by June 2021. On top of this, we have received 1,000 additional applications for voluntary exits to be reviewed. Further branch reductions on top of the 1,100 embedded in the business plan in the range of 1,000 is expected in light of the Banca 5 network scale-up, thanks to the strategic partnership with SisalPay. This clearly demonstrates our high strategic flexibility in managing costs.

Slide 16. We are proud to have a best-in-class cost/income ratio, and this chart illustrates our leading position in Europe. We have a cost/income ratio about 12.3 percentage points lower than the peer average. And I want also to highlight that the only 2 players who performed better than us in this ranking have significant operation in geographical areas with high margins that reduce their cost/income.

Slide #17. As you can see in this slide, loan loss provision declined to the lowest 9-month level since 2008. As a result, the annualized cost of risk is now down to 47 basis points, well on track to meet and possibly exceed our business plan target of 41 basis points by 2021. The NPL coverage ratio increased to around 55%, a level that will facilitate future deleveraging and will keep the cost of risk low.

Slide #18. Our NPL stock is declining sharply, having reached the lowest level since 2009. The gross NPL ratio has decreased by around 10 percentage points since the peak of September 2015 to 7.6%, and the net NPL ratio decreased by more than 6 percentage points, down to 3.6%, the lowest level since 2009. As you know, ISP has been able to deliver this impressive deleveraging at no cost to shareholders.

Slide #19. In order to reach our targets for 2021, we need to deleverage around EUR 600 million gross NPL and around EUR 200 million net NPL per quarter over the next 9 quarters. This is more than manageable, given that in the past 16 quarters, we organically deleveraged EUR 1.2 billion gross NPL and EUR 0.9 billion net NPL per quarter, with a coverage that was much lower.

Slide #12 -- 20. We recorded the lowest-ever 9 months gross NPL inflow, down 75% versus 7 years ago and down 13% on a yearly basis. These results are remarkable if you consider that in the past 6 months, 200 of our best NPL specialists in the chief lending officer area were focused on delivering the Prelios deal by supporting the portfolio selection and due diligence activities. These people are now returning to support our organic deleveraging.

Slide 21. In Q3, we strengthened our already-solid capital base, and we increased the buffer to 480 basis points versus regulatory requirement, well above our peers, after having already accrued EUR 2.6 billion for dividend in the first 9 months of the year. We have one of the highest capital buffers in Europe, equivalent to around EUR 14 billion. The application of the Danish Compromise has increased our fully phased-in Common Equity ratio to more than 13% and represents an important additional buffer in view of the next EBA stress test.

Slide 22. When it comes to capital strength, ISP continues to be a sector leader in Europe, and this clearly supports our generous dividend policy.

Slide 23. We have a best-in-class risk profile in terms of the ratio of capital to financial and liquid assets, so net NPL, Level 2 and Level 3.

Slide 24. At this point, I would like to share a few consideration regarding the Italian economy. Italian GDP recovered slightly in the first 9 months of the year and is projected to recover further in 2020, in line with the eurozone trend. Some key indicators are supportive. Unemployment fell below 10% beginning in May for the first time since early 2012. Gross disposable income of households is accelerating the recovery, and the recovery in residential real estate transactions is ongoing since 2015.

So the rebound in business confidence in October, in particular in the manufacturing sector, is encouraging. It could be the first sign that improved financial conditions are starting to play a role.

The recovery is based on the solid fundamentals of the country. In fact, Italian companies are more profitable and better capitalized than before the 2008 crisis and well positioned to benefit from the expected economic improvement. The mix of persistent low interest rate, declining Italian sovereign spread, GDP recovery and the more than EUR 10 trillion of stock of household wealth, is a positive scenario for a Wealth Management & Protection company like Intesa Sanpaolo.

Slide 25. As already stated in 2019, we expect further growth in net income, with a payout ratio of 80% as set out in our business plan.

Slide 26. To sum up, we are very satisfied with our performance in the first 9 months and our delivery against the business plan targets. Derisking, we have already achieved around 80% of the full year business plan deleveraging target, and we increased coverage.

Cost reduction, operating costs are down 2.5%, with cost/income down to 49.8%, while still investing for growth. Revenue growth, operating income is stable despite a challenging environment, and we strengthen our financial market activities to both capture market opportunity and to hedge the impact of volatility on our fee-based business, and we are now working at full speed to convert again into asset under management, both assets currently under administration and the so-called sleepy money collected in the past few years.

We are a sector leader in Europe when it comes to capital strength, which further improved in Q3. And so we are firmly on track to deliver an high net income versus 2018 and a very generous cash dividend.

So thank you for your time and attention, and I'm now happy to answer your questions.

[Operator]

[Operator Instructions] We will now take our first question from Andrea Unzueta from Crédit Suisse.

[Andrea Unzueta, analyst]

I wanted to better understand the strategy here. You bought -- or the financial assets grew by roughly EUR 15 billion in the quarter. I can see the split of the investments by region in one of your slides, but can you talk us through what -- what's the yield? What's the duration? What are you trying to achieve? And then the contribution of financial assets already accounted for close to 20% of NII in, as of June. How do you see that contribution evolving going forward?

[Carlo Messina, executive]

So thank you very much. Because I consider much better to have money in financial assets than in cash deposited to ECB with 0 yield, so that's reality. And so that's the situation of the bank. We are so in excess of liquidity that we have to put money in some areas. And considering that today, we are just serving the demand that we have on the loan book, we are investing in financial assets with a significant degree of diversification, because in this quarter, we increased much more the diversification of our portfolio. So the increase in all the other countries' government bonds has been much higher than the one that we invested in Italian government bonds. And at the end, we are just working on reinvestment of excess liquidity. This will bring us to have other increase in net interest margin deriving from financial assets, but considering that a portion of this is also in the availability of Banca IMI, I cannot tell you that the possible forecast for the net income increase, because if they decide to have a capital gain, for me, it's okay also to have capital gain. That's all.

[Operator]

And we will now take our next question from Adrian Cighi from RBC.

[Adrian Cighi, analyst]

Two questions from my side, please, staying with net interest income. You have another impact this quarter from lower nonperforming loans. Given your relatively high interest from impaired loans, 13% in the first half of this year, how do you expect the reduction plans for your NPLs to impact NII, especially when you're moving towards your 2021 target? What would you envisage this figure will be? And then just maybe one follow-up on net interest income. Can you give an outlook on the customer margins post the introduction of TLTRO 3? At the industry level, we see significant margin pressure, is this what you're seeing on the ground as well?

[Carlo Messina, executive]

So I have to tell you that we are not seeing significant customer margins on the ground. So that's a reality. Some months ago, I was waiting for a much higher competition. Today, I have to tell you that customer margin from our side are not under significant pressure. On NPL, it is true that NPL reduction is bringing some negative on net interest income, but it is part of the story of deleveraging. You have less net interest income much, but at the end, a much higher benefit on provisions. So net-net, on an EVA basis, it is positive. So because I'm focusing on generating value to my shareholders and not to increase net interest income, for my shareholders at the end, I think that it is the right way to manage the organization.

[Operator]

We will now take our next question from Giovanni Razzoli from Equita.

[Giovanni Razzoli, analyst]

Two questions. The first one is in light of what very strong growth in deposits that you had in the quarter, I would like you to share one and follow with us your view about the negative deposit rate on customer. We've seen a little bit of noise on the market. Your Chairman has already stated that you are not about to apply those measure on the customer. So if you can elaborate a bit more on these? And the second question. In the 9 months, you have already accrued EUR 2.6 billion of dividends. You are sitting on an extremely comfortable capital position. And you've shown us you are in the top league in Europe in terms of Common Equity Tier 1. And the -- your stock offers a 9% dividend yield. So the market is quite uncertain about the sustainability of your dividend policy. I was wondering whether the Board or as the CEO, you may consider proposing to the Board or to the AGM, the payment of interim of a quarterly dividend so to further increase the visibility of your dividend policy?

[Carlo Messina, executive]

So on interim dividends, this is a point that we are trying to analyze in more details. That could be an option, but we are still evaluating. We are not only the strongest bank if you look at capital, but by far, a capital buffer. That is very important. If you want to analyze our sustainability in terms of payment of strong dividend obviously related to growth in net income. But at the end, our capital position and our ability to generate sustainable net income is so strong that I have to tell you that it is not so difficult each quarter to beat the expectation of the analysts that are just waiting us not to deliver in terms of possible payment of dividends. And that's one of my periphery tasks, to deliver on that, on dividends.

The second point on deposits. Deposits is -- and so negative interest rates. So on deposits, we are looking and we are seeing on our figures a significant growth in deposits. That is a component of corporate deposits, that is not the majority of the increase, but we have also corporate deposits. These are mainly related to the postponement of investment from the corporate sector in Italy. So that's another evidence of positive trend in the financial conditions of the Italian companies.

On the other side, what for us is much more important is the increase in sight deposit from retail. In this area, we are increasing in a significant way the amount of deposits. There is one reason related to increase in disposable income of the Italian families, but also some switch from other banks into Intesa Sanpaolo. And generally, we are able to work this new money to convert into Wealth Management. That's the evidence of this quarter. And we are starting again with all the list of name of clients that our people in Private Banking and Banca Dei Territori division are working in order to convert into Wealth Management. That is why we are not considering at all to apply negative interest to our clients.

All our relationship managers are really committed to work in terms of converting into Wealth Management. In this environment of a spread below 150 basis points, and in my view with the opportunity, if government will make the right job to be with a spread BTP/Bund below 100 basis points, is really something that can be and that can result in significant growth in assets under management for my company and so significant increase in fee and commissions.

[Operator]

We will now take our next question from Christian Carrese from Intermonte.

[Christian Carrese, analyst]

The first question is on TLTRO and tiering, if you can share with us what do you think could be the take-up of the new TLTRO and the impact of the combined action by ECB for your bank? Second question is on business plan target for 2021. You have already done a strong derisk here, reaching 80% of your business plan targets in terms of NPL reduction. Cost of risk below 50 basis points, so well on track to reach the 40 basis points in 2021. And you have already beaten your target in terms of employees reduction on a voluntary basis. Unfortunately, we know the interest rates are lower than your projection at the time of the business plan. I was wondering, what are the levers, according to your thoughts, to reach the EUR 6 billion net profit in 2021? You just said that may be more commission rather than net interest income, so if you can give us some color on that?

[Carlo Messina, executive]

So I'm really concentrating on delivering on all of my promises, short-term and medium-, long-term promises. So it is clear that the environment is different from the starting point of our business plan. We are pretty strong in working on our contingency plan and in terms of cost reduction. For sure, we have significant room to continue to reduce cost base. We have a significant opportunity to improve the provisions due to the significant reduction in nonperforming loans, and not only commissions, but also insurance business. Because if you look at the insurance, in this quarter, we have the first evidence of what on property casualties we are delivering.

All the growth in this quarter is deriving from growth in property and casualty business. And on a yearly basis, the increase in terms of revenues from property and casualty is more than EUR 40 million. So it is not such a significant amount in absolute terms, but if you look on a delta basis, this means that we are accelerating in a significant way. So do not underestimate the fact that with the recovery of Wealth Management, the recovery of insurance business and an amount of profits from trading, that we remain much higher than the past trend of Intesa Sanpaolo, because we increased the operational activity of Banca IMI, concentrating all the activity in the hands of Corporate and Investment Banking Division. I think that we can continue to look at our business plan as absolutely reachable.

Looking at TLTRO. TLTRO, we will take TLTRO for an amount that could be lower than the one that we have already embedded in our figures. So it could be more close to EUR 50 billion than to EUR 60 billion. So this will be the total amount of TLTRO 3 that we will take in the next months. And on timing, we expect a benefit during the next 12 months, a benefit that could be between EUR 80 million and EUR 100 million.

[Operator]

We will now take our next question from Domenico Santoro from HSBC.

[Domenico Santoro, analyst]

A number of questions from my side. I will be quick. First of all, on the NII. I was wondering whether there will be more purchase of mortgages portfolio or other kind of portfolio, the one that you -- similar to the one that you did with Barclays, given that there is not much lending growth in Italy, but you have a solid deposit base?

On fees in the fourth quarter, I remember last year, there was some volatility -- positive volatility because of Investment Banking [ base in ] Banca IMI. Was wondering whether we should expect the same also in the fourth quarter?

On capital, any regulatory headwinds left, EBA guidelines or other? And I wonder whether you have also an updated guidance for Basel IV and the operational risk in particular?

On tax rate, can you help us to understand why your tax rate is so volatile quarter-by-quarter? This is -- it was quite high in this quarter. Is it because of the geography of the business where most of your net profit comes from?

And then just a curiosity on risk-weighted assets, how much is due to the Danish Compromise, how much of the increase in the quarter?

[Carlo Messina, executive]

So thank you very much for this long list of questions. I will answer line-by-line. So net interest income, we are planning to have other acquisition of mortgages portfolios. So yes, we will continue to buy mortgages portfolios.

Volatility on the fourth quarter. I have to tell you that my expectation is that the fourth quarter will be, in any case, a quarter in which we can have some seasonality related to cost, some seasonality related on provisions, some good performance in terms of commission and performance fee and some trading, continue to have a positive on trading. So net-net, on the fourth quarter I do not expect some trend that could be not in line with the usual fourth quarter trend.

On capital, I don't see any kind of threats on our capital base. The impact of the EBA still remaining is in the range of 40 basis points next year. So that's between next year and 2021. On Basel IV, we remain with 80 basis points. That is our best estimate on Basel IV.

On tax rate, it is clear that we have Corporate and Investment Banking activity, some geographical activity, and we -- when there is less contribution of Corporate and Investment Banking, it is probably more significant the impact on Italian, but this is the normal trend.

On risk-weighted assets, we have an increase of roughly EUR 15 billion of risk-weighted assets coming from Danish Compromise.

[Operator]

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

[Andrea Filtri, analyst]

Question on fees. If you could please detail the contribution in the quarter from upfront and performance fees? Following that, on NII, could you please detail the contribution from the bond portfolio to NII in Q3 and the quarter-on-quarter comparison. And out of the EUR 14 billion new purchases this quarter, would it be possible to detail the circa EUR 2 billion which do not belong to the bond category? And finally, just on capital. Why is the transitional ratio up 40 basis points, while the fully loaded is up 80 basis points?

[Carlo Messina, executive]

So the transition has the benefit on -- so Danish Compromise is much lower than in terms of benefit of capital. So the major contribution is on the fully phased-in.

On the fees income, the performance fees are, I think, something like EUR 10 million in the quarter. And the rest is mainly recurring fees and there is no significant deviation from the trends of the other quarters.

On net interest income contribution, is in this quarter, is more or less in line with the other quarters related to financial contributions, because the main driver for reduction has been the nonperforming loans deleveraging. And sorry, on EUR 14 billion, the increase in government bonds, what do you want to know?

[Andrea Filtri, analyst]

The component that is not part of the bonds category, I calculate it's around EUR 2 billion.

[Carlo Messina, executive]

So Delfrate and Tamagnini will give you all the information.

[Operator]

And we will now take our next question from Antonio Reale from Morgan Stanley.

[Antonio Reale, analyst]

I've got 2 quick questions, please. One on fees and the second one on NII trading. The first one, the Italian market is back on seeing positive inflows in assets under management. And you mentioned EUR 172 billion of assets under custody and EUR 65 billion of household sight deposits. What percentage of that you see as being sleepy money? As you mentioned, how much can you realistically be targeted -- targeting for conversion in net new money growth? I know you have internal targets for conversions, any color you can share will be very helpful.

Second question on trading gains. We've seen strong performance from Banca IMI. I have 2 points, please, there. One, what do you expect to be the NII headwinds, if any, from the lower contribution from the [ coverage ] book as you crystallize those gains? And secondly, if you could quantify how much trading gains you could book from your insurance book? I understand that there could be some significant potential from trading gains also from the insurance policy, if you could share the reserves amount, it will be also helpful.

[Carlo Messina, executive]

So on the insurance business, we have a solvency ratio that is 225%, with a capital gain [are ] realized that are more than EUR 7 billion. Then a portion -- a significant portion is of our clients and a portion is of Intesa Sanpaolo. But it is for true a significant amount.

Looking at the trading gain and the impact on net interest income, I don't see significant variation on these trends. So I have to tell you, in my view, that it is not significant.

On fee income, the percentage on conversion is the real key driver of our increase for 2020 and 2021. My people are working hard on these areas because we are starting from the list of clients and working on the kind of attitudes of the different clients. I can tell you that the portion that is really -- that it is possible to transform into asset under management is really significant. I cannot tell you that this would be all in 2020, but my expectation is that we can deliver in an environment with spread below 150 basis points, we can deliver a significant performance, close to the one that we gave to the -- to the investors in the 2016 and '17.

[Operator]

[Operator Instructions] We will now take our next question from Alberto Cordara from Bank of America.

[Alberto Cordara, analyst]

This quarter, you posted another good set of results, very good bottom line. So the question to you is, it seems to be quite obvious that you're getting close to reaching your target for the year, which is higher earnings. At the beginning of the year, the market was a bit skeptical about that. But I think everybody has to review (sic) [ revise ] upwards their estimates to take that into account.

So the second question is, can you push yourself a bit more forward, what about the dividend? Do you think you can equalize the dividend that you pay also the previous year, i.e., the [ EUR 0.20 ]? Or do you feel that you shouldn't commit to this target at this stage?

And then the other question is, if you can, I mean we continue to see, in the case of Intesa, also a story of cost-cutting, which is shaping up very well. If you can talk to us about the additional benefit that you can extract from closing branches after your agreement with the Sisal? And what that could imply in terms of cost-cutting benefit?

And finally, the very last question. We saw yesterday a negative news about Ilva. If you can give us your opinion on what's going to happen in this industrial situation in Italy?

[Carlo Messina, executive]

So we start from the last one because as you know in Italy it is not easy to make normal think as in other countries. But let me not make comment on what's happening because I think that it is very important that in this phase, the Mittal counter-party and the government can try to reach some form of agreement if they are negotiating on this subject. Related to Intesa Sanpaolo, we had in our forecast all the opportunities and threats that today we can understand in what can happen in the future for all the different assets and liabilities for Intesa Sanpaolo. But on the Ilva side, I think that it is much better to wait some days in order to better understand what's happening.

Looking at the net income and dividends. So on net income, it is clear that we will deliver, for sure, a net income that will exceed the net income of 2018. That's the part of the targets that I'm really committed to deliver. And as you told, there was a very limited number of analysts and investors that was with me in considering this target achievable. Today, I can tell you that I'm pretty sure to deliver at this point.

On the dividend side, you know the rule of 80%. It is also my favorite job to pay dividends, but let's wait for the last quarter of 2019.

On cost-cutting, the closure of branches is something that can bring us really significant advantages because we are able not only in reducing costs that are related to the branches, but also to create the right combination between reduction of branches and movement of people and reduction of people. So that is something that can allow us to reinforce the savings that we can have from the reduction of branches also with savings that are related with the administrative expenses connected with the reduction of people. So for us, the closure of branches is something that can bring really significant advantages and also in a time frame that is not so significant. So our expectation is that we can close a further number of branches and we can derive a significant contribution to reduction of costs also in the next years.

[Operator]

[Operator Instructions] We will now take our next question from Ignacio Cerezo from UBS.

[Ignacio Cerezo Olmos, analyst]

A couple of questions from me. First one, if you can give us an update on your funding plans on the wholesale side? And second, if you can share with us actually whether you're thinking of doing additional UTP or NPL disposals?

[Carlo Messina, executive]

Sorry. Hello? Yes. Sorry, on funding plan, I will leave the floor to Stefano Del Punta. But on likely to pay, our expectation is starting from next quarter, in which we will have, again, people working on this area of reduction in connection with Prelios, that we can accelerate the reduction organically. If there could be opportunity to work without impact for our shareholders, so working with no cost to our shareholders, we can consider also to make some other disposals. So I will leave the floor for funding plan to Stefano.

[Stefano Del Punta, executive]

Yes. On funding plan, I mean we've done a lot on the third quarter. So I mean we are more or less okay for the year. We will do something more in the fourth quarter, but don't expect too much. As stated in many occasions, no senior nonpreferred in 2019. So it will be preferred issuances. 2020, we will see when we receive the next letter from SRB. But certainly, if we go for senior preferred, it's going to be later in the year. We might be doing something in the area of sustainable bonds because we have a lot of things going on in this area. And if we have enough, we can do something there also in the context of 2019.

[Operator]

It appears there are no further questions at this time. Mr. Messina, I would now like to turn the conference back to you for any additional or closing remarks.

[Carlo Messina, executive]

So no, thank you very much. And let's look at last quarter results that will be positive, and you will be happy with our results. Thank you very much.

[Operator]

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