Mediobanca Banca di Credito Finanziario SpA

MIL:MB

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the 3Q '20 results conference. [Operator Instructions] I must advise you that this conference is being recorded today.

I would now like to hand the conference over to Mr. Alberto Nagel, CEO. Please go ahead, sir.

[Alberto Nagel, executive]

Thank you. Welcome to everybody. We have structured this call in a presentation with 4 sections. The first one is why we see that Mediobanca is very well equipped to cope with the COVID-19; the Section 2, where we explain the COVID-19 impact so far; the group results at the end of March; and then closing the remark.

Starting with the first section. I think it is enough clear to everybody and most of you what Mediobanca has been doing in the recent past and how we managed to grow and while growing, we have managed to reshape the group across the cycle. If we take a look back to 10 years ago and here we cover 2 crisis, so we cover the crisis of post-Lehman, and we cover also the crisis of widening of the Italian govies, we can see that 10 years ago, we didn't have any basically TFA base. So the wealth management was negligible. The loan book was totally different, and it was smaller, EUR 35 billion.

The assets' dynamic delivered an important CAGR in terms of revenue. So we have registered an average 5% growth of revenue in the last 10 years, coupled with a very good asset quality, which is even more important is looking at Slide 3, where we show that the GOP risk adjusted, so revenue minus cost, minus impairment in loan, was having a trajectory of plus 12% CAGR. And hence, the ability of the bank to absorb important increase in LLPs has been already remarkable in the sense that we were always able to maintain a big gap between these 2 numbers. And this gap, the so-called GOP, went up considerably compared to loan losses that, on the other side, went down. We entered in this situation with 52 basis points of cost of risk.

The reshaping and the growth was coupled with continuing increase in capital ratio with organic generation and with an improved dividend policy in the remuneration policy because, as you know, recently or more recently, we have had a buyback in our remuneration policy.

What I would like also to mention is that compared to the 2 previous crises, Mediobanca is having, I would say, both balance sheet-wise, but also business mix-wise, a totally different position, stronger. So we were 10% of CET1 in '09, at 12% in '13, and we are now at 14%.

Funding is totally different. We were reliant on wholesale funding 10 years ago. We have a bigger exposure now to wealth management deposits, with 44%. And even revenue-wise, the situation is different where we have wealth management now contributing the vast majority of fees in a totally different mix of revenue, much less exposure to equity stakes.

In terms of capital, we have, today, a 600 basis point of buffer of MDA. I think it is one of the highest buffer in Europe. And in terms of both leverage exposure to govies, but also Stage 3 percentage on loan, we stand out quite well. As you can see here, basically, Stage 3 represents after this quarter, 3.8%, so slightly improving from 3.9% on the total loan as opposed to an average in Europe, 3.1%. But honestly, our 3.8% is mainly done by few unlikely to pay. Part of them are poised to become still bonds in the coming quarters. And so the real component, as we know, of bad loans is negligible.

Now let's focus on the COVID and on the quarters. Of course, COVID was unexpected by us like everybody. Notwithstanding this, I think our business model proved to be very, very resilient in terms of thanks to governance structure, solid and effective technology platform and ultra robust balance sheet. We have devoted our attention primarily to our staff in order to be sure that their health -- its health position was assured and always safe. So incentivizing remote working, reduce working hours for retail branches, covering COVID-19 in terms of psychological counseling service and always supporting staff with webinar videos newsletter to engage, assist and update.

Clients as well has been touched by our efforts, our successful multichannel model that has a very strong digital component, in particular in wealth management, was correctly up to the job. We were also fast in containing customer base to share and apply the new measure that has been approved by the government in terms of moratorium. Aim to do more to extend even this kind moratorium treatment, even in cases that were not really envisaged or covered by the recent government decree.

For our community, we have started to put out some specific donation to project. That was the one of Milan municipality hospital in the region of Lombardy. Then CheBanca! started to raise money and to do a donation of part of them to certain specific ESG and COVID-related initiative. Lately, Chairman, CEO and General Manager have agreed to donate 30% of their fixed salary to COVID initiative. This is because we are sensible to the number of requests we are receiving every day on how to sustain community after the COVID.

As we said, the platform and the governance of Mediobanca was very reactive in terms of COVID and how to deal with -- engage with the different kind of clients. Wealth management, the fact that both CheBanca! and Private Banking borne with a very important digital footprint after the engagement with clients. And that was a very key success factor in not adding outflows and in having an important inflow, in particular, in the month of April. Consumer banking had to adapt, and they did it quickly because basically, as you know, the vast majority -- the majority of the loan are done physically.

So we have reinvented the process where through phone and website, we are in a position to give in 24 hours a meeting and then a follow-up about request of loan. Even in the payment -- repayment, we have introduced important new technological skill in order to let the client pay in a moment of lockdown. In Investment Banking, we have assisted clients that we are managing the impact on corporate finance ECM deals and also thinking about their capital structure and advising how to cope with this situation.

The impact on the financial market of COVID is pretty evident to everybody. What is worth to be mentioned is the impact on household behavior and corporate -- in corporate clients. As we have seen, why Wealth Management switching to liquidity products, and there was a clear resilience of net new money and asset base, in particular, for the network that have private bankers and advisers that are very active with clients.

New production of mortgages and consumer lending was pretty altered during the month of March and April. Why? Because basically, it was not possible to do any activity related to the purchase of a house or an act of consumption that is the driver of both mortgage lending and consumer lending.

Investment banking volume went down. So we have a very 2 good months. This is clearly evident for -- across the different business, so was very good in all the business. And in M&A, we had a very good rebound in the first 2 months, but then the volume went down like in ECM, a bit less in DCM.

The Mediobanca monthly activity year-to-date showed strong resilience in Wealth Management. In Wealth Management, in particular, Affluent and Private segment was improving month-on-month since the start of the year, with deposit becoming dominant in March and April as a result of a flight to quality and liquidity needs. So we have had only a few weeks of negative net new money. But then it was enough to have the month of April to rebalance completely this kind of trend. And hence, CheBanca!, as you have seen already in March, recorded good results, but the net new money trend, both in CheBanca! and in Private continue in April.

We've had outflows in Asset Management not linked to COVID-19. It was mainly linked to the market trend, in particular, in systemic alternative and in particularly for one brand that we have that is run. While in April, we terminated in SGR some institutional mandates, very dated and very -- with a very low profitability. This is a trend we are pursuing since already some quarter to exit low profitability institutional mandate.

So at the end, the TFA was down only 6%, but not because of outflow but because of market effect. That was basically by at least 1/3, now totally back to normality in the month of April.

We have had quite a good corporate activity. This is -- was based, in particular, in corporate new loans. Why? Because we have had drawdowns of revolver credit facility of quality borrowers. So the loan book went up. So we will have a positive impact on NII in the future quarters for CIB, given the fact that between March and April, we have increased revolving credit line drawn by EUR 1.2 billion.

As I said, in the month of -- in the second half of March and in April, the mortgage new loan and consumer new loan was negligible. We think that it is totally linked with the physical lockdown. So the sooner the physical lockdown will terminate, the sooner we will have new mortgage and consumer loan production back to normality.

Now let's speak to the group results. So impact of COVID in this quarter is not affecting core revenues. So NII at the end 9 month or 9 months was plus 3% and fee, plus 6%. So even in this quarter, both NII and fees were having a good trend, taking into consideration what happened in the last month. We have had, on the contrary, slightly negative results in trading, so minus 3%. An increase in cost of risk that was starting from all-time lows, so it was EUR 44 million, it went to EUR 100 million and adjustment to market value of seed capital exposure for EUR 40 million. So the impact has been this. Without these 2, I would say, financial impact, so the first and the third, our results could have been even better, but we haven't had any important, I would say, impact in core business in this quarter.

In fact, GOP was flat at EUR 1 billion. And the other difference between this year and last year is that we had to provision more for the systemic fund allocation. It went up because of the request of the authority. Operational gearing remained very sound, asset quality capitalization particularly strong, as I said, further improving.

Now if we go and see the loan book, Page 17, we have had Q-on-Q plus 3%. That was driven by CIB, plus 5%; and Wealth Management, plus 3%. Consumer was flat because of the impossibility to produce new loan. And asset quality further improved with, as I said, a deteriorated loan below 4%. And net NPLs on loan at less than 2%, so 1.78%, and the coverage that went up from 54% to 55%. As you know, net bad loans on loans is negligible, is 0.16%, and the bad loan coverage went up to 80%. So in our -- our exposure is mainly done by unlikely to pay.

In comparison with other quarters and other players, I think Mediobanca is standing out very well, in the sense that we have had a slight increase in Stage 2 from 5.3% to 5.9%. But we have, on average, as you see, a 92% of our loans that are Stage 1, 4.6% Stage 2 and 3.8% that are Stage 3. This compare not only with Italian banks, but with the average of Europe, it's, for us, a good comparison.

Now let's go and analyze a bit more the various components of the loan book. First, starting with corporates. We have basically divided our portfolio in 3 categories: The one that has an immediate impact from COVID-19; the second bucket that is high impact from COVID; and then the third is less impacted by COVID.

Now the first bucket is representing 2% of our loan book, and 80% of this -- 75%, 80% of this is represented by investment-grade or crossover exposure quality. Only 2% of this 2% is LBO.

In the high impact from COVID, we have 20% of our book and here, back again, in the region of 70% is between IG, investment grade, and crossover, and only 4% is LBO -- is made up of LBOs. The breakdown of our loan portfolio is 50%, 51%, Italy. The rest is Europe.

So what we see is that in CIB, the quality of the portfolio and the kind of counterparty is, for sure, having request of covenant reset and waiver. But for the time being, we haven't experienced a structural worsening of the credit risk of this counterparty. In fact, there were no basic reclassification to forbearance.

In consumer, we have a situation where our COR is not historically correlated with GDP. So basically, in our case, it's more correlated in this case with operative lockdown. So we have had an increase of cost of risk this quarter, and we will have a similar increase or similar -- not increase, similar cost of risk of the last month for Compass in the next quarter because of the physical lockdown. Physical lockdown means not being in a possibility to repay for most of our clients and not being in a possibility to collect because collection up until a week ago was not possible legally.

So the spike we have had this quarter is mostly related to the physical lockdown, while our past experience showed that the correlation between cost of risk and GDP is not there in the possibility of Compass, historical possibility of having very good gross margin. Value-adjusted new production, strong collection process and disposal, regular disposal of NPL, make -- put Compass in a position to withstand very well this event and to prepare for future growth.

Asset quality confirmed as strong in all division. I have already mentioned this further improvement in this quarter.

Funding and capital very robust. Funding, we have completed our prefunding of the fiscal year already before the lockdown. And then we have continued to raise deposits, and we have increased substantially our counterbalance capacity. So we have now over EUR 9 billion with new rules on -- with the new rules on collateral haircut. We have a counterbalance capacity that went up to EUR 9 billion. The exposure to govies remains limited to EUR 3.3 billion of Italian govies out of EUR 5.4 billion of the Eurozone.

Capital, quite strong, so 600 basis points of MDA buffer. Also because with the new rules, our low SREP is even smaller. So from 8.25%, it went down to 7.94%. So this creates a very important buffer of 600 basis points to counter any possible shock.

Dividend policy update here. We have followed the ECB recommendation that is basically suspending or canceling the guidance of 52 basis points, maintain the accrual dividend up to Q2. So basically, there is a 60 basis points corresponds to 27 bps per share. And a new guidance to be given by the Board within the month of July when we will close the full year results, in order to be then available for the general meeting that will be held at the 28th of October. So we have a calendar, as you know, in terms of general meeting and usual payment date that is, I would say, coherent with the timeline of ECB. So it will be then to decide based on ECB recommendation if our guidance can be then reverted into a proposal to the general meeting. Buyback completed, so cancellation of shares to be confirmed at the general meeting.

The capital dynamic, it's clear on Page 23. So we have had a small decrease from 14.1% to 13.9%, taking into consideration that this is the quarter where we had the most of impact of ag because ag means Generali reduction. Why? Because we have accrued the pro quota of the results of Generali, but we have not yet benefited from the dividend payout, the dividend -- the payment of the dividend. So this will be in this quarter. And the rest, it's basically not big events. So 20 bps of uptick in earnings and then basically 25 bps between RWA and valuation reserve.

Starting from segment contribution and analysis. We have to reiterate the resilience and the effectiveness of our Wealth Management. They had a good quarter, and this is adding to a very good 2 months. So basically, net profit was up 19% over the last 9 months. And this was reverted in a positive trend in top line, plus 8%, plus 12% in fees. So this business is becoming quarter-by-quarter more important for us and a very important source of fees. Now it's the majority.

And it's proving to be resilient even in tough times like the one we have seen. Why? Because the type of what's mentioned we are pursuing is a sustainable one in terms of structural fee. Less than 10% is performance fee-driven. And hence, I think notwithstanding also some outflow that we can have, in particular, in asset management, it proved to be quite a resilient and growing business.

This is based also on heavy investment or continued investment in terms of enlargement of network. Our sales force went up by 20 units, and we have now 1,000 professionals that are within the sales force of Wealth Management. And hence, we will continue to work on this reinforcement of the distribution franchise.

Here again, you see that notwithstanding the terrible market trend, we have had interesting net new money because basically, it was EUR 1.2 billion between Affluent and Private, but less EUR 0.5 billion in asset management. So net-net, it was EUR 600 million to EUR 700 million. That then was having a market impact of -- in the region of EUR 4 billion that is limited to 6%, given the fact that we have quite a prudent asset allocation, and we have a big chunk of our AUM that is basically insurance product.

Consumer had a very, very positive quarter, notwithstanding all what we said. Why? Because basically, we were able to generate plus 5% of total income and in particular, net interest income. This is notwithstanding some changes in rules about what to be returned to clients based on the so-called Lexington verdict. Notwithstanding this will be 5%. So we have had spectacular growth up until the first week of March, and we assure that a good part of this growth can be resumed when the physical lockdown will be terminated.

I have told you already on loan loss provisions. Here, I give you more color and more detail. Compass, as said, the run rate of monthly provision in the region of EUR 20 million per month. We have put a provision of EUR 36 million in the month of March. This is basically reflecting the amount of, I would say, possible deterioration that we see where today, it's not so easy to understand how much is related to real deterioration of credit, as I said, and what is linked to basically impossibilities to repay on one hand and impossibility to collect on the other. But we wanted to be on the safe side, and we have put EUR 36 million this quarter.

This means that cost of risk of Compass went up. But basically, back again, as the company has all the possibility to absorb this kind of impact, given the trend in marginality and the pre provision profit. In fact, they ended up at 29% of ROAC.

In CIB, good trend in NII and fees, not a good trend in, I would say, in trading. Part of this trading has been reversed in the month of April, as I said, and we wanted to be, of course, more cautious in terms of COR. We still have possibility to migrate UTP to bonds. Of course, in this quarter, we prefer to be more cautious and to increase slightly the cost of risk.

PI, notwithstanding seed capital charge, was higher than last year. So profit was up 3%, and ROAC was 14%. Holding function, nothing to be noted. We have here a slight increase because of trading and a systemic fund allocation, but nothing that was different from the budget for the ordinary component.

So as closing remark, I would say that this 9 months show strong results, commercial and operative results. This is a function of robust core revenues and strong new lending and net new money. This gives the idea that the bank is able to react to the challenging scenario and is able to grow in the challenging scenario where superior asset quality and capitalization is confirmed. And the bank is entering in the COVID scenario stronger than in the past.

So we need to stick to our strategic and operative priorities. So not de-focusing on vis-à-vis our strategic plan because we think that, even in this tougher macro, there will be opportunity. There will be opportunity to grow market share. There will be opportunity to grow faster in -- particularly in certain businesses like Wealth Management, where brand, capitalization and robustness is making a difference.

We have seen already some positive sign in April. That is trading, market recovery, credit collection and CIB is restarting. However, it's fair to say that we should expect core revenues to be lower in NII and fees as long as we are not able -- or will be able to rebuild both the stock of loan in Compass that is linked to the lockdown and the CIB that is linked more on, I would say, the pipeline. As I said, first time out there, of course, we need more time to recover.

We have also ran a possibility, a sensitivity to have an idea about where we stand in terms of capital, should we double the cost of risk. And so just to give you the robustness of Mediobanca, ability to absorb the crisis, should we double our COR compared to the pre-COVID record level. So in June '19, we had 52, should we arrive to 100, our quarter 1, pre the distribution of profit for next year, not for this year, will be standing in the region of 15%. So quite a high number that can absorb this kind of shock.

And lastly, I would like to tell you that we will revise our IFRS 9 scenario by the end of this year. And by the end of this year, we will give you the guidance on dividend that can be then transformed into formal proposal to the general meeting based on ECB recommendation. Thank you very much. I'm now ready for your questions.

[Operator]

[Operator Instructions] And the first question is coming from the line of Antonio Reale from Morgan Stanley.

[Antonio Reale, analyst]

I have 3 questions, please. And I saw your comments on cost of risk and the sensitivity on potentially doubling next year. But I'd like to understand back to how you got to those assumptions, particularly in consumer finance.

I mean, you've been -- I mean -- I mean, I've seen what you said and I've heard that the loan loss is EUR 36 million per month. But I would like to understand better what are you assuming in terms of new loan origination, which you expect to see going forward. If I look at Slide 14, in Q3, you did EUR 1.7 billion, so kind of a normal quarter still versus your EUR 2 billion run rate. But April looks -- well, looks very, very weak, almost close to 0. What have you assumed here going forward for next year, for example? That's the first question.

The second question refers to your Credit Solutions business. I think via that, you manage about EUR 6 billion to EUR 6.5 billion worth of unsecured NPLs, which you've acquired over the last few years. That is, of course, in gross book values. I'm guessing you will have bought those loans at steep discounts. So my question is, what is the net exposure? If I assume EUR 0.05 to EUR 0.10 on the dollar, we'll be talking about EUR 300 million, EUR 600 million of net. Is that correct? And can you help us understand how to assess the risks here as well?

And the last point is on dividends because you seem -- I mean, you've not reversed your dividend accrual from capital, and you said you're going to be guiding the market to your new policies from next quarter. Can you share your thinking here? You seem inclined to go ahead with the dividend payment.

[Alberto Nagel, executive]

Thank you, Antonio. So I want to give you more color on how we are thinking about evolution of cost of risk of consumer. First of all, we stick with the policy that you know that we're going to sell the NPLs at the end of each year. So our policy of cleaning up the balance sheet will be untouched.

In terms of COR, we do expect to have similar or slightly higher monthly provision. So we are not talking about COR. We are now talking about absolute provision. So if we have done this quarter -- or this quarter, the last month of this quarter, EUR 37 million, we think we're going to be in the worst quarter between EUR 40 million and EUR 42 million per month. Then I think that this situation will ease throughout next year.

So let's see that the first part of the year will be more on this side, and the second part will be much below this or below this. Of course, it's a guess today. What we can do is a guess about not having -- today, we have a 5% to 6% of our clients that are under the moratorium. What we do in moratorium is not something that we read elsewhere.

So moratorium for us are divided in 2 categories. The first category is our clients that have been always good payer, in good shape before the COVID. If they ask for moratorium, of course, we give moratorium, we do the so-called [Foreign Language]. So we put 2 or 3 installments down the line of the reimbursement process. And we don't classify, and we don't overcharge in terms of provision. Those that had already problems before and they ask for moratorium, we give moratorium while we classify. We start to provision day 1. So this is why we wanted to show already in this quarter a pickup in cost of risk because today, it is not clear if they are going to be regular and how much. So it's, I think, prudent to start increasing cost of risk even if you have done the moratorium.

So this is, I think, giving you some more color on consumer cost of risk. I give you more color on the loan book. On the loan book, even here, we have assumed, I think, pretty, I would say, safe and prudent approach saying that in this quarter, I think it would be nice to get 25% of the normal production. So should we be in a position to originate EUR 500 million, we will be happy because basically, up to today, as you know, car sales shop are open, but the rest is not open. So we'll see if and when during May and June, a person can do any consumer business activity.

Then we have factored the Q1 of next year, like 40% to 50% of the normal production. And then in between the second and going down the line to the third and to the fourth, a normalization back again to the level of pre-COVID. So it will take, I think, between 2 and 3 quarters to go back to a normal production. As, of course, based on today's assumption. Credit solution, you have to -- of course, you have the gross, but you need to look at the net exposure. The net exposure is EUR 352 million. So what we may think here is that we will have a delay in terms of collection because of the lock down.

But we don't expect a big serious or big raw material impact. In dividend, in dividend, how can we think about the dividend? We think that we are seeing today that is the 27 bps of the provision that is still in the capital. So our idea is to go around that number, based on how we will see the evolution of -- not the capital, the capital will be anyhow good. But basically on -- based on the expectation that also ECB will have. So if ECB is allowing to pay without problem, we will go for that. Otherwise, of course, we would refrain.

Honestly, in terms of capital, in terms of capital generation, in terms of profitability, we are clearly positioned to pay a dividend. But we don't want to be or we don't want to be -- would not like to be the guy that is out of the choir. So basically, we have all the possibility to pay. We are convinced that we can pay, but it's not only our decision.

[Operator]

Next question is coming from the line of Giovanni Razzoli from Equita.

[Giovanni Razzoli, analyst]

A couple of questions on my side. The first one, I've seen that you take EUR 40 million of charge on some seed capital investments, if I'm not mistaken, in this quarter. Can you share with us what is the underlying amount on which you took this kind of provision, and if you can give us more color about it?

The second question, you've reported EUR 500 million of loans under moratoria, if I'm not mistaken. This amount is the overall notional of the loans which have applied for the moratoria. So this is my question. That would be a very, very small figure vis-à-vis your loan book that is something like 1%, as you have pointed out, is 1/10 of what the other banks have reported. So we're just double-checking this.

And a very quick question on the -- again, on the trading performance, you had minus EUR 30 million in the Q3. You said that you have recovered this amount in April, if I'm not mistaken. So does it mean that was not realized losses, so just mark-to-market losses?

And sorry, another final question on the consumer credit. I take another approach in terms of the evolution of this business. My point is, to what extent the deceleration of the revenues is related to the deceleration of the new production because this is a business clearly of volumes, where also clearly cost of risk plays a significant role, but the deceleration of the new production and with it of the average volume can be very, very painful going forward. So if you assume, as you said, a normalization of the new production in the second -- Q3 of the next fiscal year, is the NII of the consumer credit still in the condition to grow or not?

[Alberto Nagel, executive]

Thank you, Christian, for your quite good question.

[Giovanni Razzoli, analyst]

This is Giovanni, actually.

[Alberto Nagel, executive]

Excuse me -- Giovanni. You can see the breakdown of the seed capital on Page 28, but I guide you through. It's basically EUR 355 million at the end of March, EUR 202 million are related to equity. And so to -- sorry, EUR 153 million to equity, that is RAM, and EUR 202 million to credit, which is Cairn.

Loan under moratorium, yes, you are right. These are the numbers that we have had at the end of March. Then, of course, April went up. So we don't have basically -- to give you the sense, we don't have moratorium in the CIB. CIB is basically 1 moratorium, 2 moratorium, 0.

Then we have it in leasing because in leasing, it is ex ledger. So what happened is that 40% -- 35% of our client asked for that. And but again, here, we always apply the rule that I mentioned to you. Not all the moratorium are considered free of charge, I would say, without having an implication of provision. So the clients that show some difficulties before are given moratorium, but they are already -- they have set aside in terms of provision something.

Then we have basically in Compass today in the region of 5% of the book that is under moratorium, and the same amount, 5%, is basically on mortgages. So then, of course, if you add the book of CIB where we don't have moratorium, the average percentage under moratorium is much lower than the other because we have part of the portfolio that is not subject today to this moratorium.

Just if I go to -- your third question was related to trading losses. What I wanted to tell media was not enough clear, but we had minus 3 in Q3. This number reverting into positive, so became, I would say, a profit from trading already in April, and it's like if you see, basically, we have a run rate of EUR 50 million, it's half of that. Then, of course, it's April and May. So if you can see another way of looking at the percentage of moratorium, you can see also the number of loans that are under moratorium is a bit coherent with our trend of cost of risk. So it's related.

You are right. You are spot on, on the fourth question about what is happening to the NII of Compass. Compass, we've had some quarter of decreasing NII. Why? Because basically, it will take some quarter to resume the euro production because Compass has basically every quarter, EUR 500 million of loan that goes to maturity that are reimbursed. So -- and on average, Compass basically make as a new production of EUR 700 million, EUR 800 million. Now as we are losing 4 months, of course, we need some quarters to fill this gap. But this doesn't touch the trend of Compass that would be, anyhow, a machine of NII in terms of growth for the future. It's a temporary situation that needs some months to be treated.

[Operator]

Next question is coming from the line to Azzurra Guelfi with CitiGroup.

[Azzurra Guelfi, analyst]

A couple of questions. One is on the loan growth and the other one is on the wealth management. When I look at the loan growth in CIB, it has been strong, and as you mentioned, is because of the drawing of commitment. The risk-weighted asset of the division has actually grown less. So if there is an improvement in the risk weight, is it because of the better quality of customer? Or there is something else?

And also looking forward to the future months. With the government guarantee scheme, do you expect -- do you have any expectation of how much those could be for you? And what will be the impact on the capital treatment of those loans for your heavy division?

The second question is on the Wealth Management. I heard your comment about that there could be some opportunities in this space to gain market share because they are resilient, has been better than what probably the market was expecting. I've seen the share price movement of both you, Generali and several of the PFs. Could this change your approach to external growth, given that maybe sometimes there could be opportunity in the crisis, given your very strong capital position at the moment? And if the regulator doesn't allow you to pay dividend because of many reasons, that could be another way to use capital?

[Alberto Nagel, executive]

In -- I'm touching -- thank you, Azzurra, sorry. To start with your first question, the second part of the first question, I would say that guarantee scheme will touch very few parts of our book. Why? Because guarantees, they work for -- I mean for the leasing, they work, okay, but we have only EUR 2 billion, and it is going down. Then the rest, they work a lot as I have understood for the small ticket, which we don't have. They don't work in the sense that most of our CIB clients are not asking for this kind of intervention. Why? Because they have regular access to market. So basically, there will be cases, but it's going to be limited.

Now the density of RWA in CIB is going up 1%. Why? Because basically, we downgraded internally some counterparty. Hence, we have more capital charge because internally, we have done the job of reviewing the rating of already part of our counterparties. Then, of course, the increase in RWA is linked to the increase of RCF, the revolver, because before -- up until they are not drawn, they account for 50%. Once they are drawn, of course, they account for 100%. So the difference -- this 1% difference is linked to this kind of 2 trends.

You are right, Azzurra, in Wealth Management, we need to remember what happened for us in the past. We bought Barclays because at that time, a company, a foreign group that was present in Italy wanted to go out. Now there will be -- there can be still opportunistically like this because I do think that with the severity of the conjunction, there will be decision to be taken about presence outside core markets. And hence, there can be a situation like Barclays back again. Like also decision of group that have presence in many business to exit some and to be more focusing on the core one.

So with our capital ratio, we are always very, very careful understanding whether that can be bid of this kind. And I think price-wise, the situation may become more interesting for us.

[Operator]

Next question is coming from the line of Christian Carrese from Intermonte.

[Christian Carrese, analyst]

Yes. I had a few questions. The first one is on, again, on Compass. So it seems to me that you are planning to reach, again, a normal production level in 2, 3 quarters. So you are not scared that as -- equity could deteriorate in this crisis. So you are quite confident that the cost of risk would be -- will stay under control. So if you can elaborate a little bit.

Second question is on TLTRO tiering in the financial portfolio. You have been always quite conservative in terms of pickup. Are you planning to increase the TLTRO pickup in the current scenario and given the more favorable conditions? And what kind of support could give this to net interest income?

The third question is on CIB. If you can give us an idea of the ECM, DCM trend and if there is any opportunity from COVID-19 in terms of advisory for restructuring for companies, so your business now is more exposed to SMEs and maybe it could be a good way to make fees.

And finally, on the Common Equity Tier 1 ratio, the 15% guidance you gave even in a 100% basis point cost of risk scenario is taking into account the CRR rules. So if you can elaborate a little bit on the new rules, for example, software and also anticipation of SME support impact or what kind of impact that will have on your numbers.

[Alberto Nagel, executive]

Christian, thank you very much. Yes, of course, we should take into consideration quality of clients. On the other hand, we should take also consideration that in this new world, a specialist player will take market share from general players.

So if you have a presence in the market that allows you to basically price the risk, select the client and then have a pre-provisioning profit that is making you making money even after an important increase in provision, you can then continue to print new loans and extend your reach against other operator that have a different policy in terms of pricing, has a different capital position, has a different, I would say, focalization in this segment. So this moment are positive because for Compass, because usually Compass tends to increase market share. While Compass, as you know, tends to decrease market share when the market is super hot.

TLTRO. Today, we are adding EUR 4.7 billion, and we have counted that we can have an extra EUR 1.5 billion with the new TLTRO, and we're going to go for that because basically, it will help, as you said, NII.

CIB, I do believe that -- back again, in this situation, remember what happened in 2011 and '12, you have a different business, but it's not sure. On the contrary, that is less interesting. Why? Because you will have recap, you will have consolidation, you will have restructuring for many quarters. And the trend of disruption of sector are going to be accelerated. So the digitalization, the ESG trend, sector consolidation in general will be forced by this kind of, I would say, crisis or difficulties, not slowdown.

So I think there would be a different job but I think that the market is open for that. We have seen that a good business model that are short of cash or short of equity, even in the last few weeks, were able to recap, for sure, a different multiple. But the market is open, as you know, for a situation where you need to fix problem and you give the evidence that you fix it once for all.

Yes, in the 15% CET1, it is embedded a small contribution from the new rules. If I'm right, it is going to be something like 20 basis points, 25 basis points between the salary guaranteed loan and the short term.

[Operator]

Next question is coming from the line of Alberto Cordara from Bank of America.

[Alberto Cordara, analyst]

My first question regards the Compass unit. You've been quite effective in explaining us that the cost of risk for this unit is now so strongly correlated to GDP. However, what I can see in this slide is also that the cost of credit in the past that Compass was materially higher than the recent quarters. And I think there are different reasons for that. Probably we're having a low interest rate environment. You have a higher percentage of consumer loans that did that through branches. But at the end, what I would like to ask you is from these current levels, shall we look at 400 bps, which is a level that was reached in the past, as a go-to scenario? Or that you would think it's difficult even with the big drop in GDP, like the one that we are going through, to go through?

The second question, obviously, this is entirely up to you. I mean we saw the result of 2 other Italian banks that during this current scenario of uncertainty, they provided us some guidance as to the earnings that they expect to realize this year and the next. So again, for this year, we are very close to the end. Your fiscal year is closing in June. But I don't know if for the next year, you feel it's appropriate or to give us an idea of the minimum that you feel comfortable you can achieve.

Alberto, my final question is on share buyback. You should have completed the share buyback in April. Last year, as you can see from one of your slide, there was EUR 150 million that were invested in a share buyback. And again, this year, you have done already, I think, probably all of it that were scheduled for the year. So my question is, how do we go about with the shares? Because I think with the dividend that the regulator -- decision for the regulator to ask a bank to revert dividend accruals, I mean the bank doesn't pay the dividend, the accruals made their way back into the common equity. But as to the share buyback, these shares have already been bought. They've already been deducted from common equity. So again, I'm not sure -- do you think that the regulator will allow you to cancel these shares? Or you will keep these shares into the new year and then you will cancel them this year? And by the same topic, do you think that you can start a new buyback program in October or not?

Then the very final question, I apologize, is -- so we are waiting for the regulator to give us more clarity on how banks will approach IFRS 9. We saw credit taking a step forward and -- I mean already positive on this front. And as to the issue of calendar provision in -- do you think that somehow rules will be softened? Or banks will still be -- will still have to comply with calendar provisioning on new flows, a 100% coverage on a new time frame as well as on the exit in NPE installment?

[Alberto Nagel, executive]

Thank you, Alberto. Then I would ask you to rephrase a bit the question #2 because the line was bad. But starting from -- starting from the other.

Compass today, as of today, our idea is to stay more in the region of 350 bps across the year. So basically, we will have next quarter and Q1 higher and then -- higher in terms of average and then going down. Also because we believe that, as I said, most or important part of the impact is linked by the 2 phenomenon of not being able to repay. We have to remember that up to 20%, 25% of our clients still pay through postal bulleting. So during the lockdown, they were not physically facilitated to do it. And the second, the impossibility to collect.

The buybacks and the shares, our idea is to propose to the general meeting to cancel the shares. Also because they are already deducted by CET1, and we are poised to bring this to the general meeting. Of course, it is also requested ECB approval. But as they are not today capital, I would be surprised they should -- this authorization not come. But let's see.

For the future, we haven't abandoned the idea of buybacks because buybacks, as I said, we shouldn't think about a Mediobanca that is out of a strategic plan. The idea of the strategic plan are still more -- still valid, even more valid and the idea to have both dividend and buybacks makes more sense today with the stock price at EUR 5. So of course, we can't do it now but this doesn't mean -- it is our intention to bring back this idea or this proposal next year, also based on healthy capital ratio.

IFRS 9, calendar today. As we said in the call, we will adjust our scenario in the next Q. So next Q, that is the closing one, we will adjust the scenario. And our idea today is not to favor too much procyclicality and to take into consideration the recommendation of ECB. That is, of course, we need to say -- to take -- we shouldn't forget about point in time, but we shouldn't over stress point in time. So as of today, we will have provisioning on the bonds because basically, this is bonds that can be bonds of corporate, they can be also bonds for consumer.

We have to say that our bonds, in particular, in consumer, is already very well covered because with the provision that we have done today, we are at 3.15%. That is a quite high, I'd say, provision on the bonds. Maybe we should come to the conclusion we'd add -- as it will be the concluding quarter, we add something more just to start better with the new year, but our IFRS 9 adjustment will be not night and day as the way we see it today, at least.

Then I'm missing the question #2. Alberto, if you can rephrase it?

[Alberto Cordara, analyst]

Yes. I mean I apologize. I think a couple of points that were left. One is just your advice in terms of the calendar provisioning rules on flows and the stocks, if there is any chance that these rules may be softened. I think the Italian Banking Association is making some lobby on this front. I just wanted to have your view about that.

And then the second point, again, this is absolutely not necessary, but we've just been through the result of Intesa and UniCredit, both of them, they said the need to give the market some guidance as to the earnings that they expect to make next year. And so the question to you is if you feel that you can do the same. I think that if I can venture an opinion, I think I will find it extremely difficult for Mediobanca to make losses because you have the highest pre-impairment profitability of probably -- certainly of Italian banks, but also Europe, I think you're probably one -- you're probably at the top end. But even if we leave this possibility aside, if you feel you can give us a sense of the kind of profit we can see next year.

[Alberto Nagel, executive]

You are very, very demanding analyst, but I mean I like this kind of challenge. So calendar provisioning rules. I mean the problem of calendar provisioning is not only per se the calendar provisioning, so the fact that you are obliged to do 1/3, but also when you had to do it. Basically, this is also when you have to classify something to UTP because basically from UTP on, you do this. And so the slippery point are twofold, is the criteria to classification of UTP and the calendar provisioning itself.

I think for the time being, I have not seen, at least to my knowledge, a big shift of authority on this. Maybe I was -- the focus on this, so maybe it is something already preliminary but for sure is a very important point. And for sure, the procyclicality and the system of calendar provision in that I -- basically, I understand but I don't share, is going to be quite an elephant in the room in the next few quarters. So the sooner we can have an open discussion on this, on the 2 criteria, on the 2 elements, not only per se the calendar provisioning. When you have compulsory to classify is something that -- on which different, I would say, view is needed.

No, we are -- as a guidance, of course, basically, with what I gave you, you are faster than me to get to the bottom line. But I think we are adding for another year of important profit. Then of course, it will be diminished compared to last year. It will be looking at what we have done this year, but I think we are adding to have another year of profit. I won't give you the numbers because basically, our business is different from commercial banks. And normally, we don't give any guidance on bottom line. But we are running -- and embedded in the number that I gave you about CET1, 15%. There is in our profit. For sure, not a loss.

[Operator]

Next question is coming from the line of Domenico Santoro from HSBC.

[Domenico Santoro, analyst]

A number of follow-up on -- from my side. First of all, on the consumer credit, just to liaison with the colleague question. I mean I understand -- I mean since I cover Mediobanca, it's more than 15, almost 20 years, I understand that the consumer banking and the cost of risk in the business was always correlated to unemployment rate. Presumably it is going to get worse in a couple of quarters in Italy or years. So I'm just wondering, how should we look at the correlation anew that you just envisaged given that you don't expect a much worsening cost of risk there?

And on this side, can you give us a little bit of visibility also on the credit quality in the CIB and whether we should consider that 100 basis points of loan loss provision that you mentioned in the press release as a sort of worst-case scenario for Mediobanca?

Thanks for giving all the comments about NII in consumer banking. But can you give us some thoughts also in the CIB specifically? And this minus EUR 10 million that I see in the holding function, not the contribution, is it something now more sustainable? Or there is more volatility to come? It's always very difficult to estimate this number and why you reduced quarter-on-quarter?

Then the EUR 1.7 billion TLTRO #3 that you're going to take in June, is it the final number or is the maximum that you can take? Or you can take more in terms of allotment? Of course, nobody is going to blame you to play a sort of a carry trade given the quality of your balance sheet. And also you might increase a bit the exposure to sovereign.

Then I have a question on dividend and buyback. I mean you have been very clear in the call that you don't want to leverage on state guarantees. It's just because your clients are different. So the way that we look at banks now is a bit different in the sense that they are sort of, forgive me -- I mean to be very straight on this sort of tools in the hand of the regulator because they play a social role in this very difficult environment. Shall we look at you more like an asset managers in a way, so different business model, and because some asset managers in Italy, you already fixed actually the payment date for October because that was my understanding on the results of the talks that they had with Bank of Italy. So shall we look at you in a different way?

And this is a question that -- I mean all investors, they ask me, and be a bit more positive on the possibility of you paying dividend and implement your buyback of shares just because your model is a bit different.

[Alberto Nagel, executive]

Thank you, Domenico. You have plenty of questions but all spot on. So you're right. Consumer credit is typically more linked to employment rate. Even if part of our clients are not having the so-called [Foreign Language], so the fixed employment. So they are autonomous, they are interim workers. So it's more complex. But in the number that I gave you, so 350 bps average, maybe something less, something more, we factor that on what we see today, it's a true risk. So as I said, the components we are seeing today are having a different nature. You don't understand today how much is true deterioration and how much is physical impossibility on collecting and on paying. We assume that 350 bps, it's all deterioration.

So it's -- so we think that within this, there can be also a slippage of unemployment -- or of employment, so more unemployment, and we need to see if the fiscal measures are effective. And we have set, I mean this kind of deadline on the second half of next year. So the first quarter of next -- the first half of next year, solar year, will be more evident if the fiscal intervention of the government is having an impact in maintaining unemployment under certain range. But in the 350 bps, there is everything.

CIB credit quality, credit quality in CIB, and this gives me also the opportunity to speak about state guarantees. Credit quality in CIB is a mix of the rating of the counterparties. The fact that for the time being, we don't have forbearance or a big classification to Stage 2, not even to Stage 3, there may be -- there will be some, I mean the coming quarters. But on the other hand, there will be the other way around. So there would be a reclassification from UTP into bonds. We have 3 position that have material impact, can have a material impact, 1 more than the other 2 in this segment.

And -- or what is happening in terms also of corporate event is such that we are confident that this year, the next year or even the year after, we can have some reclassification. So the cost of risk of CIB will be a blend between some reclassification on one side and some write-backs on the other.

RCF and state guarantee, so we stick to CIB. RCF, we have had this revolver drawn. But since 2 weeks, we didn't have more. So this means that after the intervention of the central banks, that have restabilized, in particular, commercial paper market and the credit market, the counterparty that we have tend not to draw anymore and to place either bond of commercial paper. This is why, somehow related, that just to modify a bit the perception, it's not true that we don't want to participate to give state guarantee. It's the other way around. It's the client, given their rating status that at a majority, a large majority, they don't want it. Why? They don't want it because basically, if you have a regular access to the market today, you don't embark yourself in such a procedure for different reasons: timing, documentation and conditionality. There are some conditionality that large corporate, they don't want to have. So it's not us. It's basically -- we are pushing for that, but some clients, they are not keen to.

Then you said -- I didn't understand well your question about holding function. Like if it is sustainable -- if it is sustainable this trend in Q4? Yes. We see flat the -- today results -- to the third quarter results of NII in holding function is going to be basically more or less flat in Q4.

Solvency -- sovereign, sorry. So you asked about sovereign, and then you said about dividend and buybacks compared. Well, in sovereign, I think we stick to our policy in the sense that it's a matter of the way we look at the bank. The bank for us should be in the funding and lending business where the vast majority of the funding is then devoted to the lending. Is not devoted to have a huge portfolio of govies. The portfolio of govies is liquidity. You have to have always counterbalance capacity to meet specific demand or a moment. But it's the way I see the bank. The bank should not live primarily through trading of govies because it can go well, but it can go badly, you can have a hit on your CET1. So it's not a matter of risk, it's a matter of model.

Then you said about dividend and buybacks. Yes, I feel that we should reserve this kind of classification. So a bank that even in the COVID era, would be able to pay dividends regularly and to do some buybacks. Why? Because we can show that the capital generation, the pre-provision profit and the ability to absorb shock, as we said, it's above the average of the -- well above the average of the market. Of course, it's not something that is basically based on us. It's based -- we are convinced, but it's a matter also of policy. And we should understand, if policy can be adapted to segment or to buckets of banks or will be general policy without, I would say, going to details about the banks.

[Domenico Santoro, analyst]

Can I just ask you, sorry, a follow-up, whether these EUR 1.7 billion TLTRO 3 takeup is the upper limit? Or you can do more?

[Alberto Nagel, executive]

It's not the upper limit. If -- I think we can go to -- in the region of 2, 2-point something, but we are taking most of the benefit, I would say.

[Operator]

The last question is coming from the line of Hugo Cruz from KBW.

[Hugo Cruz, analyst]

So just a couple of questions. One is on the seed capital impairment. You still have quite a bit of money invested in there, as you've shown in the slide. Can you give us comfort that we're not going to see further impairments in that item?

And second, on -- if you could give us an update on any discussions with Mr. Del Vecchio.

[Alberto Nagel, executive]

On seed capital, Hugo, I think it's done at fair value. It, Hugo, is fair value to the P&L. So honestly, we have had some positive component in the previous Q, if you go and see. Then this, we had -- with this severe contraction of the market, it went down. But now is, I think, already something like 15%, 20% is recovered. So I don't think, being equal of the rest, we will have further impairment in Q4 of this kind. On the other hand, I think seed capital, now we can also learn through the cycle how to edge this kind of position, but it's something that is needed also to help the asset management activity to -- as you know, to develop.

No, I said no -- I would say, there are no news on that respect. On the bank's activity, what we are doing is take the chance on every basically renewal of the Board to update the governance and to make it more market friendly. We did -- for us, we have strongly supported Generali to do this in the last month. So what normally you will see is a proposal at the general meeting in October for changes that are more market friendly of our bylaws.

[Hugo Cruz, analyst]

Okay. And so just to be clear with the seed capital, it sounds like there's always going to -- you could always have some volatility in the P&L every quarter because it's all mark-to-market?

[Alberto Nagel, executive]

Yes, yes, yes. We can't do any different because it's -- the classification is that we have to do the fair value every quarter.

I don't know if there are further questions. It seems there are not. Thank you for your patience and for your attendance. I hope that you will all come to the next call in July. Bye.