Intesa Sanpaolo SpA

MIL:ISP

Earnings Call Analysis

Intesa Sanpaolo Posts Record 9-Month Earnings

Intesa Sanpaolo delivered its best earnings in 16 years, with a net income of EUR 6.1 billion in the first nine months, of which EUR 1.9 billion was in Q3 alone. This exceptional performance has allowed them to raise the full-year net income guidance to above EUR 7.5 billion. The bank's strong outcomes come alongside a deep commitment to social initiatives, with a planned EUR 1.5 billion contribution by 2027 supported by a dedicated team. Capital strength is notable with a solid common equity ratio of 13.6%, and the bank upholds its reputation for exceptional asset quality with low non-performing loan (NPL) inflows, pushing the cost of risk down to just 28 basis points.

A Historic Peak in Profitability with Promising Outlook and Dividend Yield

The company has achieved its highest profitability within the first nine months, buoyed by historically low Non-Performing Loan (NPL) inflows. This has brought down the cost of risk to a mere 28 basis points, contributing to a doubling of Q3's net income compared to the previous year. Such robust growth lays the foundation for the company to project net income upward of EUR 7.5 billion for the year. Looking forward, the management foresees earnings to climb even higher over the next two years, reiterating their history of surpassing their promises.

Financial Asset Growth and Stable Costs Empower Future Prospects

The company's revenue increased by nearly 20%, a growth underpinned by a 65% spike in net interest income and a significant drop in provisions. Exemplifying disciplined cost management, operating costs have remained remarkably stable, propelling operating margins to record heights. Customer financial assets have surpassed EUR 1.2 trillion with an uptick in direct customer deposits enhancing future wealth management and protection revenues.

Digital and Artificial Intelligence Initiatives Promise Efficiency Gains

Investments in technology, particularly through its digital banking and AI initiatives, promise to be transformative, potentially bringing in an additional EUR 500 million in gross income. The launch of 'isybank' heralded more than 50,000 new customer accounts, while the integration of artificial intelligence is set to further optimize risk management and unlock new business avenues.

Strong Asset Quality with an Eye on Regulatory Compliance and ESG Leadership

Asset quality remains firm with no deterioration and an NPL coverage ratio that has reached 50.4%. Regulatory stress tests position the company as a robust institution, with a common equity Tier 1 ratio well ahead of the requirements. The company's sustainability efforts, aligned with Environmental, Social, and Governance (ESG) commitments, have shown impactful strides, boasting significant advances in green lending and a solid stance in sustainability rankings.

Enhanced Shareholder Returns Reflect Strong Capital and Liquidity Position

The company's capital robustness is underscored by a common equity ratio of 13.6% and a liquidity position that comfortably exceeds regulatory requirements. This financial steadiness is reflected in the generous shareholder remuneration, with a projected dividend yield surging past 11.5%. The commitment to distribute 70% of earnings as cash dividends is buttressed by the planned payout of EUR 2.6 billion, nearly doubling the previous year's per-share amount.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the Third Quarter 2023 Results, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Razia, and I will be your coordinator for today's conference. [Operator Instructions] I remind you all that today's conference is being recorded.At this time, I would like to hand the conference over to Mr. Carlo Messina, CEO. Sir, you may begin.

[Carlo Messina, executive]

Thank you. So, welcome to our 9-month 2023 results conference call. This is Carlo Messina, Chief Executive Officer; and I'm here with Stefano Del Punta, CFO; Marco Delfrate and Andrea Tamagnini, Investor Relations Officers; and Luca Bocca, Head of Planning and Control and Deputy CFO. Also with us are Massimo Proverbio, the Group Chief of our Technology and Data; and Stefano Barrese, Chief of our Banca dei Territori Division.Today, I will walk you through a very high quality set of results, but also I will update you on our tech transformation that is moving quickly, with more than EUR 2 billion already invested. Massimo and Stefano will help answer any questions you might have regarding our journey. In addition, I will give you an update on the results of our main ESG initiatives, confirming our world-class position in social impact and strong focus on climate. This is all about building a sustainable and profitable bank that can continue to be a leader in the future, while delivering strong results in the short term.Now our 9-month results. We delivered a net income of EUR 6.1 billion, of which EUR 1.9 million in Q3. They were the best 9 months of the past 16 years and the best Q3 ever for the net income. They were also the best 9 months and the best quarter ever for operating income and operating margin. Strong results mean that we can improve our net income guidance for this year to above EUR 7.5 billion. Looking ahead, 2024 and 2025 net income will be higher than in 2023. Our dividend yield is the highest in Europe at 11.5%, 11.5%. In the first 9 months, we accrued cash dividends of EUR 4.3 billion and completed the EUR 1.7 billion buyback. In a few weeks, we will pay an interim dividend of EUR 2.6 billion, that means, a dividend per share of $0.144, almost doubling the interim dividend of last year.Additional capital distribution for 2023 on top of our 70% cash payout on stated net income will be quantified at full year results approval, but this means that we have already decided to do this. We clearly have excess capital and additional distribution for 2024 and 2025 will be evaluated year-by-year. We are highly profitable, liquid and capital solid. We further strengthened our 0 NPL status and Russia exposure is down even further, very close to 0. The common equity ratio is at 13.6%; considering DTAs, it stands at 15%. All our stakeholders, not only shareholders, but also ISP people, the public sector, households and businesses benefit from our excellent performance.Of course, we are all very sensitive to the fact that many families and businesses are struggling, and we remain committed to supporting them. Our very profitable and efficient business model also allowed us to further strengthen our world-class position in social impact. Just last week, we hosted an impact day event where we discussed priorities to address social inequalities and the concrete way in which we are stepping up our many social initiatives, by deploying a contribution of EUR 1.5 billion by 2027, leveraging a social delivery machine of 1,000 dedicated people. I'm proud of our results and thank our people for their hard work.Now let's turn to Slide 1 for the highlights of our 9 months results.Slide #1. In a nutshell, we delivered the best 9 months for profitability. NPL inflows stock ratio remained at historical lows, driving the cost of risk to just 28 basis points. Q3 net income doubled last year Q3 results. Capital remained rock solid despite the impact from the vast majority of expected regulatory headwinds. The liquidity position is strong, and we increased direct customer deposits by EUR 3.5 billion in Q3.Slide #2. In this slide, you can see the impressive growth of net income, up 85% on a yearly basis and up almost 10x in 10 years.Slide #3. This all-time high results achieved in the first 9 months means that we can further improve our net income guidance for this year to above EUR 7.5 billion.Slide #4. And looking ahead, we can confirm that as early -- already said in July, we expect net income for next 2 years to be higher than 2023 net income. We have always overdelivered on our promises.Slide #5. I'm very proud that our excellent performance allow us to support all our stakeholders in a significant way. Talks with banking sector trade unions regarding a new national contract are ongoing, but I fully support paying our people more to compensate for the impact from inflation, and to do it quickly. Technology and efficiency will offset these costs. But as I said many times, ISP people are truly our most valuable asset. An increase in net income, and so in cash distribution is also favoring an increase in tax revenue for the state, and 40% of cash dividends go directly to households and to foundations to support their charitable programs for local communities.Slide #6. Intesa Sanpaolo feels the moral obligation to leave a positive mark on broader society, and we remain committed to being the engine of sustainable and inclusive growth. To further strengthen our world-class position in social impact, we launched just last week, a massive program to address social needs to fight inequalities and to promote financial, social, education and cultural inclusion based on 3 pillars: a contribution of EUR 1.5 billion; a social delivery machine with around 1,000 dedicated people; and the setup of a new organizational unit called ISP for Social.Now, let's move to Slide 8 and take a closer look at the 9-month results. Very briefly, in the first 9 months, net interest income was up 65% yearly. The total contribution from net interest income, commission and insurance was up over 27%. Revenues increased almost 20%, and costs were essentially stable, driving operating margin to an all-time high. Provisions declined significantly, and net income reached EUR 6.3 billion when excluding the final contribution to the resolution fund.Slide #9. In Q3, net interest income was up further at over 6% quarterly. We achieved record quarterly revenues, up 27% on a yearly basis and operating margin up 56% yearly. Costs were down on a yearly basis when excluding depreciation for tech investments. Net income reached EUR 2.2 billion when excluding the yearly contribution to the Deposit Guarantee Scheme.Slide #10. In this slide, you can see the strong acceleration of net interest income. Net interest income is expected to be well above EUR 14 billion this year and further growth is expected in the next 2 years, also thanks to a higher contribution from core deposit hedging.Slide #11. Net interest income growth was clearly driven by the spread component, which is benefiting from the increase in market rates.Slide #12. Customer financial assets are above EUR 1.2 trillion, up almost EUR 40 billion in the 9 months. The decline in Q3 is entirely due to the negative market performance effect. Direct deposits are up EUR 12 billion in the 9 months, reaching the highest level ever. Direct deposits and assets under administration will fuel our Wealth Management and Protection business in the future with a positive impact on commissions. Property & Casualty's contribution is increasing and in the 9 months was more than EUR 480 million.Slide #13. Costs are down when excluding depreciation for tech investments and the increase in energy prices. In particular, administrative expenses were affected by about a EUR 70 million yearly increase in energy costs and would be down net of these components.Slide 14, our 9-month cost/income ratio is the lowest ever and stands among the best in Europe.Please turn to Slide 15 to see how Intesa Sanpaolo asset quality continues to be strong. The net NPA ratio is at 1%, and the NPL inflows in the first 9 months were the lowest ever, with Q3 net inflows down almost 30% versus Q2. Furthermore, Stage 2 loans are decreasing further, 6% quarterly and 21% in the past 9 months, thanks to the high quality of our loan portfolio and our strong capabilities in prevention activities.Slide #18 -- 16 sorry, NPL stock ratios are among the best in Europe after an impressive derisking. So we still have only EUR 5.2 billion of net nonperforming loans at risk in our figures.Slide #17. Just have a look at Stage 2 loans. We are also very well positioned in terms of Stage 2 that represents only 8% of loans, a further evidence of the high quality of our loan portfolio. These figures are net of overlays for all the European competitors, and you can see that a number of banks with significant Stage 2 loans after overlays and generic provisions. We are in a very good position, considering our EUR 35 billion net Stage 2.Slide #18. Our 9-month annualized cost of risk stood at just 28 basis points, thanks to best-in-class derisking solutions, high-quality loan portfolio and proactive credit management. NPL coverage increased to 50.4%. We are not seeing any signs of asset quality deterioration.Let's move to Slide 19 for an update on Russia. Quarter-after-quarter, we are reducing our Russia exposure, which is approaching 0.Slide 20. The common equity ratio is at 13.6%. We have absorbed almost all the expected regulatory headwinds. And as you can see, we clearly have significant excess capital in each year of the business plan.Please turn to Slide 21 for a quick look at the results of the last EBA stress test. As you can see in this slide, our well-balanced model reduced the impact of the EBA adverse scenario.And on Slide 22, it is clear that we are one of the clear winners of the EBA stress test with a 140 basis point common equity Tier 1 ratio buffer versus requirements in the worst year of the adverse scenario.Please turn to Slide 23 to see our best-in-class liquidity position. The liquidity coverage ratio and the net stable funding ratio are well above regulatory requirements and our business plan targets, and we have a very diversified and sticky deposit base.Let's move to Slide 24 for more details on the liquidity position. Liquidity reserves remain at a high level and cash with the ECB is significantly higher than the remaining TLTRO.In the next chapter, I'm going to give you an update on the progress of our business plan with a focus on the initiatives related to 2 pillars: our strong investments in technology, and our commitment to ESG.Slide 26. Our excellent 9-month performance confirms the success of our business plan formula based on a full range of concrete industrial initiatives, which are proceeding at full speed. This was possible, thanks to our people, and I'm personally very proud that job satisfaction continues to grow, reaching its highest level over the past 10 years.In the next slides, I'm going to quickly focus on the strong progress we are making in relation to 2 pillars of our business plan, Technology and ISG. While in the appendix, you can find more details on the complete list of initiatives.Slide 21 (sic) [ Slide 27 ]. Regarding our investments in technology during the last results call, we presented a focus on our digital strategy that relies on 3 pillars: isytech, which is becoming the tech backbone of the entire group; our new digital channels like isybank and Fideuram Direct attracting new clients and better serving our customers and artificial intelligence to further unlock new business opportunities; increase efficiency and manage risks. These actions will generate a benefit of EUR 500 million additional gross income on top of what is already included in our business plan.Now I want to update you, [ our ] isybank and the artificial intelligence program are proceeding at full speed.Please turn directly to Slide 30, isybank, our digital bank, we successfully launched in June, is now fully operational and well received by the market, as shown by the main satisfaction indexes. The appreciation is further confirmed by the fact that many new customers have joined us, coming to our group through isybank, opening more than 50,000 new accounts.Slide 31, the migration of the first group of 300,000 clients from ISP to isybank was successfully completed, with half of the migrated customers already accessing the app in the very first hours. Even with heavy customer activity, the isybank app maintained excellent performance with the response time even faster than the ISP app, which is recognized by Forrester as the "Global Mobile Banking Apps Leader", ranking first worldwide among all banking apps.Slide 32. On this page, you can see how the adoption of artificial intelligence is well underway, while maintaining a responsible approach to the use of data. In just 1 quarter, we doubled the number of artificial intelligence use case deployed. For example, on regulatory analysis, we are the first European bank to apply artificial intelligence.Now please turn to Slide 33 to see how we are progressing on our ESG commitment. We remain commitment -- committed to being the world's #1 Impact Bank.In this slide, you can see our strong progress towards the business plan ISG targets. And also here, we are ahead of schedule on almost all of the projects. We carried out 32 million intervention to support people in need, and we granted EUR 13.5 billion in new social lending to support nonprofit activities, vulnerable and young people in urban regeneration, and we continue to support innovation to investments in start-up and innovation projects.Let's move to Slide 34. In this slide, you can see other important ESG initiatives with impressive results achieved, such as EUR 41 billion in new lending to support the green economy, circular economy and ecological transition. More than 70% of assets under management invested in ESG products and EUR 8 billion in green social bonds. And I want to stress that in 2022, we reduced by 62% the absolute emissions for the 4 high-emitting sectors with reduction targets already set for 2030.Slide 35. In this slide, you can see our leading ESG position in the main sustainability indexes and rankings.Now Slide 37. Let me say just a few words about the Italian economy, which is strong, thanks to solid fundamentals, world-leading household wealth and very resilient SMEs. Growth for this year will be close to 1%, and as inflation slows the economy is set to continue growing.Slide #38. As you can see in this slide, Intesa Sanpaolo is far better equipped than its European peers, thanks to our rock solid capital base and well diversified and efficient business model.Slide 39. This slide recaps how ISP is well equipped to further succeed in the future. I will not go through all the points, but let me highlight that we remain a Wealth Management, Protection and Advisory leader with fully-owned product factories and more than $1.2 trillion in customer financial assets and 0 NPL. We are ready to succeed in any interest rate environment, as shown by this set of all-time high results.Slide #40. To finish, let me turn to the outlook.We can upgrade our 2023 net income guidance to above EUR 7.5 billion. And this is a floor for the coming years. Our strong and sustainable performance enabled us to generously reward our shareholders with a 70% cash payout. We will pay EUR 2.6 billion as cash interim dividend in a few weeks. That means a dividend per share of $0.144, almost doubling last year's interim dividend per share. We will deliver a dividend yield of more than 11.5%. We clearly have excess capital to give back to shareholders, and additional capital distribution for 2023 will be quantified at year-end. And any additional distribution for the next 2 years, so '24 and '25 will be evaluated year-by-year.In closing, I want to repeat, we are going all on our tech transformation while delivering excellent performance and strengthening our world-class position in social impact. This is what it takes to build a bank that continue to succeed over the next decade. Intesa Sanpaolo is a clear dividend tech delivery machine with a strong focus on ESG, especially to reduce inequalities and poverty.So thank you for your attention, and we are now happy to answer your questions.

[Operator]

[Operator Instructions] We are now going to proceed with our first question, and the questions come from the line of Antonio Reale from Bank of America.

[Antonio Reale, analyst]

It's Antonio from Bank of America. I have 2 questions, please, one on capital distribution and one on the profitability outlook for 2024.On capital, you clearly stated the decision to pay additional distribution at year-end, and that's sort of a taken decision, and it's on top of your 70% payout. So that's no longer in question. I guess, what's in question is, of course, size and mix. Do you have a go-to CET1 ratio level that you have in mind at which you want to run the bank? I think in the last business plan, you had a target of above 12% common equity. So is 12%, 12.5% go-to still applicable here? And now that you've opted out of the levy, shall we assume that the extra distribution will be in the form of share buybacks? Any thoughts you can share here will be appreciated.Second question is on the net profit guidance for next year. Now it's very clear what you said for 2023, you've guided above EUR 7.5 billion net profit. The NII guidance, the message is quite clear sequentially growing in 2024. I look at your cost base, which again is quite good this quarter. Cost of risk has been around 30 bps. So my question is really, can you walk us through the key P&L drivers and explain what you think will be the drivers of your guidance of higher net profit in 2024?

[Carlo Messina, executive]

So, thank you for your questions on capital. I want to start from, what it is important to understand in terms of analysis of excess capital of a bank. So you have to start from the unexpected losses, so from the real risk that you can have in case of unexpected losses in your banks. So I can confirm that due to the fact that we made an incredible reduction of risk during the last years.We are now in a position to say that 12% is a level of capital on fully phase-in, that is still with excess capital in comparison with our risk profile. So now we have only EUR 5.2 billion of net nonperforming loans. We have EUR 35 billion of Stage 2 loans. We have a very low level of market risk and all the other parameters are absolutely in the sense that we -- with 12% fully phased-in common equity remain with an excess capital.Also, if you look at the EBA stress test, in terms of impact, apart from the 2 very diversified in South America and Turkey bank. We are absolutely the leader in Europe in terms of ability with our business model to have resilience also considering stress test. So just to make a summary of this 12% remain a level of capital that is more enough for our bank to navigate also in environment with stress test condition.Having said that, in the Board of Directors today, we decided to change the wording on the statement related to distribution of excess capital because now it is clear that we are in a position to distribute a portion of this excess capital. In terms of the way in which we can distribute, so adding to 70% payout ratio, I told to my Board of Directors that my intention is to proceed with share buyback. So that's the proposal that it is likely that I will submit to the Board of Directors when we will approve the year-end figures. And in terms of amount, we will decide at the end of the year, that's the clear position of the bank. But at the same time, I can tell you that the excess capital in our condition is absolutely a real excess capital. So for 2023, this is the situation.Moving to 2024, 2025 in terms of distribution of excess capital, for sure, our shareholders will have significant cash dividends, so 70% on the increasing EUR 7.5 billion guidance is a lot of money. And especially, if you look at our market cap, it's unbelievable that the cash dividend yield that we can provide, so investing in Intesa Sanpaolo and investors can have 11% dividend yield. I think, it is really a unique condition in the European landscape.Looking at the capital distribution for 2024, 2025, I can tell you that we remain, as you can see in our figure in which we are, for sure, above 14% in terms of capital ratio. And remember, the 12% is the level that is really appropriate for our risk profile. We will remain with significant excess capital also into 2024 and 2025, but we will decide at the end of 2024 and then at the end of 2025. But excess capital is absolutely there.Looking at net profit for 2024, I won't to just make an analysis, so this can be of help also for your colleagues. So moving -- starting from net interest income, our view is that we can have an increase of net interest income in 2024 compared to 2023. The average Euribor also at 3.6% that is the forward for 2024 will exceed the average Euribor 2023, so we'll have a clear benefit from this area.In terms of pass-through to our clients, there could be an increase in 2024. We -- in our figure, we are considered that for our beta, we can move from the 20% that we expect at the end of the year, but today, we are close to 10%, so there is room to have also a conservative approach in this. Until an amount that could exceed 40% in 2024, [ that ] I consider really conservative because my assumption is that we can have a significant delivery in extra performance having this assumption of above 40% beta that is conservative by far for a bank like us.Looking at commissions, we think that we can have an increase of commissions in 2024. If you consider the Euribor 3.6 average for 2024, this means there will be a reduction in terms of interest rate in the second part of 2024. And in this situation, it is typical that you have a rebound in Wealth Management and Protection activity. And so, also the acceleration in net inflows related to assets under management and insurance product. And so, our commissions can have rebound. We think that we can have also some form of performance fee in that case, but we have not considered in our figures for the forecast for 2024. Then we expect good performance in terms of insurance with an increase in comparison to 2023, specialty property and casualty products.Looking at credit income, we decided to be very conservative in 2023, because we do not need to make net income with the financial activities. But now, we are at a very low level of contribution from this area. We think that in 2024, we can have a recovery also in trading income, so net-net revenues will increase.On the cost side, we will have a reduction in costs that are not related to investments in technology, but we will have a growth in costs that are related with technology. Then we will manage the personnel cost increase coming from the new contract with new agreements with the trade unions because we have an embedded reduction of people coming during 2023 that will have full effect during 2024.Provisions, we think that we can remain in a range between 30 and 40 basis points, considering in our forecast a maximum of 40 basis points. And then that are the main drivers that can move into the 2024 profitability. And then in case of reduction of Euribor, we will have a contribution increase in hedging facilities. So also net interest income can have a benefit from the hedging facilities. Now that I have described my budget '24 in details, all my people within the organization have also clear indication of their targets for 2024.So thank you, Antonio, to allow me the occasion to give to all my 100 people within the organization, the budget 2024.

[Operator]

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

[Delphine Lee, analyst]

Yes. Just have a follow-up on NII. And I just wanted to come back on costs as well. On NII, just to understand a little bit the other assumptions, apart from rates and deposit data, what do you assume on lending volumes, which are clearly slowing down much faster than expected and also deposit flows. If you could also explain if this pickup in deposits this quarter, is a blip or is that something that you can sustain?And then my question on cost. So you mentioned that there's growth in IT cost, but the rest is coming down. Just wondering like should we -- is an absolute cost decline achievable next year? Or is that even a target for you? Or just trying to understand a bit, the direct -- the overall direction.

[Carlo Messina, executive]

I want to start from net interest income, then I will elaborate more on cost side. So on net interest income, we think that the deposit trend will continue more or less at this level. So we do not expect to have a reduction in the deposit base. The only dynamics up and down, you can have a reduction each time you have in this level of interest rate, a BTP issuance from the government. So as soon as you have issuance, families can decide to subscribe Italian government bonds. But in any case, in a quarter, we replace this kind of movement into assets under administration.And remember that for us, the increase in terms of asset administration coming from these investments of families is the unique opportunity then to move this money from assets under administration into asset under management as soon as you have interest rate down. So capital gain embedded in assets under administration product. And so it's the usual activity that in Banca dei Territori and in private banking divisions, all the relationship managers are able to do as best practice in Europe.So on the deposit side, just to come to -- again, to your point, we see dynamics with a trend that could be considered positive for the future. On the loan side, that was the part that you didn't mention, but I want just to give you also an emphasis on this point, I do not expect increase during 2023. And in 2024, there could be a flattish dynamic, but probably just a little increase or a little decrease. More or less, this could be the trend on the loan book side.Looking at the cost, the -- we are working in order to have a cost reduction also in 2024. But at the same time, when you are at the level of cost/income ratio, they will be below 45% and you need to accelerate in your -- in the isytech dynamics, so it is not isybank, but it is isytech. The real enable areas that can allow us to reduce in a significant way in the future, the cost base if they ask me to have EUR 50 million more costs, there will be something that can move the cost dynamic into flattish or a little increase. We will see during this quarter, what could be the real budget, but the targets are for delivering a reduction in terms of cost base apart from investments that can accelerate for 2025, the structural reduction of the cost base.

[Operator]

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

[Azzurra Guelfi, analyst]

2 questions from me. One is on the Stage 2 development, and you have clearly give us a message here that you are continuing to progress. What are you doing differently from your peers? What are the main actions that are doing to monitor and improve the Stage 2. If you can give us some color on this because that could be supportive for your cost of risk development, not just for 2024, but over time, link this with your lending policy and also the overlay.And the second one, if I can, is on the isybank customer migration. Can you give us an update on how that is going? And if you see any potential disruption on that?

[Carlo Messina, executive]

So on Stage 2, if you can go to Slide 17, just Azzurra, just to make a clear point of this, if you look at the dynamics of other banks in these figures, you have more or less stability or deterioration of figures. And it is clear that we decided to move, we started after the COVID-19, you remember that during the period, we will have a number of foregone, a number of areas in which we moved clients into Stage 2.Then with the recovery of the situation in the country with the improvement of conditions of this client and our ability to have some form of guarantees to improve the condition of the probability of the faults of this client. We will -- we have been able to reduce the stock of these clients. Then we have a project that is called Pulse to anticipate the delinquency between the deterioration of our nonperforming loans. Then we have reinforced all the credit department and risk management department in order to work with the sectoral analysis and client-by-client analysis. So we realized, in my view, a machine in order to reduce the migration of of clients into negative situation.The Stage 2 today is in line with the best practice. And if I can give you just a point on the figure apart from the COVID-19, but the quality of credit of bank is also the result of the history of a bank. So putting together Intesa and Sanpaolo, you realize the clear merger between the best-in-class in the country. Other banks in our country has been in a very difficult situation in the last 10 years. And a portion of this, by definition, will remain in your balance sheet. So the trend of Intesa Sanpaolo is clear, transparent and you have all the evidence coming from the very good quality of the banks that merged into Intesa Sanpaolo. Then we reinforced all the activity reaching result unique also in nonperforming loans. Also, if you look at nonperforming loans, you have the clear evidence that we are today a leader in terms of quality of our nonperforming loans.Stage 2 is the other part of the story. And believe me, I'm really being in this position for a long time and before this position being a CFO. So being able to understand the quality of the figures and also the quality of the provisioning. I think that there is too much emphasis on overlays. Overlays, in my view, is something like slogan marketing. You have to look at the stock, the net stock that you have at risk, net of overlays, net of generic provisions. So it is not a percentage that is the percentage of coverage of Stage 1 or Stage 2 that is fundamental. It's the stock that you have at risk. So we are working in order to reduce the stock. Then it is clear that if you enter into a reduction of dynamics of GDP, you can have movements that can increase this figure by EUR 2 billion, EUR 3 billion reduced by EUR 2 billion, EUR 3 billion. But the figure of Stage 2, in my view, is the clear evidence of the sustainability of the cost of risk for an organization in the medium, long term.Yes. On isybank migration, Azzurra, I think that also in this point, we made a unique job because starting from the fact that for us, isytech is really the clear point for the future in terms of cost reduction for Intesa Sanpaolo efficiency, technological improvement of all our IT system, especially based on cloud. So all the areas in which we are unique in Europe, but isybank is a clear case of success. We made a very good result in terms of migration. We had 1,500 clients that asked to move back into Intesa Sanpaolo out of 300,000 that we migrated into isybank. The volumes of the 300,000 migrated the volume of deposits related to this client is EUR 1.7 billion. The total amount of deposit related to this client that want to move back Intesa Sanpaolo is EUR 6 million.In the same time, we had 50,000 new clients coming from other banks that are happy of the kind of service that we are giving them in isybank. And I'm just focusing on this point because for isybank, in my perception, what is really fundamental is the ability to reach more than 1 million new clients during the period that we gave to the market in terms of a target. That's fundamental for us and the trend of growth of new clients and the kind of satisfaction is so high that we are pretty sure that we can exceed this figure.

[Operator]

We are now going to take our next question. And the questions come from the line of Andrea Filtri from Mediobanca.

[Andrea Filtri, analyst]

Yes. First question on the digital euro. What do you see as risks and opportunities of the digital euro implementation? Have you budgeted the impact to your business model? And can you share it with us?And second is a follow-up on capital return. I didn't understand how quickly you intend to verge to the 12% CET1 that you consider adequate. So if you can give us any more indications over '23, '24 and '25, if we should assume a sort of linear progression towards that number or what?

[Carlo Messina, executive]

So Andrea, let me start from the capital returns, then I will elaborate on digital euro that I know that is something that is very important in your understanding of the strategy for the future of the banking. So let me start from capital return. I didn't describe the trend of reduction in terms of excess capital because we didn't decide what could be the amount in terms of distribution. And also, we think that 12% has to be considered the real capital that can have excess capital in terms of absorption of losses and expected with a portion of residual excess capital. But for the time being, what we want is to wait for the figures at the year and then the Board of Directors will decide on the quantity in terms of distribution. I have no intention to move to 12% in a year time. So that's for sure.But in any case, just to compare with other peers, the real capital position of Intesa Sanpaolo with 0 Russia with 0 nonperforming loans with very low limited Stage 2 and so on is absolutely in a position of having in excess of 12% maintaining in excess of capital. Then I have to tell you that a bank like us, with the 70% cash dividend payout on a clear sustainable net income is already a very good opportunity of investments, and we have not to follow the share buyback rerun that today we see in the market. For sure, we will have share buyback at the end of this year, we will announce the right figures, but I have no intention to move to 12% in the short term.Looking at digital euro, we have not considered any kind of investments in 2023 for the digital euro. We will start from 2024 in this acceleration of investments that we will -- that we want to realize in order to be sure to have isytech ready in 2025 to be the backbone of all our infrastructure also to consider what would be some procedures or some areas in which we need to make investments for the digital euro. For the time being, in my view, it is not so clear what would be the dimension of investments that we have to do. But in the area of Massimo Proverbio they are making all the analysis in order to better understand what would be the impact. So we are in the mood of understanding in an action plan, what would be an investment that we need to do for the digital euro. There are, for sure, some positive, some negative for the banking sector.If I may, I think that all the majority of the negative should be managed by the ECB. So they will have, in my view, the real attention not to create some negative conditions. On the banking sector, there are some positive on payments and other area in which we can have some opportunity. But as I told you, we are in a preliminary phase and during 2024 in the area of Massimo Proverbio, they will make all the analysis for cross side and in the area of Stefano Barrese and Mauro Micillo, they will make the analysis of the opportunities of the threats that can derive from the digital euro.

[Operator]

We are now going to proceed with our next question. And the questions come from the line of Giovanni Razzoli from Deutsche Bank.

[Giovanni Razzoli, analyst]

A couple of clarifications on my side. You were also other than contributing significantly to the stakeholders in terms of employee cost and taxes, you were also a significant contributor in terms of subscription in BTP Valore in June. Can you provide us with what were the subscription of this asset class in October that you have recorded. And I was wondering whether you consider this as a potential threat for the fee income generation for the next year, there is clearly a significant competition from this asset class on managed assets. And another question on the insurance business. I was wondering whether you can share with us what is the cost that Intesa Vita may bear from the introduction of the guarantee scheme on insurance business?And the last question, you've been extremely vocal on the acceptance of the request of the trade union in terms of the labor contract and a position that other banks have not yet taken. You draw the line very clearly already, if I'm not mistaken, a couple of quarters ago. Can you share with us what is the impact of this renewal of the labor contract, so the request of the trade unions on your P&L, because it seems to me that the target of keeping the cost flat for next year, excluding the investment in technology in the context of increasing the labor cost as the trade unions asking is one of the major achievement in this environment.

[Carlo Messina, executive]

So you have 3 questions, not 2 questions, Giovanni. So starting from -- by the way, I will answer all the 3 questions. So starting from the different stakeholders of Intesa Sanpaolo and what kind of impact we had in the subscription by our clients in the new issuance of BTP Valore. The amount is EUR 2.5 billion. So the amount that our retail clients decide to subscribe in terms of BTP Valore. It is clear that in this phase, the competition with the government bonds is creating some reduction in terms of markdown limited reduction because the volumes are not so high. But as I told in the previous answer, this is a clear opportunity for us in terms of movement as soon as the interest rate, we go down to move the amount of these government bonds and ask our clients if they want to monetize their capital gain and to invest in products of assets under management.Looking at insurance, the amount -- the cost that can be embedded could be in the range of EUR 40 million for our insurance business. That's our estimate for today, then we will update on the -- as soon as we will have more information. The -- on the cost side, the kind of guidance remaining flat in terms of cost base or slight reduction, slight increase, we will see what can happen. And now we are still negotiating the budget 2024. So I'm not in a position to give the EUR 50 million of EUR 100 million plus or minus in terms of cost base. This will depend more from the areas of administrative expenses, the kind of uncertainty. On the personnel cost, we will have an increase for sure, but we will have also a reduction in terms of people that we had in terms of reduction during 2023. We will have full impact. We are talking about 2,000 people. So we will have the full impact during 2024. And we -- this will allow us all to totally compensate or to mitigate the impact of the new contract, the new agreement with trade unions.

[Operator]

[Operator Instructions] We are now going to proceed with our next question. And the questions come from the line of Britta Schmidt from Autonomous Research.

[Britta Schmidt, analyst]

I think previously you guided to about slightly over EUR 1 billion contribution from the core deposit hedge next year with higher rates, where do you see that now? And maybe you can also comment on your NII sensitivity as of now.

[Carlo Messina, executive]

I will leave the floor to Stefano Del Punta. So he can give you all the detail on this portion, especially on the hedging facilities.

[Stefano Del Punta, executive]

So when it goes to the hedging portfolio, I mean we confirm the number we gave you 3 months ago. So we are rolling over EUR 2.5 billion every month of the old hedging portfolio. So it means that at the end of September, we have now an average yield on this EUR 160 billion hedging portfolio. That has gone up to 72 basis points from less than 60 basis points that at the end of June. So the trend is absolutely in line with our expectation. And I mean you can make your own calculation, but obviously, the EUR 30 billion per year that is being rolled over and the difference in the yield from the existing portfolio to the new hedges that are in the 4-year duration area. So it's about 2.3 -- 3.2%, sorry, 3.3%, 3.2%, 3.3% of new investments will lead to an increased contribution to net interest margin, which is in the region of EUR 1 billion per year.In terms of our currency sensitivity at 50 basis points is around EUR 400 million, more or less. Sensitivity is always tricky because it's based on historical time series. And we have seen that in the run-up of interest rate, actually, our increase in net interest margin has significantly exceeded the sensitivity that we gave. So -- but this is the number that is in our numbers, EUR 400 million per 50 basis points.

[Operator]

We are now going to take our next question. And the questions come from the line of Andrea Lisi from Equita.

[Andrea Lisi, analyst]

The first one is on capital position, [ Stage 1 ]. If you should -- we should expect some impact of systemic charges in the fourth quarter? And the second question is accuracy on the NII trend. We see that in Banca Dei Territori, there is a decrease quarter-on-quarter in NII. So just to understand what -- which were the dynamics here that led to this decline? And what should we expect going on?

[Carlo Messina, executive]

So on capital position, we expect only to have 10 basis points in terms of regulatory headwinds, but no more than this. So I think that our trend could be not inflated by any negative trend. On net interest income, as soon as we reach the level of the budget that was in the range of [ 3.3 ] as a level of Euribor, we move all [ the deposit in govern ] -- in the [indiscernible] in order to be sure to have the different business unit not to rely on extra revenues in comparison to budget that can reduce their attitude to work in order to have an increase in net interest income.In any case, with Stefano Barrese, that it is here with me, this is something that it is useless because in the intention of Stefano, the beta could remain 0. So -- and if you want, I can leave the floor to Stefano Barrese, so you can just listen from Stefano, the kind of attitude and the kind of potential rebound that we can have also in comparison with our conservative assumptions. So Stefano, if you want to add something on this pass-through to our clients, your ability to maintain a very good level of cost on the liability side.

[Stefano Del Punta, executive]

And just 2 things. The first is related to the level of the deposit rates. It is really stable along the time. So instead of the trend of the Euribor and more or less today is, on average, 22 basis points. This is the level today of the deposit rates of Banca dei Territori. And on the other hand, we are using clearly not the rates of deposit for giving to the customer a remuneration. But we are using other products on the wealth management side and particularly in this case, the certificates that are giving in the short term and in the medium term, a remuneration that is pretty high. In this case, for example, only 1 year is more or less around 4%. And this is also the way to defending the level of liquidity because on the other hand, certificates make for us liquidity.

[Carlo Messina, executive]

So just to give you the figures of these areas of of reserve that we maintain in the [indiscernible] is in the range of EUR 200 million. So not using these rules of the game that we are applying in our figures in which we place all exceeding this level of Euribor into the portion of [indiscernible], the Banca Dei Territori could have been increased by EUR 200 million in terms of net interest income with an increase of 8% quarter-on-quarter.

[Operator]

We are now going to take our last question. And the questions come from the line of Chris Hallam from Goldman Sachs International.

[Chris Hallam, analyst]

Just one quick question. Looking into '24, you've given a lot of color on performance and it's obviously a very positive outlook. But just what concerns you the most? Is it betas, taxation, regulation or something else? When we're speaking again this time next year, what are the main risks that could have held you back from hitting or exceeding those 2024 ambitions?

[Carlo Messina, executive]

It is only a recession at European level and so at Italian level. So if you not have a deep recession, I think that in any case, we are able to compensate with some contingency plans all the different levers. What we will have -- what will oblige us to change the outlook would be a clear trend of depreciation in the country that could be the results of deterioration worldwide and in Europe, especially in Europe. We have, as Italy, a strong correlation with Germany and with U.S.A. in terms of dynamic, mainly with Germany. And so I think that in Germany, it is really unlikely that next year, they will remain in negative GDP. So all this can allow us to stay really comfortable with our expectation.

[Operator]

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

[Carlo Messina, executive]

So thank you very much for this session of question and answer. Your question has been very useful also for me to make clarification on the trend of our results. What I have just to put emphasis from our side is that we think that we are a unique opportunity in terms of cash dividend yield, and then we will add also share buyback at the end of the year. So thank you very much and see you next presentation.

[Operator]

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