Mediobanca Banca di Credito Finanziario SpA

MIL:MB

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Mediobanca Third quarter Results 2021. [Operator Instructions] And just to remind you all, this conference call is being recorded.

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

[Alberto Nagel, executive]

Thank you for joining the call. In commenting the 9-month results, I think it's important to stress the solid operating trend, which reverted into revenue growth of 3%, which was driven by all-time high fees and resilient NII. Fees is now representing 1/3 of the revenue and the 2 drivers are Wealth Management, which was up 5% and CIB, which was up 43%.

The cost of risk stayed at low levels with 51 basis points, but we have managed to increase the NP coverage, which was up 10% -- 10 points to 65%. Cost income in the ratio in the region of 46% despite important upgrade in distribution. And all this reverted in 9% increase in net profit and in 9% ROTE with a core Tier 1 up to 13 -- 16.3%, discounting a 70% dividend payout accrued and confirmed.

Even the 3 months results showed an important commercial activity with net new money almost double year-on-year to 1.1 million -- EUR 1 billion, sorry, TFA, up 4% to EUR 70 billion, and which is even more important that the new retail loan production was at the highest in the last 12 months with EUR 1.6 billion in consumer banking and an important mortgage new loan activity.

Revenue were at high levels, above EUR 650 million. And even in this quarter, cost of risk stayed low at 53 basis points. So we have had another quarter of in the region of EUR 200 million of net profit. Where I would say that in Wealth Management, with 22% return on allocated capital, we have revamped the recruitment with 30 new salespeople at Chebanca! and selective hirings in Private Banking. We continue to upgrade our offer through new initiatives, and we continue to perform a different client segmentation.

In Consumer Banking, we have had an increase in the quarter of 11% Q-on-Q new loans and CoR was down to a level of 174 basis points, coupled with the highest ever coverage ratio, NP at 74.4%. Direct distribution empowered with 4 new openings in the quarter, while in CIB, we had a continuation or confirmation of a robust trend in revenues across different products with a important asset quality improvement and a new important hire in France where we had -- we are adding a new partner, Hubert Preschez in a share associate.

Now the trend in the 9 months in the quarter were robust in asset gathering. In the asset gathering, we have recorded a EUR 3.6 billion of net new money, where the component of assets under management was higher than in the past, was 65%. And the 2 main drivers were CheBanca! in the affluent with EUR 2.8 billion in 9 months and with a component of liquidity which was boosted by also a promotion campaign, which is the usual campaign we do at the start of the year.

And in Private Banking, with EUR 0.8 billion of net new money and with a better trend in the quarter where we had less deposit or some deposit conversion and more AUM. Then there was a market effect of EUR 1.6 billion. So at the end, we had -- compared to a year ago, we had plus 15%. And compared to December, we had plus 4%.

Apart from Wealth Management, the other big contributor has been CIB. Here again, a robust advisory fee income in the quarter with EUR 35 million coming mainly from -- or importantly from mid-caps deal. Market revenue sustained with in the different quarters, a mix of ECM, DCM markets activity and resilient NII in CIB, in particular, if we strip out the nonrecurrent component of Burgo, which was EUR 5 million in the previous quarter and EUR 3 million in the first one.

The underlying volumes are still on the high level, and there is a seasonality, but I think we're going to stay in -- on the high level also throughout the next quarter. The recovery in volume were also evident, as I said in detail. The loan book in residential mortgage grew close to EUR 11 billion. And for the first time, in Consumer, we have had sign of reversal. So since the Q3 of last year, we have been going down because of lockdowns and the maturity of the portfolio up until this quarter where we stabilized to EUR 12.8 billion, the same of last quarter, because we have restarted an higher production.

Those trends clearly reverted in sustained high revenues. You see the chart on Page 10, we have the average of our revenue in the quarter. And you see that these 2 quarters, EUR 675 million, EUR 663 million are among the highest, if we strip out Q1 of '20, which was boosted by nonordinary contribution from Generali. So in terms of genuine operating trend, these are the 2 -- among the 2 best quarter ever in the bank in terms of revenue. And the driver are, of course, Wealth Management, which is going up steadily and now is 160 in terms of contribution; CIB, which is still on the high level with some normal seasonality of quarters, but on the high level. And consumer banking, which is still lagging temporary because of the new loan production.

Growing fees with 7% increase and resilient NII, in particular in fees, the contributor are, as we said, Wealth Management and CIB with a better sustainability. So not only is important, the size of the fee, but is also very important the source of the fee. And now Wealth Management is representing 41% of the total. NII was down 1% despite lower average volume in Consumer Banking due to the diversification effect. So we had a contribution -- positive contribution from the other NII of the group, so mortgages, CheBanca! and CIB and effective cost of funds management.

Q-on-Q trend, down 3% is, in part, detailed or answered by positive one-offs. So there was a EUR 5 million in CIB in Burgo, which I commented before. And as I said, in lower average volume in Consumer Banking. It was partly replaced by, as I said, Wealth Management trend. Better-than-expected trading results following positive market momentum.

Very good news in terms of asset quality, where we have seen a steady decrease of our moratoria loan. We were at 5% a year ago. We are now at 1.7%. So we had a bulk of EUR 2.2 billion. Now we are less than EUR 1 billion with EUR 300 million less than December, where, as you know, Consumer Banking moratoria are expired, so what we have is normal -- the normal moratoria that we do commercially every year.

Mortgages 62% expire, the remaining 85% has been classified to stage 2 and stage 3. So we have adopted a more prudent staging, putting, as I said, 85% of the remaining part stage 2 and stage 3, and expiry date of period of these mortgages are within 2021. Leasing expired 34%, residual 38%, classified stage 2 and 3 and 10 expiring by June end and the rest July '21.

As I said, to the staging, in the sense that we are still at 3.3%, 3.4% of gross NPE, but net, they are going down because we have increased the coverage, and so they are at 1.2%. Performing loan stage 2, these are having a coverage of 9.5%, while performing stage 0.6%. So overall, performing loans coverage ratio was up in a year, less than a year, in 9 months, from EUR 125 million to EUR 134 million.

Cost of risk stayed low. Of course, it was -- there's been an increase compared to the previous quarter because of the exceptionality seasonality of Burgo. So write-backs. So we had 53 basis points, which is in line with what we have said in terms of guidance. It is important to note that consumer cost of risk continue to go down because of great quality of new loan production and new deteriorated flow of loans.

In CIB, we had negligible credit losses in terms of Q3 with 3 basis points of cost of risk. As I said, coverage ratio increasing in all divisions. Mediobanca group saw basically in net NPLs, a decrease of 34% from roughly EUR 900 million to roughly EUR 600 million. Part of this is also the reclassification in Burgo into stage 1. Then the coverage went up to 65%, and this 65% is seen in every single bucket. So in CIB, up 55% from 42%, in Consumer from 68% to 74%, in Wealth Management from 46% to 49% and in leasing from 36% to 41%. So CET1 evolution is of 16.3%, so marginally better than December because of earnings, RWA and dividend accrual.

The positive momentum of the bank was reflected also in rating in ESG and credit, in particular, S&P, with a bank-specific following a bank-specific review has upgraded Mediobanca from negative to stable outlook. And this is based on the diversified business model of Mediobanca. On top, Mediobanca has been included in S&P Europe 350 ESG Index and as well in Sustainability Leaders research issued by Sole 24 Ore. This is an evidence of our efforts in ESG policy, which is well-embedded in our 3 years plan.

Now going to divisional results. All divisions in the 9 months recorded a high double-digit ROAC well above cost of equity. Well, Wealth Management from 21% to 22%. Consumer Banking stayed in the level of 29%, 28%. And CIB at important rebound from 11% to 17%. Principal investing stayed well above 10%.

Now going to Wealth Management. As I said, the 2 drivers, 2 main drivers have been the, I would say, on one hand, CheBanca!, on the other hand, so the affluent segment, on the other, Private Banking, which is now totally embedded in the IB activity. So it's a private & investment bank outfit. This was helped and will be helped even more in the future by strong investment in distribution. Thanks to the post-lockdown, we have resumed hiring and sales force are up by 60 professionals.

Net new money, EUR 3.6 billion in 9 months, with the most important part done by Affluent and Private. And the divisional results saw 11% increase in profit, revenues up 5%, which is even more important, the fact that revenue -- recurrent fees were up 9% with very limited contribution on performance fee. This can be seen on Slide 22, where we have broken down the 2 component contribution, Affluent and Private. You see that without having CheBanca! is not having any performance fee and is registering 22% increase in fees and 6% in NII with a very solid net new money trend and an overall increase of 5% in the quarter of TFA and 20% -- 19% in a year time.

Private has had a 7% increase in fees and as well as had important net new money with plus 4% in the quarter and plus 20% in a year time. Size is important, but it's even more important, the quality. If you see on Page 23, we have broken down the different component of fees by source. And it is clear that the past, we are following a path of quality and sustainability, where management fees are steadily growing.

And the contribution of performance fee is negligible, even in this quarter, where we have reached the all-time high fees, recurring fee component because if you compare this to Q2 of '20, there was EUR 11 million of performance fee, while this quarter only EUR 4 million. The new segmentation and product offering is driving also up the asset marginality trend. Compared to 1 year ago, we are 4 bps higher and compared to 2 years before we have 7 bps of higher marginality and is still a work-in-progress because we still have a very conservative asset allocation in the portfolio.

Important efforts have been deployed into product evolution in the last 9 months, where MB Private Markets initiative were fostered by the third multi-strategy fund collaboration in cooperation with Russel Investments. We have done the first exit of Equity Club, and we have done 2 funds on trophy assets in real estate. Three new thematic investment lines, new advisory mandates introducing in CMB and the 2 Mediobanca SGR diversified credit portfolio. New CLO by Cairn and 2 new fund launched by RAM. So a very important product innovation, which is key to foster, of course, the growth in terms of net new money.

Going to consumer lending, we have empowered the distribution with 4 new openings in Q3, and we have continued to invest into digital upgrade. Today, not only we manage almost 25% of direct personal loans sold through web, of which 80% is executed in one day. The good news is that the new loans are up 11% Q-on-Q, and the loan book is now stabilized, but it's still down 7% compared to a year ago. The mix is skewing back towards profitable products.

Personal loan now are up 30% Q-on-Q and now represents 50% of total new loans. So notwithstanding the decrease of the loan book, which was the function of the restriction of lockdown 2 and 3, we managed to keep the profitability on the high level because net profit was down only 13% year-on-year, but you -- can be seen as a 10% down because we had to post EUR 15 million of one-off related to Lexitor ruling.

So revenue down 5% and cost control, sticking to 30% cost income with loan loss provision down 3% meant in our ROAC of 28% and which is even more important, the strong asset quality trend, where the net NPEs are at the lowest since the adoption of new definition of default, so 2.1% of net new loan and the coverage are at the highest level.

Lockdown impact progressively smoothened, and we are seeing now a better recovery. So every lockdown, we managed to have a lower impact. But of course, compared to a new lockdown situation, we are still 80%, 90% compared to the pre-COVID. So there's still room to be done.

Asset quality indicators further enhanced. You see that net NPEs on Page 26 are all-time low, both in terms of percentage, 2.1%, but also in terms of absolute level. So we had a year ago, were the first one -- among the first to adopt the new definition of default, which had the spike in -- seasonal spike in deteriorated loan, which reached EUR 291 million. Then we grew through the COVID. And then you see that in terms of disposal of NPEs and funds that we have provisioned, the level went down to EUR 264 million with an important increase because we are at 74.4% of coverage as opposed to 68.3%.

So we had like a 6% increase in coverage in NPEs and 0.6%, which is even more important in performing. So we have done a very important job to set aside both on NPEs and nonperforming. Early deterioration asset quality index below healthy 1-year ago level. So if you see this graph on Page 26, you see that our sign of early deterioration are still well below March 18, where, of course, no signs of COVID or deterioration was evident.

CIB, robust revenue and asset quality progression. So this year has been quite a good year in terms of all the product contributions. So NII volume were up because we started to print new loan a year ago, and we continue to do events and acquisition finance related. So this led the NII fees were supported and are supported by strong activity in advisory where we have clearly a leading position, not only in Italy now and not only in large corporate. The 2 components are, today, more balanced between large and mid and between Italy and France. France is now 40% overall fee -- advisory fee.

Lending, as I said, sorry, debt-to-EBIT and capital market has been this year a very good trend in ECM, in DCM and more recently, even if it's not a trend which is valid every quarter, a better trend tone of solution, capital market solution. CoR was down 30 basis points due to write-backs. And there's been a negligible CoR in the quarter, backed by strong credit quality and positive change in portfolio mix.

So in M&A, you see that we are dealing with a lot of important transaction or announced transaction in this 9 months, both in terms of domestic market, financial sponsor and mid-corporate and also, as I said, in Europe, notably in France, but not only in France because we have an important market position also in Iberia.

Capital Markets, we're having good IPO equity issuance trend and there's -- and also a good DCM trend. Of course, in the first one, we are having a stronger market position. In the second, we have improved our market position, and we generate every year between EUR 20 million and EUR 25 million fees.

ROAC in principal, investing at 12%. This is marginally down compared to a year ago, which was impacted -- the 2 years were impacted last year by extraordinary gain, this year by a negative charge related to BSI sale. While audit function improved as well results, but on the back of positive treasury and trading activity, we managed to maintain low the cost of funding. Of course, we are a bit, I would say, if I can say too liquid, and this has an impact on NII, but I think it's a temporary position. We will try to improve in the next few quarters because as you see, all the key indicators are at very, very comfortable level.

Now as a closing remark, I would say that the COVID period proved that Mediobanca equity story is an equity story of growth, which is not evident as we know in the industry because we managed to have an uptick of fee -- of revenue of 3% and net profit of up 9%. This is, of course, taking into consideration Q1 to Q3. And we were able to deliver above industry average profitability in terms of ROTE and shareholder return.

And I think this is due to our market positioning and business mix, which is exposed to the 2 different segments of customer base. The household on one end and the large mid -- high mid corporate on the other hand, which are having the best in terms of risk-reward profile. Now I think that we can envisage for the next few quarters and in particular, for the next one, a continuation of the positive trends in all business, a new hiring spree, distribution upgrade, which will boost organic growth in the quarters to come. The new business to benefit from the end of lockdowns restriction, in particular, for consumer and still conservative provisioning because we don't plan to release overlays earlier on, and we want to enter in 2022 with all the buffer, which are there to absorb any shock.

So basically we will continue a very positive year, and this will be reverted, as you may imagine, also in a very interesting dividend distribution if and when we were allowed -- that we are going to be allowed by ECB. Thank you very much. Maybe have been a bit long, but now it's time for your question.

[Operator]

Our first question comes from the line of Antonio Reale from Morgan Stanley.

[Antonio Reale, analyst]

It's Antonio from Morgan Stanley. I've got 3 questions, please, one on NII, one on fees and lastly, on cost of risk. So my first question on NII, I know in consumer finance, new loan origination has been resilient. You've talked about sort of the 85% pre-COVID level this quarter. Slide 9 is actually very useful. It shows, if I understand correct, the average loan book, which has been coming down, of course, but it seems like we may have reached an inflection point. How do you see consumer origination and group NII going forward? Can you also remind us of the mitigating factors you talked about, TLTRO and higher bond portfolio? That's my first question.

Secondly, we look at globally announced M&A volumes and these are winding up post-crisis high, and we definitely see good momentum in Italy and Europe. Do you think we are at the start of a new M&A cycle? And related to that, how much of the fees that you booked in CIB this quarter you think can be sustained going forward, also in light of your pipeline?

And my last question is on cost of risk, which I think was up 53 bps in the quarter, 51 bps in the 9 months, clearly trending better than your full year guidance, which if I look back was 80, 85 basis points to begin with. You moved it to 60, 65. How should we think about this going forward? I see this -- I know you want to be conservative. There is already a good degree of conservatism in your approach. I understand you have about EUR 187 million has went overlay. Moratoria, 2/3 have expired, 80% resuming to regular payments. Coverage has gone up. Is 60, 65 -- is 50, 55 the new -- could it be the new level?

[Alberto Nagel, executive]

Thank you, Antonio. So let me elaborate on NII. Let's start. So NII to be direct was much better than expected in most of the business. So CIB NII, CheBanca! NII, Wealth Management NII, holding function NII. Which was not so good, as expected, was consumer. Why? There is a reason for that is the fact that the first quarter went better than expected. And the last 2 in terms of volume and in terms of mix went in a different trajectory. Why? Because there were these 2 subsequent lockdowns. With the lockdowns, what happens is that finalized the consumer finance goes very well. So auto sector and purpose loan are all-time high or very good.

But the negative is that when people, they cannot move, they do less personal loan. So you have -- what we have had is 2 quarters delay in NII. Now we have seen, as you said, the reversal and maybe an inflection point already at the end of the previous quarter, so the Q3. Because if you see, we have, I think, a slide here that shows the production in the month of February. This was a very evident sign that there is a correlation, a positive correlation between production without lockdowns as opposed with the lockdown.

So the month of February generated, if I remember, were EUR 600 million of loans. This is something we do expect for the month of May because the month of May can be another month of very good production, where it's not important only the volume. It's important the mix because if it is skewed more on personal loan, the marginality is definitely better. So I think that this quarter will be key to see the inflection point and the reversal. If we enter in 2021, '22 next year with, I would say, an increasing stock of loan -- increased stock of consumer loan compared to Q3, then our hope to have a better NII trend going ahead are fostered by an important factor.

The other mitigant are lowering -- I mean, TLTRO, we have grown and hence is there. What we can do and we are doing, and you will see in TFA in the next quarter is that we will look at mainly AUM and not deposits. So deposits will be -- we try to reduce a bit the deposit base where they are more expensive in order to have another supporting factor of NII. So we will give a more precise guidance of the NII in -- at the end of Q4. But if those trends are confirmed, we are at the inflection point now.

M&A cycle. I mean, what I am -- I was surprised is the fact that this M&A trend is there to stay because it's -- it has a very, very broad supporting elements, which are low cost of debt. Sector disruption, private equity sector consolidation. So it's very important to participate to this, I would say, part and to have the possibility to be there. You are there if you have teams that can intercept this trend. And the teams are not only in large corporate, but also in mid-corporate and are also even more working with financial sponsors.

So what the bank has been doing has been creating a stronger team, and we will continue to do this because we think that the M&A cycle is there to stay for at least 12 to 18 months. So we'll continue to hire people in order to support important target in terms of fees and volume of transaction.

Cost of risk, when we started the year, we have guided the market at being in the region of 60, 62. Then in February, we confirmed this guidance. Now we see that this guidance maybe is a bit higher compared to what we are having. So I think staying in the region of 53, 55, it's more the guidance for the full year. And this is backed by very positive evolution of not only moratoria, but also new defaulted loan trend.

[Operator]

Our next question comes from the line of Azzurra Guelfi from Citi.

[Azzurra Guelfi, analyst]

A couple of questions for me. One is on Wealth Management. The other one on capital and one on M&A, but that will be a strategic more question. When I look at the Wealth Management, the progress on revenue is visible, but what has been more visible as well has been the growth in the profitability. I've seen that you are planning now hiring higher distribution. But given the change in the mix, is it fair to expect that even next quarter and in the coming quarter, the profitability gearing to revenue and asset will remain higher and more efficient?

The second one is on capital. You are accruing 70% payout. But your dividend distribution actually will be after the ECB decision. And if I look at for the next couple of years, could you see an upside risk on dividend distribution given your business mix and the evolution of the macro, given also how the things are going, so a higher potential payout?

And the last one is on M&A. There has been several press article about potential combination with the banking group and possibly on the March, it doesn't really square. And I just wanted to think about if -- when we think about Mediobanca and its business mix, it's more about external growth for some businesses like the Wealth Management and others more than just being a potential target for a banking group consolidation?

[Alberto Nagel, executive]

Yes. Thank you, Azzurra. So [ ROAC ] in Wealth Management, we are progressing along the line of our business plan. So we are totally in line, even better, I would say, in -- the plan, you remember, was very demanding. It was done before COVID. So last year, we said, okay, forget about this. But in reality, when we rerun the number, we said we are still there. This year, it seems that we are ahead, in particular, in Wealth Management.

And I have to say that this improvement are still something that we have to improve. We have to do more. Why? Because to give you the sense, we have still an asset allocation, in particular, in the Affluent, which is way too conservative because of the origin of CheBanca! So it takes time, and it has to be done with the, I would say, the full compliance. But I think ROAC, the more we go into a more balanced asset allocation in the portfolio and less insurance product, the more we should increase the ROAC.

So we are in line with the plan, but I think we should aim to do more. This is always what I want in general. On capital, to me, on one hand, all the banks are asking and is right to distribute and to go back to normal distribution. On the other hand, we know that this is subject to ECB and ECB, we look at the stress test, but we look also at the provisioning of the bank, the prudence and the overlay. So it will be important to have -- to enter in the new year with a very solid asset quality to, I would say, and very solid results on stress test in order then to resume important distribution.

So for us, we have plenty of options as you know, Azzurra. For the time being, if you do the simple math of the dividend outcome of simply the consensus on net earnings, you're right to the conclusion that our dividend can be much higher than the plan, the one of the plan because simply, we have raised from 50% to 70% the payout and the profitability is very good.

Now on top, what we can do, we will value all the option even included buybacks, but I think better visibility can be given at the end of the full year results because stress test will be over. So we will be closer to the dividend ban expiry. So we can be in a better position from -- if and when we can put also restart buyback program this year or next year. This year, in general, we need to go to a general meeting in October, and that we will have, I would say, a few -- then a few months to do something, but it's important to have an authorization to do it also in 2022.

Now we are always in agreement in the sense that I don't think that industrially makes sense to do a combination between a specialized bank like Mediobanca and the commercial bank. There can be exception, but I hardly see them because the goodwill element, the positioning to the market and the revenue potential and growth that we can do on a standalone basis, are not to be the same if we are combined into a universal bank model. So it is right, what you say, we are thinking more to grow in Wealth Management and in distribution and also in production.

And I think this consolidation trend and decision of groups, not only in Italy, about their presence here and there may change in the future, in the near future. So there will be opportunity. And this opportunity, coupled with the solid organic growth trend in Wealth Management will make that, I think, with some even midsized transaction during the plan, we can be in a position to have an exiting market presence in Wealth Management at the end of the plan, much bigger than what we have expected at the start of the plan.

[Operator]

Our next question comes from the line of Christian Carrese from Intermonte.

[Christian Carrese, analyst]

The first question is on cost evolution. I see you said in Consumer Banking, also Corporate Investment banking, you are hiring, you are trying to increase the distribution. So I was wondering if we should expect some pickup in costs already in the fourth quarter? And in the coming quarters? And if you can share with us the operating profit trend that you expect for consumer credit?

The second question is again on M&A and on a specific deal. I saw in the highlights the headline on statement on a potential tie-up with UniCredit. If you can tell us why this kind of should not be good for Mediobanca? I referred to bankers, I refer to bank assurance agreement and so on, if you can elaborate a little bit.

[Alberto Nagel, executive]

Thank you, Christian. On cost, part of the cost increase is due to the fact that we adjust every quarters the variable cost, personnel variable cost, the bonds pool to the trend of revenues, not to have it only in the last quarter. So as revenue in CIB are going very well of course we need to adjust also in terms of cost. So I don't think there will be a particular spike in Q4 for this because we have done the job in the first 9 months, depends on also on the quarter, on the final quarter trend in terms of CIB revenue.

Then in Q4, we normally has a seasonality of project because -- and particularly, the project of -- related to the IT upgrade or all the projects that are related to compliance with regulation normally are -- every single year are in part charge in Q4. M&A, you said why do you think this? I think that there are very few synergies in terms of any cost synergies and there are dissynergies in terms of revenues because I used to do -- I used to say a simple sentence or to pose a simple question, which is the following: what do you think in terms of revenue trend should a commercial bank like BNP or Credit Agricole, just to make an example, should buy [ Roche ]. Using Roche after this transaction will generate the same revenue as before or higher or lower?

And I arrived to the conclusion that my -- the likelihood is that they are going to generate lower revenue because there are clients that go to Roche today that would not go if Roche is not anymore independent. So I think we will generate whatever is the group, very low level of synergies in cost and a good level of revenue attrition. And for this reason, I don't think that it may be interesting either for us or for a counterparty to look at such transaction. But this is my personal opinion. I don't want to convince anybody. So it's simply my feeling on knowing the industry.

[Operator]

Our next question comes from the line of Giovanni Razzoli from Deutsche Bank.

[Giovanni Razzoli, analyst]

Three questions on my side. Back on the consumer credit. I was wondering whether you do expect some increase in the competition because banks which are desperate for increasing the margins, most of them in Italy are increasingly targeting the consumer credit as a way to support the NII. We've seen this as comments also in the recent conference call.

The second question is on the quarterly results. I've seen that there were something like EUR 19 million of write-ups of financial stakes. If you can please clarify what was this contribution. And the very last question. You are targeting 55 basis points cost of risk for the full year, which is a reasonable or prudent assumption given your business mix. I would like to know what's your view instead on the guidance that commercial banks are giving in terms of cost of risk for the full year.

Also in light of what the ECB is saying about the provisioning policies of the bank at the European level, which does not seem to be consistent with the expectation of the regulator. So what's your view on that?

[Alberto Nagel, executive]

Thank you, Giovanni. In consumer, I would say that on one hand, it's likely that competition will go up. This anyhow is -- will be reverted in -- normally in a better CoR. And what we can say is that Compass, as you know, Giovanni, is in -- particularly strong in a segment of clients which are not the bread and butter of banks. So to serve the clients of Compass, or at least part of the client of Compass, you need to have a very specialized pricing and risk management and scoring. So it's not an exercise which is open to everybody because it can be painful if you don't price the loan and risk in the right way.

So the second question, if I got it, where was on seed capital write-up. We can say that there is a good momentum for all asset class, and there are some small direction exposure into the funds, which are having anyhow, as I said, a good momentum. So I think maybe not at the same level of the previous quarter, but it is foreseeable that we can have some more sustained from that kind of asset class.

Then your question is, the third one is very, I would say, clever. We are, today, in a situation which is unheard in the sense that the trend of customer and in Paris, a certain customer, if you think about large corporates or exporting company or if you stick with the household, you see that their repayment profile is very good, very, very good, to a level that you maybe, in particular, for the household, you've never seen in the past.

This is in part due to the fact that the saving is higher and the spending is lower, but it is what it is. And as I said, we never had such low defaulted loan trend. On the other hand, we never had -- we have, to be honest, such a low new loan production. So those 2 are links. So from this situation is evident that there is a sort of let's-see-what-happened approach from the supervisor because basically, on one hand, you have such a good trend, in particularly of certain counterparties. On the other hand, you have still to understand the exit from the full lockdown impact, which is not so easy to understand.

So whatever you do, up until you don't -- we don't have the full exit, so it is 2022 or 2023, there can be a doubt that the provisioning is not enough. But what is important is basically to adapt your provisioning every quarter. To sell the nonperformings, we are doing -- the warehouse of Compass NPs is so low because we sell every year the warehouse on NPE.

And if you sell with average profit like what we have done, it means that your provisioning is correct. So it is very important to have, I would say, a balance sheet flexibility in order to absorb this potential shock that can be that you may have a quarter which is going up in terms of cost of risk. But then if you have done well, your activity at the end, you deal with this, no?

So it's not easy even for a regulator to understand this trend because it's not easy for all the operators to understand what can happen. And for this reason, we need to have buffer and overlays to protect us from the worst, which is not something that we see coming, but it may happen.

[Operator]

[Operator Instructions] Our next question comes from the line of Luigi De Bellis from Equita.

[Luigi De Bellis, analyst]

Just one question on the strategy M&A in the Wealth Management. Do you feel that the current prices could be -- put prices to make a deal or valuations are too high in the sector? And generally speaking, your point of view on M&A in the Wealth Management sector? And do you feel that at this stage, there could be any cross-border deal in Italy to ARPU consolidation? Or is it too early for that?

[Alberto Nagel, executive]

Thank you, Luigi. I think that you are right in saying that the -- I would say, the large group that are listed, they are incorporating quite high valuation because of their operating trends. So I think that for large deals, this may represent an obstacle. Maybe for a smaller deal, which maybe are more opportunistic, not having the same trend in terms of expansion of revenue and profitability, the multiple can be different and more affordable.

And well, in terms of cross-border, I am doubtful that we will see a string of cross-border transaction because the ecosystem is not yet there to favor this in the sense that I don't think -- I mean, the more activity, much more activity has to be done to favor this kind of merger to have real synergies from many standpoints, capital, liquidity, true synergies in terms of a common platform in retail, which are on one end, linked also to local fiscal regulation. So at the end, it's difficult to imagine a very, I would say, synergic or synergetic transaction at European level.

You can play it a bit on the factory standpoint. So if you want to become bigger in CIB, so you have a consolidator in CIB in Europe or if you want to have someone which is bigger in asset management, you can try to play the game of consolidating smaller asset manager. But of course, it requires that the 2 counterparties meets -- the transaction meets the requirement of the 2 counterparties. So nobody wants to sell asset management, everybody wants to buy, even those that are maybe under-scale.

So few synergies and lack of, I would say, interest -- combining interest are such that I don't see it coming soon. On top, as you know, Europe is still -- I mean, euro area is not considered a single area from the banking standpoint. It's considered like 19 or I don't remember how many members do we have, like not United Europe, but every single country has a specific treatment in terms of risk weighting, capital, liquidity. So there is -- much more has to be done in order to favor this kind of deals.

[Operator]

Our next question comes from the line of Britta Schmidt from Autonomous Research.

[Britta Schmidt, analyst]

I've got 2 questions, please. You alluded to the stress test and also waiting the stress test for making any further statements regarding distributions. Can you give us a little bit of color on how the process has gone so far for Mediobanca? What are your views on the toughness of the assumptions? And do you think that there's a lot of explaining to do around the business model, especially on the consumer fund side?

And then secondly, on the UTPs, on the increase this quarter. Shall we assume that these are all regulatory UTPs related to, for example, the [ DCO ] letter? Or how much of that are UTPs that you would have classified for pure accounting purposes?

[Alberto Nagel, executive]

Sorry, Britta, but the line was very bad. So I could hardly listen to your second question. Could you repeat the second question, please?

[Britta Schmidt, analyst]

The second question was just relating to the classification of stage 2 loans and potential changes and unlikely to pay exposures that you've accounted for to give us a little bit of color on what impact the DCO letter had on your classification of exposures?

[Alberto Nagel, executive]

Well, we -- as you have seen, we have taken a more prudent approach in what is left out of the moratoria, no, from the moratoria. So the part which was not going back to full repayment or full normality, we have, on average, classified them stage 2 and stage 3. And we have started to set aside in order to cover those kind of evolution. Honestly, I don't think that this classification at the end will stay because back on what we have seen, this is prudent, but every single maturity part of this stage 2 and stage 3, normally, they got back to a previous stage, either stage 1 or stage 2.

So it was a matter of prudence and we wanted to -- in particularly, to enter into the moment of full year account end of stress test. So stress test results in order to be, I would say, well-prepared to ask for the distribution of dividend. The first element, so in the stress test, what I can say is that consumer already in the previous stress test, but even more in this one showed a very good resilience on cost of risk and on NII trend.

As we enter in the stress test at the end of '20 with very solid asset quality, I don't think that the exercise will have a very, very significant impact. It has to have some impact because if not, it's not a stress test. But I think our business stands very well this kind of stress. And let's see anyhow the final results. But starting also from 16.2% of core Tier 1, we have -- and a SREP which is very low, we have ample margin of buffer to absorb stress test.

Thank you. I don't see further questions. So if I may, I would conclude this call. Thank you for attending to -- for asking such a good number of questions. And I hope to have you all in July for the full year results. Thank you very much. Bye.

[Operator]

Ladies and gentlemen, thank you for your participation today. This concludes today's conference. You may now disconnect your lines. Thank you.