Good morning. This is the call conference operator. Welcome, thank you for joining the Banco BPM strategic update partnership with Crédit Agricole and ACE Project. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Roberto Peronaglio, IR manager. Please go ahead, sir.
Thank you very much. Thank you everybody for attending this call in the morning related to the strategic update. Before leaving the floor to Giuseppe Castagna, our CEO, for a short presentation, let me remind that you can find the presentation on the website on the investor relations page. The Q&A section is reserved to financial analysts. Thank you very much. Please, Mr. Castagna.
Hello, good morning, everybody. Just some further explanation about the two extraordinary transactions we have concluded on Friday. We are going to conclude as related to ACE in the next days. As you know, we always consider these two transactions specular because from one side, we had to raise the capital needed in order to reduce further, and potentially for the maximum amount possible, the NPL disposal. Basically, on Friday night, we have concluded and signed the MoU with the Crédit Agricole as far as the reorganization of the consumer finance activity. As you know, we still have these two important participation, ProFamily and Agos. Basically, we decided with Crédit Agricole to strengthen our relationship through the acquisition from Agos of the captive activity, which ProFamily is doing with former Banco BPM branch and network.
In doing that, basically, we stay 100% ownership in ProFamily and 39% ownership in Agos, doing so, not reducing significantly any of the future revenues from these two streamlines. The capital impact has been significant. We are calculating 80 basis points of positive impact. Of course, we consider this impact largely enough in order to make also the transaction on the Non-Performing Loans. As you know, we are still dealing with the three bidders in order to finalize the best offer. Nevertheless, we are in the position to say that also the minimum level, we will be able to perform this transaction. Of course, still many details has to come. Basically, we have still to decide the GACS transaction or not, but this will be decided when we will assign to only one of these bidder the transaction.
Nevertheless, we are enabled nowadays to declare that even if we go for the maximum amount of the transaction related to the banking non-performing, so excluding for the time being the leasing activity, which is still undergoing, the due diligence was not yet completed. We will be able to reduce dramatically our non-performing loans stock and the non-performing loans ratio. You can see on page three the different hypothesis, which I would like to stress that are not forecast for 2018 but are only pro forma on Q3 related to numbers you already know. Taking the Q3 as a reference, we could go down up to 10.6% in terms of gross NPL, 6.6% in terms of net NPL ratio, and reducing the gross bad loans down to 3% in terms of gross, and down to 1.2% in terms of net.
Of course, this is also very healthy and safe in terms of capital ratio, because depending on the kind of transaction we will be going to execute, we can already state that both fully loaded and phased in Common Equity Tier 1 are going to stay as they are in Q3 or even better. The range that we have forecasted is 11.5% for fully loaded and 13.5% for fully phased. Let's go a bit more into detail on page four. Technically, Agos is going to acquire, let's say, the new ProFamily captive business for the total consideration of EUR 310 million. ProFamily, as part of Agos, before any potential merger, will distribute its product through the entire branch network of the new Banco BPM Group.
As you know, Banco BPM merged BPM the 26th on November this year, so we have only one network, all generating consumer finance for Agos for the next 15 year. Banco BPM will keep instead 100% of the former ProFamily non-captive activity. I can say that right now, I think is almost 60%, 65% the non-captive activity and 30%, 35% captive activity. Agos will maintain its current structure with 61% owned by Crédit Agricole and 39% owned by Banco BPM. The MOU, of course, include many agreement related to shareholders, distribution, funding, and all of them will remain substantially in line with the current one, and they will last for the same number of years, 15 years maturity. On top of that, the two shareholders agreed on the opportunity to list Agos in the next two and a half years.
As a part of the IPO, Banco BPM got the option, but not obligation, to reduce its current holding in Agos up to 10%, obtaining a put option from Crédit Agricole at a minimum price of EUR 150 million, exercisable in June 2021. This guarantee is very important for our side because entail the possibility to increase immediately for this amount, very cautious amount, the Common Equity Tier 1 since day one. Is another EUR 150 million that we can take advantage in terms of Common Equity Tier 1. This option is, of course, in our opinion, very unlikely to be exercised given the wide gap between the strike price of EUR 150 million, which means EUR one billion and a half of global valuation of Agos. Meanwhile, we feel that the valuation will be almost double, increasing also the activity from former BPM branches.
The total capital generation is around 80 basis points and is very important in the light that we can maintain the streamline of future profit generation, very important, as you know, coming from this participation. On page five, you can find the three different phases of the transaction. Step one, of course, is split into the current situation with Banco BPM owning ProFamily business, both captive and non-captive. The immediate step will be Banco BPM to split the captive and non-captive business and selling the captive business, which will be 100% at that stage of ProFamily, to Agos. As you can see in step two, Banco BPM and Crédit Agricole maintaining the same stakeholdings will have Agos owning 100% of the ProFamily captive business. Let's pass to ACE project. Basically, nothing very new on page six, related to what we already told you on the Q3 conference call.
You only have that the range of the banking book on the bottom right side of the slide will be in a size between EUR 7 billion-EUR 7.5 billion, equivalent to a gross balance sheet exposure of EUR 6 billion-EUR 6.5 billion respectively. On leasing portfolio, which is equivalent to EUR 800 million, the due diligence is still in course. On page seven, you will have at a glance the impressive reduction of the de-risking we have done in the last couple of years. As you can see, apart from the evident reduction from EUR 30 billion to below EUR 12 billion, if we consider also the inflows that we get during these last two and a half years, the global stock reduction since 2016 was in the range of EUR 18 billion-EUR 18.5 billion.
On page eight, you have all the ratio split during these last three years. The last number on the right, both in the gross NPL ratio and net NPL ratio are pro forma of Q3. Meanwhile, as you know, we are still reducing our exposure through workout and normal activity. On page nine, we can give you, at a glance, a look about the remaining portfolio of bad loans. The total consideration could be around EUR 3.3 billion, including the EUR 800 million still of leasing, of which EUR 1.7 billion of leasing and EUR 1.6 billion of banking. As you can see, the accounting coverage will not be reduced that much after the ACE transaction. We will still have a coverage above 60% and a very safe 72.5% of the share of secured NPL.
On the right side, you can have a look to the leasing portfolio, which is going down through workout. We haven't yet done any transaction in terms of disposing, and you can see the significant reduction we are experiencing year by year, also in terms of workout, and this is what we will still continue to reflect our activity in the coming quarters. Last page 10. This is what already anticipated. Both phase-in and fully loaded Common Equity Tier 1 are going at least to stay the level as they are, as we promised. Possibly they will increase, but we still don't have the exact figure until we don't complete the ACE transaction.
Let me say that even when we will decide the final bid, of course, we will only have the minimum price for the transaction we are going to execute, because, of course, especially if we go for a GACS transaction, the final price, possibly better than the initial price, will be only the one decided after the rating assignment by the rating agency. We have still to wait some weeks. In any case, again, the Common Equity Tier 1 is very comfortable at higher than the current level. That's all for the explanation of the two transaction. Please, if there is any question, I will be available to answer.
Excuse me. This is the Chorus Call conference operator. We will now begin the question and answer session, which is reserved to analysts only. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Jean Neuez with Goldman Sachs. Please go ahead.
Hello, good morning. I have a few questions, please. The first one is on your regulatory and ratings requirement. I look at your SREP Pillar 2 R, and it's one of the highest among the smaller banks in Italy, and I just wanted to understand whether you had any indication as to what the magnitude of a reduction could be upon completion of your transactions. I also wanted to understand, given that your senior ratings with the major rating agencies for the time being non-investment grade, and I see, for example, UBI's just borderline investment grade, whether you'd expect that to change. That's the first question. The second question I had is, could you please talk about the earnings loss from the business you're disposing, net of the reinvestment, obviously, to keep your stake constant in Agos.
Could you please give us an outlook now that you did the sale that you expect on NPLs, what your cost of risk would be in 2019? Thank you very much. Those are my two questions.
Okay. Thank you, Mr. Neuez. The first question is very interesting. We still have to see the effect of this transaction on the market. Hopefully, this will be very well taken, and we hope that the same will be on the regulator and rating agency side. We are trying in the last couple of years since the merger to execute every quarter what we promise every quarter. Frankly speaking, also due to the general macro situation and the situation, of course, generated also by the spread in the last two quarter, we are not getting that much reward. We think this is a final transaction. This is the final step of our restructuring, and it is far ahead what we expected when we started the merger.
We had some talks with all the stakeholders of the market, even with regulatory rating agency. A few weeks ago, it looks like a bit improbable for us to conclude such a good transaction. We were talking to them, announcing what we had in mind to do. As you know, especially for regulator side, it is more a backward review rather than a forward-looking view. I don't know if they will take all the effect of the massive derisking and asset quality plan we have performed during the year. Hopefully, we will have some signal from this bettering of our portfolio, and also our consistency in terms of capital ratios. Unfortunately, I cannot tell you anything more than waiting and possibly experiencing what is the output of this SREP, which I hope could be better than previously.
I don't think that it will take in effect all the good transaction we have performed during the last month. In terms of profitability, as we stressed, and these things we think is the real good part of this transaction is that everybody was thinking that in selling a part of our business, we were reducing profitability. We can assure that we will have basically a neutral effect or a minimum effect, lower than EUR 5 million in terms of profitability due to the reorganization. We will keep also the non-captive business 100% of ProFamily. In terms of cost of risk, we can only restate what we already said in Q3, that hopefully we will have a cost of risk next year in line with the other competitor.
Just for the sake of being cautious, we think we can respect our business plan guidance, which was 60, 65 basis point.
The next question is from Christian Carrese with Intermonte. Please go ahead.
Yes, good morning. Just a clarification on the deal. If you can elaborate a little bit on the agreement in terms of funding and rebate for the agreement in the consumer credit and the put option. Did you check with the regulator the possibility to account for the capital gain, the put option, the possibility to sell a stake in 2021? The visibility on common equity is high. If you can elaborate on that. The LGD waiver, we know that there are some talks to make automatic the LGD waiver on NPLs at European level. You applied for the LGD waiver in March, if I remember properly. If you can give us an update on that.
Finally, do you expect the impact on PNL from 2019 onwards in terms of time value and PPA on the NPL that you are going to sell to be compensated by the lower cost of risk? Thank you.
Thank you, Mr. Carrese. We have no change at all in terms of rebate policy vis-a-vis the new agreement with Agos, it remained the same condition last year. In terms of funding, of course, contributing also the BPM stake, the ProFamily stake of our production of our network, there will be an increase related to this production that before we, in any case, were funding through ProFamily. No material change, and we are very happy with that. In terms of regulatory, both question CRR and LGD, for the put, we have been following all the rules stated in the CRR, we are not basically running any potential risk of not being considered because we have done exactly what is allowed in terms of CRR. Also having the agreement on Crédit Agricole side to reduce their portion of capital related to the put option granted to us.
It's regular, the increase in our capital and the decrease in their capital. In terms of LGD waiver, you know exactly our state. We have a bit more of certainty after the recent European Commission statement about the LGD waiver proposition. We are following both the development, both in terms of European Commission and Parliament and in terms of ECB. In any case, we will have all the opportunity to show that the LGD waiver basically will be part of the change model we are going to introduce in 2019. Frankly speaking, I don't see this kind of risk. Last question, I would say that the savings in terms of cost of risk is much bigger than whatever effect in terms of NII due to time value and PPA.
Of course, PPA is not related to this transaction, but in any case, we will be going to reduce the PPA due to the merger in any case, by 2019/20.
Just a clarification, if I may, on the put option. If you are not going to make the IPO, you can decide not to sell the 10% stake?
Of course, we have two different options. Better, three options. One is to exercise the put. We will remain as we are. Two, to list the company, possibly to, let's say, double the effect of the capital impact. Third, hopefully, if in two years we will not be in the position to need any capital support, we can also stay as we are.
Perfect. Thank you.
The next question is from Andrea Vercellone with Exane. Please go ahead.
Just some numerical questions. On the ProFamily business, can you let us know how many risk-weighted assets go to Agos, and how many stay behind? The same for the equity of ProFamily, how much goes to Agos, how much stays behind? On the net interest income for next year, can you give us an indication of the loss of NII linked to this transaction for time value split as PPA and non-PPA? Then just a clarification, LGD waiver aside, did I understand correctly that you will roll the model, either with the existing one or with the new one that you will ask for next year already to incorporate this specific transaction? Thank you.
Mr. Vercellone, starting from the ProFamily RWA, we are going to keep, as I was mentioning before, we have more than two-third of non-captive. We have almost EUR 700 million staying with BPM and EUR 230 million going to Agos, which is the current percentage between non-captive and captive activity. In terms of waiver, it is exactly as you mentioned. As you know, we were already working on this double option to get a full waiver directly from ECB or rather to perform a new updating model incorporating the massive reduction of NPL that we performed during the last years. As I mentioned before, it's something like EUR 18 billion. I think the highest ever got apart from Monte Paschi, which as you know, got the waiver from ECB. Third question, I would say the time value is something between EUR 60 million and EUR 80 million. For PPA, it's very easy.
Each of you, I think, has his own model, and we declared very clearly how much was the impact. It is not related to this transaction. I think you can calculate that they basically are going almost to zero, they still will have some small impacts. Luckily enough, we are anticipating also this effect.
Okay. Thank you.
The next question is from Giovanni Razzoli with Equita. Please go ahead.
Good morning to everybody. Thank you for the conference call. A couple of clarifications. The first one, you have said quite clear that you do expect the cost of risk in line with the business plan, compared with the business plan here, the risk profile of the group has dramatically improved. I was wondering why you are not already ready to revise downward the 63 basis points of cost of risk guidance for 2019. The second question is a clarification on the CET1 ratio range. You are providing us an 11%-11.5% range, even if you were to sell the entire EUR 7.8 billion of NPL portfolio. While in the press release, you are actually guiding it to 11.2%, which is the September 2018 figure. I was wondering why there is this slight difference.
I was also wondering whether this 11%-11.5% range includes or not any benefit from the sale of the NPL servicing platform. Whether this range may be increased or impacted by this transaction. A very final question, sorry, a clarification regarding the capital impact of the overall transaction. Basically you have a capital gain on the disposal of ProFamily, risk-weighted asset deconsolidation, the put option, and you are guiding us with 80 basis points of positive impact on the CET1. Is it correct to assume that you have a compounded effect related to the fact that the thresholds on the CET1 are also impacted so that you get more than the capital gains that you are recording on the overall transactions? Thank you.
Good morning, Mr. Razzoli. Risk profile is not that we don't want to go below our guidance, not even we want to be better than our competitor, starting from very high numbers during the last year, we think that it is prudent to say that the guidance will stay the same. We are experiencing, as you know, a very good pace of reduction of also inflow. Basically, we hope to be better, but also in line with the macro that we are experiencing during these last months. We feel much more prudent to say that the ambition that we had in the business plan will remain the same.
Of course, I agree with you that the profile of the bank is so much better than in the business plan that this allow us in a normal situation, and with the terms that we assumed when we produced our three-year business plan, this could be much better than that. I remember the growth of GDP was much better. The increase of investments was much better. The performing loans were much higher than what we are experiencing. Give us some assumption to be a bit more prudent. As you know, we like to got the target that we have. For Common Equity Tier 1, very nice question, I can better explain. Of course, the 80 basis point will bring us in the range of 12%.
We cannot be so precise in terms of how much will cost the disposal of NPL for the main reason I explained before. First of all, there is not yet a chosen bidder. Secondly, we don't know exactly the rating agency, which kind of price and the ratchet tranching they will have in the potential GACS transaction. Third, we have also to, let's say, try to better as much as we can the portfolio that we will GACS in, let's say so. All these aspect give us a fork, which is quite wide. Let's say that, again, to be prudent, we assume that can be between 11% and 11.5%. I should say that I think it's much more on the higher side than on the lower one.
Again, being also in place a competition also in order not to make understand exactly the price offered up to now, I would rather prefer to have this new guidance. Of course, this will include the platform, even though we didn't yet say how much of the platform will be sold because you know that we can keep a stake into the platform disposal. Third point, yes, of course, as much as was so painful for us after the BTP spike to have 80 basis points of damage, even though everybody was thinking the damage was much lower because of the threshold. In this case, as we always said, when we have the common equity one increase, we'll have also a further positive effect coming from the threshold and the DTA. The 80 basis points come also from this situation.
Thank you.
The next question is from Riccardo Rovere with Mediobanca. Please go ahead.
Good morning. Good morning to everybody. Couple of questions, if I may. The first one is on the current value, the book value of ProFamily today in the balance sheet of Banco BPM. I found in the annual report 2017, EUR 113 million, sorry, for 100% of ProFamily. Was wondering whether this is the right number, and if we take, let's say, roughly a third of that for the captive business as an indication of the potential capital gain from the disposal of only that part of ProFamily. The second question I have is on the amount of NPLs that will be deconsolidated. There is a slide you mentioned between EUR 7 billion and EUR 7.8 billion, but correct me if I'm wrong. This is the number that includes the write-offs.
If I compare this number, let's say the number of NPLs that you will deconsolidate with the one currently sitting on the balance sheet, the EUR 10 billion-EUR 10.1 billion. There is a slide which says between EUR 6 billion and EUR 6.8 billion. Just was wondering whether looking at the number on the balance sheet, we should be looking at EUR 6 billion to EUR 6.8 billion or EUR 7 billion-EUR 7.8 billion. The last question I have is on in the capital, in the 80 basis points, you have the capital gain, the risk-weighted assets reduction. The put option, the EUR 150 million will be included immediately from day one, right? The 80 basis points is going to be at the completion of the transaction, let's say mid-2019, not in two years' time. Just to be 100% sure on that. Thanks.
Yes. Thank you, Mr. Rovere. Let's start from the final one. Immediately after the conclusion of transaction, having the right to put by 2021 this 10% debt strike price, we will have this opportunity to include immediately, due to CRR rules, the effect into our capital. It's not eventual, it's sure, and it will be done immediately, at the conclusion of the transaction. The EUR 7.8 billion, as you can see on page seven of our presentation, we say that, first of all, this is the part not including the leasing, which will bring EUR 8.6 billion, the total consideration, as we announced in Q3, out of which almost EUR 1 billion is written off. On balance sheet, we have EUR 6.8 billion of balance sheet in the write-off, another EUR 1 billion. The total consideration is, we indicated, is between EUR 7 billion and EUR 7.8 billion, including EUR 1 billion of write-off.
Okay.
The third question, I have the number, is EUR 140 million, the 100% of the current ProFamily stakeholding.
If we take one third of that, based on the split between captive and non-captive, are we making mistakes? No.
No, we keep two third, not one third.
Sorry, two third.
Yeah, two third. Yeah, exactly.
Okay.
The next question is from Domenico Santoro with HSBC. Please go ahead.
Hi. Good morning. Thanks for the presentation. I'm doing the call before the market opens. It's Domenico from HSBC. Three clarification on my side. First of all, on the servicing company, the impact on P&L that you mentioned before, does it include also the potential cost savings that might come from the deconsolidation of the company? Second, on the range on capital that you show here in the presentation, the 11.5%. My question is whether the losses related to the sale are considered before or after taxes. Since I'm surprised as well to see this range, but you already said that you might be comfortable to see this number, not the range that you mentioned. Is this specifically related to the inclusion of the GACS in the transaction? The third question is on the UTP specifically.
You show in the presentation that there is EUR 8.4 billion left. Given that we all were receiving the same question, in terms of risk profile of the bank, going forward, now that you got rid of the most of your non-performing loans portfolio, is there any one-off transaction here considering the UTP, or you will basically continue the normal deleveraging of the balance sheet? Thank you very much.
Okay. The reduction is the gross loss, of course, related to the NPL disposal. It's not the net effect, it's the gross. In terms of continuing the risking, the reason why we showed the numbers of the workout on page seven, EUR 8.5 billion related to EUR 15 billion-EUR 16 billion of disposal, is just to make understand that we have a very good performance also in working out. Basically, UTP went down in the last two and a half year from EUR 12.3 billion to end of the year, basically we will be below EUR 8 billion. This means that we have a capability to reduce this asset without performing disposal. Nevertheless, once we will be freed by the pressure and the willingness we had of reducing bad loans, we are considering to make maybe some transaction, only related to real estate UTP, which we will start to experience.
Yet we are not ready to say neither the sides, neither the timing. It's a new things for us. We have to consider if after all this painful disposal in terms of cost, there will be some reason for accelerating through further disposal. Otherwise, we feel that the performing and working out given up to now can give confidence to the market. We will further reduce our global NPL. Sorry, no, the platform, the cost on the platform. Of course, we will sell the platform. I would say that the cost of the servicing will be basically offset by the lower cost of personnel. Will be an impact almost even, no effect basically, no substantial effect on profit and loss.
Okay.
I didn't get maybe one of your question.
I think we are fine. It's okay. Thank you very much.
Okay.
Thanks.
Okay. Thank you.
The next question is from Ignacio Cerezo with UBS. Please go ahead.
Yeah. Hi, good morning. Quick couple of follow-ups from me. First one is your best approximation in terms of NPL ratio by the end of the business plan. I know it's probably early actually to have a very firm view, but considering the organic trends you're seeing, actually, where do you think your total NPL ratio is going to be falling by the end of next year? The second thing is the EUR 1.6 billion bad loans outside the leasing business, if you can give us a bit of color in terms of what they are. I'm assuming some of them are residential mortgages, but just to confirm that. Thank you.
The first question, we had many business plans, so just for the sake of this sure, the original business plan, the one we had to terminate at, let's say 17.9%, by end of 2019 will be for sure below 10%. We haven't yet made all the calculation due to the GACS and further disposal, further workout we are doing during the year, but we have confidence that it can be below 10% by 2019. Of course, you know that we had done also another business plan, which was done in March this year, expiring 2020, and this is yet to be redone, but I don't feel really there is a need right now to give guidance on that. There will be a reduction driven mainly by the workout of UTP.
Can you please repeat the last question?
Yeah. On the EUR 1.6 billion bad loans you show on slide nine. Of the EUR 3.3 billion remaining EUR 1.7 billion is leasing, EUR 1.6 billion is others. If you can give us some colors on that other number.
Yes. Basically, part of the leasing is, I think is quite well explained on the right part of the slide. The vast majority, 60%, I would say, was coming from the Release activity. As you know, Release was a platform in which we have almost 90% together with other two former cooperative banks. This is going to be reduced quarter by quarter, quite massively. They are big sides normally, and almost all real estate related. The other part is the part of leasing we had inherited by BPM, and a small part of Banco BPM. Of course, the reduction in this sense is a bit slower than in Release, where we have a target of going down as quicker as possible. In terms of other bad loans on the banking book, they are almost all the loans related to the exclusion from the ACE portfolio.
The one in which we have negative passive claims or procedure well ahead, which not allowed us to be inserted into the ACE transaction. Basically are the one that are more close, if you want, to the finalization, normally well provisioned, then we have to just check the procedure in order to go ahead.
Thank you.
Gentlemen, there are no more questions registered at this time. Excuse me, there is one more question from Delphine Lee with JP Morgan. Please go ahead.
Yes. If I could just have one last question, sorry. On the 80 basis points, I assume that doesn't include the RWA relief that you would get, similar to the Exodus transaction where you got RWA reduction of 25%, 30% of the gross book value. I would assume that you would get that as well end of next year. Wanted to confirm that as well. Thank you.
Yes. It should be all in the next year. Of course, we will perform whatever we will conclude by the year-end in the Q4, most probably all the civilistic effect will be by 2019.
Great. Thank you very much.
Bye.
There is a follow-up question from Riccardo Rovere with Mediobanca. Please go ahead.
Yes, thanks for taking my follow-up question. Just a quick clarification. When you provide us with the targeted or expected pro forma gross NPL ratio after the ACE transaction, the denominator, the gross loans, do this number include the GACS senior notes, which if I remember well, is EUR 1.5 billion, EUR 1.6 billion or not? Thanks.
I would say this is static. Of course, the Exodus senior tranche is included because it's amongst our loans. Of course, not the new one, which is only a forecast of the new loans performance next year.
Okay.
There are no more questions registered at this time.
Thank you all very much. Of course, our IR will be available for any further clarification. Hopefully, really, I hope that this has been very useful for you in order to understand the completion of our plan, and I look forward to have another conference call for the Q4 results. Thank you very much.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephone.