Good afternoon, this is the Chorus Call Conference operator. Welcome, and thank you for joining the Banco BPM first half 2023 results conference call. 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 of Banco BPM. Please go ahead, sir.
... for being here, before leaving the room to Mr. Castagna for our presentation, let me remind that you can find on our website the presentation, the press release, and the Q&A is reserved to financial analysts. Please, ask to you to have only two questions for each, to give room also the other analysts to do more questions. Thank you very much. I give the floor to Mr. Castagna.
Good evening, everybody. Thank you for being with us for the Q2 presentation. I have to say that we are very proud with my management team to present a very strong set of results. If we start from page six, on the left hand side, there is, let's say what we have been harvesting during the last year in order to get very strong results in terms of profitability and strengthening the balance sheet. On the right side, what we are seeding in order to generate future revenues in the next quarter to come.
Starting from the left side, we have had the best performance in terms of P&L in the first part of the year, with EUR 624 million on net income, which is 78% more than last year. We have been able to generate 140 basis points in 6 months of capital, of Common Equity Tier 1, going up from 12.8 to 14.2 stated, and 14.8% in terms if we consider also the Danish Compromise. On the other side, we were able to further reduce the NPE ratio. We are now down to 3.8% in terms of gross, and 1.9% in terms of net NPE ratio.
We still have a very sound CR, around 180%, and NSFR around, above 130%, after having reimbursed basically more than half of our TLTRO facility. On the right part of the slides, again, what we have been doing during the last months in terms of high-value transformation initiatives. As you well know, we have announced a few weeks ago the creation of the second-largest player in terms of payments business in Italy, with the significant revenue growth potential, and we have been able to join this company with a very strong consideration for our side, up to EUR 600 million. On the other side, we are still in the process to reshaping the bancassurance deal.
As you will know, we well know in May, we have exercised the call on 65% on Vera Vita and Vera Assicurazioni, and we are in the process in the second part of the year to close also the joint venture with the Crédit Agricole for the non-life part of this business. On page seven, some flavor about the results that we got Q-on-Q. You see that, total income went up 6% Q2 on Q1, and 21% year-on-year. Cost Income, 10 full point lower than last year to 47.8 in Q2 2023 versus Q2 2022. Also, Cost of Risk was down to EUR 121 million, which is 12% lower than Q1 and 21% lower than Q2 last year.
Um, with a pre-tax income and a net income, almost, uh, uh, one hundred percent better than the previous, uh, uh, H, H1 two thousand and twenty-two, uh, at, uh, four hundred, four hundred and forty-one million as pre-tax, and, uh, six hundred and twenty-four, uh, million in H1 twenty-three, which is again our record level, uh, in, uh, the first semester of the year. These results bring us to increase again, uh, the net income guidance for the full year twenty-three, uh, which was, uh, one hun- one billion, one hundred and forty million, uh, in Q1, when we had the Q1 presentation, which was, uh, seventy-five cents per share, and we are able now to increase to more than one point two billion, which means above eighty cents per share. Let's go back to what we have done during the, this period in terms of product factory.
We have from one side, on the left, increased our full ownership of product factory. Let's say, apart from Banca Aletti and Banca Akros, which are our private bank and our corporate and investment bank activity, we have now 100% of Banco BPM Vita and Vera Vita, which will be merged together, creating a wholly owned life bancassurance company. On the right side, what we have done in order to strengthen with the key strategic partners, the other participation in the other JV, starting with Crédit Agricole, which we have added to the stake of in Agos, which is 39%. We, almost recently, increased the long-term commercial agreement with Crédit Agricole in consumer credit. We have recently added the 35% of the joint venture in non-life bancassurance.
Together with this, the new partnership in payments business with FSI and Iccrea Banca, in which we will have 20, almost 29% of the stake. During the last year, we have also increased from 14% to 21.7%, our participation in our asset management company, Anima, for which we are the first shareholders, and very happy shareholders, I have to say, together. Today, they had very good results. The strategic rationale is, of course, to develop with the top level of partner a range of product to offer to our clients, to try to exert a significant influence through direct involvement in governance and management in all the product factories, and also to obtain a long-term stream of revenue and dividends out of the stakes that we have in this participation.
In the meantime, we were able to extract almost EUR 1 billion on value from the last two transactions, more than EUR 400 million from bancassurance, and almost EUR 600 billion on consideration for the payment system. Just to recap on the payment system, as you know, is a EUR 2 billion NPV deal, based on three strategic pillars. One was the preservation of the current P&L contribution, which in 2022 was EUR 140 million. This is a business that in the first half of 2023 is growing 10% year-on-year, so give us a lot of opportunity to increase this stake of revenues from payment system. The second pillar was to create, have upfront value generation.
As you know, we will get EUR 500 million at closing and EUR 100 million as a deferred payment, obtained in two years, which will mean 32 basis points for the upfront and 50 basis points for the total consideration of increasing Common Equity Tier 1, which, of course, is not yet included in the figure I showed of the current Common Equity Tier 1. The third pillar is the upside that will come from the streaming of dividends and from the valorization of this company, which will be the second payment system company in Italy, and possibly we will extract also some value from the increasing value that we will have from this participation.
Some figure, this new company will represent 10%, will have 10% of market share, almost 9 million on payment cards, 400,000 point of sales, and almost EUR 110 billion on transacted business volumes, all in all. On the right side, you see also the different composition as shareholders. The two banks will have 28.6%, FSI will have 49.29%, on the PayCo, on the shareholding in PayCo. In bancassurance, I already said, we have exercised the call on Vera Vita.
In the second part of Q4, we will have Crédit Agricole to purchase 65% of the stake in BPM Assicurazioni and Vera Assicurazioni, for a consideration of EUR 260 million for the 65%, which for a total value of EUR 400 million. This will come together with the signing of a 20-year distribution agreement for this joint venture. The rationale is to have an insurance group with a leading player on the P&C market, to have the possibility to have a single commercial offer to our customer, unifying the product catalog, which until now was split into two different companies.
Of course, to extract the most favorable value and synergies from the product factory, together with the favorable treatment that we expect to get from the approval of the Danish Compromise. Let's go on page 12. Before going through the figure of Q2, let me say that on the right side, we wanted to show the clear pattern of the new profitability trajectory that you can follow through the last three years. I would say H1'20 was still a year of restructuring, with the NII net fees at EUR 1.7 billion, going up to EUR 2 billion in 2021 and 2023, and now reaching EUR 2.5 billion. The same you see in the Cost/Income, 64% H1'20, then down to 55%, now down to a further 49%.
To finish with net income, which was EUR 100 million in H1'20, EUR 350 million in H1 '21 and H1'22, and now reaching EUR 624 million in H1'23. This comes, of course, from the strengthening of net interest income, which grew 50% year-on-year, also to the very good tenure of the other income revenues and cost control. I would say that Q-on-Q, we have a reduction in operating, a small reduction in operating costs, from EUR 640 million to EUR 635 million.
A reduction in loan loss provision from EUR 137 to EUR 121, with together with the increase in income, lead us to a profit from operation pre-tax of EUR 540 million versus EUR 470 million of Q1. After taxes and the systemic charge, this bring to almost EUR 360 million in Q2, versus EUR 265 million in Q1. Going to the year-on-year results, let me just stress that the net profit from continuing operation is up 65%, and the net income is up 78%. Let's say that this come also from a net financial results, which is completely different from H1'22, in which we had an overperformance of EUR 177 million.
This year, we have a loss that then we will explain farther on, of EUR 42 million. Notwithstanding, the net income of H1 was for almost 50%, coming from something that is not anymore a profit in H1'23. We still have realized an increase of 78% in net income for in the first part of the year. NII growth on page 13, we have the 49% I already mentioned, which means 9% in Q2 versus Q1, with a commercial spread which increased to 402 basis points versus 357 in Q1.
Coming from an asset spread, which we still are able to maintain at the same level of the last 2 quarters, 152 basis points, and an increasing liability spread, growing from 141 of Q4 '22 to 2.04 of Q1 '23 to 250 basis points of Q2. Of course, this is thanks to the EURIBOR trajectory, which is growing in the last 2 Q from 264 to 339. The depot cost for us grew from 0.45% in Q1 to 0.71% in Q2, which means that our beta is still at a level of 33%.
These numbers allow us to increase our guidance of NII for 2023, from EUR 3 billion to EUR 3.25 billion, based on the same level of depot rate from ECB, no further hikes in the last part of the years. Of course, with the same level of beta, which means a sensitivity of EUR 300 million for 100 basis points of increase of rates. Let's talk about the balance sheet. We are keeping our performance not really aggressive on customer loans. We are happy to stay more or less EUR 1 billion lower than the first 2 quarters. But the quality of our assets is bettering even more.
As you see on the right part of the slide, the collateral, the secured loans to household and non-financial companies grow to 68.8%, of which 23% with state guarantee. If we consider only the SME portfolio, this secured part is up to 73.6%, and the state guaranteed loan, if we consider only the non-financial companies without the household, is up to 30.6%, vis-à-vis slightly more than 6% in 2019. On the left, bottom part of the slide, you see the new lending, which shows a performance which is lower than last year.
There is, of course, a lower demand, but also what we don't see is the refinancing that we saw until H1 2022, due to the interest rate that were stable, and we had a lot of companies refinancing and getting longer maturity during that period. Of course, this is not happening anymore. The total of general lending is now EUR 10.2 billion, vis-à-vis, more than EUR 13 billion in the first semester of 2022. Let's say that in July, we saw a recover of lending. We have granted EUR 2.2 billion in July, but our policy will still be very prudent, addressing the best rating classes of client, and of course, in our territory, which are mostly in northern of Italy.
Let's also stress that new lending to corporate enterprise is almost 56% green related. In terms of customer funding, we have increased 2% Q-on-Q, and 3.3% year to date, the customer funding, total customer funding, up almost EUR 7 billion since the beginning of the year, more than EUR 4 billion in last Q, in Q2. With, let's say, Q-on-Q, the same level of deposit, but a strong increase in asset under custody, driven, of course, by Govis placement during the last quarter. All in all, the customer funding is up year to date, EUR 7 billion in asset under custody, EUR 1 billion in asset under management, and since the beginning of the year, EUR 2 billion lower of deposit transformed into asset under custody.
Also the deposit base is very resilient. We have a huge retail base, EUR 57 billion are guaranteed deposit. The average retail, which means household and SME deposit size, 21,000 EUR. The composition of the side deposit is 80% coming from retail and SMEs. Let's go on page 16 to net fees, up to EUR 948 million year-on-year, with a growth of EUR 9 million, 1.8% in the commercial banking fee, and a reduction of 5.8% into the management and advisory fees.
These results are very good in our opinion because it comes after cancellation of the fees of excess liquidity on current accounts, which we gave back to our clients in Q2, and is a lower contribution of EUR 14 million, as well as higher cost for synthetic securitization for EUR 11 million. So all in all, we have a very strong performance from many fee-driven activity. One for all, the payment services, which is EUR 26 million year-on-year, and also the fees on lending year-on-year are still very consistent, EUR 5 million more than last year.
On the management, intermediation, and advisory fee, we have a reduction of 5.8 million percent year-on-year, mainly due to lower fees from funds and SICAV, due to the increased interest rate environment, which was, which accounted for EUR 51 million, but was partially compensated by higher fees, both from certificates, which we issued for, with, fees for EUR 16 million, and the Govis placement, which gave us almost EUR 12 million of fee contribution. Cost control is still very strict. As I mentioned before, we have a small increase of 1% year-on-year, but Q-on-Q in Q2, we are lower both than Q1 2023 and Q2 2022, 1.4% on Q1 and 0.5% on last year.
This allowed us to have a very good 47.8% of Cost/Income in the quarter, and in the first part of the year, this goes down to 49.5% as a Cost/Income. For the first time, we are below 50%. The headcount evolution. Since the merger, we have reduced more than 5,000 people. We are now below 20,000 people, thanks to the last early retirement scheme signed in January. We will have another 250 person leaving the bank. 100 of them have already left, and this allowed us to go below 20,000 people.
Also in terms of branches, we have almost reached our target of 1,300 branch, closing almost 17 branch in May 2023. Let's talk on page 18 of asset quality. We are very proud of the reduction we had, starting from the merger. We were at 24%, and now we are to 3.8% in terms of gross NPE. Again, down to 1.9 in terms of net NPE ratio, so are with the same figure of the best in class in net NPE ratios in the country. Consequently, also, our Cost of Risk is declining, even though we continue to have a very prudent approach in provisioning the new income, the new inflow of non-performing, and still managing and increasing cost in the stock of NPE that we have.
In fact, we see that now we have maybe the highest coverage vis-à-vis our competitor. We will continue to decrease NPE, to dispose NPE. We have done EUR 200 million of disposal in Q2 2023, as a part of the EUR 700 million we have already provisioned for, and out of these, EUR 300 million will be disposed in the second part of 2023. The overlays go up from EUR 160 million to EUR 200 million. The prudent provision policy is very well shown on page 19. As you can see, we still have a coverage of below 50 basis points, but still at a very consistent level.
The gross NPE went down from EUR 5.5 billion to EUR 4.2 billion, with a reduction in the first part of the year of further EUR 600 million of NPE. The bad loan coverage was down because of the disposal of the... we were mentioning before, but as you can see, the UTP coverage is still increasing to 42.1% versus 40% of the last two quarters. The share of secured NPD is increasing to 66%, as well as the total NPE coverage is growing, is still at 50.6%. This is thanks to a very good default rate.
We are still experiencing also, up to July, we have a default rate, let's say, a gross default rate of 0.93%, which, if we discount the secure rate, go down to 0.78%, at a level even below 2022, which was a very record year. The stage two are mostly at the same level, but let's say that this comes from an inflow top-down of EUR 1.8 billion coming from the client that benefited from the measure coming after the flooding in Emilia-Romagna, and exclusion of EUR 1.5 billion coming from bettering their rating class. Let's me pass the floor to Edoardo Ginevra for the financial aspect of the presentation.
Thanks, Giuseppe. Page 20 gives an idea of this data on the evolution of our financial portfolio, and shows that there are basically limited evolutions versus the first quarter of the year, with total outstanding sustainable at EUR 36.1 billion, 72% of them represented by amortized cost component, and this is for the left part. On the right, you see that corporate account for EUR 5.5 billion, with Govis over for EUR 30.7 billion. Share of Italian Govis is stable at 37.6%, confirming our diversification policy adopted since the merger between Banco and BPM.
Italian Govis, in this representation, worth mentioning that they represent only, they are accounted for at, they booked it for value comprehensive income, only for a percentage of 20.7%. The remaining part is booked at amortized cost. On page 21, we see the representation of, on the left, our reserves on debt securities at fair value at comprehensive income. Here, since the first months of the year, we have seen a positive evolution with a net amount that used to be EUR 626 at the beginning of the year, now down at minus, or up, to be honest, up at -EUR 516, with confirmed very low sensitivity level.
The basis point value of our Govis portfolio at fair value at comprehensive income is only at EUR 300 billion, and close to zero for Italian Govis. Net financial result, some information are given on the right part of this slide. The total was EUR 34 million negative in Q1, and now is EUR 8.4 million negative. This is the combination of two very separate, very diverse effects. On one hand, we have a positive contribution from financial assets and financial activity that is as high as EUR 55.1 million.
On the other hand, we have the cost of certificates that is accounted for among the components of net financial result, due to Bank of Italy accounting rules, which is EUR 63.5 million, and which is the outcome of the evolution of the interest rates. Needless, needless to say, these instruments are, in any case, helpful, both from a P&L perspective, because they generate positive commission contribution in terms of placement and structuring, and from balance sheet perspective, because they can replace institutional issuances and can be accounted for, can be computed for MRL purposes. Going now to page 22, here we see a positive evolution on our liquidity and funding position under many respects.
First of all, liquidity, total liquidity, measured as the sum of cash and comparable assets, now is as high as EUR 44.5 billion. It used to be EUR 40.7 billion 3 months ago. Exposure with ECB, despite we reimbursed EUR 9 billion of the TLTRO, now we have a positive net exposure, measured by the difference between the repo facility, EUR 21 billion, and TLTRO usage is EUR 17.7 billion. This, of course, excludes the reserve requirement calculation. LCR, for the last quarter, went from 199 to 179. This is the result of the limited impact from TLTRO reduction, the EUR 9 billion reimbursed in June.
Bearing in mind that, for example, if we go back to 30th of September of last year, we had a similar level, 179%, with EUR 39 billion of TLTRO usage. As communicated in previous occasions, the steady state level or the long-term level of the LCR is expected above 140%, even after a full TLTRO reimbursement. In the bottom part of this slide, we also represented the, our funding activity, which was quite sustained in June, with EUR 750 million of greens in your non-preferred, and EUR 750 million of covered bond, the market that reopened very recently. Green bond issuances are now at EUR 1.5 billion since the beginning of the year. We have also published our new social and sustainability bonds report.
We have also been happy to see Moody's providing a positive signal to, in terms of for our credit rating by switching to positive outlook in June 2023. Let's go now to page 23, which gives the breakdown of the capital evolution in the last quarter. First of all, an important piece of data to look at is that we went from 12.8 to 14.2, so 140 bips increase in these in the first half of this year. This I'm mentioning, before taking into account the pro forma benefit of the Danish Compromise. The conservative estimate of this pro forma benefit leads to a potential total of 14.8.
The breakdown of the delta in the last quarter is given, represented in the work, the capital work, that says that net profit in the second quarter, gave a positive contribution of 68 basis points, 36 basis points of which had been dedicated to the dividends and 81 coupon to that matured in the same period. Positive contribution also from our capital light model activities, represented in the balance sheet actions component, contributing for 22 basis points, positive contribution from reserves, 4 basis points, and other components, including, among other things, DTAs for 10 basis points. Capital ratios are represented in the bottom left. Tier 1 is 16.6. Total Tier is now very close to 20%, 19.5%, with AWA below EUR 59 billion.
Capital buffers, both in terms of MDA and in terms of excess of CT1 capital on minimum CT1 requirement, are above 550 basis points, which become 612 basis points if we include the pro forma estimation of the Danish Compromise. Again, I leave the floor to Mr. Castagna.
Thank you, Eduardo. Just to conclude on page 25 and 26, let's say that let's recap very quickly that these outstanding results, in terms of profitability and NII, net income, operational efficiency with the reduction of Cost/Income, the reduction of Cost of Risk, coupled with the solid balance sheet presentation, which bring us to have less than 2% of a net NPE. let's say a very unattended capital generation, 140 basis points in just six months, allow us to lead to a further upgrade in P&L, in the P&L guidance. we've on page 26, you can see how, how we think our profitability for 2023 will increase from EUR 0.75 of earning per share to EUR 0.80, to EUR 0.80.
Let's remind that in 2022, it was only EUR 0.46, just one year ago, an increase from 11% to 12% of return on tangible equity. If we reduce to 13% the Common Equity Tier 1, the return on tangible equity will be 13%. The higher profitability allow us to increase the dividend, the payout, with this, with the same current payout level of 50%, we're able to have an increased guidance of around 9% dividend yield in 2023. What next? Let's say that we also have upside expectation from the new strategic plan to be presented in Q4, both related to a new guidance for 2024 EPS guidance.
We still confirm EUR 0.90, which is again, 12.5% more than the guidance of 2023. This will allow a dividend yield of almost 10% in 2024 at current payout level. We will also take advantage of our strategic plan to reconsider our capital distribution. The strong profitability and the capital generation will be reflected in an additional shareholder remuneration, which of course, we will propose to our AGM next year. That's all on our side. Let's give the floor to the question.
Thank you. This is the Chorus Call Conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. We kindly ask to use handsets when asking questions. Anyone who has a question may press star and one at this time. The first question is from Antonio Reale with Bank of America. Please go ahead.
It's Antonio from Bank of America. I have two questions, please. One on the use of capital and one on the outlook for NII in 2024, please. On capital, you never had this much capital, 14.8% is a record high for the bank. You still have some regulatory headwinds to digest, but you also have at least 30 basis points coming from the payments business and all the organic generation that is implied by your guidance, which means the likely the level of capital is set to stay above 15%. Now, very few banks in Europe have this much capital. My question for you is, how are you thinking about the best use of capital for a bank like yours?
non-interest income growth is a focus for next year, and you've been investing in some of the product factories like you showed on slide 8, life insurance, payments. I wonder how you see the trade-off between using some of this excess capital to grow more in products like private banking or asset management, where, where you could possibly, want to do more versus doing, share buybacks here. Also, do you have a go-to Common Equity Tier 1 level in mind at which you want to run the bank? That's my first question. My second question is on the outlook for 2024. You've increased 2023 guidance for net income and for NII. You didn't change the EUR 0.90 EPS guidance for 2024.
Can you talk a little bit more about the outlook that you expect for NII next year, at least directionally, on the evolution of NII in 2024 compared to 2023? Is there any reinvestment contribution from your interest rate hedging strategy that we need to take into account? That's my second question. Thank you.
Thank you, Mr. Reale. let's say, of course, there were the two question that we left on the end of the presentation. Again, we have a, a extraordinary opportunity with our new business plan in December to give you, you more detail about what you asked for. Let me say, we are, first of all, a bank which we want to have industrial project. We were, I think, very good during this year, which of course, we're not year, in which we had always such a capital to still take all the opportunity from the capital management action to increase our stake in all the product factory.
This bring us now with a very solid and with a good level of confidence to replace a potential NII reduction in the future year with fee commission coming from this product factory. Of course, we are now satisfied with what we have done, but still we have opportunity, because as you said, we are not at the maximum level of each of these investments. Opportunities that could be in the future, we will look at them very attentively, as we have done up to now. Of course, we know that investing capital in industrial activity means to get a reward and a return, which would be better for our shareholder, rather than have, for instance, a share buyback or an increasing in dividends.
It's very much possible that if we will confirm this level of capital after, you know, that we are also waiting for some headwind from a model change. If this level of capital will be confirmed, we are very confident that there will be room for reconsidering and increasing our shareholding distribution strategy. As far as 2024, it's a bit too early to say. We are already announcing that we will do 12% more than 2023, which is already something vis-à-vis most of the competitor. We want to be sure of the situation end of the year in terms of EURIBOR, in terms of global GDP growth, or recession as it appears, in the last few days.
Let us make all the homework, but for sure, we will have some good, we feel that we can have some good opportunity also to increase that guidance, but it's better to wait some months. Let's say, for instance, you were asking just directionally, NII, of course, we haven't considered any other increase in 2023. If this will be the case, of course, we think that we will have a very strong part in 2024, better than H1 2023, and then possibly the potential decline coming from the possible reduction of interest rate. We still have to have a clear idea of the EURIBOR movement coming from ECB, but for sure, NII should be at least at the same level, if not better than 2023.
Very clear. Thank you.
The next question is from Noemi Perrucco with Mediobanca. Please, go ahead.
Good evening, and thank you for taking my question. I would like to go back to our capital return, if I may. Clearly, the quantum will be revealed in the strategic, the update, of your business plan. I just wanted to have more color of your line of thinking here. Clearly, we know now the capital gain of the payment unit on day one, also the EUR 100 million deferred payment. First of all, here, what's the timeline of this further payment? Is it reasonable to expect that all of it will be paid out and further top up will be announced during the strategic update?
Do you expect this top up to be a one-off or potentially a way for share buyback to structurally integrate your payout policy? Then my kind of second question is more on deposits. How do you see deposit market evolving, both in terms of demand and competition? Is the BDP still the preferred option or are term deposits getting more traction? If you could share with us also the deposit beta in Q2. Thank you very much.
Thank you, Noemi. Let's say, difficult to give more color that we try to give up to now. Let's say that contribution from the payment system should come in the first half of 2024, but we will have, of course, some more precise data by year-end. The further EUR 100 million will come, I would say, by 2027. For the kind of shareholder remuneration, this is the real issue. We want to consider. There is profitability and capital.
Profitability would lead us normally to have a higher distribution of dividend. Capital would lead us also to, try to exploit at our best, our capital in order to get a good return for our shareholders, especially at this level of price of our bank, which is still 0.6, on the tangible. There would be a, a combination of the two. We want to have the opportunity, having the business plan to be done in a few months, to, to try to give you the best color as possible by December. Again, we feel very much comfortable in increasing our, shareholder remuneration in any case. About deposit, no, I wouldn't say...
We are very concerned about increasing our total deposit base, because, you know, with interest rate going up, deposit, direct deposit, go to foster asset under management or like in this case, asset under custody. When the interest rate will go down, maybe will be the opposite. We have to be able to increase in any case, as we have done during these last six years, the total volume of direct and indirect deposit, in order to give our clients the best possible opportunity. Never, like in these months, we say to our colleagues that they can offer to our client the best proposition vis-à-vis, risk return, opportunities.
Of course, come starting from the deposit for risk aversion to BTP, for a prudent investor, to, of course, assets under management for people who want to take a proactive approach in their investment. We have opportunity in all three these things. We are very happy to do that. We gave, we had more than EUR 1 billion of placement of BTP in the last Q. So we are in the position to do whatever is better. The important for us is to grow into the total deposit base and to exploit in the subsequent Q, the capability that we have to attract deposits.
The next question is from Christian Carrese with Intermonte. Please go ahead.
Hi, thank you for the presentation. My first question is I would like to make just a quick recap of the journey since the merger back in 2016. Just to say how nice was the turnaround you and your team have done in this period. You started with a EUR 1.6 billion losses and a 24% gross NPE ratio. Now we are, you are, you are targeting a EUR 1.2 billion, more than EUR 1.2 billion net profit in 2023, with a gross NPE ratio below 4%, and you did this kind of turnaround without a capital increase. Well done. Congratulations. Now, I was wondering, what is the next challenge you, you, you see?
Starting from the capital position that is very solid, with a Common Equity Tier 1 at around 15%. I was wondering, what do you think is the best way to use this excess capital? You already said something on the payout, buyback or cash dividend, but I would add also maybe what do you think about the investments in technological transformation, digitalization? Do you think that is also the time to maybe increase, to boost investment on technology, maybe to save more money, for cost rationalization and also to boost maybe some revenues? Do you think that after this kind of turnaround, there is room for a new kind of, a new merger, to grow in Italy through acquisition? This is my first question.
The second question is on the financial results. I see the certificates, the impact of the certificates on this line. I was wondering if you can give us a sort of guidance, what you expect from the trading for the full year. Of course, we have to look at maybe Net Interest Income, the increase of the guidance on Net Interest Income, together, combined also with the cost of the certificates. Thank you.
Thank you, Christian, for the kind words. My team and I, we are very proud of the result we achieved. They were not always good time, but for sure, we had some good opinion on us coming also from broker and investors. Thanks for the observation. That maybe the thing that we are more proud is that we were able to go through that difficult time without asking money to our shareholders. We never had capital increase. I think maybe it was a unique case for banks in that period, apart maybe from Intesa. Next challenge is a bit of what you have said. We showed that we want to invest in the industrial project.
I think the payment system investment, shows that we don't want only to cash in, but we want to invest, basically 60% of what we get, will be invested in the new joint venture. We have other, product factory in which we can still, increase our share, and we will follow very attentively all the opportunity to foster future revenues for the bank. We know that, sometime in the future, interest rate will go down, and we have to be ready to, substitute with more commission and fee, the lower NII. This is, our strategic idea. Of course, it's very important also what you said on cost reduction. We think that, is now the moment. We have invested a lot in terms of, digital.
We I think we have one of the best-in-class pro digital proposition for our client. coming from the we bank experience and still very much appreciated by the market. What we have done maybe less, is to reshape the IT infrastructure of the bank. You know, that we since first of July, we have a new top line manager, which is the responsible for the innovation of the bank, and he will be in charge of IT, operation, and so on. This will be his task. He is working already in order to give you some hint on the business plan, but for sure, we have now enough room in terms of capital strength to provide money for new investment, aimed to reduce costs in the future.
I don't think M&A is on the top, you know, is on the table right now, apart, again, not amongst banks, at least. There could be something on the product factory, but not in the banking sector for the time being. For NFR, I ask Edoardo, maybe to give you-.
Yeah
a more precise answer.
Coming to the component of the cost of certificates, you probably have seen in page 15, we gave the, the stock, the level of the outstanding balance, which is, which went from EUR 4.8 billion-EUR 5 billion. These generates the, the cost component, which we described in the NFR slide, which is given by the market rate, parameter, the EURIBOR, plus the spread, which is consistent with the spread that we normally pay on the wholesale market. Depending on the maturity, but let's say currently between 150 and 200 basis points. We believe that this is quite similar to what we observed, other things equal, in the other banks that have similar activities in assurance of certificates in their own balance sheet.
I believe that with these ballpark numbers, you have an idea of what could be the guidance.
Thank you. Thank you very much.
The next question is from Giovanni Lazzoni, Deutsche Bank. Please, go ahead.
Good afternoon, to everybody. My question is on the evolution on the cost for 2024, because so far we have seen banks providing a relatively optimistic trend for the cost in 2024, despite the salary drift that we are experiencing, that we will experience probably as the part of the renewal of the labor contract and the overall inflationary environment. I was wondering, how do you see the cost, overall cost base evolution for 2024? The second question is on the evolution of the funding cost in the Q2. It seems to me that the deposit beta has increased in the Q2 versus the Q1, to above the 33% that you are mentioning in the, in the core, in the, as a target for the full year. Is my understanding correct?
Era, can you give us an indication of the evolution of the deposit beta for the second quarter? Thank you.
Okay, thank you, Giovanni. Let's say my opinion is that if we don't do nothing, the evolution of cost with inflation, a new contract, for our colleagues and so on, of course, will bring to some increase. What we were very good up to now is to contain this cost through different action, and this is quite clearly shown having Q2 2023, with lower cost than Q1 and Q2 2022. Of course, this is the time for providing serious and possibly also with, with, with cost investment, but we need to try to reshape the IT and operational system on the bank. This is our target for sure, one of the pillar of the next business plan. It's not something that come immediately in one year.
We'll have, let's say, tactical move, for to contain in the next quarters, but also a strategic view, for re-reducing a solid and stable reduction of the cost base in the future. We know that there is room for that, amongst the many things we have been able to do during this year. For sure, the investment in the IT system and the cost efficiency in the operation was not our top level worries, but now it is. Now we have to work very consistently in order to lower the cost to serve, the cost base, and we will invest in these very attentively. For the funding cost, maybe, Edoardo can-
The beat on the deposits. Yeah, the question on beta, the overall, overall, we are on average, since the beginning of the year, below the amount, the, the, the number that is implied in our guidance. In general, the behavior of deposits is very stable as far as those deposits that have a contractual rate fixed between the bank and the client are very stable in terms of pricing. The only ones that move are the contracts where there is some indexation mechanism. With this in mind, which account for less than 25% of the total. With this in mind, we confirm the guidance that we gave, the 33%, on the overall year and leading to the amount of EUR 3.25 billion NII.
Thank you.
The next question is from Marco Nicolai with Jefferies. Please go ahead.
Hi. Thanks for taking my questions. I've seen the NPL ratio move down quite a bit Q-on-Q. Can you give us more color on the move? On the other side, default ratio ticked slightly up. Do you think this level of NPL ratio is kind of the bottom, and shall we expect stability from here, or you see it in a different ways? And also, can you give us some more color on fees towards the end of the year? Obviously, you canceled the commissions on excess liquidity. Is the impact, the negative impact of this, all embedded at this point, or we shall expect more negatives, and similar, do you have any views on the impact of synthetic securitizations going forward? Thank you.
Thank you for the question. No, we don't think we are at the bottom of NPE, because we still, as I mentioned before, we have been already provisioning for another, let's say, EUR 500 million of disposal, already accounted for with the IFRS 9, of which at least EUR 300 million will come in Q3 and Q4 2023. Then, of course, opportunistically, we still have continuous opportunity to have a single name disposal. Of course, all, if this will bring to a further reduction, will depend also on the other side. That means the inflow of NPE. Up to now, with this default rate, the situation is very comfortable.
This should bring us to lower even more by year-end, the NPE ratio, but let's wait and see if there is some deterioration that could bring to a new higher inflow. Let me remember that end of 22, everybody thought that in 23 we would have had the double of default rate of 2022. Fortunately enough, it didn't happen. For fees, no, we again, in Q, up to now, in the first part of the year, we had only 1 quarter impacted by the excess liquidity, given back to fee, given back to our clients. We will have another 2 quarters in which this will work, and I would say that would be for an amount of almost EUR 30 million, EUR 28 million-EUR 30 million.
As well as we will have some further burden from synthetic securitization. We have just completed another securitization a few weeks ago. All in all, we think that if we exclude these items, we will have a sound result in line with H1. Otherwise, we have to run a lot in order to substitute this impact on fees with more activity on commercial banking and asset under management. Of course, it's our target, so we are working for that. As I mentioned before, July was a very good month in terms of investment product placement. Again, let's wait and see what will happen in the next few months.
I would say that we would be very happy to match H2, say, level of H1, H1.
Thank you.
Thank you.
The next question is from Manuela Meroni, with Intesa Sanpaolo. Please go ahead.
Yes, good evening, thank you for taking my questions. The first one is on the NII. Could you please share with us what is the deposit beta in the second quarter, and possibly divide it between retail deposit beta and corporate deposit beta, and the same for your guidance for the full year for the 33%, how much is retail, how much is corporate? I would like also to understand on the NII, if you have some hedging strategies like replicating portfolio, able to protect your NII from a decline in rates. The second question is on the cost of risk. What is the cost of risk implied in your 2023 guidance? If you are assuming the use of your EUR 200 million overlay provision. Thank you.
Thank you, Manuela. I will give you the second answer. I will pass to Eduardo. We didn't give guidance for cost of risk 2023. We are still a bit prudent in our assumption when we target EUR 1.2 billion, which of course, the risk that could increase a bit in the second half of the year because of what I was mentioning before, the possible deterioration of the economic environment. Would be really a slight increase. Why we still have cost of risk at this level? Because we want still to provision very much at the same level we did before the new inflow.
It is possible, let's say this is an upside, having now 30% of non-financial corporate covered by state guarantee, the more this will go into the NPE inflow, the less will be the Cost of Risk, because we will not anymore obliged, or willing, to provision 35%-40%. This could bring, of course, in the next few quarters, some further reduction in Cost of Risk. At this, of course, with an economic environment, which is still at this level. The overlays, we don't like to much say that you can use the overlays, because basically the overlays are at the current level of quality of your portfolio.
If there is such a deterioration on the market, to give you the need to use more provisioning, normally you find yourself with not such overlays like now. Again, this is our, I know that other banks say that they, they can use overlays. Of course, if the overlays will still be there, we will, we have a buffer to use. Let Eduardo answer to the guidance for beta and replicating strategy.
Yeah, yeah, of course. Starting from replicating strategies, you probably have observed, are observing that the shape, the current shape of the yield curve, that which sees still an inverted shape, between the short term and the long term. Meaning that, yes, replicating strategies are the, the right recipe to use in a period of declining rates, but this should be implemented gradually and depending on the evolution of the curve. Of course, we already have a significant amount of such strategies in place, which we normally use for ALM purposes to steer the overall sensitivity of the P&L. Turning to the, the, how to call it, the breakdown of the beta.
Basically, our key determinants of the beta, as I said in replying to the previous question, is the distribution, is the split of deposits between indexed contract and the remaining part, which is not indexed. The indexed contract are at 25% of the total base. Of these 25%, one-third is vis-à-vis institutional counterparts for contracts such as treasury contracts, treasury relationships, and the remaining two-thirds are mostly retail and SME that are used to improve the relationship and bring cross-selling. Corporates, we, in that segment, we use a very limited, to a very limited extent, if not zero, such contracts, and so far, even in corporates, we have observed in a non-indexed contract, a very low level of sensitivity.
Beta, overall, in, the, the, the quarter, the, the one that you observed, is more or less the same level of the overall guidance for the year. And this, is, has been, consistent throughout the segments, of course, with a higher elasticity for, a larger account, corporate and institutional, and much lower for the retail part.
The next question is from Andrea Vercellone with BNP Exane. Please, go ahead.
Good evening. Just one question. I'd like some clarifications again on the certificates. You have EUR 5 billion of certificates, which at the moment, are costing you, booked in trading, EUR 62 million per quarter. Directionally, if rates go up, it will cost you a little bit more. If rates go down, it will cost you a little bit less. Is that correct, or there's something else that we should take into account? I'd like to have an idea of the average maturity of these certificates, and whether commercially, you are thinking of further increasing the notional, because clients are probably asking for it. Thank you.
Thanks, Mr. Vercellone. Of course, you, your, your point is correct on the directionally, inter- directional interpretation of the certificates component. Of course, we didn't include into these cost of certificates, the smoothening due to the commissions that we earn on these, the instrument, which is related not to the stock, but to the issuances. Bearing in mind that we normally are as a market maker of the instrument, we tend to replace part of them in the portfolio of our, our clients with new issuances, refreshing them. In terms of stock, I believe that the current one is consistent with our recent history, and we don't expect to, to change it of a significant magnitude.
this is reflected in the overall profitability, of course, is a component which is similar to the cost of institutional funding, with some specificities, and is reflected overall in the behavior of the NII and of the P&L of the bank that, as is clearly observable in the last few quarters, presents a significant sensitivity to the increase in interest rate, positive sensitivity to the increase in interest rates.
How much of this EUR 5 billion is with your retail clients, and how much of it is with institutions?
It, sorry, is all for retail clients. Most of the EUR 5 billion have been sold to our clients, but a limited part has been placed in other networks of banks that use Agos, our factory for certificate, as a factory for issuances to be distributed in such smaller networks, normally.
Okay. Thank you.
Thanks.
The next question is from Andrea Lisi with Equita. Please go ahead.
Hi, thank you for taking my question. The first one is on this venture in the payments business. If you can provide us, at least preliminarily, which is the contribution or expectation of the contribution we expect here on top of the EUR 140 million fees you already received from this business. If you can already elaborate a bit more on this? The second question is on the sensitivity of NII, not to rate increase, but to the change in beta.
If, the, beta, changes, let's say, 1 percentage point differently from, your observed, beta estimates, of it is embedded in your guidance, which will be, the impact on NII with respect to the EUR 3.25 billion you have, as estimate for the full year? Thank you.
Thank you, Mr. Lisi, Castagna speaking. payments business is very, very early to say what will be the new production with the new product factory, because as you can imagine, there will be, first of all, another, let's say, nine months before the closing. There will be some further period in order to have the the the, let's say, the IT migration into the new company. This will mean that at least for 12, 18 months, we will still working as we are working right now. Without any upside, possibly from the new strategic option, but with the upside of the growth, which up to now is 10%, coming from the increase of this kind of business.
Of course, then when we will be in the new company, but it's something that we will explain better in our industrial plan. Starting from the second part of 2015, we can have some more color about what we expect. Eduardo, for the NII sensitivity?
Yes, I didn't expect to answer to a question on a second derivative. At the end of the day, what we are talking about is this beta is a parameter that measures the sensitivity of interest rate to the evolution of rates. If rates remain stable, whatever is the beta, your NII remains stable. What we put in our guidance is stability of rates at the current level set by ECB 375 for the deposit facility. Having said this, if we have in mind that EUR 300 million sensitivity of our NII, 200 basis points in, 200 basis points increase in rates, an increase in 1% of beta means a decrease in this sensitivity of EUR 10 million. Order of management, of course.
Excellent. Thank you.
The next question is from Hugo Cruz with KBW. Please go ahead.
Hi, thank you very much for the time. Just some clarifications on capital and capital return. On capital, do you think you need to run the bank at the CET1 ratio of 14%-15%, or do you think you can go below that? Second, I think you said there will be some regulatory headwinds, if you could give some guidance there. Third, can you remind us of the capital impact of the Vera Vita deal, and if it's already included in your guidance for the Danish Compromise? Finally, when you're talking about increasing shareholder remuneration, you know, there's buybacks, but in terms of dividends, are you thinking about, you know, increasing your payout above 50% or just extraordinary dividends? Thank you.
Good evening, Mr. Cruz. Capital, no, I don't think that 14, 15 is a normal Common Equity Tier 1 for regular business. We think that, as we said before, we will use this capital both for industrial, industrial growth, and for capital distribution and profitability distribution to our shareholder, in which percentage and level, we say that it's better to wait for our industrial plan just to have a better knowledge of the situation we will have in front of us for the next years. Headwinds, we mentioned many times before in the previous presentation, that we are still waiting for some change in the model for corporates. We frankly speaking, we don't have such a clear idea.
We will see when this will come, I feel either by end of the year or Q1 2024. Of course, very well manageable by the capital we have at our disposal. Capital impact on Vera Vita, again, maybe, maybe Gerardo can, can answer to this.
Yes, sir. We have an impact of the Vera Vita transaction and combined with the transaction on the non-life business, without considering the Danish Compromise, which is between 12 and 15 basis points negative. This is the outcome of a number of assumptions, including those on PPA, so can be considered as a prudent quantification. The same on your question on Danish Compromise, where, we reported an amount which doesn't change after the acquisition of, Vera Vita. It can be possible, that, it is possible that, the actual amount, the actual mitigation, due to Danish Compromise can be increased after the Vera Vita deal.
Last question. Remuneration. I mentioned before, this would be a mix of I wouldn't say extraordinary dividend, because it would be a new policy on dividend distribution, possibly coupled with some, this, yes, extraordinary, buyback, coming from the capital generated.
Great. Thank you very much.
The next question is from, Delphine Lee with J.P. Morgan. Please go ahead.
Yes, good evening. Thanks for taking my questions. Just very quick, 2 quick ones, just a follow-up of the previous questions. One on II, is just on the deposit beta. Can I just ask what your assumption is for the exit, because beta for this year and what you have for 2024? And then on the capital return, just wondering, so if we understand this correctly, you're going. The buyback would only be extraordinary. I mean, so you're just thinking about increasing the dividend payout at this stage, or am I getting something wrong? Thank you.
Okay. Thanks, and good afternoon. I think that for beta, the exit is in the region for 2023 is in the region of around 40% that we assume that is implied in our guidance. I don't know if this answer your questions, your question on beta.
Yes, it does.
I leave the floor to... Okay. About remuneration, again, we say that we will manage to understand what is the best possible return for the shareholders. This will be, of course, coming together from profitability generated and the capital stance at the level, at the moment, we will have the business plan, plan done in front of us. For sure, could be also a, the two measures together, I would say we will give the new policy on capital, on dividend, possibly together with a potential buyback coming from the one-off generated with the transaction we have done.
Okay. Thank you very much.
Thank you.
The next question is a follow-up from Noemi Perrucco with Mediobanca. Please go ahead.
Hi, thank you for taking my follow-up question. Just before, you mentioned an industrial project, the potential growth in product factories. My question is, in which business would you like to grow, and what timeline do you have in mind? Thank you very much.
Simple follow-up? No, we mentioned before, basically, we have, we, we consider ourself in a very strong position in terms of where we wanted to be as product factory. As well, if, if you would ask to me, one year ago, if I thought that the bancassurance was available, I would just have said no, before Cattolica was taken by Generali, because I didn't have any chance to do that. Then, following the events, we were able to do something, a very interesting for us. Let's say that with the current situation, we are very happy, as we are.
In a different situation, we could consider to increase, if possible, if the event will be in the position to allow us a different share, for instance, in asset management, this would be something that we will consider.
Thank you.
Thank you.
Mr. Peronaglio, there are no more questions registered at this time.
Okay. Thank you very much to everybody in order to have another conference to follow. Thanks for being with us, and have a very good summer. Thank you.
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