Earnings Call: H1 2021

Aug 6, 2021

Good morning. This is Chorus Call operator. Welcome to Credence Conference Call Presenting 20 21 Half Year Results. Let me turn the conference over to the General Manager of Caden, Mr. Nazzarino Gregori. Mr. Gregori, you have the floor. Thank you very much and good morning to all of you. Thank you for logging in on this Friday in August that is just before your holidays. And let me stress, first of all, the strategic role the banking industry has played and is still playing in providing support to households and companies after or during the COVID, after the uncertainty that characterized 20 20. As a group, we took up the commitment to work towards that, and we did so not just during the pandemic, but also during the recovery phase. We're helping the companies starting again, and we are protecting the savings of households and supporting them while they roll out their projects. I am very proud also of the work we have been performing in house and that we will continue going forward to have a working environment that takes care of the well-being of our team and that enabled us to achieve results that I satisfactorily define as of absolute excellence. Before talking about the results, let me give a warm welcome to all the colleagues from the Casa Risbagnio di Cento. And for 2 weeks now, they've been part of our group. They've come on board. And I would like to thank them very much for the commitment they took up and for the hard work they did over the last few months. We are inheriting a strong legacy. They have a long standing tradition over 100 years old, and it's very much appreciated by the geographies where they are located, services to both households and companies. So I'm confident that we will be both successful and will be generating, creating value. And we are creating value through the results, the outstanding results we have been generating, stressing the effectiveness and resilience of our business model in the way we do banking. And these are our main strengths. Let's start with loans growing about 9% year on year and that are still growing at a higher pace than the banking system despite the strong competition. And following that, the quality of our assets, we are among the top banks in Italy, and we are in line with the European average. And I'm sure we will retain this status of excellence also when it will come to a much impact when the state grant or help will be discontinued. And profitability is also very high, and it's constant. And it does not depend and they do not depend on the different stages of the economic cycle. And at the same time, they grant a very strong capital soundness, not just in Italy, but also in Europe. And all that, let me reiterate, is the result of clear strategic goals we've given ourselves and the promptness with which our human capital, our employees respond to the external challenges, turning them into opportunities and comes from the results of the recent stress test performed by the ECB. We are among the banks that have the lowest impact in case for CET1 ratio depletion. We have less than 300 basis points in impact. And that means that in case of economic shock, we would have a very strong capital buffer in excess of 3.50 basis points. If we look at the Italian banking system, only Credem got that result. And we are among the top 5 banks after the exercise conducted by ECB and among the best 16 banks if we consider the 101 European Credit Institutions that were considered by both EBA and the ECB. We are very, very happy and very satisfied. And we built a very sound capital position over the years, thanks to a careful risk control and the ability to generate capital in an organic and sustainable way, rewarding our shareholders in a very consistent way. And at the same time, we have moved on in our digital pathway. We have tried to adapt to the constant changes in the customer needs. It's true the pandemic sped up that process. But I think that now the this is a structural change we have faced, and it's importance in the banking industry. Within this pathway, we've been following as a group that only have been we've been raising awareness among our clients to use online channels, but we want to provide them with a complete range of services so that they can take advantage of technology and at the same time, they can still benefit from the human relationship between the bank and clients when it comes to investments, when it comes to funding and when it comes to protection. And the growing figures you see on this table are the outcome, the result of investments we've been the group has been making over the years with a lot of conviction. And I do confirm that we will still keep on supporting these figures by working with our customers, working our customers through this digital transformation process, and we will release further technology products over the year. I would like to thank our people for that because it's thanks to their attitude towards innovation that the group achieved through 2 very important awards, the AB Lab Award for the Innovation in Banking Services. 2021 was also under the sign of consistency when it comes to sustainability. In 2021, we published, we released our non financial reports, and we listed a number of objectives that we wish to achieve in the coming years as a group. So we want to achieve carbon neutrality by 2025 from the environmental viewpoint by reducing excess emissions and offsetting the residual ones by buying carbon certificates. And we want to adapt our organization to the needs that are stressed by the ESG issues. We want to be more effective and govern the evolution of the risk control when it comes to these objectives. We are very enthusiastic about them, and we will involve our employees and stakeholders and our clients, of course. With all of them, we want to improve the way we support them and we support ESG issues as well that are of utmost importance. Let's now move on to our income statement. Our operating income is still growing sizably, thanks to the NII performance and also thanks to commissions and fees. This is not depending on one offs as performance fees and trading fees. As you can see on the core margin profit, that is almost up 9% versus the Q1 of 2020, costs down versus the previous quarter and the growth versus last year is evidence, bears witness to the fact that we performed, we achieved savings, non recurring savings during lockdown and we took action to somehow offset the impact of COVID in 2020. Despite that, our net operating result is growing in excess of 13 percentage points, thus reconfirming the sustainable development or growth of our revenues. And also, our LLPs performed really well. And after the improvement in the economic conditions, they showed signs of progress and they showed no signs of deterioration in our credit or in our loan portfolio. We closed the quarter with a very good performance and with a net profit growing 75%, landing at more than EUR 36,000,000. If we drill down into a greater level of detail, you see our NII improved, thanks to our securities portfolio, increase in loans to customer and the good performance of customer spread versus the previous quarter, despite the fact there are more interest payables to the ECB that are tied in with the positive dynamic flow of direct funding. So we want to reduce excess liquidity, especially when the economic recovery will lead the way and will affect consumer behaviors and customer behavior. So we expect to have an improvement in our margin NIM in the coming months. As you can see, customer spread is flat versus the previous quarter. And the banking system went down 3 basis points since then. And despite the low level of interest rates and despite the liquidity injections the ECB made that are further increasing competition, I don't expect this phenomenon to change over the short term, especially for the level of rates that is affecting new loans. And this is only a partial view that helps you better understand the dynamics from the customer perspective and does not include institutional fundings that enables us to have inflows at negative rates with a positive impact on our aggregate figures. Let's move on to the securities portfolio. You see we have new positions being added, especially in foreign govies. And that led to an increase of the average rating, a better diversification and at the same time, a reduction of the a reduction in the weight of Italian govies. The exposure to Italian govs is 93% in HTC and thus further reducing with comparison to the past the impact on valuation reserves should there be an increase in volatility in the BTP Bund spread. Let's now move on to non interest margin. I would like to stress the fact that our recurring components are growing, net of the results of performance fees and interest fees non interest fees. And so year on year, it's growing 13.9%, further reconfirming how essential it is in the current situation to have a business model that, of course, focuses on diversifying income sources. We are diversifying both volumes and the profitability of assets under management, thanks to our product factories. And I would like to congratulate our product factories. Trading and management fees are in excess of €100,000,000 They have a performance up 21.3%, thanks to new placements in the last quarter. As you can see from the slide, we have excellent results from the perspective of banking fees versus Q2 2020. And that was we had an impact of lockdown, characterizing that time, and so we see a recovery of traditional activities. Last but not least, let me highlight the insurance income after a major performance in the last quarter is recording results in line with the expectations we had for 2021. We think we have to really support our clients to cover all of their needs. And the performance we showed stress is the focus of our group on Bancassurance business. And this is very important at this stage and this critical stage, health stage, I mean, because of the pandemic. I'm very confident versus the second half of this year, we will focus on markets, and we will keep on protecting and improving and protecting the savings and assets of our clients that will enable to us to be to further increase our performance on those revenue items. Let's now move on to costs. What you see on the slide is evidence there's evidence to the fact that our group can be very flexible when it comes to managing costs based on how revenues are going. And in the worst part of the pandemic, we were very efficient in cutting costs and adapting them to the uncertain revenues that we're characterizing that time. As of this year, we've proven that we can grow fast and that dynamic is also reflected in our expenses. Personnel costs are in line with pre pandemic levels and admin costs and expenses have been flat for about 4 quarters now. As you can see from the slide, in this quarter, we are expensing another part of the integration expenses after the acquisition of Caricento. And going back to growth, let me and digital solutions so that we can be more and more efficiency efficient in house and at the same time to provide our clients with more and more innovative product. As you can see, DNAs show that our group is committed to the topics I've just mentioned and also using in a very creative way data and information, where data flows and information we available. We have to keep on investing well. Let's now move on to loan to customers. As I was telling you before, we our loans are still growing, thanks to moratoria and state backed loans, but also thanks to the work of our sales network. Residential mortgages and leasing went up, respectively, 15.2% and 7.9%. And they are not tied in with state backed loans. So they are a telltale fact that our people, our salespeople are very close to our clients when it comes to helping them implement their projects. And we are still supporting the local economy by issuing state guaranteed loans in excess of €3,000,000,000 at the end of this last quarter. Let me highlight that moratorium stocks are decreasing also because of the increased maturities in the last quarter. But that doesn't have an impact on cost of risk. Thanks to the excellent financial profile our corporate customers have, and they have not asked for renewal in the staying of payments. The excellent increase in loan enabled us to have an overperformance visavis the banking system. Almost 7 percentage points over performed. And we also achieved almost 2% market share. Let's now look at funding. You can see the excellent job our group did in net inflows for assets under management in excess of €1,600,000,000 And our customer really trust us, our assets under management. And we still have positive direct inflows, direct funding inflows. And sometimes, we also had funding going to investments and therefore also having a very good impact on the income statement of the group, as I showed you in the previous slides. The positive inflows when we had with the market not having changed, increased our, as I said, direct deposits and direct funding. And we could also improve our management and trading fees. We encouraged our clients to move towards investing in assets under management, and that will lead to further growth. Let's now move on to bond issuances. You've recently seen us with a covered bond issuance that will be replaced, the ones that will come due in the last quarter of 2021. We could call back would have an early callback of subordinated loans. And we will also look into new issuances based on how the funding will perform and also depending on the new MREL requirements. Let's have a look at the credit quality. We haven't seen any new impaired loan flows, thanks to the resilience of our loan portfolio and also government measures that will be extended until year end. So the nonperforming loan stock is therefore further reduced. We disposed of unsecured loans, and that had a neutral European average of the lowest level for the Italian is now in line with the European average of the lowest level for the Italian banking system. As a matter of fact, we also reduced our net exposure at the end of the first half. The total impact on net loans is 1.6%. This ratio is down to 0.37% if we look at NPLs with a system figure that is 1.04%. That's the reduction in net bad loans. And then when it comes to coverage, we have a coverage of 72.4%. If we look at the total of impaired loans, the coverage is 52.4%. If we look at the further coverage levels total and 87.8% if considered above loans only. You know that retaining a very high level of assets and the value of our assets, it's one of the pillars in our strategy. Last quarter, we got to an all time low for cost of risk. And end of June, we achieved a result that was really best in class also considering the health situation generated by the COVID pandemic in 2020. Provisions made in 2020 enabled us to recover, to pick up on performing loans. And that effect, combined with the lack of further impairment in our loan portfolio, enabled us to have a cost of risk in the negative for the first time minus 10 basis points. Even if we don't consider the positive effect on write backs, cost of risk is at the lowest level for the system, equal to 9 basis points. Cost of risk in the negative cannot be considered as an expectation of what or guidance of the year end levels, but it helps us better control our asset quality also going forward, that is to say in the coming months and revise our expectations for 2021 at a lower level than the pre pandemic level. So let's now have a look at the assets and liability. You see loans, our loan portfolio after the disposals we made in Q1 loan to banks are we have ECB deposits that are used as a guarantee for that, and we have direct funding. And deposits is unchanged. You cannot yet see the increase in institutional fixed income, but you'll see starting from July 7, the impact of our new bond issuance and also our capital is increased. Thank you the shareholders' equity is increased, thanks to the profit we had in the last quarter. And we still have very good levels, even similar to those we had before 2020. So we have stability, granted. Before I leave room for questions, let me talk about our capital and capital ratios. Let me underline that the recent stress test confirmed the high soundness of our capital ratios. And in an adverse scenario, we are in the bracket that would have the lowest impact on our CET1 ratio. We increased our supervisory ratios, our capital adequacy ratios, despite the increase of RWAs and the inclusion of a dividend of €0.28 per share. We are very, very happy about the current capital position that enables us to have a very strong buffer versus the minimum regulatory requirements, and it helps us both supporting growth and taking in starting from next quarter the merger with Caricento and to be very to still show very sound figures. This is it from my side. Now we are open to questions. This is the Chorus Call operator. Let's now open the Q and A session. First question comes from the line of Luigi De Belis with Equitasim. Banking and insurance fees you're going to get for the next quarter? And then cost of risk, could you give us a guidance for full year net of Caricento of the Caricento impact? And on the M and A topic, what's your strategy looking at the consolidation process that is ongoing in the banking system? Are you would you be interested in Carige, for instance? And the net funding, do you think this positive trend will further carry on in July, August September? So when it comes to the first question, trends for the non interest income, insurance income, we have a positive trend on non interest income and interest income. And the insurance income will be in line with last year. So we think we will hit the objectives this year and we will do so in a better way than we did last year, especially on the insurance income. As to cost of risk, we as we said, as we hinted that, cost of risk this year is very low. And we hope our cost of risk will be below 10 basis points. M and A strategy and Carige, let me answer right away. Carige, we cannot provide any information as we signed a binding an NDA, sorry, it says Mr. Gregory, with our interlocutors. So we've looked at things, but we signed an NDA. And it is a very complex situation indeed. And once our interlocutors will decide, they will say what our position is. As to our M and A strategy overall, we the recent acquisition of Caricento is surely is an evidence that we want to move along those lines. As I've always said during these conference calls, if you want to have to do good business, you have to it might be a win win situation. Growing would imply further enhancing our business model. And therefore, we set ourselves an objective for organic growth because that's very useful. And will there if there will be opportunities, we will look after them. We will sound them. We're now looking at emergency opportunities. We want to look at value accretive transactions rather than emergency related transactions. And of course, we will be active in the market from that perspective. As to direct funding, direct funding, we expect an increase of growth. However, we have to also consider how consumer behavior will change. We might well, consumers might start spending more and therefore also direct funding balances might decrease. So for 2021, we have around €30 2,000,000,000 as stock of direct funding. And in the insurance business, we are improving versus 2020 with the trends I mentioned before. The next question comes from the line of Nicolas Silva with Intermonte. Good morning. Thank you very much for accepting our questions. First of all, on Caricento, could you elaborate on the expected contribution you have from Caricento after consolidation? And then on Caricento again, you gave a guidance of €35,000,000 integration costs. You've already expensed half of them. Can we expect the other half in the second part of the year or part of it also in 2022 on capital? 14.4 percent is starting point at the end of Q2. What is the guidance you can give for the second part of the year? And then a follow-up on the guidance you've just given on cost of risk, lower than 10 basis points. Net of possible extra provision for Calicento, could you still give us a guidance for cost of risk? Well, let me start from the last one. Cost of risk is regardless or independent of Caricente, of what we said about Caricente. Caricente, let me talk about cost. Integration costs will be about EUR 25,000,000 of which EUR 17,000,000 almost €17,000,000 were already expensed in H1. And we should not have any integration cost, further integration cost, but that would still be included in the balance I just mentioned. I don't know how much we will expense in H2 or it's going to be a very residual or very limited amount even if we and as to cost of capital or capital, we do not have any changes versus what we've already given as guidance. Caricento, we have an impact on CET1 of about 50, 55 basis points at year end because of Caricento. Thank you very much. Next question comes from the line of Fabrizio Bernardi, Please, sir. Good morning to all of you. Maybe I heard I didn't hear well. You talked about a €0.28 dividend, maybe I was mistaken. That will be a sizable increase versus your historical data because you've always been very careful, very prudential with your dividend policy. And we've always asked you during the conference calls, we've always asked you some guidance on your dividends policy. Is it changing? Could you elaborate on it? Is more consumer friendly? Or what was I wrong? Did I misunderstand before? This is Mr. So capital wise, the decision will be made by the Board of Directors. They will resolve upon the dividend at year end once we've also see the impact of Caricente and once we see how the income statement evolves in the second part of the year. The accrual we are seeing now, it's a regulatory accrual, meaning that it's the accrual that was foreseen expected by the supervisory bodies based on the historical payout, based on higher net income. So it's a technical accrual so far that will then be defined better defined by the Board of Directors at year end. But okay, I understand. But of course, thanks to 2021 bottom line, if you pay EUR 0.28, I cannot see Creditem paying maybe paying 28 in 2021 and maybe paying less in 2022. I can't see CreditM paying a lower dividend in 2022 than 2021. So quality wise, it would not the dividend payout was €0.20 in April, and that is the maximum allowed by the ECB regulations. And this is an accrual on the profit for this time frame for the period for this period. So it's not included. We have not yet made a decision. The decision will be made by the Board at a later stage at year end. So if we compare that to the dividend paid in April, €0.20 that's a technical accrual, the €0.28 And then it will depend whether or not the Board will confirm it. Thank you. Next question comes from the line of Riccardo Rovere with Mediobanca. Please sir, go ahead. Thank you very much. Good morning to all of you. Two questions, if I may. As to the cost of risk, you clearly said that in this quarter, you released the general data you'd uploaded in or accounted for in 2020. Did you release everything? Or do you still have to release more? Securities portfolio in Q1, correct me if I'm wrong, it was partly disassembled or it was reduced. Maybe I was wrong in the way I understood it at the time, but I thought that was a temporary action. And then the portfolio would have been put together again over time. But in this quarter, it's probably it's practically unchanged. So what's going to happen to those assets? And would there what will there be an impact on NII as well on the interest income? Well, Mr. Gregori speaking. And when it comes to still being able to work on internal models, we have not yet fully exploited the potential as to the securities portfolio, we've shown in the slide, our securities portfolio is EUR 10,249,000,000. I did not grasp I did not understand your question. Could you maybe say that again or explain better. Can you hear us, sir? Mr. Rovelli? Sorry, I was on mute, Mr. Rovere's sake. Looking at the presentation, if I'm not mistaken, I'm looking for the page. I'm looking for the slide. Page 9, 4.5, 4. I know it went from 8 to 10, but the one with the highest returns is still €44,000,000,000 4.5. So talking about that trend, by year end, it was €5,000,000,000 something. Is this the new policy? Or Daniela Molini speaking. From a general viewpoint, it depends on market conditions. And so far, we do not we're not going to increase the impact of Italy on our overall securities portfolio because we've made a decision to diversify our portfolio. We will make decisions at a later stage concerning the overall size of the portfolio and the balancing of the portfolio components. But so far, we are not going we do not envisage to increase our percentage exposure to Italy. Looking at the slide always, if I understand correctly, what you were doing, you're working on something that's not Italy. I don't know what countries we're talking about. You're limiting duration. Do you end up with the same net impact? I work on I work with less risky securities, but the net effect is the same. We've actually purchased securities, U. S. Govies, for instance, or foreign govies, non Italian govies. And they somehow contribute some carry. And therefore, they are purchases. We did purchase securities, but not Italian securities. If I may, Mr. Gregori, may I ask another question? With the previous question, you said we have not yet completed. No, in the second half, I said. Next question comes from the line of Luigi Tramontagna with Banca Accruz. Please sir, go ahead. A technical question, again, on the Caricento impact on your P and L. Your PPA has only just started. The purchase price allocation has just started. Could you talk about the individual gains you will be accounting for in Q3? The gain is the capital gain is about €50,000,000 once up and running and the synergies are unfolded. We'll have EUR 9,000,000 revenue synergy and cost reduction EUR 13,000,000 positive impact on net profit €15,000,000, 1.5. Next question comes from the line of Manuela Meroni with Intesa Sanpaolo. Thank you for the presentations. I have two questions. One is on the interest income, which is flat versus the previous H or half. Do you expect a further growth of interest income in the coming months because of volume growth? Or maybe a growth in the securities portfolio? Upfront fees, what are the upfront fees accounted for in Q2? Placements are about EUR 15,000,000 for the whole half year. That's the that's what we accounted for. And after the interest income, I think it will pick up, it will recover and it will go on growing, thanks to the increase in loans volumes. And the same applies to customer spread, as we were saying before. Something else will be moving. It's consumer credit, which is growing. So if consumption will pick Next question is a follow-up from Luigi De Melis, Equitasim. Thank you very much. A quick follow-up on costs. Could you elaborate on the expected trend for the next two quarters? Thank you. As to costs, as to D and A, is there we expect to in 2021, we will keep on investing and we will keep them at the same level. The D and As will be at the same level as to OpEx. We will have increases, and they will be aligned well, personnel costs will be aligned, and we will have an increase of other admin expenses. But we will be able to keep them at bay, so to say. Bear in mind that on personnel costs this year, we have made provisions also for the performance bonuses that will depend on the time frame. Last year, we'd been prudential in the 1st part of the year, so we didn't have that. Mr. Gregory, there are no more questions in the queue. Well, if there are no more questions, I would like to thank you again for joining this conference call and have a nice holiday given the time we are going through. See you soon. This is the Chorus Call operator. The conference call has come to an end. You may disconnect your phones. Thank you very much.