Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banca Ifis third quarter 2022 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. Frederik Geertman, CEO of the bank. Please go ahead, sir.
Thank you and good afternoon, everybody. Welcome to our call. I will, as always, briefly present the results. We have a couple of slides, and then we will take your questions if you have them. Page four, the synthesis. We had a good quarter. Net income in the third quarter is EUR 33 million. That's a 4% increase year-on-year, even though last year we had a EUR 10 million TLTRO benefit that was booked in the third quarter of 2021. Over the nine months, we booked EUR 105.5 million profits, which is +32% year-on-year, which is a record for the bank. We have revenues in the quarter of EUR 165 million, driven mostly by the core business that's delivering on both sides, commercial banking and NPLs.
Nine months revenues are at EUR 489 million. That's a +10% year-on-year, and that's another record for the bank. Commercial activity, very solid, driving the numbers I just mentioned. We have factoring turnover in the third quarter. It's +9% year-on-year. It would've been 24% if we had excluded factoring versus the public administration, which is a business that we have restructured in the last few months, as you will remember, leading to a very, very significant slowdown. New business and leasing plus 58% in underwriting year-on-year, and we have a record quarterly cash collection of the NPL portfolio at, in excess of EUR 100 million. That's +24% year-on-year. Operating costs are stable QoQ, thanks to contract renegotiation offsetting some inflation pressure that we're really feeling now.
Loan loss provisions at EUR 50 million, and that includes a EUR 7 million prudential add-on that's on the performing book on concentration risk, further increasing a management overlay that we put on the provisions. We pay an interim dividend of EUR 1 per share. That's a 50% payout ratio as usual, so we're paying EUR 52.4 million. The ex-dividend date is on November 21st. The record date is on November 22nd. Very nice projection of the CET1 ratio. We're above 16% at 16.18% on September 30, including the net income over the nine months, but this time we included, given that we're paying dividends. The part that we're not paying out is included in the CET1 ratio that I just mentioned. Let's go into some of these numbers in a bit more detail.
Page five, revenues, as we mentioned, +6%. I would like to draw your attention to the development of the blue bar, the dark blue bar that excludes one-offs and excludes the PPA. We have a progression of EUR 140 last year, EUR 150 last quarter, EUR 162 this quarter. It's atypical, I think, in Q3 to have this revenue dynamic. Normally, Q3 is a bit softer, but we had a very good July and a very good September, compensating for the normal August slowdown. Commercial banking revenues of EUR 83 million in the quarter, was EUR 68 million in the previous one, reflecting for the first time some positive interest rate correlation. As you will remember, during the quarter, the interest rates started moving up, so we're starting to see some contribution there.
On the NPL side, EUR 66 million revenues. Normally, we would have expected a bit less, I would say, right? We're offsetting negative seasonality there with production. Finally, G&S, negative development, meaning EUR 60 million against EUR 27 million the previous quarter, but the EUR 27 million included a one-off TLTRO euro benefit, which was booked in Q2 of EUR 7.5 million. All in all, very solid Q3 that you would normally expect to be a bit weaker, but in fact came out stronger than Q2 in terms of revenues, especially core revenues. Moving on to commercial activity. Why did this happen, right? Why are we seeing these results? On page six, a few examples of our commercial activity, the ones we normally show you, so you have some historical data.
Factoring turnover +24%, excluding factoring versus the public administration, right? Very lively market with +18% in the same period. New leasing underwriting +58%. Still small ticket focus, so there's no big tickets in those numbers. It's all productivity, and it's especially solid in terms of SME lending, therefore equipment, tech equipment for SMEs. The automotive side, same level of dynamism, also due to our historical strong presence in electric vehicle brands. Page seven, a little update I want to give you on the digitalization. It's quite some information on this slide. I'll try to be synthetic about it and please bear with me, but I think it is important and we'd like to show you that we probably go ahead.
We have four pillars of digitalization, client origination, client onboarding, client management, and commercial development. It's mostly after sales and risk and credit assessment. Let me give you just a few hints about what's happening on each of these pillars. So on client origination, what it is you try to generate new flows of people that want to get in touch with the bank. We have now reached 25% of new customer origination from online channels. That was 20 when we started the plan, and we hope to close the plan around 40. We have fully digital long-term lending operational. So if a company wants to, they can apply and contractualize a long-term lending operation fully remotely, signed digitally. We have fully digital leasing and rental that we will launch in Q1 2023.
Client onboarding, this platform we call Next. It's both a platform for our dealers and our commercial partners, so people who distribute our credit, and the platform on which the client can onboard, so become our customer and digitally get recognized, do the anti-money laundering stuff and sign. This platform is partly delivered, partly being rolled out. We now have on the factoring and lending side, 130 commercial partners on it. We're selling 28 products through it, and we've had more than 10,000 client visits of people therefore entering an onboarding process or entering a product exploration on that side. On leasing and rental, we have 600 partners on it. We have dealers in there, car dealers, equipment distributors, so all the people that sell stuff that we put leasing contracts behind.
Over there we have now in excess of 50% of the leasing contracts and in excess of 70% of the rental contracts being signed digitally. That includes all the documentation for the purchase of the goods being exchanged digitally. That's a 100% paperless experience, which 12 months ago would have been zero, roughly, right? These two percentages of 50% and 70%. We get some very, very serious headway there in terms of getting to a paperless distribution and onboarding of our products. Getting to after sales, the third column, Ifis for Business platform, we have 90% of all active factoring clients onboarded onto the system in six months, leading to a fully digital customer experience for them. It means that, for instance, their invoice uploading is done digitally.
Debtor approval, new debtor approval is done digitally, so the request and the approval, request for increase in limits is done digitally. All the after sales that a company might want to do when they have a factor relationship with us is done through that platform. You can see the numbers coming up, right? 150,000 digital client requests, 100,000 online interactions now managed there. Substantially, the whole of the factoring after sales is now moved to digital. That's going to be extended by third quarter 2023 to the whole leasing and rental world as well. Finally, risk and credit assessment. We are completely digitalizing and rewriting credit processes. We're now in leasing and rental on 60% automated digital credit decisions. That means almost instant, the machine approving the leasing and rental.
By Q3 2023, we will have fully digital factoring credit renewal. We expect roughly half of the decisions to be fully automatic, 40% to require a one-click manual confirmation by the underwriter, less than 10% to be fully human. Now, if you add these things up, you can see that today we're probably halfway, slightly more than halfway, I would say. By Q3 2023, this bank will be substantially paperless and digitalized in its client interaction, in its credit underwriting, and in its after sales. I can't stress the importance of this type of development enough, even though, you know, you will see it, you know, expressing itself in the numbers only over time, but it's the type of projects that we believe are, if you execute them well, are transformational. Moving on, page eight, the NPL portfolio performance.
On the left-hand side, EUR 101 million quarterly cash collections. We make you appreciate the projection, right? 82, 91, 101. 49 million judicial, 52 million extrajudicial. We put a little bit of focus on the ERC, where so the expected cash recovery out of the portfolio. You can see that roughly two-thirds of that is judicial. That has a quite a nice distribution of workplaces where we can get the salary through the courts. On the non-judicial part or the extrajudicial part, we give you a bit of breakdown of how the portfolio is made up. Why? To show two things.
One is the fragmentation, and the other thing is the age distribution of the debtors. Now, this is a very different business than corporate NPLs. With private individuals, time is usually on your side. So if you have a debtor that over time will improve his or her situation, you can still get to extrajudicial repayment plans, even if a few years have passed. That normally doesn't happen with corporates because after the liquidation process of the NPL, right, the company doesn't exist anymore, and so you don't have a chance to work on that side. So we're starting to see a little bit of difficulty, a little bit of slowdown on the extrajudicial side. It's still weak signals, but we can expect in the coming months and years, probably inflation there to bite a bit.
I'll get back to that later. Page nine, costs. Pay a little bit of attention to the numbers here, so hopefully explain what happened. First of all, I would like to focus the attention on the purple bar, the EUR 5 million in Q2. Those were costs that had been booked as provisions the quarter before. In Ifis' tradition, if you will, we book these requests that come from the resolution funds and from the guarantee funds as provisions as soon as they come in. Then we book them as costs with zero P&L impact in the following quarter when the number gets defined. So what you saw in Q2 was that there was EUR 5 million there that we don't have in Q3.
Other operating costs, the blue part, light blue part, is exposed to inflation. That's the part where you should expect probably a bit of pressure, right? Not present yet. That means that for now, although I don't think that this will be true forever, right? For now, the contract negotiation that our colleagues from the CRO department are carrying out is offsetting pressure on prices. We have the green part, revenues-related costs. There you see an increase. The costs are related to NPL recovery. It makes sense because you saw the cash collection also increase. It makes sense twice because the part that's mostly developing is the judicial part, which is a little bit more cost-intensive than the extrajudicial part.
The consequence of keeping up the cash collection in the NPL business and compensating with judicial collections, the extrajudicial part, is that we get a bit more costs. These are revenue-related costs. Finally, on personnel, there's a bit of rounding there, which might lead you to think that there's some increase. In fact, it's substantially stable QoQ. You can look at the FTE development in the appendix. We show the numbers quarter by quarter. You can see that the headcount is not significantly increasing. Now, in order for you to understand this little mechanism of provisions that then become costs, we show on the bottom two lines, right, what's happening on the provision side, right? Let's start in Q2 2022, the middle bar. You see that EUR 5 million costs were booked in Q2, EUR 5 million provisions for the two funds disappeared, right?
Other provisions, we also took back some other provisions unconnected to this mechanism. In Q3, there are no costs for the resolution fund and for the Italian Guarantee Fund, but we have a EUR 7 million provision coming in that will become cost in the next couple of quarters. There's no P&L impact in the next quarters. It's already in the books. It might look a bit volatile if you look at the totals, but in showing you the dynamic, we hope they're being a little bit clearer. Page 10, cost of risk and asset quality. We have a EUR 50 million loan loss provision in the quarter. I want to underline that what came up naturally is about eight.
Still very modest cost of risk in terms of flows to non-performing and in terms of additional provisions that become necessary in the non-performing loan book. It's once again only EUR 8 million. We added another seven million of management overlay. Booking is against concentration risk. That's just a way in order to put it prudentially against the structured finance portfolio, where we want to have a bit of prudence in terms of the macroeconomic situation. By now, not having taken any write-backs for the COVID provisions and having added a bit throughout this year, including in this last quarter, we're now close. I would say we're at about EUR 50 million provisions against potential macro risks, right?
We think that considering that this is by now roughly the amount you would expect to book in a full year, right, we think that we are adequately prepared for a severe downturn scenario, would it materialize. On the ratios, bottom part of the slide, we show you separately the gross and the net NPE ratio with and without the gray bar, which are the invoices that we have advanced against the Italian public health system. Starting with the core stuff, gross NPE ratio of 5.3%, net NPE ratio of 2.7%. The 2.1 is there because we classified into past due most of our exposure towards the Italian public health system.
In the third quarter, we executed the transaction where we sold some of these invoices. The effect on the ratios of that transaction will happen in Q4, because there's a little bit of delay for technical reasons I won't get into now. Meaning that, what you should read there is roughly 70 basis points lower in the gray bar than what we show here because of a transaction that's already carried out. Very limited impact on the commercial banking portfolio. We have a EUR 50 million increase quarter-over-quarter of past due. I think on the risk in the commercial banking portfolio, I'll comment a bit later on the next couple of pages. I know that there's a lot of interest in this subject.
Let me just clarify what happened on the pharma stuff. You will remember that Banca Ifis had a business of advancing invoices towards the Italian public health system. The total book used to be around EUR 500 million, roughly EUR 500 million-EUR 600 million. The characteristic of the business was very low risk because it's public and because in the end, the public health system paid, even if you had to take them to court over the delays. In the meantime, applying interest rates, and in some cases, penalty interest rates of about 8%. That business model, the way it was conducted in our bank, and I can't speak for other banks, was assumed to be not compatible with the new definition of default.
After also extensive dialogue with the regulator, we decided to classify the remaining exposures we have against those counterparties in past due. Of course, when the payments are late, and to manage that portfolio downwards. We're still happy to take this business with the Italian public health system, but only with counterparties where we can avoid to classify the exposures in past due and where we can have a very rigorous management of the payment times. Business model based on penalty rates is considered possible, but you need to be prepared to classify in past due. We think optically this would be, and also in terms of capital usage, this would be not ideal for our bank.
We decided to really restructure it and become very selective in the type of risks that we take. Okay? That's what happened. We're now managing this gray bar downwards, as you will appreciate from the next quarter onwards. We already made quite some headway on this since May or April, which is roughly when we took this decision. Still on the left side, page eleven, looking forward. Asset quality deterioration, is it there? Is it not there? You can take a look for yourself. I already mentioned very modest increase in past due coming into the portfolios. Also, if we look at the performing book, we still have very moderate signals. Let me take you through how we view this normally, both to show you how we.
Well, how we manage internally, frankly, so how we think about this type of risk, and also to give you some numbers on the scenario. You will remember in Q1, we presented this to the market. We did an extensive survey, detailed survey, with 560 corporate clients that operate in the most impacted sectors: steel, oil, auto, luxury, energy, cement, ceramics, farming. Impacted by energy or impacted by raw materials, like farming, for instance, it has fertilizer, of course, right? We asked them, "Do you have direct impact from the Russia-Ukraine situation?" On the left, most of them said, "No, I don't," or medium to low impact. That's still the case. Let's not spend too much time on it. We asked them, "Do you have indirect impact?" Meaning, do you have a severe impact of raw material prices or of energy prices?
What happened since Q1? We're giving you an update. First of all, the EUR 500 million that we had in Q1 in these sectors became EUR 490 million. You can see the beauty of factoring. When you decide that certain situations become a bit tense, you exit rather quickly. Short-term credit has this advantage. We have a 7.5 percentage point decrease against these high-priority sectors. Second thing, on the right-hand side, of those clients that declared a relevant impact from these phenomena, how is their rating distribution? You can see that today we have 25 + 41 + 30, so roughly 95% of the clients in ratings of five or better. Keep in mind that six and seven are still commercial, right? They're not defaults. How did that develop?
You can see in the gray numbers next to it, how it was in Q1, and there you can appreciate that we get some modest flow from the highest, from the best ratings, right, into the intermediate ratings. From the rating one to three, from 37% to 25%. Rating four, from 33% to 41%. It accepted some clients from the rating one to three category previously, and so forth. Moderate increase in rating levels, therefore, right? Moderate increase in perceived risk and nothing much further. I would consider this a very benign still situation. I don't think we can do anything else to give you forward-looking appreciations on the cost of risk.
The only thing I can say is in our bank, and I think it's true also listening to the other banks and speaking to my colleagues, in terms of risk, it is apparently all still so far so good. We're not seeing any issues yet. Now, I remind you that in this quarter, we took another EUR 7 million of management overlay, leading to EUR 50 million of management overlay in terms of cost of risk. We're not saying that it won't happen. We're saying that it's still looking very benign. You know, if it will deteriorate in the future, we think we're prepared. A lot of it also has to do with how healthy your loan book is from the start. That's why we like to share with you this rating distribution.
Because when you start with a very healthy loan book, even in case of deterioration, it doesn't get that bad. When you start with a risky loan book, even though bonus, in case of deterioration, it can get obviously bad much more quickly. Page 12. Net income guidance. Here we want to make a little bit more focus than we did in previous quarters. Now, of course, we presented EUR 105.5 million net income over the nine months. So if you just project that, and you take into account that Q4 is normally the most dynamic quarter, then you might assume that we would be closing around EUR 140 million maybe. What we are confirming is EUR 120 million. Why are we confirming EUR 120 million?
Because we want to keep space for a couple of one-offs that we expect in Q4, and we're gonna share with you what these are. First, the government in, I think it was August or September, passed a decree by which they increased the threshold for the execution of legal proceedings against pensions from EUR 750 to EUR 1,000. That leads to a slightly decreased capacity that we have to go with legal proceedings against these NPL debtors. We're still estimating the impact. We currently have a range. We expect that to impact between 0.5% and 1% of our ERC, okay? So the expected recovery of collections. Second element, inflation. I mentioned it already earlier.
On the voluntary plans, when you double the energy costs of a family, then the likelihood that they would have at the end of the month, right, the same amount to give you to repay their old loan is obviously diminished. We are assuming pension, inflation effects on the NPL debtors. That too, faithful to our tradition, we take it as a one-off, so we do the model changes, and it will appear as a one-off in our numbers. Now, the way this works in amortized costs accounting is that we will have in Q4, for these two elements, negative revenues. This will be booked as negative interest revenues. You would expect it to be provisions maybe, but it's mostly going to be negative interest income.
I will spare you my own personal thoughts on this, but apparently it's the rules, so we will follow them. That means that we'll have in Q4 a net interest impact on these two things that we estimate between EUR 30 million and EUR 40 million roughly altogether, right? We want to take that up front because we don't want to take into 2023 way or how should I call them, right? Further effects, right? When we can make the estimate now and just take the effect up front. In addition, expect the first small impact of the TLTRO part, right? As you know, all the banks have published that, right? We have the TLTRO becoming less attractive.
That starts between the second half and the end of November, formally and also economically. That means that we'll have a couple million of net interest income going away there too. On the basis of this, I would prefer to confirm the guidance of EUR 120 and not push further into increasing the guidance that we already have. That includes, therefore, the provisions that we made with the management overlay that I already spoke about, and that includes taking the full upfront hit of these effects on the NPL business of both the decree and of inflation, according to our models. Page 13, CET1, I'm closing. Very nice numbers, going above 60%, significantly above 60%. Where do the improvements come from?
You may remember in Q3 that we had transitorily dipped below 15%. It was optically slightly less beautiful than I had hoped. As we discussed, it was transitory, because we have a permanent risk-weighted assets decrease of 84 basis points. That's both due to the change in the risk weighting of the purchased NPLs. You'll remember that goes down from 150 to 100%. By itself, it's worth EUR 380 million of risk-weighted assets.
Regulatory recognition of a transaction we had done in Q2 already, but that we needed to complete an SRT process, a significant risk transfer process with the regulator that's now completed, so we can account for EUR 170 million risk-weighted assets further reduction, leading to 84% CET1. That's permanent that we did back. We have the interim results. We paid the dividends, so we keep the payout ratio at 50% and therefore we show it in the CET1. Those are the two more important ones, leading us to a very comfortable 16% CET1 ratio, which incidentally is more than our MREL requirement.
It means for those that are interested in these types of things that we don't have any specific MREL issues around bonds or other stuff, because the capital that we have is enough to satisfy the regulatory requirement, making us very comfortable also on that front. We maintain the payout ratio at 50%, and we consider this CET1 ratio as a guarantee of being able to pay the dividends in the future, if such a thing exists, right? Could call it an extra safety. I wouldn't use the word guarantee. We regard it as strategic flexibility. In case something would come up that is core business, that looks nice, that adds value, we might be able to purchase it without too much worries about the capital effect.
That's the significance of 16.18. We're not planning anything special, neither buybacks nor macro dividends on top of the 50% that you are aware of. I've finalized the part of the slide that I want to discuss with you. I would encourage everybody to flip through the appendix. Nobody ever does it, but it's full of lots of details. I think we're being quite extraordinarily detailed and transparent on those slides. If you want, take a look, and in the meantime, I'm here for questions. Thank you very much for your attention in the meantime.
Excuse me. 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 touch tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Manuela Meroni with Intesa Sanpaolo. Please go ahead.
Good afternoon. Thanks for the presentation. I have five questions. The first one is on the TLTRO. What is the impact on the cost of funding of the change in the TLTRO condition? What is your strategy as regarding the repayment of the TLTRO?
Thank you.
The second question is on the threshold for the enforcement of pensions. Do you expect that with the threshold at EUR 1,000 could be extended also to workers there, so not only pensions? Third question is a clarification on your 2022 guidance. Key guidance includes from EUR 30 million to EUR 40 million headwinds on revenues, if I understood correctly, considering both the threshold and the cash collection. I wonder if this number is correct and if this includes also the higher cost of funding of the TLTRO. Finally, if this number is a number that can be considered as one-off or there is some part of this number that is recurring. Fourth question on the NPL. What is the expected evolution of the prices on purchased NPLs?
Do you see some decline in the prices, considering the higher inflation and the coming slowdown? The last question is on the NII sensitivity. Could you please update your sensitivity of NII to the interest rate increase, please?
Okay. Well, thank you, Manuela. That's quite a list. I will, I wrote them down, okay? If I forget one, then, please remind me, okay? The TLTRO, changing the cost of funding. Yeah. The math is very simple. We have EUR 2 billion TLTRO. It went from - 50, which is what it was originally, to plus 150 today, right? The impact annually would be EUR 40 million, right? Two percentage points on EUR 2 billion. That would be the annual impact. What that does to our interest rate sensitivity, you may recall from previous calls, it was already, actually it was even you, I think that asked about it. You may recall that we had an interest rate sensitivity for a 100 basis points increase in Euribor, right?
In all rates across the curve, right? A shock of all rates across the curve, I should say. We had an estimate of EUR 30 million-EUR 40 million, okay? If we take EUR 20 million TLTRO effect out, right? Because that further increases in the refinancing rate, right? We should expect them to enter also in the curve, right? Then the net interest sensitivity of the bank, including the negative TLTRO effect, would be order of magnitude EUR 15 million-EUR 20 million, right? Could be slightly better, but that would require some action on our side, on the liability side, right? I won't push it further. You know, mechanically, about EUR 15 million-EUR 20 million. Thresholds for the pensions, is that going to also be extended to wages, right? Well, I'm not obviously the legislator, right?
What I would say is that the threshold for the enforcement of the limit on pensions was under discussion for years, right? No one ever mentioned it for workers. The rationale of the law is to preserve retired people, right? Who have little possibility to increase their income. Workers, obviously, are in a different position. I think in terms of vulnerability, it will be very different. Now, any potential move on the worker side, I think would severely impact the consumer credit industry as well, right? Today, as far as we know, there's no specific plan or law being prepared in this respect. I think it would be very controversial if somebody went that way. Guidance on the full year, EUR 120. Does it include the EUR 30- EUR 40 headwinds?
Yes, it does, and it's the reason why we haven't increased it, right? The EUR 30 million-EUR 40 million is one-off. Yes, I confirm. It also includes a negative TLTRO effect, but which is not one-off, obviously, because it will be with us. In 2022, that will be very limited because it will only impact from the end of November forward, right? It's almost EUR a couple of million. It's not going to significantly impact the results anyway. You know, when we gave the guidance, we were aware, and when we confirmed it today, we were aware that we also had the TLTRO side, right? Keep in mind that normally Q3 is a very dynamic part of the year for us, right?
We would have expected the Q3, all else being equal, to be actually better than Q4, sorry. Right, Q4 is normally the most dynamic part of the year. We would have expected the Q4, all else being equal, to be better than Q3, right? That's included, yes, in the guidance. Prices of the NPL portfolios, are they declining? Not yet, actually. That is a bit scary to watch, meaning that we see people purchasing portfolios at prices that both appear aggressive in terms of expected recovery and appear aggressive in terms of cost of funding. I would assume the prices have to go down. It leads us, in certain cases, to bid on auctions where we see that the portfolio goes another way. We can live with that.
I think the bank could go on for a long time, even without purchasing or with purchasing small amounts, working out what we have. We have actually the expectation to make our purchase budget this year. Remember, there's also a bit of secondary market going on, and we've been quite successful in there. If you ask me, I think prices of NPL portfolio should come down, but haven't come down yet. You can also look at it positively. I sometimes make this comment. The fact that we have foreign capital coming into the country and bidding on these portfolios is also maybe good news. It means Italy is an investment case still. It means that there's a lively market.
It means that, you know, it's a mature market that doesn't just go away when things get a bit tougher. When I see these auctions, then I you know, even if sometimes it means that we have to let it go, right? I'm still quite happy to see you know, presence and lively participation. Net interest income sensitivity, but I think I replied to it when we talked about the TLTRO. I think, Manuela, I went through all your questions. Tell me if I'm mistaken.
Yeah. Thank you very much.
All right. Conference operator, do we have additional questions?
I'm sorry. I had a technical issue here. The next question is from Christian Carrese with Intermonte. Please go ahead.
Hi, good afternoon. I would start from what you said on NPLs and the prices. You would expect prices to go down. I was wondering if there is any risk of impairment on your current NPL stock in the coming quarters due to interest rates. Secondly, on capital, there was a benefit this quarter due to the change in the rules on distressed credits. Is there any tailwinds or headwinds that you expect in the fourth quarter? The third question is on guidance 2023. As you said, current nine-month results would imply something like EUR 140 million net profit without the one-off that you are going to book in the fourth quarter. Take into account the EUR 50 million overlays booked currently on your balance sheet.
What do you expect for 2023? The guidance could be improved or you expect some still some deterioration in asset quality that could reduce visibility on the target. Finally, on dividends, the interim dividend, EUR 1 per share. Do you confirm that you are not going to change your payout strategy, so 50% payout confirmed? Because it's quite unusual to see such a big interim dividend compared to the full year dividend, because we are talking about, let's say EUR 50 million net profit in the fourth quarter. The last part of the dividend would be quite low compared to the interim dividend.
Yeah. Thank you, Christian. NPLs and prices. Yeah, I would expect now, normally over time, these things, they translate into the market, right? I would expect prices to come down a bit. Do I expect an impairment? No. We manage it as we did actually or as we will do actually in Q4, right? We have the models there and the funding that is, you know, connected to those portfolios and that is there.
When we have situations in the market that force us or that would bring us to changing the curves that come out of the risk models, then we change the risk models and we take the effect. Now, beyond what we've done, which is prudence, by the way, and what we are doing in Q4, which is connected to inflation, we are not expecting to need to do more, right. Also, I have to remind everybody that we are in the context of a record in terms of cash collection coming out of the NPL business, right, and of a very solid P&L performance of the NPL business.
No, I don't think it would be reasonable at this moment to talk in any way, shape, or form about impairments that are necessary in the NPL business on top of the inflation impact that we're taking in Q4. Tailwinds or headwinds in terms of capital in Q4 in the NPL business? No, we think it's stable now. No, we're not expecting any further break or any particular, you know, bad news. Guidance on 2023, are we ready to increase it? A little bit hesitant on that, I would say. In 2023, we're going to have a lot of different things playing out, and we're now running the numbers.
Obviously when we get to conclusions, we will be transparent and we will talk about the guidance, but I won't do it now in quantitative terms. Let me do it in qualitative terms. What we're going to have is a rates effect that's going to be positive. Even net of the TLTRO. We're going to have an inflation effect that is negative. We're going to have costs coming in. We're going to have a cost of risk effect. It's true we had the overlay, but you know, we're preparing for bad weather, right? We're gonna have...
We're gonna assume that we're gonna have, due to the lack of growth or even slight contraction that some people are estimating, we assume we're going to have a cost of risk increase. We're going to have potentially a benefit from being able to invest in slightly more interesting terms on the proprietary portfolio, right? Because there are some good deals out there now compared to how they were, you know, a few months ago even. As you put all these LEGOs together, we're going to have a cost effect, which is not inflation. That might be, you know, having to generate a bit more cost in the NPL business in order to get the collection at the rate at which we want to have it, right? Judiciary and non-judiciary.
We're putting these LEGO blocks together, and the way this will pan out exactly for 2023 in terms of the goals that we give ourselves is not entirely clear yet. What I would say is on the basis of what we see now, we have no reason to reduce the guidance. I wouldn't go so far as to say that we will increase the guidance. We prefer to be a bit constant. I hope you appreciated this also in the last quarters. We try to work on predictability, on transparency, and on lack of volatility in the things we say and the things we deliver. Finally, interim dividend. Yeah, we confirm a payout ratio of 50%. Now, there was a decision about doing the interim on six months or nine months, right?
Paying the interim dividend on six months leads you to a more balanced probably payout. We decided to do it on nine months for two reasons. One is that would lead to a payment date in November and the payment date in May. Six months apart twice a year, right? It gives a regular interval. Secondly, it allows us to pay the interim dividend when we have a fairly good understanding about how the year will go. Therefore, we're keeping nine months. The choice was, are we going to use a payout ratio on the interim that's different than the payout ratio that we want to use on the full year? It was just a choice to keep it constant.
We want to signal that to us the payout ratio of 50% is something that we want to keep, that will remain with us for some time. Just to avoid any discussion, interpretation, or volatility on that number, we're keeping it. That's why you have a slightly large interim dividend, and you're gonna probably see a slightly smaller, I agree, right, final dividend, right, in as decided by the shareholders meeting in April and paid out in May.
Can we say that, compared to a few weeks ago, now you are a little bit more confident on 2023 because, maybe a few weeks ago you were not prepared to say that the target 2023 could be reached because, interest rates now went up, so positive, and maybe asset quality is not deteriorating as you were expecting until now. Second on dividend, can we say like a joke that you prefer to pay higher dividend because you are scared that Mr. Enria could put again a ban on dividends?
I'll answer both of your questions with a smile. On my words and what they mean, you're starting to make me feel like a central banker, you know, interpreting my words, but I'm not that important, Christian, you know? I'm just a guy trying to figure out what his P&L looks like in 2023. You know, the... Let's put it this way. We would really like to be reliable in terms of delivering your plan, right? We're still working on the positives and the negatives, and it's in any case going to be a very different P&L than we thought when we wrote the plan only nine months ago, right? It's going to be different in its build-up, different in its sources.
Let me maintain this little bit of prudence before going further and just say that we would really like to be reliable in the three-year plan, right? We will see if we can construct it in that way. Let me not make a promise now before I have the numbers, okay? Before I have the numbers for that. In terms of paying in the meantime, well, obviously there's a lot of debate at central bank level about the level of prudence that would be appropriate given the macro situation. There are some messages around buybacks and around extraordinary dividends. There are no messages around normal dividends. We are not rushing to pay because something may happen in 2023.
I'm not expecting anything to happen to our regular 50% payout ratio in 2023. It's not in my hands, but we don't have any signal, and I'm not interpreting what's coming out of the central bank as something that will imminently, you know, impair our ability to keep the payout ratio where it is. I also say this on the strength of the 16.18% CET1 ratio, which I think is, in the context of still retaining half your earnings and keeping them as capital, a very comfortable number. It's what I mentioned when I said consider that to be a, you know, an extra element that will make us reliable on the dividend policy. Okay.
Very, very clear. Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Andrea Lisi with Equita. Please go ahead.
Hi, thank you for taking the question. The first one is on the CET1. Just wanted to understand which level of CET1 you expect to land by year-end. The second one is on the management of cost. You've seen that the revenues are above the business plan, but also costs are above, because obviously inflation also costs related to NPL management and so on. If you have planned to make actions to mitigate the increase in cost and in case which are these actions. Thank you.
Yeah. Thank you, Andrea. CET1 year-end would be nice optically to keep it above 16%, but I'm not sure. You know, you have a little bit of volatility, right? I think I can promise that we'll be north of 15.5% in most scenarios, right? Remember that when we presented the business plan, we said we're going to gradually consume some capital, right, or absorb it. All in all, you could say it's. Sorry, I need page nine, sorry. Yeah, you have the part that's exposed to inflation, and I expect that to grow.
I've already been told by my COO, Fabiola is looking at me now, that we should expect a couple million, more than a couple of million next year, right, to come in on this blue part of the chart. That's energy costs, 'cause, you know, we don't consume much, but still, you know, we have the offices and everything. We had an interesting conversation with the energy supplier last couple of months, leading us to really see what happens also to our clients, right? In general, whenever something expires, when you sit down with the supplier and you talk about costs, right, you get to face an increase. By now it's become like pretty mainstream.
I would like to tell you know, the light blue part, right, from the chart, we're keeping it down, and we have been keeping it down until now. We're doing everything we can, but I expect that thing to grow. HR, we're being quite judicious with hiring. You can see the FTEs not growing a lot. Actually, we'd like them to grow a bit. We want to make a bit of investment into the commercial part. We'd like to reinforce the network a bit. We think we can earn that investment back easily, right, given the commercial dynamic that we have. I think, you know, cover, you know, a few tens of people more in the network would be really nice in terms of client development and everything.
Expect that number of FTEs to grow a bit, but not much. We're going to have contract renegotiations with the unions on the sector level, right? The whole of the banking industry is going to see the effect of those negotiations. I would expect those negotiations to lead to cost increase. On the dark blue side, too, I think costs would tend to increase. We have the revenues related side, green. Those are good costs, if you will. You know, let's assume stable, right? Which means that we will be still vigorous, right? We will earn the revenues on the NPL side. What can we do?
Beyond the contract renegotiation that we already mentioned, there's also a bit of selectivity, I think, in advisory costs that we can afford and therefore, you know, work a bit on consumption. But overall, I think the equation is that costs will increase and that our challenge will be to increase revenues further, also, frankly, using the rate scenario. This one of the reasons why I was a bit careful on 2023 and the numbers is that precisely these are the dynamics that we want to see in more detail before making explicit and definitive remarks about the guidance for next year. Okay. What we can manage downwards, we will, but the things that I mentioned to you, some of them are frankly not so much in our control.
Clear. Thank you.
The next question is from Simonetta Chiriatti with Mediobanca. Please go ahead.
Hello, good afternoon. A couple of questions from my side. The first is on the public administration segment, the factoring segment. I would like to understand better your strategy going forward. If you are completely exiting this segment or just shrinking your presence in this business? The second question is on the NPL business, where you said that you plan to reach your budget for the year in terms of pre-trades. Do you think that the market will change in the coming weeks, allowing you to do so, or because during the third quarter, basically the activity was very low?
Finally, as far as the impact of the new decision of the government on pensions, if everything will be absorbed by the provision that you are going to make, provision, I mean, the measure that you are going to take in the last quarter of the year, or if we can expect a lower profitability of this business also in the coming years. Thank you.
Yeah. Thank you, Simonetta. Public administration. Are we planning on fully exiting this business? No. Are we looking at very serious selection of debtors today? Yes, forcibly. What is the consequence of that? The consequence of that is very limited purchases in the last months, right? As we digest the portfolio, whether or not clients will come back to sell us these invoices will also obviously depend on what the rest of the market does, right? What we want to explore is the extent to which it is possible to buy, like some other banks have been doing for years already, right?
Extent to which it is possible to buy invoices, make sure that they are managed, in a short time frame, make sure that we have, documentation and proof of any commercial disputes in the cases where we have delays. Because if you have this documentation invoice by invoice, then you are allowed not to classify it as past due. That's operationally a slightly different game. It's less remunerative because you will never have penalty rates, right? It requires the people who sell you these invoices, i.e. the large pharma companies, the suppliers, right? It requires them to allow you to buy the invoices without buying exposure to those local health authorities that have particularly bad payment records.
It's not an exit, but it's a very severe reset of business practices, leading to a very drastic drop in volumes that you've observed. How it will develop, it will also a bit depend on us, but also a bit depend on the market. Okay? NPL business, you're saying we expect to make the budget of purchases. How is that possible when the market is so challenging? I'm making this statement on the basis of pipeline, right? We have quite a number of situations where we are quite far ahead. There's also some bilateral stuff in there on the secondary market. We can't be sure, but if you ask me now, I think we have a reasonable shot at making the budget for the year. Will the market change?
I'm not really assuming that over the next couple of months, right? I would assume that during 2023, we're gonna have the investors factoring in a different environment into their purchasing behavior in terms of cost of funding and in terms of collection expectations, but not in the last quarter. The reason why we mentioned this sort of intermediate level of confidence about making the budget is that we have, you know, some view on the pipeline and there are a couple of transactions which we think will come in over the next weeks. Finally, pensions. Is it absorbed, all of it, one-off, the impact? Yes. Yeah.
No. Yes, the first impact. Okay. We take the majority of the impact in 2022, probably, depending on our final, say, consideration. Of course, then there will be a recurrent impact, which is slightly quite low. Let's say between EUR 4-EUR 5 million, something like that. We are updating, checking the numbers and refining our assumptions. This for sure will be part of our 2023 guidance. We will discuss in that moment.
Thank you, Martino.
Thank you.
Thank you, Simone.
Once again, if you wish to ask a question, please press star and one on your telephone. The next question is from Giuseppe Grimaldi with BNP Paribas. Please go ahead.
Good afternoon, everybody. I have two questions. The first one is a clarification on the one-off item that you see. You were talking about EUR 30 million, EUR 40 million. So it's something that is gonna be related primarily to the NPL in the fourth quarter, is if I got it correctly. The second point is on the funding, considering what you have seen right now in the bond market, do you still plan to increase your exposure to bonds in terms of funding in the years to come, as you mentioned in your business plan or everything is paused at the moment?
I agree, or I confirm, EUR 30 million-EUR 40 million is mostly in the NPL business. It is all in the NPL business except for the little piece of TLTRO effect that we mentioned, right? That's recurring, by the way. It's not a one-off, right? We're gonna have a Q4 NPL business which is impacted quite significantly, right? In terms of funding, do we still expect to increase our exposure to bonds? Well, if you look at the current environment, it looks like quite a spectacularly inefficient way to finance yourself compared to other possibilities we have. If we look at retail funding now, we offer 3% today on 5 years deposit, and the market appears to be accepting that nicely.
I would expect the market to slightly increase that further, right, over the next months, and we will follow it like we always do, right? You have to be competitive in these products, or you won't collect money, right? If you compare this with the, what is it now, 6%-7%, right, that we've seen on some senior issues, and I'm not talking about the price we get. I'm just talking about what I observe in the market, right? We've seen these numbers on senior preferred bonds, right? Once again, you know, they look like quite spectacularly inefficient. Would we, all else being equal, prefer to issue paper on the market? Yes, because it allows for more continuous relationship with the investors. It, rating agencies like it.
There's lots of reasons why, if possible, we continue to do it, even accepting a bit of inefficiency in terms of price. Currently, it looks like it would be really much more advantageous to use other forms we have, right? Both institutional and retail funding in other forms. No decision made yet. It's one of the things that will feed into the P&L next year. There you go. It's yet another one of these LEGO blocks, right, that we're playing with to get the numbers in 2023. I think what we know now is what I've said. I don't think I can say anything further that would make any sense.
Of course, if the market improves, we will be quite happy to issue. We saw a lot of issuance in the last couple of days, by the way, so it looks like maybe it's opening up again. Regardless of the condition, there's also a question of availability, right? Last two days have been encouraging. January is usually a very intense month in terms of issuing. I think if we take a bit of a look at how November goes, and we take a look at how January goes, we will be probably more informed to answer your question precisely.
Thank you. Thank you for the clarification.
Yeah. Thank you.
Mr. Geertman, you have no more questions registered at this time.
Thank you all. Thanks to my team. Thanks to Martino. Thank you all for your attention. It's 5:15 P.M. on a Thursday afternoon. We've had lots of calls today. If you're still here, I really appreciate it. Thank you all.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.