Ladies and gentlemen, good evening. Welcome to the conference call for the presentation of the H2 results of Banco Popolare. At present, the participants are just going to listen our listening modalities and there will be a Q&A session. Whoever wishes to ask a question has to press or dial star one. We inform the participants that this conference is going to be recorded today, Friday, August 7, 2015. Let me now hand it over to the CEO of Banco Popolare, Mr. Saviotti.
Good evening, everybody. As usual, we start from the first slide, which is not slide number one, of course, I am going to be very rapid because in the following slides, we will be able to get into greater detail. With respect to slide number three, I am just going to give a very rapid snapshot of performance highlights.
We had EUR 4.9 billion with 100% increase in profit from operations. But I would like to say that was a medium-term lending. In 2014, we had extended EUR 5.7 billion worth of medium and long-term loans. This is already a significant result that we obtained in the first six months. A very good result in assets under management and administration, little less than EUR 6 billion were underwritten with respect to mutual funds and SICAVs, EUR 1.6 billion of bancassurance products, EUR 900 million discretionary accounts for wealth management, and EUR 1.8 billion in terms of certificates. Consumer credit +22%. Credit cards reported an increase by 100,000 units. Checking accounts, the delta between the opening and closing of a checking account was 32,500 accounts. Let's talk about the income statement.
The first half of the year closed with a book profit of EUR 293 million and a management accounting result of EUR 290 million due to the fair value option. This EUR 290 million amount, this result, includes a negative contribution by the leasing division of EUR 55 million, which you find on chart six. In the following slide, you can see the non-recurring P&L items for the first six months of the year. Of course, we have Banca d'Italia's tax asset with a positive contribution of EUR 85 million. Then tax litigation that dates back to 2006 was finally completed. We actually won the appeal at the appeal court, but then at the superior court, we were asked to pay EUR 17.7 million plus due to additional incentivized exits.
We have EUR 11.6 million worth of charges, and this favors the exit of other 70 people, and then a EUR 6.5 charge that relates to the sale of our Luxembourg bank. In the first half of the year, the P&L had been charged EUR 23 million. This was the estimated amount for the Single Resolution Fund. Let's talk about the P&L line by line, starting with net interest income. Net interest income has increased by 2.7% year-on-year and quarter-on-quarter it went up by 3.3%, mainly as a result of the reduction in wholesale and retail funding costs, which reflects the fact that we have been focusing on less expensive funding sources. The customer spread decreased by five basis points, and this is due to an asset spread reduction of nine basis points, which was negatively impacted also by renegotiations on some major exposures.
Whereas the liability spread is still recovering and over the quarter it improved by four basis points. On page nine, we see net commission income increased by 7.7%. The branch network, as usual, was very professional and was able to well react to the increasing demand for investments by customers, in particular with respect to asset management products. We've seen a greater contribution also from other commission streams, for example, consumer credit, guarantees given, and depository bank commission streams. The commission stream or the commission volume on a quarterly basis is well above the average of the 2014 quarters. We believe, of course, that in future quarters, the increase will be more subdued. Indirect customer funding went up by 8.3% year-on-year, driven by asset management. Thanks to funds and SICAVs, which increased by 17.5% year-to-date, showing that the positive trend which had started last year is still continuing.
The quarter-on-quarter decline is due to the lower value of assets under administration, due to the temporary negative market performance in June. The net financial results on page 11 went down by 26.1% due to the lower income generated by trading activities, which was impacted by the negative market performance in Q2. In particular, in June, when the Brexit crisis deteriorated. Banca Aletti generated a more contained result due to the fact that their structured product activity declined, because the network over the quarter was more focused on asset management products rather than on structured products. In any case, the quarterly average is still satisfactory, is still good, and to date is above the quarterly average reported in 2014. Operating costs, personnel expenses.
Personnel expenses went up by 1.5%, but they increased because over the quarter we accounted for non-recurring charges of EUR 11.5 million, with the exit of additional 70 employees. Hadn't we charged this amount, we would have had a 0.2% reduction in personnel expenses. A slight reduction, and this despite the absorption of costs referring to the latest contractual increase agreed in the previous national labor contract. The average headcount decreased by 585 employees, and the period end headcount saw a significant decrease of 729 resources year-on-year, and of 198 people quarter-on-quarter, or in line with the expected downward trend. In the next six months, we're going to have other exits based on the incentive schemes and solidarity fund plans.
In fact, on page 13, you see that by the end of 2015, we will have full-time equivalent employees of 16,217, whereas the target was 16,882, which, however, is the target expected for the end of December 2016. So in December 2015, we are already going to hit the 2016 target one year ahead, and still with 165 full-time equivalent employees less. With respect to other costs, other expenses, we've reported a 6.1% reduction in other administrative expenses. However, if we exclude non-recurring items reported in the first six months of 2014, the decline amounts to 3.7%. In particular, the other administrative expenses went down by 3%. But in this case, should we strip the EUR 7 million reduction in liability that we had reported in 2014, the reduction would be equal to 5%. Amortization and depreciation was down apparently by 20.4%.
Excluding the EUR 17 million worth of non-recurring impairments on real estate that was carried out in 2014, they actually increased by 3.7% due to higher IT investments. Let's now move on and talk about our balance sheet. First of all, let's concentrate on total direct customer fundings, where we have a reduction of 1.9% year-on-year. That is mainly due-
Reduction in bonds. The bond component was partly offset by an increase in repos and partly by a EUR 1.9 billion increase year-on-year in the stock of certificates. The progressive decrease in bond funding is due to a specific choice we made. We put in place measures that were meant, in fact, to reduce the overall cost via the replacement, which is still underway, the replacement of this type of funding with another type of funding, which is less expensive. We have put in place a call of the bonds. The reduction of 1.5% in core deposits is mainly due to the current decrease in time deposits. Please note that the weight of wholesale funding is equal to 16%, essentially in line with the year-end figure.
On page 17, you see a snapshot of our liquidity, excellent liquidity position for the group, where we have an exposure to the ECB, which is equal to EUR 12.9 billion, EUR 1.7 billion more than March, because we drew an additional EUR 3.2 billion worth of TLTRO, which is currently a total of EUR 11.9 billion. At the same time, we cut back on the short-term component by EUR 1.5 billion. Please note that the further unencumbered assets eligible for refinancing with the ECB are well above EUR 14 billion, and they are essentially made up of Italian govies. As far as Basel III liquidity ratios, LCR is well above 100%. We stand at 164%. The Net Stable Funding Ratio is 95%, and it is calculated based on the most recent rules of the quantitative impact study. On the following page, you see the maturity profile for 2015.
As you can see, we're faring very well. In fact, we have EUR 1.7 billion, EUR 1.3 billion for wholesale bond maturities, EUR 400 million for retail bond maturities. In the second half of the year, we'll be calling EUR 500 million. The last call to complete, which will be the last call date that will round off the plan we had prepared. Let me once again make you notice that we placed a seven-year covered bond worth EUR 1 billion, which was priced at the mid-swap rate plus 28 basis points, and we placed it on the institutional, on the wholesale market. It was very well-received. In fact, it was oversubscribed by 2.5 times the initial amount in July. We placed a five-year senior bond of EUR 1 billion priced at the mid-swap rate plus 240 basis points. Once again, oversubscribed 4.5 times the initial amount.
By the end of the year, we think we'll make additional bond issues. Let me remind you that as far as the retail market is concerned, we placed a lower Tier 2 seven-year bond worth EUR 500 million. As to govies, on page 19, you see that nothing changed much over the quarter. Our portfolio is essentially made up of Italian government bonds with a residual average maturity of 3.9 months. As of July 31st, the AFS reserve for Italian government bonds was equal to EUR 161 million gross, compared to -EUR 14 as at June 30th, while the unrealized gains on government bonds in the held-to-maturity reserve amounted to EUR 271 million as at July 31st, compared to EUR 201 million as at June 30th, 2015. Moving on to page 21, we take a look at customer loans, where we reported a decrease of 2.6%.
That's in spite the loans made during the quarter were quite significant compared to the results we reported in 2014. In fact, as I said earlier at the beginning of my presentation, we lent EUR 4.9 billion. As far as retail customers are concerned, we reported a 54% increase. Small business increased by 76%, while the mid-corporate increased by 122%. On the following page, which is page 22, you can see the cost of credit risk, 85 basis points on an annualized basis, compared to 137 basis points reported in 2014. As you can see, also, loan loss provisions are plunging compared to 2014, minus 40%. That is thanks to the remarkable decrease in inflow into new NPLs. All this take place while we retained a very high level of coverage we reported at the end of 2014.
On page 23, you see once again a snapshot of the evolution of NPLs. They go up by 6.6% year-on-year, precisely because of the significant reduction in the inflow of new NPLs, minus 66%, as you can appreciate on the left-hand side of the table. Thanks to the fact that EUR 205 million worth of unsecured bad loans, which we sold in the second quarter, we report a decline of EUR 311 million precisely, minus 1.4% in the first half of the year. Coverage compared to June 30th increased, stocks went down, and thus we can say that net NPLs decline on an annual basis by EUR 786 million, precisely minus 4%, and in the half-year period, they declined by EUR 141 million, minus 1%. Gross bad loans increased year-on-year by 12.3%, I wish you to notice that our growth is, and continues to be lower.
The number of bad loans we report is still lower compared to the Italian banking system. In fact, based on the latest data provided at the end of May by the Bank of Italy, there was a plus 14.9% reported by the banking system and a plus 5.5% in the first five months of the year compared to the growth of our bad loans, which was just 1.9% in the first five months. The coverage of the group's NPLs is strengthening despite the good levels we have already achieved in 2014. In fact, there was a slight decline compared to March, 44.9% in June, compared to 45.1%. That is essentially due to the fact that, as I said earlier, unsecured bad loans worth EUR 205 million were sold in the second quarter.
Coverage including real collaterals keep growing, and it is equal to 98% for bad loans and 85.8% for unlikely to pay loans. That is due essentially to the fact that there are very many loans that are backed by collaterals, 76.9% for bad loans and 74.4% for unlikely to pay loans. We keep reiterating, and I will reiterate it once again, that the group's coverage level has to be considered in the light of the buffer of collaterals of secured loans compared to total loans. In fact, if you take a look at the average for our peers, we have a much better level at 87% compared to an average of 80%.
In the following page, you see a greater degree of detail. It simply says that bad loans that are backed by collaterals is equal to 76.9%, while when we talk about unlikely to pay loans assisted by collaterals is 74.4%. Bad loans are covered by 58.1%. Real guarantees are covered by 45.9%. Unsecured loans have a coverage of 82.9%. As you can see, the same applies to unlikely to pay loans where we have collaterals. Excluding collaterals, we have a coverage of 22.9%. Loans that are instead not secured by collaterals have a coverage of 38.1%. On page 26, you see a snapshot of the leasing division. We are still downsizing the portfolio. In the first half of 2015, the portfolio was cut back on by EUR 352 million, minus 5.4%, after the decrease we reported already between 2009 and 2014 of 5.4%.
Gross Non-Performing Loans are at EUR 3.8 billion, minus 2.4% at the end of the first half 2015. Minus 1.8% in the second quarter 2015. This is the lowest level reached since 2009. I would like to reiterate once again that we cut back by over EUR 6 billion our outstanding loans. Non-Performing Loans went from EUR 3.8 billion, went down, thus allowing us to say that the recovery activity we are doing are actually paying off. As far as accounting coverage is concerned, we confirm the 33% coverage. If we add collaterals, we have a coverage of 103%, even though in spite of the incorporation of an average haircut of more than 20% for underlying collateral values. There is an additional buffer to cover outstanding risks. On page 28, you see a snapshot of our group regulatory capital ratios and our capital position.
You know that the European Central Bank assigned us a Tier 1 common equity ratio of 9.4% as at June 30, 2015. Under Basel we are at 12.2% with a total capital of 14.2%. This is due mainly to a reduction in risk-weighted assets in Q2. We have had a reduction of EUR 1 billion due to counterparty risk, a reduction of millions in operational cost, and then the DTA reduction, which were turned into tax credits for EUR 706 million. Whereas market risks increased by EUR 493 million. Instead, in the fully loaded, the CET1 ratio fully loaded is equal to 11.3%, down compared to the same item on March 31, as a result of the AFS reserve reduction, which over the period had a negative impact of 68 basis points.
If we include the positive change in the AFS reserve that was reported in July and amounting to 46 basis points, and the impact of the sale of the stake held in Istituto Centrale delle Banche Popolari Italiane, ICBPI, plus 62 basis points, the CET1 ratio fully loaded increased to a pro forma of 12.4%. With respect to the total capital ratio, considering the lower Tier 2 of EUR 100 million redefinition, it goes to 15.7%. We wanted to highlight, and so I will reiterate this right now, that we sent a model change request on the PD and LGD corporate and retail, and we are still waiting for the validation of the Joint Supervisory Team of the ECB. We have no idea when we are going to receive this validation. We believe that the new parameters may come live as of the prudential reporting of December 2015.
This led me to the end of my presentation, and I will be more than happy to answer to your questions.
We are now going to open the Q&A session. If you wish to ask a question, dial star one and wait until you are introduced. To cancel your question, please dial pound. Again, we are now going to open the Q&A session. If you wish to ask a question, dial star one and wait until you are introduced. To cancel your request, press pound. Giovanni Razzoli. First question.
Good evening. I have two questions for you. First of all, loans. EUR 5 billion in the first six months of the year, which means EUR 2.5 billion in the second quarter. If we consider the loan stock in the various segments, I believe that compared to the first quarter, you reported a slight slowdown. Do you share this view, and would this be due more likely to the fact that your
Network has a lower appetite with respect to the new product, or is there a lower demand? The second question I've been asking is to all the Popolari banks. It has to do with the demutualization process. As part of the governance changes, are you going to set a permanent limit to the voting right for shareholders? From your point of view, would the setting of such a limit involve right to withdraw that might be exercised by the members of the board of directors?
With respect to lending, to granted loans, in the second quarter, we extended slightly fewer loans, but not that much less. It was EUR 2.5 billion in Q1, and it was EUR 2.4 billion in the second quarter.
In June, we reported a slight slowdown in the granting of new loans, which had nothing to do with our own choice, just because of declining demand, a more sluggish demand. Even today, it's a bit lukewarm. The loan applications we receive are more similar to what happened in June than to what happened in the previous months when we had more applications coming in. With respect to your second question, we haven't made any final decision yet with respect to any constraints or limitations to voting rights, be it temporary or permanent. We've talked it over, this is going to be postponed to the board of directors meeting that we're going to hold on September 15th. Only then are we going to make a final decision.
With respect to the right of withdrawal, should it come in place in our bank, I don't think that we are going to have any problems. I believe that if any, there will be a few, and in any case, should any such right be exercised, the group is not going to face any capital problems.
Next question comes from Ms. Azzurra Guelfi.
Good afternoon. I promise I'll speak slowly. I have two questions. Pricing and net interest income.
Ms. Azzurra, please, you remember that when you speak fast, I'm too old, I cannot keep pace with you, please speak slowly.
I know. I plead guilty. Please stop me if I am wrong. Net interest income went up in the quarter. Volumes did not increase, so your margin improved. I see that your customer spread changed and declined specifically. I would like to have more information about financial income, which I believe was responsible for this growth. As far as 2015, you gave us a guidance between 80 and 100 basis points. You made 85 in the first half. Are you still comfortable with this lower end of the range, especially in the light of the reform which the government has recently passed?
Well, let me take your second question first. It comes natural for me to confirm the lower tier of the range I had communicated to you, considering the current situation, the current economic cycle, considering that flows are limited. You may have noticed we reported a 66% reduction. I really believe we can say we can keep the cost of credit at this level. As far as NII is concerned, I have to say that there is a EUR 3 million-EUR 4 million contribution given by our trading portfolio. All the rest is just due to the policy we have implemented. Volumes did not grow excessively, as you correctly pointed out. We worked on the cost of funding because the cost of both retail and wholesale funding, as I said in the course of my presentation, decreased. This allowed us to achieve this good NII.
Andrea Vercellone, next question.
Good evening. I have a few questions. The first refers to the internal models. You were saying you are still waiting for the validation or the authorization by the Joint Supervisory Team. Can you give us any guidance with respect to the impact this might have? The second question refers to Arca. There have been newspaper articles saying that the Banco Popolare has practically exercised its right of withdrawal with respect to its shareholding in Arca. If this is true, can you explain why, and do you have any price guidance? Third question, personnel expenses. Net of the solidarity fund charge, they've gone down quite significantly quarter-on-quarter. I would like to understand whether this is a sustainable trend or whether there have been non-recurring positive items this quarter. For example, the transfer of variable or the carry forward of variable items.
With respect to your business plan and with respect to headcount, do you expect that also next year you are going to report a significant number of exits, or did you just do this ahead of time and at this point you're just going to sort of drift on? Not only do I expect to report additional exits next year with respect to our employees, I believe that they are going to exceed the 70 FTE employees we reported this year. I expect to see 150 exits next year without increasing personnel expenses, which are still going to be within the limits we've set last year. There are no non-recurring or strange positive items or any type of switch that was not distributed. Everything was just ordinary and regular.
As far as Arca is concerned, I confirm we exercised our right of withdrawal, which is subject to the counterparty's ability to, or possibility of having the necessary funds within the defined time. With respect to the model change application, I can say that my chief risk officer and the head of risk managers have their own view. They believe that we are within 50, 60 basis points. I'm a bit more conservative. I would talk about from 60 to 70. Since we are at 12.40, I am not that concerned considering that the 12.40 does not include what I've just told you, i.e., the basis points that I will obtain by exercising my right to withdraw in Arca. So whether they are 60, 70, or 80, in any case, our common equity Tier 1, fully loaded, is good and gives rise to no concerns.
With respect to Arca, it's the right of withdrawal against Arca. So the buyer is Arca. Yes, that's it. I confirm what you're saying. What is the reference price? Well, I'd just skip this altogether. I just told you that I would obtain a good level in terms of basis points, so it's up to you to make your own calculations. Thank you.
Let me just remind you that if you want to ask a question, you can press star one on your keypad and wait until I say your name. If you want to cancel your request, you can press pound. Next question comes from Mr. Carlo Di Grandi.
Good evening. I'd like to go back to page 28, where you describe your capital ratios. Could you please tell us more about the changes quarter on quarter from 11.6 to 11.3, since your assets are declining, and also, what is the capital contraction concerning those 30 basis points on a like-for-like basis? What was the change?
As far as risk-weighted assets changes, I told you earlier that the decline in risk-weighted assets was due to the counterparty's credit risk reduction of EUR 1 billion, operational risks EUR 342 million. DTAs turned into tax credit, EUR 106 million. Market risks, negative impact of EUR 493 million. We also should take into account the sale of the Istituto Centrale delle Banche Popolari. We should also consider that we beefed up our AFS reserves, and that implies a cost of about 68 basis points, and we managed to regain only 46 of them. So we came up with a pro forma figure of 12.4%. Thank you.
Next question, Domenico Santoro.
Just one detail I would like to get. EUR 22.3 million worth of loan loss provision. What is the reason for these provisions? This is something we've stacked ahead of time.
We've set aside these provisions for possible but not probable, not likely risks. It's a sort of contingency. We wanted to be prudent. I'm not going to detail or itemize what are the various reasons why we did that, but consider it just a prudential measure that may always be useful in the future.
There are no other questions. Let me now hand it over to Mr. Saviotti for his final remarks.
Well, there's little I can add other than saying that my people and I are satisfied with this result. We are satisfied. We don't want to lay back. If the economic cycle is going to remain stable at this level, I'm not talking about a boom, but a more relaxed level, Banco is going to keep generating good results. Thank you.