Good morning, everybody, and welcome to day three. It's my pleasure to introduce Stefano Porro, CFO of UniCredit, a role which he has held since 2020. I think you've been doing the conference every year-
Yeah
Thank you again for your support. Similar setup to the other discussions, so 35 minutes. We're gonna do a few questions between the two of us, and then open up for audience Q&A towards the end of the session. But so first of all, Stefano, thank you so much for coming. So let's begin with a broader question. You know, UniCredit has gone through quite a journey in the last three years, and is quite a different bank to 2021. So maybe if you could start by just outlining what lies ahead for the franchise and what more is there still to do?
Yeah, absolutely. So good morning, everyone, first of all. Effectively, let's say it's been a journey, and we're referring to a transformed bank, right? So if we look to the past, as a matter of fact, we have dramatically increased the profitability. If you look the return on tangible equity, if you look the capital efficiency, if you look the cost efficiency, but also if you look at the capacity of originating capital, and then distributing the capital. As a matter of fact, if you look the last three years, we have been distributing the market cap since the beginning, so EUR 18 billion, while generating twenty-seven billion capital. And then we've been able to be a leader in many of the KPIs, right?
So you can see, risk-adjusted revenues KPIs, like revenues to risk-adjusted asset, cost efficiency, the cost income, the capital efficiency, meaning the organic capital that we're able to generate. Not talking also about the EPS and DPS growth. So from that perspective, UniCredit is not more a restructuring story. UniCredit is something different now, right? So what we are looking is more, let's say, a sustainable, best-in-class bank, right? So this is, if you want the difference in comparison to the past. What is ahead of us, right? So we've been working in the last three years, not only to achieve what we have achieved, but also to lay to work in order on some specific elements that will help us in support such a level of profitability over time, right?
We have been working, let's say, on factors, for example. We have been working on all the elements that will support our capital efficiency, but also our cost efficiency. Let's look 2024. If you look 2024, fundamentally, net profit in excess of EUR 8.5, the profitability will remain very high, right? It will be return on tangible around 16.5, and the distribution would be in line with the previous year, right? EUR 8.6. With an excess capital, that's really something, right? Because take into consideration the level of capital of Q1. If you are netting from the final and from Basel IV, the excess capital is above 6.5, right?
When we're looking beyond 2024, we will see, let's say, some of the differentiating factor that we are working on playing a role, right? So there is still something to do, right, especially on fees. On fees, we are expecting a growth that will support the trend of revenues during the course of 2025 and 2026. We are able to keep really the cost under control, and same for cost of risk. So when you are looking beyond 2024, our target profitability is very high and very good because it is, let's say, in excess of 15. And the capital generation is also very good, right? So that's why we are able, with such a level of capital generation, to have very good best-in-class distribution.
Then on top of that, you have the excess capital. On top of that, with the excess capital, as we communicated, we will either deploy or return. If you return at the average, and then we will do that by 2027, so the horizon is that one. So if you look 2026, 2027 distribution, assuming to a return, clearly the average 6 and 5 and 6, so 2025 and 2026 will be higher than what we have distributed in 2023 and 2024. Unless, I mean, we will deploy that, but clearly with some specific criteria that are in line to what we've done in the past.
Very clear. So maybe digging into to our favorite topic, NII, how do you see the drivers of NII beyond 2024? If you think about the different drivers, pass-through, rate cuts, volumes.
Yeah. Let's start from what I was telling you before, right? So it's important to look to net interest income trend, having in mind also the fee trend, because when you look into the overall revenues, right? So that's why the action that we have put in place and that they will execute will support the increased level of fees, and as a concern, will help in mitigating the effect from, let's say, NII normalization. Let's look to the key driver of 2024, right? Last year, we have around EUR 14 billion net interest income. This year, we're expecting that NII will moderate. Which are the key driver? First is rates. The average EURIBOR was last year 3.4. This year, that we are expecting that will be above that.
So let's see today ECB, but on average, we are expecting to be with an EURIBOR this year between 3.6 and 3.7. Which is the net interest income sensitivity? The net interest sensitivity is, in our case, plus 25 basis points or minus 25, is around EUR 140 million effect on the net interest income. So all in all, if you compare to 2023, rate situation is better. Different for, for 2025 and 2026, in which we are expecting a lower average. Then we have the deposit pass-through, so, i.e., the ratio between what we are paying to our client and the average short-term rates. In relation to that, let's look the history and, the expectation. The history is the average during the course of last year was 25.
We exited with an average of 28% in Q4. Q1 was around 30%, more or less. In that 30% is pretty differentiated, right? So you have Italy's 14.5, so it's low. Germany also are about 40. If you look, let's say Q2, is a bit higher, so it. But it's completely in line with our expectation for the year. So the expectation for the year is slightly above 30%. Okay? Then we have the replicating portfolio. So it's the, if you want, the non-commercial component of the net interest income, where the replicating portfolio, i.e., the amount of derivatives that we are doing in order to hedge our deposit, is around EUR 85 billion. This is rolling, let's say, every year, around 10%-15% every year, and this is positively contributing to the net interest income.
What will be the contribution in 2024 versus 2023? Around EUR 400 million. That's a positive side. If you look the horizon, 2024, 2026, such a contribution will be EUR 700 million. It's going to reduce over time, because the more we go, the more the average, let's say, yield of that replicating portfolio will increase, so the benefit will be lower. Then we have two other important components. I have to say more important for 2025 and 2026 rather than 2024. That is, the stock of lending and the spread of the lending, right? Stock of lending, we confirm the expectation that our stock of lending end of this year will be lower than the beginning of the year, especially in country like Italy and Germany. Let's remind ourselves that UniCredit does not go for volume lending, okay?
So as part of our strategy, we go for profitable lending, right? So we are very focused on there is discipline on one end, and on the other end, on the risk-adjusted return of our profitable lending. And if you look, we are among the, let's say, the majority of the peers, we are the, among the highest with the return on capital, our Net Interest Income, and this is deriving from such a strategy, okay? It's clearly differentiated by sector or geography, and it will depend also on the market evolution, but all in all, this is the expectation. On the other end, 2025 and 2026, we are expecting a lower stock of lending, also because the GDP trend in many of the countries where we're operating will improve. Repricing of the asset side, this is an important component.
If you look at Q1, and if you look at the stock, overall stock of lending, we have repriced the credit spread of around 7 basis point. If you look, the new medium and long-term production improved, all in all, between 30 and 40 basis point, front book versus the back book, i.e., the maturing asset or the repricing asset, in all the geographies. So there are the premises, and also when there will be a normalization of the rate to reprice, on the front book and so on the overall book. Which is a sensitivity, because I talked before in relation to the sensitivity. Sensitivity indicates every basis point, considering that the stock of the lending, the commercial one, is more than EUR 400 billion, consider one basis point improvement is around EUR 40 million of net interest income.
That's why taking everything into consideration, we're expecting a moderation of the Net Interest Income during the course of 2024, with a resilient Net Interest Income in second quarter.
You mentioned in the, in both of those answers, the importance of fees over the next few years. In Q1, you grew fees, you know, sequentially versus Q4, but also year-over-year. Could you sort of unpack a little bit how you think about delivering that incremental, you know, I think the EUR 1.4 billion by 2026? What are the key drivers within that?
Yes. So, 1.4, let's say, is a steady state improvement of the fee base in comparison to 2023. So broadly, it should be 2026, as you have mentioned. Let's start from our fee base. That's important to consider that it is diversified by geographies and also by source generating fees, right? So by items. Geography is around 50% in Italy, 30% is Central Europe, 20% is Germany. When you look in the source, look at our fee base in Q1 to give the, to give you the flavor. So it's EUR 2.1 billion, the fees. A little bit more than EUR 600 million is connected to asset management investment, and EUR 600 million also is the part related to payments.
I mean, look at that, because the overall payments in the case of UniCredit is an important one. The financial related one is around EUR 400, it's more than EUR 400. The life part is more than EUR 200, and then there is another part that is close to EUR 100, is what we are calling client hedging fees, so the fee that we are doing hedging the position of our clients. So that's very diversified. Another important element to consider is the ratio of fees towards revenues. Sometimes, we are losing that. In the case of net of UniCredit, it is 34%, right? And in Italy, is around 40%. In 2025 also, with the rate normalization at the group level will be about 35%. So we have worked on what?
We work on fundamentally enlarging the product shelf, right? So in order to be able, let's say, for different items, to increase the number of product that we can advise and we can sell to clients. Factories, meaning, let's say, strengthening the factories, either with partnership, like we've done with Allianz or with Mastercard, to give you an example. But also, strengthening, also by hiring, our, let's say, people base, right? So if you look, for example, to advisor in capital market, right? But also to the training of our people in the network, when then we need to advise and sell, for example, insurance product, which is the split of the 1.4 growth, right?
So, is around 400 deriving from asset management, in which what we are doing and what we will do is increasing the number of, let's say, asset under management that are distributed with internal factories, right? So we have an internal factory, it is called onem arkets. Then there is the JV that we have with Azimut. What we're looking for is working in order to increase the amount of the value chain or the total fees in asset management that we are retaining. Consider that we are retaining around 70% now. We are retaining 100% of the distribution fees, and on average, consider that the average rebate that we have on asset management product is around 70 basis points, okay? So that's not bad, right?
What we're aiming for with such a strategy is moving up such a ratio from 70% to around 80%, right? 80% or more. And that is independent from what will happen with Amundi, right? So we will remain with an open architecture, and this EUR 1.4 increase, and of which EUR 400, is independent from the renewal of Amundi, right? Because it's depending from other levers. Then we have insurance. Insurance growth is around EUR 300, is a part life, a part non-life, property and casualty. The large part will fundamentally derive from the reinsourcing of the JV that we have in Italy, one with CNP, the other with Allianz, that will do during the course of 2025. So this is dependent on us, right?
And it's more a matter of allocation of the capital, right? Another portion will be deriving from property and casualty, whereas deriving from credit protection insurance. We are doing very well on consumer financing, right? So the new production Q1 was very good, Q2 is the same. And so connected with that, we are cross-selling credit protection insurance. Then we have also property and casualty product. In Q1, the growth was double-digit, so the expectation is to do very well also from this perspective. Then we move to payments, right? So if you look payments, as I told you before, that's an important component for us. We're expecting to grow 300.
Now, if you look, the overall revenue base of payments in our case is a big one, it's EUR 2.5 billion, where we're looking to 2023 numbers. Is around EUR 1.3 billion deriving from transactional payments, around 0.5 billion is issuing and acquiring, and the remaining part, that is 0.8 billion, is the fee connected with current accounts and so on. Where the growth will come from? The growth will come from- the 300 million will come from transactional payments. If you look our market share in pan-European cross-border payments and so on, is 3 times our market share, usually in, let's say, corporate business in each of the country where we're operating, because we can, let's say, cross the flows of our clients.
This is a portion of the group, is around 4% CAGR, if you look 2026 versus 2023. The other part of the growth is deriving from issue and acquiring. Part of that is deriving from the partnership, for example, that we've done with Mastercard. Part of that is deriving from the activity that we do, and it will be a single, high single digit growth in relation to that to that component. Then last but not least, we have, let's say, for another 300, is the corporate solution part, that is mainly the financial, but especially the advisory and capital market, that is connected with the action that I told you before, in relation one, and to the strengthening on our workforce in order to advise our client.
On the other end, reaching not only, let's say, large corporate, but also mid-corporate and small-medium enterprise, especially mid-corporate. We would like to be, and we are indeed, the go-to bank for SME, not only for cross-border payments, but also for advisory and capital market. Just to close on that, a couple of points. A good portion of the increase is locked in, in the sense that it's depending from levers that are in our hands, right? It can be partnership already done and so on, or insourcing of the life insurance. Quick view in relation to Q2, the trend is good. It is in line with our guidance, that for 2024 is few hundreds million EUR during the course of 2024. EUR 1.4 billion is steady state.
2024, we are confirming that we will be a few hundred million EUR better than 2023, and Q2 is confirming the trend, especially in relation to the trend of investment fees and payment fees.
And if we keep moving down the P&L and turn to credit costs, you know, if I put the EUR 1.8 billion of overlays to one side, credit costs have come in lower than, you know, you've expected for some time now. That's true for several European banks as well. You know, given the relatively, I guess, benign macroeconomic backdrop, what do you think is really sort of underpinning those lower than expected credit costs? How long can that last? I mean, is this sort of too good to be true?
Yeah. So, let's distinguish the macro-driven one or the more sector-driven situation from the idiosyncratic one, so for UniCredit, right? I believe that's very important. Let's start from UniCredit, because UniCredit is coming from, let's say, a ten-year approach of de-risking on the NP and changing the risk profile on the origination, right? So... And then if you look, let's say, ten years ago, and you look now, it's a completely different bank, right? So if you look the stock of NPE, the NPE ratio is very low. Now, it's, let's say below 3%, 2.7, even lower, if you look the EBA numbers. Let's look also to the origination, right? So, if you look to the origination, you look our expected loss.
The expected loss of our portfolio, the stock is around, excluding Russia, is around 30 basis points, and is below 30 basis points if you look the new business, right? And, if you look the provisioning policy, the provisioning policy has been conservative, right? Because we've been reducing the NPE, but then increasing the percentage of the coverage. Always remind that when you look to our NPEs, the absolute amount, the vast majority of that is unlikely to pay, right? So when you look to the coverage, bear in mind that the majority of that is unlikely to pay. Then, so taking that into consideration, we are confident that our, let's say, steady state cost of risk will be in the range of 20-25 basis points. I'm looking to, let's say, the period 2025, 2026, 2027.
In the case of 2024, we are confirming that will be below 20 basis points. All in all, let's not... I mean, you are right, let's put aside the overlays. The overlays are there, right? So that is, in a way, the surplus of provision that we have done, because the next couple of years, either we are utilizing or we will fundamentally release, and EUR 1.8 billion, if you translate that into a cost of risk component in a couple of years, is an important element to be considered. Then when you look more, let's say, macro, and sector situation, as a matter of fact, there are solid elements to be taken into consideration, right? So, because all in all, there was a general reduction of the NPE level in the sector, right, in the last period of time.
And then when you look the situation of household, but also of corporates, on average, the savings were higher, right? Also, during the, let's say, the COVID period and so on. Also the cash profile of many of the corporates, in a way, either was not deteriorating or improved, right? And on top of that, there were some specific supporting action from governments, but also from banks, right? So the combination of all of these improved the resilience of the sector, and improved the resilience sector in situation that are also pretty diversified. Because if you look, we have moved from COVID, high level inflation, high rates, and so on. So it's not only one threat scenario, it's more than one. I mean, that is a very good situation, but let's look for the future, right?
So for the future, we do believe that the default rate will increase, but will not increase in a meaningful way.
Mm.
What I mean is, let's look to UniCredit. So UniCredit, the average default rate in Q1, if you are excluding a couple of big tickets, one in Italy, the other in Germany, was below 1, so at 0.9. More or less in line with last year. For the future, we are expecting that the default rate will be higher, right? So will be above 1, but it will be closer to 1 than closer to 2, right? So, also for some of the reason that I mentioned before. When you look to UniCredit, consider the diversification profile. I commented before, diversification profile in relation to fees, when you look to cost of risk, let's look also that is not only Italy, right? So it's Italy, Germany, Austria, and Eastern Europe.
And when you look also to Germany, bear in mind that we are not, as the average, right? Because in Germany, we are mainly focused on affluent and private banking, not on mass, and we are in the mid-corporate, not really in Germany, on the small business. And this is also a positive element when then you look, let's say, the full trade and the expectation of the trend, of the cost of risk. 2024 and Q2, as I highlighted before, 2024, we are confirming the guidance of a cost of risk below 20 Q2, at least so far, we've not seen anything different than the Q1 trends, and then it's fundamentally in line with the full year guidance.
Very clear. So I don't think we can have a conversation about the outlook for UniCredit without discussing excess capital. But clearly, you know, in the current context, there's also been an increased focus on M&A in the sector. So I wanted to put a few different questions to you on this topic. So first, could you remind us the financial hurdles which you set yourself when you consider M&A? Second, you know, could you talk a little bit about the context of strategic fit of any kind of deal? Is there a risk that strategic fit is a bit of a nebulous concept? And then third, perhaps, how does the ECB view your distribution ambitions, which are clearly a little bit more elevated than a lot of your peers?
Okay. So, let's start from, let's say, the criteria.
Mm.
We didn't change the criteria, right? So the criteria are the same as the one that were presented in unlock. So when we presented the plan, right? So, and the criteria is fundamentally based on creation of value for shareholder, and we have proven that we've been really disciplined, right? So in following this, this criteria. So fundamentally, when you are looking into the financial component, are related to the return on the investment on one end, and, if you want, the price earning level, right? And the two are also connected. Then you have, as a benchmark, the return of a share buyback, right? Because when you are doing a share buyback, fundamentally, we are buying our share at the prevailing price earning, right?
The translation of this into return on the investment in this moment is between at or above 15%. So the idea is to do transaction that post synergies can fundamentally be done with a price earning at or below the prevailing price earning of our stock. That means that the bar, in some situation, is very high, right? Second element, strategic fit. What do we mean with strategic fit? Strategic fit, we mean fitting on one end with our strategy, but on the other end with the possibility to generate the necessary synergies in order to arrive to that goal. And so what we have done is the following: so we have worked fundamentally on factories. We've been very good in cost efficiency and capital efficiency.
Let's remind this, because this is what we look at, also for potential targets in order to replicate what we've done for UniCredit, also for potential targets, okay? So this is a part of the strategic fit. When you are looking to the type of transaction, type of transaction or, one, traditional banks, there is not a specific focus in one of the countries. We are operating in 13 countries. We are looking to all the countries, specific eye on Central Europe, due to the profitability and the growth perspective of the area. We are looking to traditional banks. We are also looking to insurance, for example. An example is what I mentioned before in relation to Italy. When we are looking, then the condition and the financial condition, the condition in terms of price earning and some can be slightly different.
But then when you look at the effect, for example, from the Danish Compromise, in Italy, if you look the allocation of the capital and the return that we can get from them is totally in line with the return on investment that I highlighted before. Then we are also assessing, and potentially we can do something in the fintech, let's say, part, but then when we look on that, we're looking to something that is not meaningful, and clearly, the financial criteria are different because the criteria that we look and the strategic approach to that is slightly different.
When we're looking to, let's say, ECB, because we have mentioned also in relation to the ECB, fundamentally, the key topic in all the interaction was, is, and in our opinion, will be, let's say, track record, but then the capacity to deliver on the capital generation. So what I mean is, let's go back to what I told you at the beginning. EUR 18 billion distribution, 21, 23, 27 billion is the organic capital generation. When you look to 2023, the distribution EUR 8.6 billion, the capital common equity ratio went up because the organic capital generation was very, very high.
Now, for the future, I mean, if you look this year, the capital generation will be clearly above 300 basis points, and we believe that the capital generation will be very sound also in 2025 and 2026. And so this is able to support best-in-class distribution. It's clearer than when we have a dialogue and interacting with ECB. ECB is looking usually multi-period horizon in a stress test situation. But then when you look at that UniCredit, and you combine with this capital generation capacity, and clearly the level of capital that we have, we are confident that, like happened in the past, also with the future, the interaction with ECB will be good.
As a result of that, we are confident that the distribution level that we have gathered for will be also confirmed by the interaction with ECB.
Very clear. Now, I do want to open up for audience Q&A, but just one more before we do that. So, you know, to wrap up the conversation, I think you know, your final point on the importance of organic capital generation summarizes it neatly. You know, the most, but not the only important ingredient in that, is your return on tangible equity, which you're able to deliver. You're targeting, you know, at least 15 or above 15%. So having walked through all those parts, what kind of gives you the greatest confidence that you have the levers, the different levers, to be able to pull to deliver on that 15%+?
Yes. So we are confident because of what we have mentioned before, right? So let's start from the top line. One is fees, right? So we've put in place all the action that makes us confident that we can grow from the fees. We mentioned before, the 1.4. So the net interest income will normalize. I've not mentioned before Russia, but if you look at Russia, in our case, we will have EUR 200 million net interest income in 2024, but also few hundred million more in 2025, okay? But that's... Leaving that aside, we will have the normalization net interest income, especially in 2025 and 2026, deriving from rates, but the fee contribution will be very good. Then let's look to cost.
We believe that we are able to keep costs flat or slightly down, also beyond 2024. Cost of risk, we have mentioned before. Our cost of risk is low, but then through the cycle, steady state, in this period of time, we wait that we're able to remain in the range of 2025. Below the net operating profit, there is, on one end, systemic charges, right? So what we are paying for Deposit Guarantee Scheme, Single Resolution Fund as well. This year, we will be EUR 244 million lower than the previous year, but overall, we believe that we can also be few hundred less, also in 2025 and 2026. And then we have integration costs, right?
So integration costs, if we look at 2023, EUR 1.1, we will be trending to around zero in 2025. So all in all, if we are taking everything in consideration, the profit, the profit will be- we believe is, sustainable, high level. The profitability in excess of 15, notwithstanding the normalization. Better quality, right? Because I mentioned before, if you look the top line, the average of fees versus revenues will be above 35, and, we are remaining with, a very good excess capital, right? So going back to excess capital that I highlighted before. So all in all, if I can summarize, let's say, the rate peak is, let's say, behind us, but the growth, of fees and best-in-class distribution level is ahead of us.
Very clear. Okay, I think with that, let's see if we have any questions from the audience. Ian, halfway down at the front. Just the microphone is coming to you now.
Good morning. Thank you. Could you talk, please, a little bit about regulatory and political stability in your largest markets? Because it's always one of the hardest parts of investing in any European bank, and most recently, I've seen in Italy some noise about maybe the finance minister is going to change, maybe that might change the government's stance towards the banks. And we saw a few months ago, there was an attempt to put on extra taxes. That quietly disappeared. But maybe does that come back on the radar again or not? And I also saw some court cases being brought against the banks to try and force you all to be a little bit more systematic with moving deposit rates alongside loan rates, which obviously goes exactly against the net interest margin dynamic, which you've generated so well over recent quarters.
Let's say, when we are looking to the core market, in Italy, currently, there is no specific concern in relation to the stability of the government, per se, and the related actions. When we are looking, also, if you look, let's say, the majority that the current coalition has, all in all, we're expecting that we remain stable over time. In relation to the specific actions, yes, when we look to the past, there was, let's say, Bank Levy, but then has been, in a way, addressed.
Currently, what we are looking for, what we are looking at, if you look also the effect deriving from the normalization of the rates, is such that combine also with some other action to support the economy put in place that the bank are allowing us to be confident in relation to the fact, at least for the time being, we are not expecting an unstable regulatory or political situation in Italy. Then, as always, as we've seen in the past, also in some of the Central Eastern Europe countries, the profitability of banks is remaining very high, so we cannot exclude the...
We do have in place currently Bank Levy in some of the Central Europe countries, but the overall evolution that we are expecting is not such that we can expect meaningful impact on our, let's say, bottom line deriving from such an evolution.
Okay, that brings us neatly to time. Stefano, thank you so much for giving us some of your time and sharing your thoughts. Thank you.
Thank you all. Take care.