IITSF - Intesa Sanpaolo S.p.A. (ISNPY) Q4 2022 Earnings Call Transcript

Intesa Sanpaolo S.p.A. (ISNPY)

Q4 2022 Earnings Conference Call

February 03, 2023, 09:00 AM ET

Company Participants

Carlo Messina - Chief Executive Officer

Conference Call Participants

Giovanni Razzoli - Deutsche Bank

Antonio Reale - Bank of America

Azzurra Guelfi - Citi

Delphine Lee - J.P. Morgan

Christian Carrese - Intermonte

Benjie Creelan-Sandford - Jefferies

Britta Schmidt - Autonomous

Andrea Filtri - Mediobanca

Hugo Cruz - KBW

Andrea Lisi - Equita

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the conference call of Intesa Sanpaolo for the presentation of the full year 2022 results, hosted today by Mr. Carlo Messina, Chief Executive Officer. My name is Raziel, and I will be your coordinator for today's conference. At the end of the presentation, there will be a question-and-answer session. [Operator Instructions] I remind you that today's conference is being recorded.

At this time, I would like to hand the call over to Mr. Carlo Messina, CEO. Sir, you may begin.

Carlo Messina

So, thank you very much. Welcome to our 2022 results conference call. This is Carlo Messina, Chief Executive Officer. And with me are Stefano Del Punta, our CFO; and Marco Delfrate and Andrea Tamagnini, Investor Relations Officers.

Today, I'm going to walk you through a very high-quality set of results. We are delivering on our commitments. And for 2022, we will distribute cash dividends of €3 billion, and this is equal to a 70% payout ratio as promised. In the next few days, we will launch the second tranche of the share buyback, bringing the total additional distribution to €3.4 billion.

Full year net income was €5.5 billion when excluding provisions for Russia de-risking. This is well above our 2022 business plan target. Even including Russia de-risking, net income was €4.4 billion, the best result in 15 years and well above the guidance we gave following the invasion of Ukraine.

Looking ahead to 2025, the final year of our business plan, we expect to comfortably exceed our €6.5 billion net income target. This is thanks to the boost from interest rates. Our resilience has a zero-NPL and a zero-Russia exposure bank and our flexibility in cost management and our leadership position in wealth management, protection and advisory. As we have proven again and again, we will over-deliver on our promises.

Now, let me turn back to 2022. Despite the difficult macro environment, we delivered the best-ever year for operating income, operating margin and gross income. Q4 was the best quarter ever for revenues with a strong acceleration in net interest income, and we paved the way for this year with very conservative provisions, setting aside €1 billion as overlays and to favor de-risking.

I also want to draw your attention to the 110 basis point increase in our capital position in just one quarter. When we reduced risk-weighted assets by rationalizing positions no longer EVA positive and disposed of assets that were no longer efficient capital-wise. This is one-off exercise, does not affect future profitability and gives us a strong buffer [indiscernible] regulatory headwinds. No additional risk-weighted assets reduction is needed.

Our common equity ratio is up 13.5%, including the impact of the [transaction] (ph) of share buyback. It is almost 15%, including DTA absorption. [indiscernible] is close to 13% this year and above 13.5% in 2025 and above 13% post Basel IV and 14% considering DTA absorption. This does not take into account any additional distribution that will be evaluated year-by-year. We confirm our business plan target at Common Equity Tier 1 ratio above 12%.

Rewarding shareholders while maintaining a solid capital position is embedded in our DNA [and remains our] (ph) priority. De-risking continued with a €4.6 billion reduction in gross NPL and a massive decline in Russia exposure that is now below 0.3% of group exposure, and we will continue to work to further reduce the limited remaining exposure. This confirms our commitment to being a zero-Russia bank and a zero-NPL bank. And in this respect, I want to say that the asset quality picture remains being with the lowest ever NPL inflows and the lowest ever NPL stock and ratio. I'm proud of our results and thank our people for their hard work.

Execution of the 2022 business plan is proceeding at full speed with all initiatives well underway. We continue to invest strongly in technology and innovation. And despite these investments and very high inflation, we still managed to reduce costs.

Let me also say a few words on the overall macro situation that has recently improved. I remain positive for two reasons. First of all, the Italian economy will quickly recover already in 2024, even if there is a slowdown this year. And secondly, our bank is fully equipped to face challenging environments for multiple reasons.

We are delivering excellent operating performance, and we have a best-in-class risk profile with the NPL stock that is a fraction of the past and a rock-solid capital position. Of course, we are very sensitive to the fact that many families and businesses are struggling, and we remain committed to supporting them.

As ISP, we are providing €400 billion in lending to the real economy and not to mention our many social and climate initiatives, which we are stepping up. And because we take care of our people, we provided a one-off contribution of nearly €80 million to mitigate the impact of inflation for our people.

Now, let me provide the highlights of the full year results. Slide Number 1: In 2022, we delivered high-quality earnings, with net income of €5.5 billion when excluding Russia de-risking, exceeding the business plan target. We achieved the best-ever year for operating income, operating margin and gross income, and Q4 was the best-ever quarter for operating income. Net interest income is accelerating, and we reduced costs. We reached one of the lowest NPL stock and ratios in Europe, and we massively reduced our exposure to Russia. Capital position is and will remain rock solid, and we are paying €3 billion in cash dividends and the second tranche of the share buyback will be launched in the next few days.

Slide Number 2: In this slide, you can see the evolution of net income. And in 2022, we delivered the best net income of the past 15 years.

Slide Number 3: While delivering a record-high net income, we set aside €2.6 billion pre-tax to become a zero-Russia exposure bank and to succeed in the future by further strengthening buffers.

Slide Number 4: On top of that, in Q4, we put in place managerial actions to reduce risk-weighted assets to enhance value creation, further reinforcing capital to absorb any regulatory headwinds. This one-off reduction refers to positions EVA-negative or no longer justified in relation to absorbed capital and does not affect future profitability since the asset disposed can be easily replaced in the new interest rate environment with higher-yielding assets with low or zero risk-weighted asset absorption. In fact, we have already started. Capital ratio will remain well above the 12% business plan target, which we confirm, not considering any additional distribution that will be evaluated year-by-year. We clearly have an excess capital.

Slide Number 5: In this slide, you can see that, once again, we are delivering on our commitment with a tailwind from interest rate increases, providing a clear and strong upside to the €6.5 billion net income target for 2025.

And let me take you to Slide 7 to provide some color on the P&L. Slide 7: In 2022, net interest income grew by 20%. Commissions were resilient and the declining is due to negative market performance. Insurance income reached a record high, also thanks to strong growth in non-motor P&C revenues. Operating costs decreased. We have been conservative in provisioning, allocating €1.4 billion for Russia and €1.2 billion as overlays and to favor de-risking. Net income was more than €6 billion when excluding costs concerning the banking industry and provision for Russia, Ukraine.

Slide Number 8: Looking at Q4, we delivered high-quality operating performance. Net interest income was up almost 60% year-on-year, and commissions were up 3% on a quarterly basis despite the absence of performance fees. The total contribution from net interest income, commission and insurance income was up 16.5% on a yearly basis and over 14% quarterly, demonstrating the resilience of our business model. Also, in light of strong core revenue performance, we didn't push on profits from financial assets that were also affected by the disposal of low-yielding capital inefficient assets.

Revenues were up [indiscernible] best quarter ever. We booked a one-off contribution of €36 million for ISP People in addition to the over €40 million in Q2 to mitigate the impact from inflation. We have been very conservative in provisions and booked €1 million as overlays and to favor de-risking. Q4 net income was €1.1 billion.

Slide Number 9: In this slide, you can see the strong acceleration of net interest income up €700 million in one quarter and €1.1 billion compared to the fourth quarter of last year. Rate increases are a strong upside for us. And net interest income will grow by €2.5 billion this year, assuming one-month Euribor reaching an average of 2.5%.

Slide Number 10: In this slide, you can see that net interest income growth on a quarterly basis and yearly basis was driven by the commercial component.

Slide Number 11: Customer financial assets were €1.2 trillion, with a €26 billion increase in Q4. We had a €4 billion positive net inflows in assets under management on a yearly basis, and wealth management will continue to be an important driver for growth in the future and our well balance sheet and efficient business model give us a clear competitive advantage.

Slide 12: We continue to be very effective at managing costs, down 0.4% in 2022 despite very high inflation. Depreciation is up as we keep investing for growth, especially in technology.

Slide Number 13: Thanks to massive deleveraging, the net NPL ratio is the lowest ever at 1%, already achieving the business plan target. We reduced NPL stock by €4.6 billion on a yearly basis, and we had the lowest ever NPL inflows. Let me remind you that we have reduced the NPL stock by €54 billion since the peak in 2015.

Slide Number 14: As a result of this impressive deleveraging, NPL stock and ratios are among the best in Europe.

Slide Number 15: Our underlying cost of risks [indiscernible] 30 basis points, in line with being a zero-NPL bank. We have been conservative with provisions. And in Q4 alone, we booked €1 billion as overlays and to favor de-risking paving the way for the future.

Slide Number 16: As you can see on this slide, NPL coverage continued to grow in Q4.

Slide Number 17: We achieved an impressive Russia de-risking. This exposure decreased further in Q4 and is now very limited and high quality.

Let me take you to Slide 18 to give you some color on the capital position. Fully phased-in Common Equity Tier 1 ratio is 13.5%, up 110 basis points in Q4 when we reduced the risk-weighted asset by rationalizing position no longer EVA positive. Let me be clear, this one-off exercise in terms of size does not affect profitability and gives us a strong buffer against any regulatory headwinds. The capital ratio already takes into account €3 billion in dividend and a 60 basis points impact from the second tranche of the buyback. It does not include the 125 basis points of additional benefit from DTA.

Slide 19: Shareholders are not the only one benefiting from our performance, Intesa Sanpaolo has contributed broadly to society and our excellent performance allow us to create sustainable benefits for all stakeholders.

Slide Number 21: In addition to delivering excellent results, the people of Intesa Sanpaolo are working at full speed across all the industrial initiatives of the business plan. In the past 12 months, we have launched all the business plan initiatives, of which 70% are ahead of schedule when compared to our '22 targets. This year, we will launch Isybank, our digital bank to serve about 4 million existing clients who already choose not to use our branches. You can go through the details of the ongoing initiatives in the next 11 slides.

And on Slide 30, you can see our leading ESG position in the main sustainability indexes and rankings. But for the sake of time, let's move to Slide 35 to see why ISP is well equipped to succeed in a challenging environment.

Slide 35, Italian economy: The Italian economy is strong, thanks to solid fundamentals world-leading household wealth and resilient SMEs. Lower energy and commodity prices will help ease inflationary pressures and as inflation slows the economy is set to reaccelerate.

Slide Number 36: As you can see, this slide, ISP is far better equipped than European peers, thanks to our best-in-class rock -- best-in-class risk profile, rock-solid capital position and the resilient efficient business model.

Slide 37: Let me now recap the key points demonstrating how ISP is well equipped to further succeed in the future, our resilient, diversified and profitable business model [indiscernible]. We remain a wealth management protection and advisory leader with fully-owned product factories and €1.2 trillion in customer financial assets, that can succeed in any interest rate environment. Our capital position is and will remain strong. We cut our exposure to Russia to below 0.3% of group customer loans, and we will continue to reduce it. Zero NPL bank status already achieved. Net interest income provides a strong tailwind. And in Q4, we paved the way for the future with very conservative provisions. Costs are down despite inflection, demonstrated our -- demonstrating our high strategic flexibility in managing costs and the execution of the business plan is proceeding at full speed.

Slide Number 38: To finish, let me turn to the outlook. In 2023, we foresee significant operating margin growth, which will be driven by solid growth in revenues, thanks in particular to net interest income, together with a continued focus on cost management. This, coupled with a strong decline in loan loss provisions will enable a growth in net income well above the €5.5 billion reached in 2022 when excluding Russia. These forecasts are based on conservative assumptions.

We confirmed the 70% payout ratio. And in the next few days, we will launch the second tranche of the buyback. The outlook for this year means that we will continue to reward our shareholders, [indiscernible] for ISP and me personally, while maintaining a rock-solid capital position. This year, subject to shareholders approval [indiscernible] at least €5.3 billion, taking into account the dividend we will pay in May, the second tranche of buyback and the interim dividend as usual we pay in November based on the net income guidance for the full year.

Common Equity ratio is expected to be close to 13% this year, taking into account regulatory headwinds and with no additional actions to reduce risk-weighted assets, and above 13% in 2025 post Basel IV, 14% taking into account the benefits from DTA absorption. All these levels of capital ratio does not consider any additional distribution that will be evaluated year-by-year. It is clear that we have a significant excess capital not only in the short term, but also in the medium and long term. As already said, the €6.5 billion net income target in 2025 will be comfortably exceeded.

It has proven again and again Intesa Sanpaolo is an unstoppable delivery machine, and this thanks to all our people into a strong, long-standing and cohesive management team. So, thank you for your attention, and I'm now happy to answer your questions.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] And the question comes from the line of Giovanni Razzoli from Deutsche Bank. Please ask your question. Your line is open.

Giovanni Razzoli

Good afternoon. Thank you for taking my questions. I have two basically. Can you share with us what are the regulatory headwinds that you expect in 2023? In the last conference call, you mentioned 45 basis points, then there has been a little bit of noise in the market. So, if you can share with us what is an updated figures out there and to what they are related?

And my second question is on the guidance for 2023, whereby you target net income well above €5.5 billion, which is basically the same level of 2022, excluding Russia, but then you have a €2.5 billion of higher NII. So, my reading is that 2023 could be well above the €6 billion rather than well above €4.5 billion. I think, I'm conservative. So, I was wondering whether I'm missing some points or whether my understanding isn't correct? Thank you.

Carlo Messina

So, do you want me to answer [indiscernible] to the presentation for the first quarter results of 2023 [indiscernible] that's reality. But I have to tell you that starting from -- because if we want to deliver a surprise, you are just firing the surprise, but I understood the market. Now, we need to have more compression on our outlook. That's the new style of the European CEO to give a super bullish guidance in order to [indiscernible] share price. So, I will give you the view line by line, so you can create your view on what can happen there.

Remaining with my statement in the presentation that was also driven by the fact that if we accelerate [indiscernible] and formally figures on 2023 that are close level of the 2025 business plan, we will have to change the business plan. And believe me, I think that there will be a timing [indiscernible] of net interest income. We will have to give the market the new figures because the increase is so massive that we will have to disclose to the market. But the real point is that we need to have a clear and stable view on the expectation of the Central Bank.

And today, there is a trend of increase of interest rate, but with some not completely clear view from the ECB. But the real point for me is 2025. So, 2023, when I will give you all the details line by line, you will have your [indiscernible] probably your expectation, not giving from me, but your expectation confirmed. But the real point for me is the need to update the 2025 figures, because today are really too much conservative in consideration of the new scenario. So, let me give you some color, so just to avoid all the next 20 questions on the outlook. So, I want to enter line by line and as usual, I will give a transparent view on all the figures. Then I will elaborate on the regulatory headwinds and our expectation on risk-weighted assets.

So, starting from net interest income, we think to be in a position to have a strong increase in net interest income, €2.5 billion, is absolutely the figures that are in the end of the group is already embedded [indiscernible] of Madame Lagarde of yesterday. So that's the starting point of the 2023 conservative assumption, because I'm thinking that interest rate can increase also on average during 2023. And so that's the first point, there will be strong growth in terms of net interest income.

Then, in commissions. Commissions, we do not have significant commissions. We have only €30 million of commission related to liquidity -- so-called liquidity accounts and are mainly concentrated in corporate clients. So, we will reduce this €30 million, but no more than this in terms of reduction of commission. Then net inflows will be related to wealth management, will be a positive and an increase in comparison to net inflows of 2022. So, our expectation also [indiscernible] is to have between flattish and increase in terms of commission. Then we will see what would be the market dynamic, the reason why I prefer to wait until first quarter of the year to give a more detailed view on the final net income, but also commissions and the combination of commissions and insurance income will be from flattish to slight positive in our view. That's what we see, especially in insurance business, we [indiscernible] strong momentum for property and casualty business. So that will be another driver of growth in our revenues based.

On trading income, we think that we can have a reduction in trading income in comparison to 2022. So that's our expectation. The indication to my people is not to accelerate on a yearly basis. This does not mean that we can have some quarter with very positive results. But on a yearly basis, my expectation is to have reduction in terms of trading income on a yearly basis. Then, moving to the -- so at the end, the revenues will have strong boost from all of these items.

Moving to the cost side. The results in 2022 allowed us to have some contingency that we placed in 2022 in terms of cost base. So, the expectation for 2023 is that the cost base could be from flattish to slight increase depending on the level of inflection during in 2023. Then in 2024, and in 2025, again, we will have a significant reduction in terms of cost base. In the dynamics of the cost, we will have personal costs depending on the renegotiation with trade unions. Our expectation in any case is to have a reduction in terms of personnel cost on an annual basis.

And moving into the depreciation, depreciation will increase, because we will accelerate investment in [indiscernible] Isybank. So that's fundamental. And in this quarter, we decided not to make any kind of specific presentation on technology of Isybank, because as it happens today, all the attention is on capital [indiscernible] share buyback comparison with other peers. So, it's only a way of not giving what I consider in reality, strategic for the group that is the technological upgrading of Isybank and the investment for the group, but depreciation will increase.

Administrative expenses, we placed a portion in 2022 of this cost that we can have in 2023, then we will see what would be the real dynamic of inflation. The expectation today is to have a slight increase, but with the capital budget that is above €1.6 billion in 2023. So, it's an amount that it would be difficult to spend because it's really a massive amount of money. And in any case, we maintain a significant contingency plan in order to reduce for [hundred and hundred millions] (ph) the amount of cost also during 2023, if needed. So that's the position on the cost base.

Also, in 2022, on personnel cost, we had an increase in cost related with incentive schemes. So that's the reason why costs increased in the personnel cost. But at the end, all the dynamics for 2023 is for a potential reduction of cost.

Looking at provisions, the run rate of our cost of risk is 30 basis points. So, related to the net inflows that we expect for 2023. Then we have considered 10 basis points for further disposal of non-performing loans. So, our target is to try to remain, in any case, at 1% NPL ratio, net NPL ratio. But again, it's not a compulsory target in the sense that 1% is the level that is going to reach in 2025. So, we have flexibility also in terms of cost of risk without using overlays during 2023.

So, again, moving into gross income, making your own calculation, I will give you -- I would not give you the final results, but the expectation is well above €5.5 billion. That's the -- well above is a figure that you can decide by yourself. I will give the more precise figures during 2023.

And we need also to have this consistency with the business plan, so maintaining the level of net income of the business plan because we decided to give full transparency on our capital ratio. And the only way to give the capital ratio that is consistent also with the information of the Board of Directors. Because Intesa Sanpaolo, we used to give a significant role also to the Board of Directors. And so, if they approve the business plan, they have figures on business plan, we do not change on a quarterly basis the dynamics of our figures. And the estimates that we made on capital ratio are based on the figures of the original business plan. And that's for outlook and profitability.

So, I'm completely assure that our outlook is an outlook that is really conservative. And in the first quarter, we will have -- you will have all the evidence of our delivery during 2023. But I don't like this approach of giving fantastic outlook and then creating expectations just for the sake of short-term increase in the share price. We are only looking at the medium long-term value of Intesa Sanpaolo as usual. But our estimates -- so the estimates that I gave to you are absolutely more than feasible.

So, moving into the regulatory headwinds, the point of our risk-weighted assets. So, we gave to the market 45 basis points as the impact related to regulatory headwinds. In reality, the after -- the work that we made with the [indiscernible] the final results of this analysis on our internal model will bring to an impact that could be close to 70 basis points. That will be an impact that we will take in a significant portion in the first quarter of this year and other part in the second quarter, but that should be the final impact for us of all the regulatory headwinds related with our internal model. It is a large corporate model. So, it's the area of large corporate, mainly investment grade, large corporate, but that's the impact that we will have in 2023.

Then in 2023, we will have another 20 basis points impact related to IFRS 17 [indiscernible] through the analysis that we made and will be applied in the first quarter, because through the analysis that we made, we have the possibility to increase net income of the insurance business. And with deduction from net equity, we will have increase in net income in the next years [indiscernible]. So, due to this strong capital position, we decided to place in the first quarter of 2023 also this impact. So, these are all the figures related on the negative. Then we will have a growth in terms of risk-weighted assets related to business. They could be in the range of 30 basis points, 40 basis points, depending on the kind of growth that we would be possible to have during 2023. And on the other side, we will have net retained income and the recovery of DTAs. So that's leading more or less 13% during 2023.

I have, also, to add that we had, in any case, further room to reduce risk-weighted assets during the business plan. So that's our expectation. In terms of the next regulatory headwinds, we think that with 2023, we should end the impact for us because there is not an impact coming from the so-called return to compliance through the negotiation with [JST] (ph), but this is really the results of the inspection of the ECB in the company. So, it's the final end of the regulatory headwind process with the ECB.

At the same time, on Basel IV, our estimate today is to have an impact between 60 basis points and 65 basis points. And this is confirmed with further analysis that we made this year and this quarter. So, we can confirm that also looking at Basel IV, we will be in absolute condition to have a capital ratio above 13% in 2025 post Basel IV remaining with roughly 100 basis points of DTAs that can be recorded in the next three years after the entering of Basel IV.

So that's the capital position. So, this means that we have a clear and strong excess capital not only in 2023, but in the medium term. And these -- all these estimates are conservative. So, we decided to have a very conservative approach in all the estimates.

So, that's all. I think that we can close also the meeting for today.

Giovanni Razzoli

Thank you for the color.

Carlo Messina

I am joking.

Operator

We are now going to proceed with our next question. And the questions come from the line of Antonio Reale from Bank of America. Please ask your question. Your line is open.

Antonio Reale

Hi. Good afternoon, everyone. It's Antonio from Bank of America. I have two questions, please. One on capital returns and one on deposit betas, please.

On capital returns, you have the largest dividend payout in Europe at 70% of earnings. I don't think you had budgeted any additional buybacks in the business plan other than the one you're doing. But then, I think also you don't have any rate hikes and as you've vented the business plan was really from a different world in this context. So, my question is where do you stand? You said you would assess this additional distribution on an annual basis. That's very clear. But how are you thinking about your payout and the mix between dividends and buybacks going forward from here? That's my first question.

Secondly, on deposit betas, your market leader in Italy and I'd like to understand what you've assumed for deposit beta in your €12 billion NII figure for this year? And what are you seeing from competition from your client base when it comes to deposit pricing? And what would you expect for the rest of the year? I've seen some of the banks are starting to lower current account fees, which I guess is the first natural step. So, I'd like to hear your thoughts on the moving parts. Thank you.

Carlo Messina

So, thank you, Antonio. So, moving from -- starting from the beta, so we can move in this. It is clear that we are the market leader in Italy. So, there's no other bank in a position of Intesa Sanpaolo. So, our beta is completely different from the one that other players have in the market. But in any case, we decided to have a very conservative stance in our approach for us that is to have a beta between 35% and 40%. I consider that the beta for the families today is close to 3%. So, we are talking about something that is absolutely negligible.

Then during 2023, it is clear that if you want to make forecast and give an indication much better to be conservative, but it is different. We have a market share of 10% -- a market share of 30% in the country. And at the same time, also the kind of correlation that we have between deposits, asset under management, insurance products and mortgages is unique in Europe. So, it is clear that we have a position with our clients that's maintaining the attitude of moving into the interest of the clients, but this allows us to propose a mix of different products that can maximize also the value for the bank. So -- but in any case, on net interest income.

But if you look at the past, so if you look at the period in which the interest rates were so negative, we were able -- we had such a significant negative impact because we had such a strong deposit base. But at the same time, being a wealth management and protection company is also a point of strength in this phase, because you are able to manage in a better way the position of the client and also the different attitude of the clients. I have to tell you that I'm talking about the, obviously, retail and private banking clients. Corporate clients from this perspective are not so strategic [indiscernible] of net interest income generation from -- on the markdown side.

Looking at capital. So, the position of the -- capital position of the bank and the implication of this new environment is absolutely one of the point that I was mentioning in the better understanding of structural change in the market, because with structural change in the market, we had such a boost in profitability -- such a real boost in profitability that we will have to consider the redefinition of the net income generation for the future for the [indiscernible], also the capital ratio embedded in our future estimates. The one that we gave to the market is the minimum.

So, it's a very conservative approach. We have considered a 70% payout ratio. And in terms of excess capital redeployment, I think that it is absolutely fair to wait until the end of the year, not to give before the end of the year any kind of indication. It is clear that we have excess capital. We confirm. And due to the fact that we reached the 1% net NPL ratio in advance, because at the end of 2022, we are already at 1%, there's no other European bank in the same position. And at the same time, we have very low level 2, very low level 3, and we have still reduced also in this quarter, a portion of our exposure to [indiscernible] we are in a unique position to have real and substantial excess capital also in comparison with 12%. So, 12% is really a level of capital in which already we have embedded in excess of capital in comparison with our risk-embedded portfolio of activity. So, we will have all the timing to decide on this excess capital.

It is also clear that price to book will be another way of looking of what you can do with the excess capital. Because from a financial point of view, until the 1% price to book, you can have positive from a financial point of view in realizing and delivering a share buyback exceeding one, there could be other ways of giving back the capital through distribution of reserves and other instruments. But for the time being, the decision on this will be taken at the end of 2023. My expectation is to be in a position to give a very good satisfaction to our shareholders.

But the demonstration of this action -- and also the fact that I decided to give the clear trend 2023, 2024, 2025. There's no other player in Italy -- in Europe, sorry, no other bank in Europe giving such a disclosure because the majority of the bank will have the impact of regulatory headwinds, the real regulatory headwinds, not the one that they are declaring as what they have transmitted to the ECB, but the real impact that we will have in 2024. And then the real impact of Basel IV in which a majority of European banks are telling, we are calculating. We will be below the average. So, we decided to have a clear position also in the medium, long term, and no other player made this clear and transparent demonstration of excess capital also for the future. Then we will decide at the end of 2023.

I think that what we will give in 2023 is really such a significant amount in terms of remuneration, the cash dividend that we will pay in May, the share buyback, the cash dividend that we will pay as an interim dividend in November. So, we do not need and we are not making any kind of competition with other European bank in terms of payment to shareholders. We think to have reached such an amount in which our shareholders can be happy of their remuneration. So, that's all.

Antonio Reale

Very clear. Thank you.

Operator

We are going to proceed with our next question. And the question comes from the line of Azzurra Guelfi from Citi. Please ask your question.

Azzurra Guelfi

Hi, good afternoon. Two questions for me. One is on the capital trajectory that you have given. What is the rate assumption that you are including in that? And is it based on your €6.5 billion net profit in 2025? So, just to understand how much conservatism the results in that. And I know that you have a 70% payout, but over the year, that could add up.

The other question is on the asset quality. You talked about something around 30 basis points of cost of risk and -- for 2023. What the area of the loan book that you are, if any, a bit concerned about that you are monitoring more closely? I saw the flows. I know the level of NPLs. Just to understand, what are you seeing on the ground, especially on the corporate and SME space? Thank you.

Carlo Messina

Thank you, Azzurra, and your title in -- and your analysts are always very smart. So, the capital -- of the capital position, so the -- as I told in making a clear view on what is my outlook, my outlook is a statement in which I want to make clear to the market that we have a significant upside, but we want to remain close in terms of communication, what we have in the business plan. And what we have considered in the assumption embedded in the capital plan is absolutely the business plan.

So, for 2025, we have €6.5 billion. That is completely out of any kind of expectation that you can make today due to the fact that if you consider 2.5% Euribor is absolutely conservative. But if you consider 3% Euribor, they will be in 1-month, what Madame Lagarde told to the market. There will be another upside of another €500 million in comparison to that we have around 2.5%. So, we have -- we are in a clear conservative position. And you know that we are used to give guidance and information on the market only if we are pretty sure to exceed the guidance and the information. So, this is really conservative from our side.

Looking at the cost of risk, so the running 30 basis points cost of risk is more or less considering an amount of inflows that would be in line of 2022 with a limited growth in comparison, because asset quality, today in Italy, is absolutely under control. All the sectors are delivering in very good performance. It is clear that we are increasing the monitoring on the commercial real estate area, that's an area in which, as in all Europe, there's a specific attention, but also a significant portion of overlays are placed on commercial real estate and on energy sector. So that's the area in which we can consider to have an attention -- particular attention during 2023. And as I told, we maintain also a buffer for increasing coverage in order to make disposal of non-performing loans in case of need during 2023.

Operator

We are now going to proceed with our next question. And the question comes from the line of Delphine Lee from J.P. Morgan. Please ask you question. Your line is open.

Delphine Lee

Yes, good afternoon. Thanks for taking my questions. My first question is on the risk-weighted asset reduction that you've had in Q4, which is massive. Would you mind just elaborating a little bit? Because we understand it's not affecting profitability, but -- just wondering if there is some impact on trading that you have already front-loaded or anything that has been included in your NII guidance, anything that you could quantify, just so we get understanding of how that works, because it's quite a big amount.

The second question is on the overlays of €900 million. It's an amount that you have continuously increased to be on the conservative side. Should we expect more to come in 2022? Or is that embedded in your sort of 40 basis points cost of risk? Or is that €1 billion kind of the maximum and you feel comfortable with that level? Thank you.

Carlo Messina

Thank you, Delphine. So, looking at the risk-weighted asset, so I will give you all the details on what we had as an impact in the last quarter of 2022 and the impact that we will have in 2023. So, looking at the trading income, we had a negative impact in Q4 [indiscernible] €70 million related to the disposal of the portfolio that was -- that is mentioned in our slide. So, this is the negative one-off in a quarter related to this.

Then, we lost also €20 million and €30 million of [net income] (ph) in the last quarter of 2022. So that's the majority of the impacts related on this deleveraging that we realized during the last quarter of 2022. Then you can have some another €10 million, €20 million, but no more than this. So, let's put it this way, it could be €120 million, €130 million of revenues. The run rate, so during 2023, it is without the trading income, but is multiplied by four, the net interest income. So you are, again, in a range of [€125 million].

At the same time, we started and we are close to complete next tranche, in which we are increasing the government bond portfolios placing in all to collect for an amount of €10 billion is with a diversification in this portfolio. So, we will have 50% of the portfolio should be to AA and AAA. And the other portion is 30% Italy and 20% Spain. So, there could be a mixed portfolio. And this will give us €125 million, €130 million of revenue. So, we compensated in terms of revenues through a zero risk-weighted asset and also zero impact on capital in terms of actions. So, at the end, the impact of profitability is really zero on our figures in 2023.

And looking at the overlays, we don't think to be in a position to have the need to increase overlays also because our expectation is that the GDP in 2024 should increase in comparison to 2023. So, the need to have an overlay is more related with some uncertainty also connected with the macro environment. So, the specific situation should lead us not to have the need to increase the overlays. In our figures, so in the 30 basis points, we have considered not to use these overlays. And as I told you, as I told also in previous answers, we decided also to have in our budget some room, 10 basis points in order to accelerate further de-risking, but no more increase [indiscernible].

Delphine Lee

Okay. Thank you very much.

Carlo Messina

Thank you.

Operator

We are now going to proceed with our next question. And the questions come from the line of Christian Carrese from Intermonte. Please ask you question. Your line is open.

Christian Carrese

Hi, thank you for taking my question. The first one, a clarification on the cost of risk. So, you said 30 basis points, plus 10 basis points, but you already reached 1% net NPL ratio. I was wondering, look at your slide of your presentation, maybe you are discounting the Bank of Italy scenario with a plus 0.6% GDP 2023. I was thinking about if there will be a mild recession in 2023, how your number on cost of risk could change?

The second question is on fees. You gave a guidance similar to other players of flattish fees for [2022] (ph) or slightly up. On this point, I saw -- we saw the recent press articles on a potential wide ban on inducement for investment advice that could be proposed in April. If you can share with us your thoughts on that, what kind of impact could have on your P&L, if any, so it will be useful. Thank you.

Carlo Messina

So, I will start from the inducement. This regulation is mainly related to the counterparties that use third-party products. So, it is not majority of the case of Intesa Sanpaolo because our point of strength is absolutely to have our own [factory] (ph) in asset under management, insurance business and all the different areas. We have a limited portion in private banking. Obviously, there is not only the product of our group, but the impact on us is really negligible. So, the impact could be massive for other players that are using not their own factory, but for us, it's absolutely negligible.

Looking at the cost of risk, it is clear, depending on the degree of recession, because if we are talking about minus 3%, 4%, we will have to enter into a completely different story and attitudes towards not only the cost of risk, but also overlays and other areas in terms of cost of risk. So, we will enter more in Russia, approach in the Russian management crisis approach. So, we will have to assess the problem and place the needed provisions also for the future.

In case of not a significant recession, we see only limited increase in cost of risk would be 10 basis points, 20 basis points, but not more than this. In that case, we will -- probably we will not complete another reduction in terms of non-performing loans, and we will use the provisions that we have considered in budget in order to cover increasing inflows in terms of inflows generation for the future. That's all.

Christian Carrese

Thank you.

Operator

We are now going to proceed with our next question. And the questions come from a Benjie Creelan-Sandford from Jefferies. Please ask your question.

Benjie Creelan-Sandford

Yes. Good afternoon, everyone. Thank you for taking the question. I just had a question on net interest income. I mean, you've been very clear on the guidance for the outlook just in terms of understanding the dynamics a little bit better in 2022. Is it possible to share with us your average loan yield and your average deposit cost at the end of '22? And how that compares to the same time in the previous year? Or I guess on the deposit side, what I'm really asking is, what's your current beta versus your expectation going forward? And also what the TLTRO contribution was to 4Q NII?

And then just one quick clarification, apologies if I missed it earlier. I think just on the regulatory capital headwinds, you guided to 70 basis points on model updates. Was there an additional impact on IFRS 17 on top of that? And if so, what was the number? Thank you.

Carlo Messina

So, on the regulatory headwinds, we will have 70 basis points that is already including the 45 basis points. So that's all related to the internal model. It's mainly concentrated in large corporate internal model. And on IFRS 17, we will have 20 basis points, and that will be all the regulatory headwinds that we will have for the next year. So, there will be no more regulatory headwinds in our figures. The -- as I told, we will have also an increase in terms of risk-weighted asset coming from the business. And at the same time, we will have contribution from recovery of DTAs and net retained earnings.

I don't know if I have understood your question on the regulatory headwinds. Then, I will answer on net interest income.

Benjie Creelan-Sandford

That's perfect. That's exactly what I was looking to confirm. Thank you.

Carlo Messina

The client rates in our cost base has moved from the end of 2021 to the end of 2022 from 0.14 to 0.20. That's the movement in terms of the cost base. And sorry, on the average side -- you have asked also the average side. We move -- no, that's -- on the total amount, considering also the medium term, also the wholesale is from 0.38 to 0.4. So, it's absolutely negligible, the movement on the cost of funding. At the same time, on the asset side, we moved from a total of 1.6 to a total above -- well above 2.24. That will be the figures. Then you can elaborate, sorry, on this point with Marco Delfrate and Andrea Tamagnini, they will give you all the figures and all the details that you want to share with them.

Benjie Creelan-Sandford

Brilliant. Thank you very much.

Carlo Messina

Thank you.

Operator

We are now going to proceed with our next question. And the question comes from the line of Britta Schmidt from Autonomous. Please ask you question.

Britta Schmidt

Yes. Hi. Thanks for taking my questions. My first one would be on the €29 billion RWA decline. What drove the thinking to undertake such a significant reduction now? And could you perhaps also explain as to whether the regulatory headwinds might have been higher had you still had these assets on balance sheet?

And my second question will be coming back to the potential inducement fee ban. I understand that as a largely captive business, you're a little bit isolated from that. But do you think that the impacts on other players could lead to a margin contraction in the asset management market overall that could potentially impact you? Thank you.

Carlo Messina

Sorry, I didn't understand very well your question, because the line was -- there was a noise in the line. So, I didn't understand very well. Could you repeat, please, the two questions?

Britta Schmidt

Yes, sure. Can you hear me okay now?

Carlo Messina

Yes. Now, okay.

Britta Schmidt

Okay. The first question was just on the €29 billion RWA decrease in the quarter, which is very substantial. What drove the timing of that to undertake this now? And would these assets have potentially increased the regulatory headwinds going forward, if you still had them on balance sheet?

And the second question was regarding coming back to the potential inducement fee ban. I understand you're captive business and you're differently impacted there. But if, let's say, led to a decline in overall asset management margins in the sector for some of your peers, do you think there could also be an impact at Intesa coming just from the pricing of these products? Thank you.

Carlo Messina

Okay, thank you. So, looking at the €29 billion reduction in risk-weighted assets, only a portion of this is connected with our activity in large corporate. So, we are talking about more or less between €5 billion and €7 billion risk-weighted assets. And so that portion could have been affected in case of remaining in our figures by the increase in terms of the model. The other portion is efficiency. And considering that we have already, as you know, a potential impact of 45 basis points, we originally planned to reduce in the first quarter for an amount in line with the management of 45 basis points. When we understood working with the ECB that the impact could have been higher than this, we decided to accelerate other actions that could have been taken during the three years of the business plan. But in any case, for us, it is business as usual. So, it is only the dimension and concentration of action, but not something so complex to realize.

In terms of assets under management and the potential impact on the yield, I have to tell you that looking at the kind of products and especially the kind of strong franchise that we have with our clients, it is difficult to say that we can have a significant impact coming from some reduction in terms of commissions due to the fact that market is changing conditions. So, it is clear that if all the markets will have a reduction of 1 percentage point. So, it is unbelievable that we will have no impact. But if the impact would be 10 basis points, 20 basis points, 30 basis points, I have to tell you that our leadership is so strong that I don't see a significant impact for us.

Britta Schmidt

Thank you.

Operator

We are now going to proceed with our next question. And the questions come from the line of Andrea Filtri from Mediobanca. Please ask you question.

Andrea Filtri

Yes, good afternoon. I have a question on insurance and one on DTA. On insurance, could you please remind us of the level of life traditional reserves at Intesa Sanpaolo Vita and the amount of unrealized capital gains or losses it has today possibly before and after policyholders' interest? And linked to that, what is the lapse rate in Q4 '22 versus Q4 '21?

On DTA, do you envisage any further DTA write-ups as per the one booked in Q4 '22? Thank you.

Carlo Messina

So, for insurance, Andrea, I will -- so we are -- you are so interested in our insurance business that I will suggest to you that we can fix a meeting not only with the Delfrate, but also with Nicola Fioravanti that is the head of our insurance division. So, you can have all the figures and the details that you need in order to make your analysis, and we will set also next week, if you want. So, you can have all that the position of the insurance business made with our people and in complete transparency with all the people that are managing the business. We remain with a significant amount of potential capital gain and strong reduction with the past. This is obvious, but this remains an area in which we will have positive results. But in any case, to give you all the detail, you can have clear access to my people within the organization.

Looking at DTA, we maintain another tranche of these DTAs related with the UBI acquisitions that are in the range of €300 million, €350 million, and we will decide the timing in which we will have this contribution to net income. It is not included in our outlook.

Andrea Filtri

Thank you so much.

Carlo Messina

Thank you.

Operator

We are now going to proceed with our next question. And the question comes from the line of Hugo Cruz from KBW. Please ask you question.

Hugo Cruz

Hi, thank you. I'd like to ask about the costs. Can you tell us -- you said flattish to up in 2023, and there were some contingencies built in 2022. So first of all, I'd like to understand what kind of inflation assumption and ideally staff cost inflation you assumed for 2023? I think there's discussions with the trade unions and obviously, you as the biggest bank, perhaps might have a better insight into those discussions than the other banks in Italy.

And then in terms of the contingencies, perhaps, I was wondering if they are related to Isybank. So, it would be great if you could give us some insight into how much you've already invested into Isybank, and how much you expect to do as well in 2023. So, I just wanted to understand if there are any kind of CapEx that was spent in 2022, that's not going to be there anymore in 2023? That's it. Thank you.

Carlo Messina

On the cost base, you have to consider that in our budget, we have considered an amount of cost coming from inflation, and inflation has been considered on the average from [indiscernible] that could be between €500 million and €600 million. So, it is the initial impact coming from the inflation. And then we made a number of actions in order to mitigate the impact, reducing close to zero, the dynamics of the total cost.

On the personnel cost, we have embedded some figures, but due to the fact that we are in a process of negotiation with trade union, I prefer not to give any kind of indication. So, allow me to be on this point, just talking about the total cost of personnel that should be in reduction in 2023 in comparison with 2022.

The contingency [indiscernible] for an amount that would be in a range between €200 million and €300 million. So, moving the total dynamic of cost in negative territory -- in case of need, obvious, but in case of such an increase in revenues, our cost income ratio will be so positive in terms of dynamics that we will analyze if needed, contingency plan.

On Isybank, we made an investments in -- during 2022 above €100 million, and the expectation in 2023 would be in a range of €150 million, just for Isybank. Then, we have all the technological infrastructure that we move into the bank because our project is then to transform the platform into the IT system of the majority of the retail activity of the group.

Hugo Cruz

All right. Thank you.

Carlo Messina

Thank you.

Operator

We are now going to proceed with our next question. And the questions come from Andrea Lisi from Equita. Please ask your question. Andrea Lisi, your line is open.

Andrea Lisi

Sorry, I was on mute. Thank you for taking my question. The first one is on what do we expect also based on what are observing on the evolution of the economy on -- in terms of loan growth going on in particular for 2023? And also, the deposit trajectory, considering on the one hand, your strength that you have with [indiscernible] but also on the other hand at that there is competition from others and also investment in short-term liquidity can be remunerative in some way. So, what do you expect on the deposit trajectory?

And the second question is on overlays. You accumulated overlays in the quarter. In case you do not use overlays in 2023, do you expect to lease them? Or do you think it is more safe to wait and see also what will happen for the following years? Thank you.

Carlo Messina

On overlays, we will see. It will depend on the assumption related, in particular, on the commercial real estate activity and the [indiscernible] sectors. So that will be the main reason to maintain these overlays. At the end of 2023, we will make all the analysis that we need in order to understand if there is room to maintain or not.

Looking at the economy, the loan growth is reducing the speed. So, it is clear that in the market, there is a lower demand in terms of loans. Company, corporate clients are using their own deposits. So that's what's happening in the country. We see a strong position in any case, strong financial position of the Italian corporate sector. So, we remain very positive on the corporate sector in our countries.

And looking at deposits, the only area is, as I told, is the corporate sector that is reducing some portion the amount of deposits. Families depend on the financial position, but remain an area in which families continue to maintain a significant portion of the savings.

Andrea Lisi

Thank you.

Operator

We have no further questions at this time. I will now hand the call back to Mr. Carlo Messina for closing remarks. Please go ahead.

Carlo Messina

So, thank you very much. We think that our delivery has been very good.

In the first quarter results, we will analyze all the areas and the more precise figures on the real outlook and not the estimate outlook for 2023. And at the timing, we will be in a position also to give you more detailed information on the trajectory also for [2024] (ph). We hope to have all the information coming from the Central Bank on the future view on the real economy and the monetary policy of the ECB, and at the timing, we'll be in a position to give full disclosure on -- for the future and the significant upside that we have for the future.

So, thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.

For further details see:

Intesa Sanpaolo S.p.A. (ISNPY) Q4 2022 Earnings Call Transcript