Intesa Sanpaolo SpA

MIL:ISP

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the 2021 third quarter results, hosted today by Mr. Carlo Messina, Chief Executive Officer.

My name is Ashlyn, and I will be your coordinator for today's conference. [Operator Instructions] Today's conference is being recorded. At this time I would like to hand the call over to Mr. Carlo Messina. Sir, you may begin.

[Carlo Messina, executive]

Good afternoon, ladies and gentlemen, and welcome to our 9-month 2021 results conference call. This is Carlo Messina, Chief Executive; and I'm here with Stefano Del Punta, CFO; Marco Delfrate and Andrea Tamagnini, Investor Relations Officer.

I'm very proud that even under stress from the pandemic, we continue to achieve excellent results, excellent but not exciting, but in any case, excellent. We delivered a net income of EUR 4 billion, the best 9 months since 2008. Growing profitability and best-in-class efficiency were matched by a solid capital position and significant NPL deleveraging led to the lowest NPL stock since 2007 and the lowest ever NPL ratios.

Our resilience and solid capital position underlined by the results of the EBA stress test make ISP one of the best positioned European banks to pay high and sustainable dividends. In fact, we paid EUR 700 million cash dividends in May. And in October, we paid an additional EUR 1.9 billion cash distribution from reserves to reach the total 75% payout for 2020.

We also confirmed a 70% payout ratio for this year with an interim dividend of EUR 1.4 billion to be paid this month. This performance was achieved while building up buffers to further strengthen the future profitability of our results and sustainability of our results, paving the way for the new business plan, successfully completing the merger with Italy's #4 bank and performing Italy's largest ever branch disposal, all during multiple lockdowns.

Our people were very busy, but ISP never stopped being a delivery machine. My appreciation goes to all those who made this possible, so my people.

Now let's dive into the details. Please turn to Slide 1. We had an excellent 9 months. Net income was up 29% on a yearly basis. Looking at Q3, which is affected by the annual contribution to Italy's deposit guarantee scheme, net income was EUR 1 billion, almost double compared to Q3 last year.

9 months and Q3 revenues were the highest ever, thanks to best-ever commissions. Growth in customer financial assets added EUR 55 billion to fuel our Wealth Management engine. Costs were down 2.3%, and we reduced NPL stock by EUR 17 billion on a yearly basis and had the lowest-ever 9-month NPL inflow. NPL ratios are the lowest ever, down to 2.9% gross and 1.5% net according to the EBA definition. We have already achieved our full year commitment to deliver a net income of minimum EUR 4 billion. This means that in Q4, we are in a comfortable position to increase profitability and to consider managerial actions that enable us to begin the new business plan as an even stronger and more profitable bank.

Slide #2, while delivering excellent results in these 9 months, we set aside almost EUR 500 million pretax of which EUR 160 million in Q3 as an additional buffer to strengthen the future sustainability of our results.

Slide 3. ISP is well prepared to succeed in the future. Thanks to our solid fundamentals built over time. Our common equity ratio is well above regulatory requirements even under the EBA stress test adverse scenario. We allocated almost EUR 7 billion pretax as a buffer to succeed in the coming years. We carried out impressive NPL deleveraging, and we are an efficient wealth management and production company with more than EUR 1.2 trillion in customer financial assets.

The combination with UBI will deliver synergies of over EUR 1 billion per year. We have successfully evolved towards a light distribution model, and we have a strong digital proposition. On top of that, we are proud of our role as the engine of sustainable and inclusive growth and we remain fully committed to supporting the transition towards social, cultural and environmental improvement. This is also demonstrated by our recent commitment to achieve net-zero emissions by 2050 and by joining the Net-Zero Banking Alliance and the Net-Zero Asset Managers Initiative.

Slide #4. Our solid fundamentals will allow us to continue delivering best-in-class sustainable profitability. Rewarding our shareholders remain a priority. As already said, for 2020, we paid EUR 2.6 billion in cash dividends, and we confirm a 20% payout ratio for this year with an interim dividend of EUR 1.4 billion to be paid this month. We have already accrued EUR 2.8 billion of dividends in the 9 months. We are the engine of Italian social economy and in addition to our direct support to communities, EUR 1.5 billion out of the total EUR 4 billion in dividends we paid this year, will go directly to families and individual investors as well as to charitable banking foundations that are our shareholders, sustaining their inclusive action to support social and cultural projects and people in need. But we can add the benefit to the real economy from the fact that the majority of our institutional investors receiving dividends manage the assets of families and private investors.

Slide #5. After being hit hard by COVID, the Italian economy is recovering better and faster than expected. The National Recovery Resilience Plan strongly focused on investments and reforms, is already providing additional support for the rebound. In this context, ISP will provide more than EUR 400 billion to businesses to support the recovery plan.

Slide #7. Despite the challenging environment, we delivered the best 9-month net income of the past 12 years.

Slide #8. Let's take a look at the points of strength that will drive Intesa Sanpaolo in the future. In recent years, we reduced the NPL stock by more than 2/3 while increasing coverage. And we further increased our rock-solid capital base, while also acquiring UBI and paying more than EUR 18 billion in cash dividends. We increase the already high share of revenues from commissions and insurance income.

Slide #9. We are far better equipped than our peers who take all the challenges ahead, and we have a best-in-class risk profile, one of the highest capital buffers and we are one of the cost income leaders in Europe.

Slide #10. While delivering the best 9 months of the past 12 years, we quickly and successfully completed the merger and IT integration of UBI Banca and the larger disposal of banking branches ever done in Italy.

Slide #12. On this slide, you can see the highlights of our strong performance, but let me give you some color on the following pages.

Slide 13. In the first 9 months, we continue to improve across all key indicators. Net income was 29% higher than last year, and we deleveraged the NPL stock by more than EUR 70 billion on a yearly basis.

Slide #14. Our excellent performance allow us to create sustainable benefits for all our stakeholders. Contributing broadly to society has always been a key part of our DNA. You can see this in our robust support to the real economy and our strong ESG focus.

Slide #15. As you know, we immediately responded to the COVID emergency, and we continue to do so with a complete set of actions to care for our people and customers, support the real economy and society and ensure business community. Intesa Sanpaolo has a duty to lead a positive mark on broader societies.

Slide 16, and to support the transition towards social, cultural and environmental improvements. In this very challenging moment, we remain committed to being the engine of sustainable and inclusive growth. As already said, we committed to Net-Zero emissions by 2050. We joined the Net-Zero Banking Alliance and the Net-Zero Asset Manager initiatives, and we published our first climate dedicated report.

Slide 17. Our ESG program aims at consolidating our leadership around ESG climate topic. As part of our program, we are investing heavily in ESG training for ISP people and corporate clients. You can go through the details on the next page, but for the sake of time, let's now move to Slide 19.

In this slide, you can see that we are the only large Italian bank at the top of the main sustainability rankings.

Slide #20. In this 9 months, while merging UPI and despite COVID, we delivered excellent performance, driven by high-quality earnings. Commission grew over 11%, more than compensating for the decline in net interest income. Profits on traded were solid and fully realized. Revenues were up nearly 3.5%. We continue to be very effective in managing costs with administrative expenses down 6%.

Operating margin was up 10%, the best 9 months ever. We have been very conservative in provisioning. And in this 9 months, we set aside almost EUR 500 million pretax as an additional buffer to strengthen the future sustainability of our results. Gross income was up 46% when excluding the Nexi capital gain. Net income becomes EUR 4.5 billion when excluding costs concerning the banking industry.

Slide 21. Q3 was one of the best ever third quarter for net income. Compared to the same quarter last year, commissions were up over 8%, reaching the best-ever Q3 results. Operating margin was up almost 20% thanks to revenue growth and cost reduction. Gross income was up almost 70%. Net income was up 80%. On a quarterly basis, gross income was up 11%. Net income is at EUR 1.2 billion when excluding costs concerning the banking industry.

Slide 22. Net interest income. In this slide, you can see that on a quarterly basis, net interest income increased slightly. On a yearly basis, the decrease was due to financial components that were affected by the reduction in the size of the securities portfolio as a consequence of the integrated management of ISP and UBI portfolios and by NPL deleveraging.

Net interest income was also affected by a strong increase in retail direct customer deposits which impacts net interest income in the short term but boosts our Wealth Management engine in the coming quarters and years. We still continue to manage our revenues in an integrated manner to create value. As you will see in the next slide, in these 9 months, we recorded strong yearly growth in commissions, which more than compensated for the decline in net interest income.

Slide 23. The first 9 months were our best 9 months ever for commissions. We did this while successfully merging UBI and despite COVID.

The Slide #24. Customer financial assets increased by almost EUR 19 billion on a yearly basis. Assets under management and net inflows were positive by more than EUR 12 billion in the 9 months. In the past year, we recorded an extraordinary increase in corporate and retail deposits, which will fuel our Wealth Management engine in the coming quarters and shows once again the resilience of Italian companies.

We continue to be -- Slide 25, very effective at managing costs while keep investing for growth.

Slide 26. We are proud to have one of the best cost to income ratios, and this chart illustrates our leading position in Europe.

Slide 27, NPL stock has continued to decline sharply with 24 quarters of continuous deleveraging, more than EUR 1 billion in Q3 and we have almost all NPL ratios in the past 12 months. As you can see in this slide, loan loss provisions declined by almost 50% and the annualized cost of risk is down to 34 basis points when excluding the additional provision to accelerate NPL deleveraging and we recorded the lowest-ever 9-month NPL inflow, while the large majority of moratoria already expired.

Slide 29. Our fully loaded common equity Tier 1 ratio is 15.1% on a pro forma basis after the EUR 1.9 billion cash distribution from reserves paid in October and including DTA absorption, which we'll compensate for the future Basel IV impact. Our capital buffer versus regulatory requirements is well above our peers and our fully phased income on equity Tier 1 ratio is 13.8%.

Slide 30. When it comes to capital strength the leverage, ISP continues to be a European leader.

Slide 31. We have a best-in-class risk profile in terms of the ratio of capital to illiquid assets and ISP also enjoys a strong liquidity position and that almost EUR 120 billion in excess medium, long-term liquidity.

Slide 32. This slide is only to remind you that the EBA stress test showed the good outcome for ISP despite the very severe stress applied for Italy.

Slide #34. In closing, let me recap the key points that show the sustainable strength of Intesa Sanpaolo. Our resilient and profitable business model outdelivered even during the pandemic and while successfully completing the merging with UBI. We already achieved our full year commitment to deliver a net income of minimum EUR 4 billion. These were the best 9 months in Q3 ever for operating income and commission.

Costs were down significantly, and our cost to income remains one of the best in Europe. We strongly reduced our NPL stock. NPL ratios are the lowest ever. Our capital base is well above regulatory requirements even under the EBA stress test adverse scenario. The UBI combination was completed quickly with success and synergies will be above EUR 1 billion per year. Our resilience makes ISP one of the best positioned European banks to pay high and sustainable dividends. This year, we have already distributed EUR 2.6 billion in dividends. And for 2021, we have already accrued EUR 2.8 billion towards our 70% cash dividend payout ratio for this year. And net income, and we will distribute EUR 1.4 billion of this as an interim dividend in a few weeks.

Let me thank all the Intesa Sanpaolo people once again for their hard work and commitment that allowed us to achieve these excellent results. For the past year, I have been calling ISP a delivery machine. And quarter after quarter, year after year, we have kept our word even in a total global crisis that no one could predict.

As we get close to the end of our current business plan, I'm very proud of this best ever 9-month results that pave the way for the next business plan. They give us the strength and flexibility to take actions that will put us in the best possible position as we head into our new business plan a few months from now. The ISP model is super solid and is built for the sustainable benefit of all our stakeholders. I'm looking forward to sharing the new plan with you soon. And now I'm happy to take your questions.

[Operator]

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

[Antonio Reale, analyst]

It's Antonio from Morgan Stanley. I have 3 questions, please. The first one, I look at your balance sheet and you continue to derisk. The bank is now in a position that it has probably never been throughout its history. Underlying cost of risk clearly reflects that. I think it was in the 30-basis-point range. You keep selling NPLs. And I think, if we classified another EUR 1 billion or so this quarter. So this is a buffer, potentially a large buffer that gives you some optionality ahead of the plan.

And so my question is, how do you intend to use it? Do you want to move up the risk curve and pursue lending growth? Is it more M&A growth outside of Italy within wealth? Is it just banking on a very low cost of risk for the plan horizon? Can you share your thinking there? That's my first question.

And secondly, it's really the other side of the same coin, and that's on NII, which remains under pressure. I look at your Slide 22 and despite higher volumes, NII was flat. We see the negative contribution from spreads, which suggests there's still underlying pressure there. So deposits have also grown. I look at your NII in the 9 months and channelizing minus 4% year-on-year. What is the outlook for net interest income from here? And what would you expect from volumes going forward, both on the lending side and on the deposit side, please?

And lastly, my last question is, would you anticipate any changes to your capital treatment or financial investments from the Basel III proposals that was published last week?

[Carlo Messina, executive]

So the -- I will try to elaborate on all the different points, making kind of synthesis between my view of the future for the NPL, capital and lending activity for the banks. And so elaborating on net interest income.

For Basel III, equity investment will be within the impact of Basel III, but I can confirm you that -- Basel IV, sorry, in the sense, and we can confirm that in our case, is not so significant due to the fact that DTA will more than compensate the impact of Basel IV.

Looking at the kind of strategy that we decided to realize in these 2 years is for sure to completely change the risk profile of Intesa Sanpaolo, starting from the point that, if we add an excess of capital with an amount of EUR 60 billion nonperforming loans, EUR 35 billion nonperforming loans, EUR 80 billion nonperforming loans, this excess capital is getting momentum in substantial point of view because with a significant reduction on nonperforming loans, now our real excess capital, especially due to the fact that we have limited derivative Level 3, no -- Level 3 and Level 2 assets. So we are in comparison with other peers with a real excess capital. And probably, we are in a unique position in comparison with all the other peers.

There's also another point looking at the capital position, solidity and the reduction of nonperforming loans that is the point that, in any case, stock of nonperforming loans demonstrated to generate provisions in the future. So if you look at the history of cost of risk for the bank, a significant portion of the cost of risk has always been related to stock of nonperforming loans.

So my target is to create conditions to have a cost of risk during the next business plan that is mainly related to new inflows. And due to the fact that, in any case, the scenario for the new business plan will, for the first time, in Italy will bring to a growth of GDP in the next 3, 4 years, it could be 10% cumulated. It is likely that inflow will be really limited. So if you are in a position to reduce in a significant way the amount of provisions related to the stock, you are increasing profitability for the future. And I think that, it is in the interest of all the stakeholder of the bank to enter in the new business plan with a real limited impact coming from the stock of nonperforming loans.

Lending is clearly related to the potential and the demand coming from the country is related also with the growth in GDP. Our perception is that there will be a trend of increasing demand in loan volume but this is not still the case in the country. Only large corporates are entering into an investment mode. Small and mid are just starting today in making decision of new investments. So our strong capital base remain available for future valuation in terms of making happy our shareholders. The dimension of the excess capital will be a function of the new plan. And so this will be something that we will elaborate in February.

At the same time, net interest income is an important driver of our profitability, but it is not the most important part of the profitability because it is clear that, if you are increasing deposits quarter-by-quarter in an environment with minus 50 basis points, Euribor you lose money. But at the same time, you increase future profitability in terms of commission or if interest rate will increase in the next years to have a significant rebound in net interest income.

Looking at the short-term trend, net interest income will have, for sure, a contribution from volume -- loan volume. Deposits are still increasing and consider that we are making conversion of deposits into asset under management because the increase in net inflows that we had in these 3 quarters derives completely from conversion of retail deposits. So we are still in a mood of increasing deposits at the same time, increasing asset under management.

Markdown will depend on the Euribor. I hope that we'll be the last reduction that we had in the third quarter in terms of markdown and so we can have further flat contribution from markdown. And the financial components can give us some propositive. At the same time, reduction on nonperforming loans means that you will have some reduction of net interest income, but significant reduction of provisions. So in terms of net income, net income contribution that could be significantly positive. So that's all.

[Operator]

We will now take our next question from Delphine Lee of JPMorgan.

[Delphine Lee, analyst]

Yes. I'd like to just ask about just a very short term about this year's performance in Q4. Clearly, we've already achieved EUR 4 billion. I was just wondering what we should expect in terms of provisioning again in Q4 or anything that we should be aware in terms of cost increase. Just trying to get a sense of sort of how much you can anticipate to improve profitability in the plan for the future? And also, in terms of -- can you just remind us like the stock of provisions you've taken for us -- well, for Stage 2 loans? And how much of that has already been used just to get a sense of how much could be written back over time? And I just wanted to follow up on Antonio's question, just briefly on Basel IV. Is your guidance still unchanged around, if I remember correctly, 80 basis points of Basel IV?

[Carlo Messina, executive]

So your point on the fourth quarter is for sure, the most important part of the story of our results. And I understand that from your side, there are a lot of point of attention on our results because we have already reached the EUR 4 billion that we have considered at minimum. It is clear that reaching more than EUR 4 billion, the guidance is now that we can achieve more than EUR 4 billion. The underlying profitability is getting momentum, and we'll get momentum also in the fourth quarter apart from some seasonality in terms of cost, but the trend is for sure in increasing the profitability, core ordinary profitability for the banks.

The real point of attention is the preparation of the business plan. So it is clear that what I want is to create condition, to generate sustainable and significant net income for the next years in which we will be in a positive trend for the country and we will be in a unique position considering our client base and our wealth management and protection business model. So I want to enter into the plan with 0 problematic related on cost of risk and on nonperforming loans.

The trend is, we remain 35 basis points underlying cost of risk. Then we have a possibility of making analysis of increasing profitability, but at the same time, reinforcing the future results for Intesa Sanpaolo. We are still making analysis.

We are in the process of completing within the end of the year what could be the best way to manage the new business plan. At the same time, I mean the analysis of implication of the digital framework on branches and cost base of the group is the other part of the story. And again, it's something that we have to evaluate with significant attention and we have significant room that can allow us to manage the business plan as a clear winner in the next years in the banking -- European banking landscape. So that's my position. I want to be completely transparent. We will increase profitability. But at the same time, we will make analysis of what can improve the kind of sustainable profitability, increasing net income for the next years.

Looking at Stage 2, we have a number of reserves also in these areas. We didn't use provision and the change in scenario that is already embedded in the figures. So we have room also for reducing provision or increasing buffers in the next -- in this quarter. So that is part of the analysis that we will make in the fourth quarter. And believe me, this is really an happy conditions to be. So that's our position. We created conditions to be in a unique position compared with other peers to make the reinforcement of our results for the future.

Basel IV, the maximum amount is 80 basis points. So the analysis that we are completing, and it is clear that in our business plan, there will be until '25 we will make a clear and full disclosure also of Basel IV. But at the same time, I have to tell you that the DTA is embedded in our figures that we have the majority of concentration between '23 and '28 will allow us to manage these spike in terms of risk-weighted assets in a very comfortable position in comparison with all the other European banks.

[Operator]

We'll now take our next question from Azzurra Guelfi of Citi.

[Azzurra Guelfi, analyst]

I hear you loud and clear on the strategic direction for the next business plan. One thing that I might ask you is about the cost of possessing inflationary pressure and probably in order to keep cost flat underlining the synergy. There could be additional need for restructuring. I don't know if you thought about that. Is it something that we can expect in the fourth quarter? I don't know, linked to the digitalization or franchise for the rationalization on top of what you already have included.

The other question is on IFRS 17. I don't know if you can share with us any color. It seems to be the European banks are less affected than U.K. one, but I just wanted to hear your thoughts on this.

And another one, if I can, very quickly, is on capital and the potential risk coming from consideration from the regulator of climate risk. Do you think that the Italian banks, given the loan book and the analysis that ECB has done on the physical and transitional risk are at higher risk compared to others? Or is just because there is not yet enough granularity and the SMEs are a bit of a black box from that point of view from the outside?

[Carlo Messina, executive]

Thank you, Azzurra. So looking at the cost, there are 2 areas in which we have to make analysis considering the new business plan. One is provisions, and I have already elaborated on this point. The other one could be analysis of what could be the impact for the future and digital proposition in the next year. So that's something that we are making in-depth analysis.

We made a lot of integration charges in the past and last year. So as I told you, we enter in this space as in a very happy position because we used more than EUR 6 billion last year in order to increase profitability. Now we used EUR 500 million increasing profitability -- increasing, sorry, the future profitability. So with reserves in these 9 months. And now we enter in a quarter with a strong fundamental operating performance that can allow us to make all the degree of analysis in order to improve profitability in the short term for our shareholder -- in the fourth quarter. At the same time, with the possibility to reinforce profitability for the future.

I'm pretty sure on provision. I'm not so convinced that we can have all the degree of flexibility in terms of accounting principle on the cost side. We will make what it is necessary in order also to face this point. But believe me, the cost sides are -- costs are and will remain in the future, a clear point of strength of Intesa Sanpaolo and the ability to manage and to reduce cost is something that we remain strategic for the group.

Looking at IFRS 17. So there are 2 points. One, on profitability and one on capital. Looking at profitability, the European and especially Intesa Sanpaolo position is that, we can have some volatility in terms of results but not significant. So we are not worried at all on this point on profitability.

On capital, there could be any impact of some minor -- could be 10, 20 basis points, we will see in the next quarter what would be the real dimension. But at the same time, we are starting with actions of mitigation of this impact. So we will have the final figure for the presentation of the plan. But in our view, it is not significant. It's absolutely manageable through mitigations that we can realize during the 2022. So not a problem at all for us.

Looking at capital and climate risk black box, that's something difficult to understand for the other banks. So I cannot talk about Italian position. I can talk about Intesa Sanpaolo position. And I cannot talk about European position because difficult to understand the position of all the different banking sector. I don't think that according to Intesa Sanpaolo this can be considered high risk. So we think to have a manageable exposure. And in any case, we can create conditions in order to mitigate any kind of impact that can derive from this point.

[Operator]

We'll take our next question from of Pamela Zuluaga of Credit Suisse.

We'll move on to our next question from Andrea Filtri of Mediobanca.

[Andrea Filtri, analyst]

I have 3 questions. The first is on fees. If you could, please, and detail for us upfront fees and performance fees in Q3. What was the gross and net flow in AUMs in the quarter? .

The second question is a bit unusual. But do you expect any impact for Intesa Sanpaolo from the proposed changes to the fiscal treatment of taxes paid upfront on the treatment of intangibles that have been included in the draft budget law by the government.

Third question, actually, if you could please detail us the drivers behind the EUR 82 million provision on other assets in this quarter and the EUR 63 million other net gains. Thank you.

[Carlo Messina, executive]

So looking at the -- starting from the EUR 82 million and EUR 63 million. So EUR 82 million negative, EUR 62 million positive. We had an extraordinary gain of EUR 63 million, and we decided to increase cleanup in terms of provision different from credit provisions. So it's another form of increasing future profitability through the usage of an extraordinary profit.

Looking at the intangible, we don't think that we can have something especially negative for the future. So I don't think that we can have an impact looking at this. And in terms of fees, the amount of performance fee has been reduction compared with the second quarter, reduction by EUR 14 million. So we had a reduction in terms of this and also the upfront fee are in reduction in comparison with the second quarter.

The trend in terms of net inflows is EUR 12 billion, and that's mainly coming from the conversion of retail deposits. Fees are and remain the most important part of our future profitability due to the fact that we think that we can easily achieve an acceleration in conversion of retail deposits entering into the business plan, and we will elaborate on this point in the next business plan. But we are starting with the list of clients and the ability for our network to work mainly on retail deposits, but also of assets under administration as usual.

[Operator]

We'll take our next question from Andrea Vercellone of Exane.

[Andrea Vercellone, analyst]

On Q4, can you give us an indication of the performance fees that you have already accrued but not yet booked. So if markets don't change versus today, what are we looking for in terms of one-off performance fees for Q4?

Then I just wanted to make sure that the capital gain on the disposal of the merchant acquiring operations of UBI has not yet been booked. I think it hasn't, but I just wanted to be sure.

Then on capital, out of the 35 basis points of negative headwinds linked to the EBA guidelines that you still have to take, was anything already booked in Q3? Or it's all coming in Q4 or maybe postponed to future years?

[Carlo Messina, executive]

So Basel IV, the remaining part would be in 2022. So not an impact in Q3, and our expectation not to have in Q4. The EBA guidelines, sorry, note Basel IV, EBA guidance. .

The capital gain, the possible capital gain of UBX UBI not yet booked. So it is true. It is not yet booked.

And on performance fee, the amount is really significant, but I don't want to give you disclosure because we will see the dynamics of the market.

[Operator]

We'll take our next question from Jean Neuez of Goldman Sachs.

[Jean-Francois Neuez, analyst]

I just wanted to ask you a question on competitive dynamics for new business in lending. So we see that the volume growth right now is not very, very strong but can be seen from the industry as a whole. But we also know that the TLTRO bonus rate is currently ongoing. And from June next year, at least for now, it's supposed to finish.

I wanted to understand from your perspective, do you feel that today, this bonus rate, even though on a stand-alone basis, it's obviously in addition to net interest income, whether you feel that net-net, it's been leading to competition, which has detracted from net interest income? And whether you feel that when the bonus rate finishes, it's going to be easier pricing conditions and create easier comps for net interest income or whether just the removal of bonus rate is something that you feel is, is something which is a headwind for NII after it's removed?

[Carlo Messina, executive]

So that's a good point. If you -- if we look at net interest income, that's the most important part of the story for the future apart from a possible not expected for the time being, rebound in Euribor interest rate. If we look at the volume dynamic the situation in Italy, if you look at the dynamics of the corporate sector is that large corporate started to use their proceeds deposited with the banking sector and starting to invest using their own deposits. So that's the first part of a trend that probably started some months ago.

Now they are accelerating, and it is typical in this phase. Now SMEs company are starting to make evaluation of investment plan. So they are accelerating due to the fact of the national plan of recovery and resilience. So they are putting themselves in a condition to have benefits from the acceleration of the trend in GDP in the country and the acceleration of public investments starting with funds coming from next-generation EU.

My expectation is that this will have a clear acceleration next year in terms of loan demand and possibility for the banking sector to increase -- to have a real increase in terms of volume. So the competitive dynamics within Italy in my view today is not so significant because on the other side, the attitude of companies to invest is just starting now.

We will enter in 2022 with accelerated biggest country -- in 2022, with an acceleration in terms of investments from companies and so from an acceleration in terms of loan demand. I think that this will allow to more than compensate in terms of growth of net interest income, what we can reduce in terms of contribution from TLTRO, considering that in any case today, we are reinvesting TLTRO in -- with the ECB. So the net benefit is not so significant.

And at the end, the contribution from loan volume could be much higher in the future. So the 2022, in my view, will be the year in which, there could be the acceleration in loan demand from the Italian companies. And it is clearly correlated with the 6% growth in GDP that we will have this year, but the 4% that we will have next year. So 10% in 2 years we'll have, for sure, an acceleration in terms of loan demand.

[Jean-Francois Neuez, analyst]

Okay. And my second question was, you're obviously doing already a lot of net income right now, in particular, if you don't include normal preparation items that you might book in Q4. In view of what you already produce, I guess, improving from there is incrementally slightly harder. And in that vein, how much more of a priority does it become to normalize your capital ratio, which is high, maybe compared to what it used to be in the short to short- to medium-term towards your capital target?

[Carlo Messina, executive]

So that's -- again, let me give you just 2 figures. So when we started the previous business plan, we used to have the business plan ending in 2021. We started with probably stock of nonperforming loans that could be EUR 60 billion. And a target of fully loaded target and implicit figures related to common equity of 13%, 12% fully phased in.

So just to make it easy, but today, we have EUR 18 billion nonperforming loans, net probably EUR 8 billion, EUR 9 billion nonperforming loans, but we have a capital ratio that is 15% -- more than 15% on a fully loaded basis that it is really important because we have the hedging towards Basel IV in these figures that is fully loaded and the fully phasing that is 13.8. So it is clear that we have a real excess capital that is unbelievable in comparison with some years ago.

The usage of this excess capital in the future will be part of the business plan. So I don't want to anticipate in this occasion, but will really elaborate in in-depth in -- during the presentation of the business plan. But just to give you these figures, EUR 60 billion nonperforming loans, 30% fully loaded, EUR 18 billion gross nonperforming loans, 15.1% common equity Tier 1 ratio.

[Operator]

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

[Domenico Santoro, analyst]

Just a few questions from my side. I will be very quick. First of all, I mean, other banks in Europe, they are releasing the COVID-related provision. The macro overlay that they have booked last year. So I'm just wondering if you could quantify them. .

And whether at the point accountant that we ask you to release, if everything goes right next year. And I'm just wondering, if those are the provision on which you will do a sort of assessment in the fourth quarter to accelerate the leveraging to build up a profitability in the future.

The second is on capital. I mean the quality of your balance sheet now makes us in a position to look carefully at your excess capital. So I'm just wondering whether this 12% minimum that you fix in a way, is that after Basel IV and it is comparable with the 13.8% that you're having this quarter? This is just a methodological question.

And whether the 70% payout that you confirm for 2021 could be consider there was a as a raise for the next years and therefore our models? And then on cost, I mean, a chunk of the savings related to the merger, they're going to filter already next year. And I wonder, if you could give us the direction for cost, which is going to be negative for sure or a range in the case of revenues that go very strong or in case you may use cost also as a contingency plan.

[Carlo Messina, executive]

So just I will answer to the first question, then I will elaborate on the second because I don't want to enter into the business plan today. So starting from your question, we have still EUR 700 million of possible reduction in terms of generic reserve that we can use in the next quarter. So just to give you the idea of our really strong position because 0 inflow, new inflow of nonperforming loans zero, just to meet you the idea of very limited inflow, a significant reserve, significant profitability that we can generate in the future.

And let me add just a point on the comparison with the previous business plan. Because if you just make -- considering our sensitivity to net interest income to the Euribor, an increase of 100 basis points in Euribor will bring us EUR 2.3 billion, EUR 2.4 billion of increase in net interest income.

So if you consider the hypothesis of Euribor in our business plan that is ending in 2021, and you can see the cost of risk of 40 basis points, that is much higher than we have today as a run rate because it is 35 basis points. As I told you, apart from the deleveraging, we are really close to the EUR 6 billion that we had as a target in terms of our original business plan. So just to give you the idea of our ability to create actions in order to deliver results and what kind of optionality we can have in terms of potential rebound of interest rates.

So only if, the Euribor will go to 0, so not moving from minus 50 to 0, we will have EUR 1.2 billion increase in net interest income. So just to give you the idea of what we created in terms of engine for delivering profitable and sustainable results in our organization.

So a lot amount of reserves in terms of extra release of provisioning of extra creation of room for future profitability.

In terms of capital and costs, I want to elaborate in the next presentation in all these items because the target could be also Basel IV, but we will have to analyze in terms of new business plan, what would be the dynamic of loan of operational risk. So there are some items that are related with the possible disclosure of these figures, and we will not elaborate on this point in the way in which we have the final point for the group, but it is clear that reducing the risk -- the amount of risk, the excess capital can increase from a substantial point of view. Then we can make decision of maintaining some buffer. But for sure, we have an enormous amount of real excess capital in terms of our capital generation.

We will fix the level of capital, the minimum level of capital. So we will give you the rule of the game related to capital in terms of payment of future dividends, but it is clear that our ability to generate net income. And my personal attitude to remunerate shareholders is the same and will remain the same also in the future.

Looking at cost side, again, contingency plan are enormous in our bank because we manage the capital budget. So our strength in terms of cost management is related to the fact that we have project by projects and for each single projects, the amount of costs that are related to personnel costs, administrative expenses, the depreciation that are embedded with the investments. So our ability is to manage this possibility of using the capital budget as board in order to manage the cost side in correlation with the revenue side. But also on this point, in this business plan, you will have the full disclosure of our target and our ability to create contingency plans.

[Operator]

We will now take our next question from Britta Schmidt of Autonomous Research.

[Britta Schmidt, analyst]

I've got one question remaining, really. A bit to assess the trend of the net interest income and also the managerial actions in Q4. You've got a lot of margin with people in profits, you've got existing reserves that are unallocated and there's the merchant acquiring gains still to come. In the past, you've commented on also using bond sales potentially as a trade-off towards NII. Do you think that this will be required in Q4 as well? Or should we assume that the current stock of the bond portfolio is going to basically remain where it was in Q3?

[Carlo Messina, executive]

That's another good point because we concentrated on the loan volume, but there is also another way to increase the performance in net interest income that is to increase the volume of government bonds, and we made it in the past in the situation in which commissions were under pressure.

So the evaluation on the right dimension of the portfolio, it is not a short-term item. So it is not an item of the next 2 months. But for the future, 2022, let's put in this way, for the budget 2022, we are making also analysis of what kind of levers we can have in terms of increasing the net interest income also through an increase of the dimension of the financial portfolio.

We are not -- we are in a good position. Also if you look at the percentage of Italian government bonds on the total amount, valuation are still in process. So we -- for the time being, we didn't increase. So that's for the time being, the timing of November we did not increase in a significant way the portfolio, but the analysis can bring us to make different valuation. For the time being, I cannot give you the real point because we didn't complete it the budget process, and this is a decision that is important for 2022.

[Operator]

We will now take our next question from Ignacio Cerezo of UBS London.

[Ignacio Cerezo Olmos, analyst]

I've got 3 questions, 2 on fees, 1 on net interest income. On the fees, I mean, if I have a look at the growth of AUM is around 1% quarter-on-quarter, which seems to be lagging a little bit in the broader market performance. So if you can explain, why is that? Related to this, we have seen a similar amount of inflows into AUM around EUR 4 billion quarter-on-quarter. The placement fees are significantly lower. So if you can explain why that is the case? And on NII, if you can give us some indication whether again Q4 is going to be lower or higher than the third quarter of the year.

[Carlo Messina, executive]

Looking at the asset under management, we have an increase that is related to the kind of percentage equity and other liquidity and government funds within the total amount of our assets under management. I have to tell you that, I'm not so concentrated in the growth in terms of performance, not because it is not important, but because I think that I need to move the attitude of my people. And you certainly remember that our attitude was to give list related to assets under administration to be switched into assets under management.

Now we are completely changing the focus in terms of which from retail deposits into asset under management. So today, we are concentrated in these areas. Looking at the performance of our asset under management, factories, my understanding is that the performance is in line with competitors and in line with peers with significant possibility to generate performance fee.

Sorry. And the last question on net interest income, could you repeat, please?

[Ignacio Cerezo Olmos, analyst]

Yes. Yes. If -- yes, the Q4 actually is the number you expect it to be lower, higher or more or less at the same level as the third quarter.

[Carlo Messina, executive]

Yes. As usual, not easy to give a specific guidance on a quarterly basis because you know that we have a clear correlation with the trading profit. So this will depend on the attitude of our Banca IMI and treasury departments to realize capital gain instead of maintaining net interest income.

And if you look at initially, so without change into the attitude of our departments, the net interest income should be flat. That's our expectation. In case they decide to make other disposal, it will depend from the possibility to reduce the impact of markdown. And so from the ability to accelerating, switching retail deposits into asset under management.

We are delivering for this month good performance in terms of switching of retail deposits but also the attitude of Italian families is still to maintain and increase deposits with the banking sector. So we will have to check this point. My expectation is that, we can rely for sure, in terms of volume growth and from financial contribution. If we will have an acceleration in terms of capital gain in the portfolio, we will see what could be the dynamics in this quarter.

[Operator]

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

[Giovanni Razzoli, analyst]

Two questions on my side. The first one, do I remind correctly that 2022 net profit guidance was above EUR 5 billion. I was wondering whether we shall look at it as ...

[Carlo Messina, executive]

Sorry. I cannot hear you well. Sorry. Could you repeat, please, because there's a noise in the voice?

[Giovanni Razzoli, analyst]

Sure. Can you hear me now? Hello?

[Carlo Messina, executive]

Yes. Absolutely. Yes...

[Giovanni Razzoli, analyst]

I was wondering, whether I recall it correctly that the 2022 net profit guidance was EUR 5 billion, and if shall we look at it as a still indication for next year as a net profit.

And the second question relates to the outlook for the capital at the European level. Do you believe that in a post-pandemic world, the regulators should focus their attention more to leverage ratio rather than to common equity Tier 1, a KPI where you look much even more stronger than you actually are. So is this something that is reasonable in your opinion?

[Carlo Messina, executive]

First point, EUR 5 billion, it is absolutely confirmed. So my expectation is, there could be minimum EUR 5 billion for 2022. Looking at the outlook on capital, that's a good point because there is a lot of increasing attention from the supervisors in terms of dimension of assets and the view on leverage buyout on the kind of risk that you can have in your balance sheet in terms of also of not only in terms of risk-weighted assets.

My perception is that in any case, common equity can remain the most important driver in terms of valuation, but there would be an increasing analysis related also on leverage. But common equity, my perception is that will remain the main driver of analysis from the supervisor in the business model, sorry because there will be a combination with business model.

[Operator]

We will now take our next question from Anna Benassi of Kepler Cheuvreux.

[Anna Maria Benassi, analyst]

My question regards, again, your comments from the one-off in the Q4. As you were guiding for 60 basis points of cost of risk for this year and you are running at 44. Do you consider that at this point what you are talking about one-off. So this 60-basis-point increase in the, all you need or you want to put in Q4 to increase coverage and to be even more relaxed for the years to come?

My second question regards tax rate. It has come above expectations and guidance in Q3. So I wonder if there's anything special in Q3? Or if you should -- reach that level in Q4 -- Q1 -- Q4, sorry.

And then a comment if you may, on the Monte Paschi situation. I know you are not going to be in there yet, but this is, still this is the largest bank in Italy. It is going to remain in [ Verona ] for another while. Do you have any comments on what could happen now? And surprisingly, your main competitor didn't take the opportunity to trying coming in the market share. So as the first reaction one could see that, life will be interesting for you rather than difficult.

And finally, just I want to thank you for giving the common equity Tier 1 fully loaded without the mitigation, that number is very useful for us.

[Carlo Messina, executive]

Sorry, the line was not good, but I will give you answer on the provision and the 60-basis-point guidance. And then, I understood on Monte Paschi di Siena. I lost the second question. So I don't know, if you want to repeat or if you want to elaborate at the end of -- might you. Could you repeat that...

[Anna Maria Benassi, analyst]

Well, no. The second question was very easy. It's about tax. Yes. It's about tax rate -- that too, exactly by the expectation in Q3, so I wonder if there is a one-off for this quarter or if that is the baseline for Q4?

[Carlo Messina, executive]

So again, on provision, as I told in previous answers, the run rate today is 35-basis-point, and I cannot tell you that we will have a different trend also in the last quarter. So the run rate that we have today and hopefully, looking at the future dynamic of GDP, this could be a trend that can be a trend of correlation with the Italian Intesa Sanpaolo loan portfolio. So that's for sure something that it is in our -- embedded in our figures.

At the same time, as I told, I think that we are in a unique position to have room to increase profitability. So to give increase, our profitability in comparison to the EUR 4 billion that we have already achieved to our shareholders. But at the same time, to create also room for the future and the room to have further and further degree of flexibility on our excess capital, and this will be only related with the possibility of making further reduction of nonperforming loans and improvements of the risk profile of the group.

60 basis points is clearly a maximum level of provision because today, as I told you, we do not see significant reason to move in a different way, looking at the ordinary trend, then we can decide and we will evaluate in the next months to make something extraordinary, but it is today under evaluation.

So for full transparency, I want to give this to the market, but I have not a final point and the final decision on this point. For sure, we will increase profitability in comparison to EUR 4 billion. I'm really making evaluation to reinforce the sustainability and the real excess capital of the bank for the future.

Looking at tax rate, the tax rate adds an extraordinary negative in this quarter. So the run rate could be probably much better than this quarter. That's on a quarterly basis. Then we will see in the business plan what can be considered the tax rate for the future.

And on Monte Paschi di Siena and the Italian banking sector, my perception is that today, in Italy, we have a strong banking sector. So I have no perception of weaknesses in the country. There are 2 situations that are under attention. One is, and the other one is [indiscernible] and the other one is, Monte Paschi di Siena. In any case Monte Paschi di Siena is in the end of the Italian government. So I have to tell you, this not can be considered as a systemic risk because in a country in which you can have a clear trend of growth and a potential rebound of interest rate, not in 2022, okay, not in the first part of 2023. We will see what can happen in the next years, but also bank like Monte Paschi di Siena can have a significant rebound in terms of profitability. So I'm not worried at all for the Italian banking system.

It is obvious that the combination with another bank like UniCredit could have been a good solution, but it is also true that in a negotiation, you have to maintain the ability to create value for your shareholders. And if you think that it is not possible, the negotiation has to be stopped.

[Operator]

We'll take our next question from Pamela Zuluaga of Credit Suisse.

[Pamela Zuluaga, analyst]

I have 3 quick follow-ups. The first one on the specific provisions that you keep on booking regarding the NPL portfolio to accelerate deleveraging, how should we think about these charges moving forward? Can you give us some detail on your target coverage levels? And how much longer should we expect this targeted increase in coverage to maintain higher cost of risk levels?

Can you also give me some more detail on the size of the impact of the ongoing NPL deleveraging on NII for next year? And finally, on your guidance on sensitivities to rates that you were mentioning before, how much of the EUR 2.3 billion impact from the Euribor could come in year 1? Or is this an NPV of the potential impact? Can you give us some detail on this very high sensitivity and where would that leave your hedge of the liability side of the balance sheet?

[Carlo Messina, executive]

Sorry. Just to give you on the sensitivity, the EUR 2.3 billion is the amount per year in which net interest income can be increased. So the present value will depend on of the number of years in which you can make this analysis. But the real point of strength that today is a point of weakness, if you look at net interest income, because we have a dramatic charge on our cost of care related markdown net interest income but would be a rebound in terms of super increase in profitability per year. So it is not an NPV.

Looking at the dynamics of net interest income the deleveraging -- the last 2 deleveraging, so the one in June and the other one in September today gave us an impact of EUR 10 million, EUR 50 million per quarter. So that's the amount of the combined -- of the 2 combined deleveraging that we made in these 2 quarters.

And looking at the provisions, in the business plan, we will give the cost of risk target we consider for the future. But today, I anticipated what I consider as a run rate in terms of inflow. What will be different could be the coverage because it will depend on the percentage of bad loans and the likely to pay. So that will be the part of the story, that we will have to complete by the end of the year in terms of analysis, if we have room to create extra condition to reinforce our risk profile through a further derisking in the future. But it is something that we have not completed in terms of analysis.

[Operator]

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

[Benjie Creelan-Sandford, analyst]

Yes. Just one question from me on capital return. I mean obviously, I realize you don't want to give specifics ahead of the business plan. But I wondered whether you could share with us conceptually how you're thinking about it. Is it correct to focus on capital return from a payout ratio target point of view? Or is it more sensible to look at the excess capital over your minimum requirements throughout the compass or throughout business plan as the more relevant indicator for the potential pace of distributions going forward?

And obviously, at the moment, you're based on the payout target, where you've talked before about the kind of implicit 100% payout ratio cap. I just wondered, whether in your discussion with regulators, et cetera, whether you think that implicit cap is still relevant? Or is it the excess capital, which is the more important indicator?

[Carlo Messina, executive]

And sorry, I was joking on exciting on your report, but was obviously a joke. And I'm very happy of all the reports and the kind of analysis that you are doing on our bank.

Looking at the capital return, that's a good point. But I want to elaborate from the starting point, that is the minimum level of capital, so the capital target. We will elaborate our story of redeployment of capital and dividends starting from the level of capital.

So you know that in the past, we made analysis on the future dividend, cash dividend payout, but giving only what could have been the common equity in the future. Now we will enter into something that is -- this level of capital will be the minimum capital, giving also a rule of the game, how to manage possible situation in which we can go below this level of capital.

And due to our excess capital, my expectation is that, this will never happen to go below the level of capital. But in any case, this will be the starting point in the capital return story of Intesa Sanpaolo.

The second point will be payout ratio. So that will be the second point of the story of capital. Return payout ratio is and will remain fundamental for us. And that's the reason why we want to increase in the future, and we are using also 2021 as an year to give and increase the acceleration in sustainable profitability for the future for the group because due to the really strong, real capital position of the group in comparison with net nonperforming loans, Level 2, Level 3, we think that our future profitability will be the main driver to understand the ability to pay dividends to our shareholders. Then it is clear that you will remain with an excess capital because the starting point will be a starting point with substantial excess capital.

The exercise will be analysis of kind of actions that could consider also share buyback, but it is something that we will have to decide at the end of the business plan. So I'm in a position not to give the full position on this point. But the main areas in which I want to work and elaborate for the future are the ones that I described. So minimum capital and payout ratio and then we will evaluate other forms among which, we can consider also share buyback.

[Operator]

We'll take our next question from Alberto Cordara of Bank of America.

[Alberto Cordara, analyst]

From my side, a couple of questions. The first one on the trend in commercial fees that appear to be very strong. So looking at your financial database, I see that there is a growth year-on-year of 8.6%, which is higher than the growth in deposits and higher growth in lending volumes. So can you please elaborate on the driver behind such a growth? And also about the contentious point on whether to -- it could be a good idea to start charging negative rates to deposit also.

The second question related to the -- very good progress that you still show on NPE down also this quarter, an NPL ratio of 2.9% according to the EBA methodology. We were left not such a long time ago to the idea that EBA wanted banks to go to 5% and now you are well below that. So the question is, what is the final go-to target that you have in mind.

[Carlo Messina, executive]

So Alberto, I will start from the last question because I understand that this is the most important point that you analysts and also the investors of Intesa Sanpaolo want to understand.

The work that we are doing is not to work for a target. Because at the end, the level in which we are today is absolutely, as you correctly said, a comfortable position, especially looking at our business model that is mainly devoted to wealth management and protection, so sustainability of futures and revenues. And so that's part of a story that is not related to the target in itself. Then my point is that we need absolutely to move in a situation in which due to our strong revenue and sustainable revenue base also related with a significant recovery in GDP for the future in the country. So revenues will be sustainable and can increase in the next years, and it is a unique opportunity to increase revenues for the future.

Costs are absolutely under control and we will make other actions in order to reduce the cost base. At the end, we will generate operating margin that should be available for our shareholders in order to potential distribution. The only way to transform the operating margin into net income is to work at provision level. The cost provisions in any case for any kind of stock that you can maintain can be increased by the impact of the stock of nonperforming loans.

So our obsession today is not to reduce the nonperforming loans just because we want to improve the degree of NPL ratio of the group. But because we want to be really in a position not to have impact or significant impact from the stock of nonperforming loans.

And for the reason I told at the beginning of the presentation that I'm convinced that in a scenario of the growth of GDP, it will be difficult to have a significant inflow of nonperforming loans. Our provision could be really limited for the future, if we are able to manage the stock on nonperforming loans.

So our analysis today is really concentrated on the degree of recovery that we can have in the next 4 years in the stock of nonperforming loans, trying to work on the areas that can bring in the next years some real impact in terms of reduction of profitability through increasing provisions. So we want to avoid to have provisions for the future. That's the reason why we will continue to work in this areas in order to make a situation, a starting point for the new business plan that can allow us to be really a Nordic bank in terms of also provisions in our figures.

At the same time, you have also considered the possibility you asked on negative rates on deposits. So let me elaborate on this point. I'm not in favor of negative rates. That's my personal attitude. I consider the deposit base as a real point of strength for a company like Intesa Sanpaolo.

And I'm convinced that in 2 different situations, the situation of minus 50 basis points Euribor, this amount of deposits, it can be really something that can be converted in a significant way into asset under management. So the -- I don't want to create some nasty actions towards my clients that are the most important part of the revenue side combined with what is my real capital that is, for sure, people within the organization. But client is the other part of the story.

So if you want to work for a potential conversion, I want to maintain really fair relation with clients. But at the same time, I'm convinced that the Euribor sooner or later will increase. So it is unbelievable that you can remain 2022, it is impossible. But after 2022, there could be some movement in Euribor. And due to our sensitivity the possibility to increase the revenue base is really massive if we maintain a significant amount of deposits.

We will see. In the business plan, probably we will consider a very conservative approach on Euribor, but it is embedded in the forward analysis that sooner or later, Euribor will increase in the future.

And looking at the fees, it is true, commercial fees are creating momentum for growth in our total amount of revenues. We had a massive increase in terms of areas related with payments, current accounts and the area of loan book. It's really something that we consider and also with corporate investment banking activities. So we think that this can be really another engine for growth in the future sustainability of our commissions in which our business model is not only wealth management, but it is also revenues coming from our client base in commercial activity.

[Operator]

I would now like to hand back to Mr. Messina for any additional or closing remarks.

[Carlo Messina, executive]

So thank you very much for your question and answer. I think that you need absolutely to have the presentation of the business plan to have the future trends of profitability, but I tried to be as transparent as possible in order to allow you, analysts and the majority of my investors to understand what can happen in the quarters, but also in the business plan. So we'll have the presentation of the plan in February in combination with the presentation of the results of the group. So thank you again for being with us today. So thank you very much.

[Operator]

Thank you. That now concludes the call. Thank you for your participation. You may now disconnect.