Modena Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Bper Banca SpA earnings conference call or presentation Friday, November 8, 2019 at 8:30:00am GMT

BPER Banca S.p.A. - MD & Director

BPER Banca S.p.A. - Head of Planning & Control

BPER Banca S.p.A. - CFO

UBS Investment Bank, Research Division - Associate Director & Equity Research Analyst of Italian Banks

Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the BPER Third Quarter 2019 Consolidated Results Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Alessandro Vandelli, CEO of BPER. Please go ahead, sir.

Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [2]

Okay. Good morning, ladies and gentlemen. Thank you all for joining this conference call today about our 9 months 2019 results. This is Alessandro Vandelli, CEO; and I'm here with Roberto Ferrari, CFO; Alessandro Simonazzi, Head of Planning and Control; and Gilberto Borghi, Investor Relations Manager.

Before going into details about our 9 months results, let me briefly highlight a few key points, which help, in my opinion, to have a clear picture of the state of the (inaudible) after the period, full of important(inaudible) . Please go to the executive summary of the presentation on Page 5, which is already available on our website.

So far, 2019 has been a very busy and demanding year. We are close to the end of this 2019. I think we can be very proud of what we have been able to realize. In few words, we have successfully combined a growth strategy to the enlargement of the group perimeter, with a strong clear improvement in asset quality, and at the same time, confirming the solid capital position and a good level of profitability.

You all know the details of the deals that we closed at the end of July, so let me only express the greater discretion for having positively completed important activities for the growth of the group. As a result, Interbank and Arca Holding became part of the group's scope of consolidation starting from July 2019.

Now I'd like to focus on a few leading points that, in my opinion, represent a sort of a feel of our storytelling. With our 5 key words, the first one is growth. Our group has grown significantly in terms of total assets, reaching over EUR 80 billion of total assets and climbing to EUR 172 billion of total funding, mainly thanks to the change in the scope of consolidation. We are going to see some details in the next slide.

The second word is asset quality. Asset quality strongly improved. Gross NPE ratio now stands at 11.6%, down by more than 2 percentage points since the beginning of the year; by 8.3 percentage points since January 2018; and circa 12 percentage points since the peak of the crisis in [mid-2015] when we had an NPE gross ratio of 23.5%.

Default rate is at 1.6% annualized versus 1.9% in 2018 and versus the peak of about 7% in 2013. All these figures clearly show the strong step forward in asset quality of our group year after year.

Moreover, we have already started the activities for a new securitization of a portfolio of bad loans expected by the end of first half 2020, with the aim of reaching over 1 year in advance the target of the gross NPE ratio well below 9% set in the business plan for 2021.

The third word is capital. Our capital position is very strong, even after the completion of the (inaudible) and the derisking achievements. We have been able to manage capital in a very effective way, and we continue to be very solid with a (inaudible) migration fully phased as of the end of Q3 at 12.36%, up, respectively, by 3 bps versus Q2 and 41 bps versus December 2018.

Profitability is the fourth word. All in all, our profitability is resilient despite the difficult macroeconomic scenario and low negative interest rate levels, even on ordinary basis.

9 months 2019's paid net profit at EUR 522.9 million, which is not directly comparable to the same period of the last year because of the change in the scope of consolidation and some significant nonrecurring items, likely in the third Q, bad will generated by the acquisition of Unipol Banca of EUR 353.8 million and higher loan loss provisions, also in line with expected acceleration of the derisking process.

In the first half '19, we have other negative nonrecurring items for a total of EUR 22.9 million. Having said this, I'd like to highlight the resiliency of revenues, in particular, the net commission, which show a very good performance, both year-on-year and Q-on-Q, and the decline of operating costs on a like-for-like basis as we are going to see later on.

The last word is business. We recorded a positive development of the commercial activity, especially in mortgages, showing an overall increase in the new production by 5.9% and over plus 40% in the residential mortgages segment. Toward the end, we are perfectly conscious that our job has not been finished yet. In fact, we are working on another bad loan securitization, for example. But our track record can make things happen, and our solid capital base and profitability expectations are a good starting point to think optimistically for the near future.

Now let's go quickly into the analysis of the 9 months, starting from the balance sheet. We can move on to Page 7. So first of all, balance sheet and the total funding, the consolidation of Unipol Banca and Arca Holding, significant change this -- the shape of our funding structure, in particular, concerning assets under management and assets under custody.

Total funding grew from EUR 94.7 billion in June '19 to EUR 172.1 billion in September '19, with Unipol Banca and Arca Holding contribution, respectively, of EUR 63 billion and $14.8 billion.

Let's turn to Page 8. So we have direct funding, and we can see more details about the breakdown of the direct funding, which comes at EUR 58.2 billion from EUR 51 billion in June '19, with the contribution of Unipol Banca of EUR 9 billion.

Customer funding now stands at EUR 55 billion, with a large portion of current accounts and sight deposits, which accounts for EUR 46.8 billion, mainly due to the conservative approach of customers to investments in the current difficult economic and financial environment.

The institutional funding dropped to EUR 3.2 billion, mainly due to the zeroing of the repos segment. In Q4, we're going to have maturities of EUR 0.5 billion of retail bonds, of which EUR 0.3 billion related to a Tier 2 bond issued by Unipol Banca, at a very high coupon. This will help our job in reducing cost of funding in the coming quarters.

On Page 9. Here, as I said before, we can see the significant contribution of Unipol Banca and Arca Holding to indirect deposit, both in assets under custody and assets under management and, a lesser extent, Bancassurance.

But it's worth mentioning that indirect funding and Bancassurance stock climbed close to EUR 114 billion. That's an important number, probably the highest after the 2 big group, dependent big groups, in the back (inaudible). And we can see details in the table on the slide.

But I'd like also to underline that on a like-for-like basis, we can appreciate a growth in all aggregates versus December '18: assets under custody, plus 11.4%; assets under management, plus 7.2%; and Bancassurance, 10.1%. Moreover, in the third Q 2019, positive net inflows, both in assets under management and life insurance segment, which represent notable results for the period.

Moving on to 10. Cost of -- gross and net customer loans are, respectively, at EUR 56 billion and EUR 52.5 billion. As you know, our strategy provides for particular focus on mortgages, and within that, our -- the residential segment.

On this side, we recorded an increase by 1.5% on the-- of the stock of mortgages, also supported by good performances of mortgages new production, up by 5.9%, with a particularly strong increase of residential mortgages segment, up by 40.6% versus the same period of 2018 on a like-for-like basis.

In the third Q 2019, we accounted also the well-known bad loan disposal of circa EUR 1 billion of GBV to UnipolRec. The good quality of the performing loans book is still confirmed with very low bucket of high-risk exposures.

Let's turn to Page 11. This page can have a confirmation of the amazing job we have done on asset quality improvement. Gross NPE ratio fell down, respectively, by 2.1 percentage points versus June '19 and 8.3 percentage points versus January '18. It's worth remembering that we stood at 23.5% in mid-2015 . It is obvious that this is not the target we have in mind, and in fact, we are committed to this already further on derisking.

As I've said, we have already started the activities for a new securitization of a portfolio of bad loans expected by the end of the first half 2020, with the aim of reaching over 1 year in advance the target of a gross NPE ratio below 9%, setting the business plan for 2021. We are confident to be able to deliver successfully as our track record clearly shows.

A brief look at the fourth Q '19. We have the consolidation of Unipol Banca and the bad loan disposal of about EUR 1 billion GBV to UnipolRec. In the end, the gross NPE stock decreased to EUR 6.5 billion, that means the ratio of 11.6%. NPE coverage decreased to 51.1% due to the different NPE mix, decrease of bad loans and increase of UtP and past due.

Moving on to Page 12. We can appreciate a significant improvement of the default rate, which stands at 1.6% annualized compared to 1.9% in 2018. We can also focus on the strong improvement of bad loans recovery rate, which comes at 6.1% annualized compared with -- to 5.3% in 2018.

This is a confirmation that our servicing platform, BPER Credit Management, is a very efficient machine, and it is doing an outstanding job and playing an important role within our overall NPE strategy.

Now we can move on Slide 13. The security portfolio went up versus June '19 by EUR 1.6 billion at EUR 18.8 billion, mainly due to the contribution of Unipol Banca, a consolidation of EUR 1.2 billion.

Italian government bonds are at $6.4 billion, EUR 1.1 billion from Unipol Banca, weighing 34.2% of the financial assets portfolio. We continue to follow our strategy to diversify the financial portfolio and not to be too concentrated on the Italian sovereign risk. Total bond and Italian govies portfolios duration are, respectively, 3.1 years and 4.3 years.

Now we can move to -- on to focus on those figures on Page 15. 9 months '19 stated net profits to that EUR 522.9 million compared to EUR 358.1 million in the same period of 2018. The 2 figures are not directly comparable mainly because the change in the scope of consolidation this quarter as well as some significant nonrecurring items in the 2 periods.

On a like-for-like basis, net profit in the 9 months is EUR 143.7 million, including higher loan loss provisions, were also in line with expected acceleration of the derisking process to be implemented through a new securitization of bad loans.

But what is worth noting is that core revenues, NII plus net commissions, on a like-for-like basis and net of accounting effects related to IFRS 9 and 16, but for a bank [under] a strong [reason] as BPER as significant are substantially stable year-on-year. The decrease of NII of 1.1% is offset by the increase of 1.4% of commissions.

Moreover, operating costs declined by 1.2% year-on-year on a like-for-like basis. So overall, apart from extraordinary item, I think that this 9 months results showed some supportive trends, both on the revenue and cost side.

We can move on very quickly to Page 16, where we report the quarterly figures. Net profit of the third Q of EUR 422.4 million and 42 -- EUR 43.2 million on like-for-like basis. Also, in this quarterly view, we can recognize more or less the same trend on a like-for-like basis, commenting for the 9 months results: a resilient NII; good performance of net commissions; decreasing operating costs; and as we noted that the third quarter accounted high loss provisions (sic) [higher loan loss provisions], also in line with expected further acceleration of the derisking process.

We can move very quickly to the main trends related to the profit and loss, starting from the net interest income on the next page, 17.

Here, we can show a resilient NII in Q3, which came at EUR 259 million on a like-for-like basis and net of IFRS 9 and 15 effects, increasing compared to EUR 257.6 million in Q2 or plus 0.5% quarter-on-quarter. For a bank like BPER, under significant derisking process, the impact of accounting changes to IFRS 9 and 15 are particularly relevant. So for this reason, I think it's important to look at the ordinary trend, which shows a remarkable resiliency. On a like-for-like basis, 9 month '19 NII decreased by 4.2% year-on-year, but only 1.1% year-on-year, if we exclude the IFRS 9 and 16 effects. Considering the current difficult macroeconomic scenario and low negative interest rate environment, I think it's now a negligible result.

Net commission on Page 18. We are very satisfied of the net commission trend. In the 9 months, our net commissions stood at to EUR 656.1 million or EUR 585.2 million on a like-for-like basis, up by 1.4% year-on-year, mainly supported by positive overall performance of assets under management, plus 2.9% year-on-year, and Bancassurance at plus 19% year-on-year. These positive results are perfectly in line with our goal to improve our approach toward fees-oriented businesses, in which we are investing a lot in terms of resources.

On Page 19. In the 9 months '19, trading income were positive at EUR 77.2 million, $62.3 million on a like-for-like basis, which is not comparable with the third Q '18 for the presence of nonrecurring items. This is well explained by the call out in the slide, which you can read.

Trading contribution in Q3 is positive EUR 49.7 million, EUR 34.9 million on a like-for-like basis. The increase compared to EUR 5.4 million in the second Q of '19.

Moving forward on Page 20. Also, in the operating costs, the 9 month results showed a good performance. 9 months operating costs stood at EUR 1,071.8 billion, $998.9 million on a like-for-like basis, down by 1.2% year-on-year. The quarterly trend recorded a much more positive result. It was a drop by 8.2% quarter-on-quarter, particularly due to the usual seasonality and staff costs of the third quarter of the year. Other administrative expenses and D&A, impacted by the accounting effects of IFRS 16 and not directly comparable on a year-on-year comparison.

On the pro forma, the needs met our IFRS 16 effect. And the like-for-like basis, administrative expenses, and D&A down respectively by 1% and 10.8% year-on-year.

These are an encouraging signals of improvement given the positive expectations we have on cost side, when all of the actions included in the business plan will be fully implemented.

On Page 21, we recorded in 9 months, higher loan loss provision at $161.1 million and EUR 143.3 million on a like-for-like basis. This was due mainly to higher loan loss provisions booked in the Q3, also in line with expected further acceleration of the derisking process related to a new securitization, we are working on. You know that the aim, as I said before, of reaching over 1 year in advance fixed target of a gross NPE ratio below 9% set in the business plans for 2021.

Consequently, cost of credit raised to 78 bps versus 47 in 2018.

About liquidity. On Page 23. The liquidity position is solid, thanks to the growth of the total eligible assets now at EUR 20.9 billion, increased by 11.7% versus the end of 2018, along with a bucket of unencumbered eligible assets of EUR 10.6 billion, and asset liquidity of EUR 2.2 billion made by deposits with the ECB. Both LCR and NSFR ratios stand well above 100%.

On Page 24, we were able to confirm our solid capital position, even after the completion of the strategic transaction.

CET1 fully phased is at 12.36%, up by 3 basis points compared with 12.33% in June '19 and up by 41 bps versus 11.95% at the end of 2018. In my opinion, this is a very important achievement confirming our ability in capital management and the focus of the group on capital solidity. There are moving -- many moving parts affected the capital ratios in this quarter.

In summary, we were able to slightly increase our CET1 ratio versus the last quarter by 3 bps, with a mix effect of the following factors: related to ordinary activities, we have a positive contribution, in particular coming from retained earnings, including for quarter dividend, showing a good internal capital generation ability.

RWA reduction mainly driven by loan reduction in the large corporate segment and the disposal of EUR 1 billion of GBV, lower amount of deduction and other elements. And negative impact came from write-down related to shareholdings. Related to the strategic operations, we have positive impact from Banco di Sardegna minority acquisition, plus 56 basis points, more than offset by the acquisition of Unipol Banca, minus 94 bps, and Arca Holding incremental stake, minus 20 bps.

Now in conclusion, let me highlight briefly key messages on the Page 26. The main messages we can get from the 9 months results are solid capita. Once again I must underline the effectiveness of our capital management strategy, especially in light of the extraordinary deals, along with a very comfortable liquidity position. This is confirmed by the common equity Tier 1 fully phased at 12.36%.

Second, asset quality. Our current gross NPE ratio is at 11.6%, which can be considered a very good achievement, if we consider that it stood at 19.9%, just at the beginning of 2018.

As I said before, our target is to go well below 9%., and we are taking action to reach this level by the end of the first half 2020, over 1 year in advance of what is embedded in the business plan for 2021 through a new bad loan securitization.

Third, profitability. All of these achievements come with a good profitability trend, net profit and revenues are a resilient and operating costs are showing signals of improvement. Starting from the situation and considering the expected benefits from the extraordinary deals and from the business plan actions, our group has the opportunity to reach a good and sustainable level of profitability going forward.

So overall, we have a satisfactory situation, a good starting point for the rest of the year and for challenges of 2020.

Now, thank you all for your time and attention. And we are going to start the Q&A session and to take your questions. Thank you, again.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from Domenico Santoro with HSBC.

--------------------------------------------------------------------------------

Domenico Santoro, HSBC, Research Division - Analyst [2]

--------------------------------------------------------------------------------

I do have a number of questions. I might go one by one, if you don't mind. I'm looking at the NII, in particular, and the contribution from Unipol is a bit softer compared to the numbers that you gave in the last presentation. So I'm just wondering whether here is a different accounting or something happened that I'm missing?

And if you can also give us the expected evolution given the funding synergies that you envisaged in the plan, in particular, on the instruments that you mentioned in the call, that are going to expire going forward. If you can mention, please, the average cost of these instruments and the phase out over the next 2 years, please.

--------------------------------------------------------------------------------

Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [3]

--------------------------------------------------------------------------------

Okay. Thank you very much Santoro for your question. Let's say, overall, we consider a very positive trend of the NII. Let me say that meaningful results on this line are in line with our expectation. What I can say is that probably try to understand the evolution of the NII for the next year, probably the third Q was the best way to understand what would be the next year trend. Let's say that in the last part of the year, we are -- we have subordinated loans of EUR 300 million. This is going to be a supplier. And the coupon of these subordinated loans is 6.07]. So for this reason, we think there would be an impact also in the last part of the year, but especially in next year.

Analyzing the evolution of NII, let's say that we have some positive elements, starting from TLTRO and the TRIM. And we expect to have a positive impact around EUR 1 million for [month] coming from these elements. And so this is an important point for the NII in the coming years.

And at the same time, you know that we are working on the cost of funding. And in particular, we see room in the funding of Unipol Banca. So let's say, looking at the third Q, the level on NII, yes, it is probably to see a decline in time value because we have a reduction of the stock of nonperforming, but we think that this could be offset by the elements that I mentioned before. So the expectation is to confirm during 2019, the level of NII of the third Q.

--------------------------------------------------------------------------------

Domenico Santoro, HSBC, Research Division - Analyst [4]

--------------------------------------------------------------------------------

Nice. On the cost and side -- on the cost side, sorry, if I analyze the level of Q3, I don't know whether is a problem accounting, again. And I add back the EUR 55 million, EUR 50 million run rate of Arca, which was not included in your target for 2021, I get exactly the number that you gave us for 2021. So also, the question here is whether we should include in our model, a better evolution of costs. I know that you mentioned in the press release some seasonality in the fourth quarter because of the integration on top of the restructuring costs, so more visibility here would be appreciated?

--------------------------------------------------------------------------------

Alessandro Vandelli, BPER Banca S.p.A. - MD & Director [5]

--------------------------------------------------------------------------------

Well, thank you. What I can say about the fourth Q 2019 is that there would be the cost of the redundancy play, because as you know, we completed the negotiation of the Union. And that in our business bank, we set a range between EUR 180 million and EUR 200 million. And now we can say that probably the cost will be on the lower part of the range, it's probably a little bit under EUR 180 million. But we are waiting at the end of the year to have a full picture on the costs related to the redundancy plan.

And about the restructuring (inaudible) the integration of Unipol Banca, indeed, we have already booked some of these costs in the third Q. So our expectation is something around, probably EUR 15 million, so not a significant amount is -- in particular, related to the integration of the IT. And we are working on this because at the end of November, we are going to have the measure of Unipol Banca in BPER. And let's say, this is another important achievement because you know that to complete the acquisition at the beginning of the year to complete the integration by the end of 2019 is an important element.

Yes. About Arca. Arca in our business plan was not present, is something -- an add-on, let's say, on our revenue and cost. I think that also here, the third Q could be a noncore to understand the evolution. Taking into consideration that typically BPER has in the third Q, a reduction on cost -- on staff cost, this is a typical trend. But at the same time, thanks to the conclusion -- the completion of the negotiations with the union, the expectation is to see, starting from the last part of 2020, some reduction in the cost -- in the staff cost.

I don't know, Alessandro Simonazzi, if you want to add something about this.

--------------------------------------------------------------------------------

Alessandro Simonazzi, BPER Banca S.p.A. - Head of Planning & Control [6]

--------------------------------------------------------------------------------

For what concerns the guidance for the future, we expect something better than what we declared in the business plan in terms of cost savings for the future. And so this is why probably you find something better than what we said before. For what concerns redundancy plan, the expectation after having delivered the agreement to the Unions, is to confirm the synergies that we stated in the business plan. Probably, there will be a fine-tuning in terms of phasing, but anyway, we confirm the main figures that we included in the business plan.

--------------------------------------------------------------------------------

Domenico Santoro, HSBC, Research Division - Analyst [7]

--------------------------------------------------------------------------------

Go here to see the original:
Edited Transcript of BPE.MI earnings conference call or presentation 8-Nov-19 8:30am GMT - Yahoo Finance