Trend & Outlook

In 2022, in the context of the fragile recovery from the international emergency due to the Coronavirus epidemic, operations were heavily impacted by the conflict in Ukraine which, since the end of February 2022, has had serious repercussions on the international economic system and on companies’ operations.

Already in the second quarter of the year, the Group activated campaigns to monitor customers that are particularly exposed to the increase in energy prices and the procurement of raw materials, to identify in advance potential signs of impairment of exposures. Those initiatives, which involved a portfolio of over € 10 billion, provided reassuring signs, with only € 95 million in loans classified as non-performing in the second half of 2022, in addition to the € 55 million already classified during the second quarter.

By contrast, as of 31 December 2022, the Group’s direct exposure to Russia and Ukraine involved a generally negligible amount. During the year, the Group laid the foundations for a complete integration of the insurance business through the acquisition, finalised on 22 July 2022, after obtaining the legal authorisations from the competent authorities, of 81% of the share capital of Bipiemme Vita S.p.A., an insurance company operating in the life sector, for an amount of € 309.4 million. In turn, Bipiemme Vita holds the entire share capital of Bipiemme Assicurazioni S.p.A., operating in the non-life sector.

In April, the Board of Directors of Banco BPM actually resolved to exercise the option for the purchase from the partner Covéa Coopération SA of 81% of the share capital of Bipiemme Vita S.p.A., in which Banco BPM already held a 19% interest. The two insurance companies, which concurrently changed their company names to Banco BPM Vita and Banco BPM Assicurazioni, were consolidated on a line-by-line basis starting from the second half of 2022[1].

This transaction, concluded in advance of the date of 31 December 2023 set out in the Strategic Plan, also serves to obtain recognition of the status of a “financial conglomerate” to access benefits in the prudential treatment of the equity investment deriving from application of the Danish Compromise^[2], currently being evaluated by the competent Authorities. As regards the Non-Life/Protection business, in the second half of the year Banco BPM, following the competitive process aimed at evaluating possible partnership options, on 23 December 2022 signed a binding term-sheet with Crédit Agricole Assurances which provides for (i) the sale of the 65% stake in Banco BPM Assicurazioni’s share capital and, subject to the repurchase by the Bank, of the 65% stake currently held by Cattolica Assicurazioni in Vera Assicurazioni’s share capital, and (ii) the launch of a 20-year commercial partnership in the Non-Life/Protection sector[3]. The transaction, which is expected to be finalised by the end of 2023, is based on a valuation of 100% of the Insurance Companies equal to € 400 million.

At the end of 2022, the organisational and governance model of the Parent Company was also redefined: the Board of Directors’ meeting of Banco BPM on 21 December 2022 in fact defined the new structure of the General Management and top executives. In more detail, the Chief Financial Officer (CFO) Co-General Management was established, the scope of the Chief Business Officer (CBO) Co-General Management was redefined, the new Corporate & Investment Banking (CIB) function was established and the position of Chief Risk Officer (CRO) was established.

The new structure fosters better coordination of the Group’s activities with respect to the path outlined in the 2021-2024 Strategic Plan and facilitates the governance of areas of greater complexity in line with the evolution of the external context, to better respond to the expectations on governance developed over the last few years also in terms of supervision.

 

Further progress in the derisking process (-€ 2.6 billion in the year[4], including the sale relating to the “Argo” project finalised in the second quarter of the year), resulted in a reduction in the gross NPE ratio, which came to 4.2% (compared to 5.6% at the beginning of the year). As part of the NPL management strategy, additional sales of more than € 500 million were planned over the term of the plan, with a clear benefit on the stock of gross non-performing loans and the credit quality indicators, whose expected economic impact was already charged to the income statement in the first half of 2022.

During the year, the Group also carried out important capital management operations: in January 2022, an issue of Subordinated Tier 2 instruments was completed for an amount of € 400 million, with 10-year maturity, targeted at institutional investors, which is part of the Group’s Euro Medium-Term Notes Programme; this operation was augmented, in April, by the issue of an Additional Tier 1 perpetual instrument for an amount of € 300 million, reserved to institutional investors, which by making it possible to achieve the Additional Tier 1 capital target, has further strengthened the Group’s capital position.

During the year, three green bond issues were completed in the Green, Social and Sustainability Bonds Frameworks: the first, in March, related to a Green Covered Bond for an amount of € 750 million, with 5-year maturity, targeted at institutional investors; the second, in September, regarded Green Senior Non-Preferred Bonds for a nominal value of € 500 million with 4-year maturity, and the final one, in November, regarded Green Senior Non-Preferred Bonds for a value of € 500 million and a maturity of five years and two months. A further issue was made, in January 2023, of Green Senior Preferred Bonds for € 750 million, also intended for institutional investors. An additional issue was finalised in July, of a Green Senior Preferred Bond, for a nominal value of € 300 million, subscribed by a single investor based on a private placement to finance green disbursements, which supplements Banco BPM’s ESG strategy. Those issues represent the effective implementation of the environmental and social sustainability objectives that increasingly guide and characterise the Bank’s various business areas.

In 2022, Banco BPM concluded an own share purchase programme to serve the employee incentive plan for a total of 4,582,640 shares (equal to 0.30% of the ordinary shares outstanding) and a total value of € 16 million. Following the conclusion of that programme, and taking account of the assignments to employees during the period, Banco BPM held 6,159,480 own shares as at 31 December 2022, equal to 0.41% of the share capital. On 15 December 2022, the European Central Bank (ECB) notified Banco BPM of the SREP decision containing the outcomes of the annual Supervisory Review and Evaluation Process (SREP). As a result of said decision, the minimum requirements that Banco BPM is required to meet for 2023, are as follows:

CET 1 ratio: 8.71%;

Tier 1 ratio: 10.69%;

Total Capital ratio: 13.33%[5].

Banco BPM Group’s capital solidity is fully confirmed as at 31 December 2022, as it far exceeds said prudential requirements, both with reference to the effective ratios calculated in accordance with the phased-in criteria in force for 2022, and considering the capital ratios calculated on the basis of the criteria in place when fully phased.

Lastly, in relation to the credit rating assigned to Banco BPM, the following is noted:

• on 26 April 2022, Fitch Ratings assigned new ratings, all in the investment grade area, with a stable outlook. In detail, the Long-Term Issuer Default Rating assigned is BBB- and the Long-term Deposit rating is BBB. The rating has reflected a positive valuation based on various factors, including: revenues, risk profile, funding, capitalisation and management quality;
• on 11 May 2022, Moody’s Investors Service upgraded the ratings by 1 notch, bringing the Long-Term Senior Unsecured rating to Ba1 and the Long-Term Deposit rating to Baa2, with stable outlook. That upgrade mainly reflected the Bank’s improvement in credit quality as a result of the continuous process of derisking its loan portfolio. Moody’s also noted the capital position of Banco BPM, which significantly exceeds the regulatory requirements;
• on 14 October 2022, DBRS upgraded the ratings by 1 notch, bringing the Long-Term Deposits rating from BBB to BBB (high) and the Long-Term Issuer Rating/Senior Debt from BBB (low) to BBB, with stable trend. This rating action also reflected Banco BPM’s success in improving its financial position, specifically in terms of asset quality, profitability and operating efficiency.

 

 

Last update: February 2023

 

 

[1] For more details on the consolidation of the two insurance companies, please refer to point 1 of the Explanatory Notes of press release: Banco BPM Group Results as at 31 December 2022

[2] Under the premise that, by effect of the acquisition of Banco BPM Vita, Banco BPM Group will be recognised as a financial conglomerate as defined by Art. 3 of Legislative Decree no. 142 of 30 May 2005, Banco BPM submitted a petition for the application of Art. 49 (1) of Regulation (EU) no. 575/2013 (CRR). Based on this regulatory provision, Banco BPM expects to obtain authorisation to not have to deduct the book value of the interest in Banco BPM Vita from CET 1 Capital. In this instance, the equity interest not deducted from own funds will be considered an exposure to credit risk to be weighted in compliance with the CRR.

[3] Company which, in turn, holds 100% of the share capital of Vera Protezione.

[4] Change in gross non-performing loans, without considering transfers from performing loans recorded during the period. Includes sales, returns to performing status, derecognitions, recoveries, write-offs and other changes.

[5] For more details on the calculation methods for capital ratios and minimum requirements, please refer to point 6 of the Explanatory Notes of press release: Banco BPM Group Results as at 31 December 2022

The overall picture continues to be conditioned by geo-political tensions stemming from the Russia-Ukraine conflict, with significant impacts on growth prospects and inflationary dynamics that, having started with commodities, then spread to other sectors.

Against this backdrop, after the strong growth recorded in 2022, the Italian economy is expected to slow significantly, also discounting the effects of a restrictive monetary policy. Given this context, exogenous variables will likely continue to represent the main influence on the

Group’s operating performance in this financial year. Despite the worsening conditions of ECB funding through the TLTRO facility, net interest income will benefit from the hikes in short-term rates, particularly in the commercial-driven component; indeed, the Group maintains a significant sensitivity, amounting to approximately €160 million in a scenario of a parallel shift of +100 bps in the rate structure.

Fees and commissions, while still discounting a high volatility context affecting in particular fees from investment products, both up front and running, will be supported by the dynamics of the stream generated by the core commercial banking activity.

The trend in operating expenses, which will continue to be one of the main areas of focus for managerial action, may be affected at least in part by inflationary pressures and the effects of a sustained investment policy in support of the business development initiatives envisaged in the Strategic Plan.

The dynamics of defaulting NPL inflows this year could increase as a result of the economic slowdown, with an impact on the cost of credit for which we continue to maintain a cautious approach in the absence of improvements in the macroeconomic framework.

Coverage levels are expected to continue to be robust, also thanks to the conservative valuation approach adopted in recent years and confirmed during 2022, on both performing and nonperforming exposures.

For the full year, the Group’s net income is expected to improve significantly compared to last year, along a trend that, even on a projection basis, exceeds both the profitability trajectory and the overall targets outlined in the Strategic Plan.

 

Last update: February 2023