Operator: Good afternoon. This is the Corus Call conference operator. Welcome and thank you for joining the UniCredit Full Year 2012 Group Results Presentation Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions.
At this time, I would like to turn the conference over to Mr. Andrea Maffezzoni, Head of UniCredit Group Investor Relations. Please go ahead Sir.
Andrea Maffezzoni - Head of Group IR: Ladies and gentlemen welcome to our 2012 fourth quarter and financial year presentation, before starting if you are from my side I don’t think I need to tell you once again that the macroeconomic environment in Western Europe, I think particularly in Italy remain a very difficult in 2012, leading to a negative impact on lending. And this in addition to historical low, EURIBOR which dropped further in Q4.
It is against this backdrop that I'm very pleased with the way our results (adapt) in 2012. Our gross operating profit remained stable. Thanks to the implementation of our strategic plan actions such as an active focus on cost cutting measure and cost containment, and we made EUR865 million profit in 2012.
In view of the difficult situation in the fourth quarter, we strengthened significantly the coverage of impaired loans to 44.8%, having taken certain loan loss provision of the EUR4.6 billion.
At 43.4% in Italy, we are up 320 basis point quarter-on-quarter and we reached a level that is the highest in the country. This will put us in a stronger position definitely looking 2013. The bottom line impact of this initiative is partially offset as you will see by a goodwill tax redemption, with no impact on our capital which has kept increasing.
In 2012, we were able also to increase our tangible equity by more than EUR11 billion and to reduce our funding gap by EUR33 billion, thanks to EUR25 billion growth in direct funding.
In terms of commercial funding gap, it has dropped overall from EUR117 billion to EUR66 billion, down by EUR51 billion, of which an impressive EUR36 billion in Italy.
Our capital ratios have increased with the Basel 2.5 ratio of 10.8% and the fully-loaded Basel 3 common equity higher than 9%. The 10.8% core Tier 1 ratio does not include the positive impact of the sale of the 9.1% stake in Pekao that we did in January and the proposed disposal of (tier bank) in Kazakhstan, which will take the cost, the innovation to 11.14% from 8.4% one year ago. Let's keep in mind that to calculate our fully loaded Basel 3 common equity Tier 1 ratio we're very conservative and consider a lot of risks that eventually may not necessarily materialize and we also don't consider future earnings impact.
The CEE& Poland once again has confirmed our expectation as the Group profit engine, with gross operating profit jumping more than 15% in the region in Q4 versus the same period of the previous year. To further strengthen the potential of the CEE& Poland we have actively managed our business portfolio in the region, taking a number of measures to streamline to improve efficiency to save costs throughout the area. This involves also among other things the ongoing sale process of Kazakhstan. This is a realization of our operation in Baltics and the creation of our Car financing joint venture in the rapidly expanding Russian market has been done, if you remember with Renault-Nissan.
Our CIB transformation continues with the division being refocused on fewer larger corporates with the need of recurring capital market services and this is creating more of a possibility for cross-selling. The focus on best clients in terms of both profitability and risk provides return higher than the cost of capital at country level.
Then in terms of risk-weighted asset, the overall risk-weighted asset in CIB has dropped by a massive 53 billion, since 2010, so like three years before Basel 2.5 impact, 53 million of which 32 billion in the last year. All the measure we've taken in 2012 as you will see have laid the big ground for future and will allow us to benefit early from possible upswing in the economy.
Based on our positive annual result and with the full confidence in the Group ability to generate recurring profits going forward the Board of Directors this morning we propose – the Board of Directors we propose a 2012 dividend of EUR0.09 to the AGM on May 11.
Now, we can go through the presentation. I will not make specific comment on the Executive Summary. Only thing I would like to say here is that based on the work already undertaken within the Group we are confident that we are very well positioned to benefit early from a future economic recovery and we think we will start seeing the first sign across Europe in the second half of this year.
Let's move now to the Slide 5; net profit and net operating profit. As you can see in 2012, we realized a net profit close to EUR900 million. Despite of the fourth quarter 2012, it is showing EUR553 million loss. Loss is primarily due to restructuring costs in Germany and Italy and the impact of Kazakhstan, which has been reclassified into asset held therefore sale. This is in view of the sale of the bank.
The net operating profit standing at negative EUR2.6 billion in the fourth quarter, obviously reflects the EUR4.6 billion loan loss provisions taken once again to finance the impaired loan coverage ratio in Italy. Coverage ratio right now is at 43.4%, again one of the highest in the market. The coverage increase was partially offset at the bottom line by the impact of the goodwill tax redemption. This had a positive effect of EUR2 billion on our tax. Net operating profit was supported by our effective implementation as we will see of group-wide cost-cutting.
I will move now to Slide 6; few comments about the net operating profit breakdown. Revenues in the first quarter were particularly hurt by the persistent negative economic environment and by the historically low level of interest rates. This was in spite of renewed positive trend in fee generation and a clearly visible impact of our cost-cutting effort that are down almost 3% compared to 2011. Again, you can see from this slide, the effect on the loan loss provisions. CEE & Poland, they confirm its position as a growth engine for the Group with buoyant say, results in Poland, Russia and Turkey, that are three of our key markets. In spite of a slowdown of activity across some part of the region, CEE & Poland the net operating profit was stable year-on-year reaching EUR2.5 billion.
On Page 7, comments about revenues. The total revenues remain stable year-on-year with EUR25 billion, but dropped in the fourth quarter of 2012 versus the same quarter in 2011. Again, this was due to rock-bottom interest rates, a continuously negative economic environment and adverse market conditions. The good news is on the fee side, the fees were up in the quarter, showing a positive strength in investments and transaction services.
The net interest income was impacted as you can see by the historical low interest rate as well as persisting weak loan demand in Western Europe, whilst there was a robust demand in CEE & Poland, with revenues kept growing particularly in Turkey and Czech Republic. Once again, we have a completely different trend between Western Europe and Central Eastern Europe.
Net interest, Slide 8, again, affected by the very low interest rates and low loans demand impacting volumes, although improving over the period the cost of funding remain pretty high compared to the past issuances which are now maturing. This was despite of the tightening of the sovereign spreads in the fourth quarter 2012.
Once again, CEE & Poland stands out with net interest up on year basis by a healthy 4.3% driven by Turkey and Poland, in particular, both in terms of volumes and rate effects. Western Europe suffered both in the quarter and the full year, primarily due to Italy and also Germany.
A look to volumes; and we are on Slide 9. As you know one of the strategic plans core objective for us was to reduce the funding gap. In one year the funding gap shrunk by more than EUR33 billion. Positive strength had continued across all regions in the fourth quarter of 2012 with the material contribution especially from Italy where we had in one quarter over EUR13 billion.
As I mentioned earlier, the commercial funding gap dropped from EUR117 billion to EUR66 billion, down by EUR51 billion; again mostly in Italy where we had a drop of EUR36 billion. Then also to direct funding, the ratio improved further to 130% from 121% one year ago. Loan volumes are down, primarily due to market counterparties and weak commercial demand in Italy and Germany, on the left side up in Poland and Central and Eastern Europe. Customer deposit decreased slightly versus the third quarter in 2012 due to market counterparties. Whereas in Italy we have been particularly successful at attracting over EUR5 billion of new funds in the fourth quarter, illustrating in some way the strength and the quality of the UniCredit brand in the country. Again, Russia, Poland and Turkey also saw very good inflows.
Let's move now to net interest. Again, this is Slide Number 10, to show that low customer rates are affected by historical low Euribor rates. We almost offset this trend thanks to the ongoing repricing effort and the fact that our lending customer rates only declined 11 basis points compared to the 16 basis point drop in the Euribor is a confirmation of our ability to outperform the market. Same on the customer deposit side where we have a drop, but it is below the Euribor movement.
Let's have a look now to the trends in terms of fees and commission, Slide 11. As you can see, net fees and commission were up in the fourth quarter, so this is a good news, versus the third quarter, jumping plus 7% in fee in Poland, mainly thanks to Czech Republic and Poland. Investment service grew by close to 17% in the quarter after a particular difficult year and this was thanks to better market condition and to the sale of third party products generating new commission and fees, as well as stronger inflows of assets under management. Important point about selling third party products, meaning corporate bonds to our retail market shows internal liquidity we don't have in this moment any issue.
Transactional & Banking Service fees were up, driven by collection and payments. The problem for the financing services fees that dropped considerably because they are linked to the lending side in Italy especially on the CIB side and also linked to the new overdraft regulation that has been implemented recently and will continue to impact also in 2013.
I would move now to Slide 12. We move to the cost side. I think that we have no hesitation to say that our cost cutting drive is working, with cost overall dropping 2.9% compared to the end of 2011 and down 4% in Western Europe. We are also able to offset the typical Q4 seasonal trend with cost dropping 1% also in the last quarter.
The decrease of staff expenses was driven by reduction of staff in Italy, Germany and also Austria. This slide shows diverging trend between, again, Western Europe, where costs are shrinking and CEE & Poland where we are seeing an increase, primarily thanks to the investment to support the business in the region. And you have to just keep in mind that we grow 1.7% in CEE against an inflation rate that is above 5% so I think it’s a good achievement, anyway.
Renewed management initiatives are being put in place for 2013 with the aim to at least confirm the 2012 cost base despite planned investments, due to regulatory compliance and investment in the business.
This slide Page 13 is new clearly shows the dynamics underpinning our successful cost saving efforts in 2012. In fact the amount of cost saving as you can see exceeds the reported 2.9 decrease year-on-year as we had also to offset the impact of some negative items such as the inflation and IT cost in total EUR200 million so we have to solve this cost and generating the additional cost reduction.
We reduced staff expenses both by cutting the number of FTE as well as bringing down staff unit cost. We paid particular attention the discretionary component obviously of our cost. FTE Slide 14 is down materially since the end of 2011 with a reduction of more than 4,000 people bringing the total number of FTE in the Group to slightly above 150,000, 160,000.
Most cuts were made in Western Europe particularly in Italy, where the staff numbers are down by 1,500 people and this will have obviously sustainable positive effect on HR cost. We have some also (environment) in Poland thanks to improved efficiency and productivity.
Page 15, also this is a slide we never presented up to now. You have seen before what we have been able to achieve in only one year in term of cost reduction. As mentioned earlier, we will continue our actions and launch new initiatives. This slide gives you a summary overview of our recently launched additional actions, which shows our continuous effort on cost containment. We identify the number of projects, which will allow us to make additional cost saving. We expect that this measure will create saving with a net present value of EUR1.8 billion. Gross was likely more than EUR200 million of integration cost taken in the 4Q 2012, so net present in total EUR1.8 billion.
Let's move now to cost of risk. As discussed already, through the presentation, we took EUR4.6 billion loan loss provision in the last quarter of 2012, this in order to take in account the difficulty of this economic climate. We have done EUR2.1 billion additional provision on top of the normal run rate to improve the coverage in Italy. This conservative approach to provisioning has driven up, obviously the cost of risk in Italy, quite considerably. This high rate is due the factor to one-off provisioning and does not indicate a future run rate. There is an increase as you see also for Germany that is explained by a single large ticket and already this quarter we go back to the normal level about 40 basis points, 50 basis points.
Slide 17 show that the additional provisions taken in Italy were focused on specific categories, which have been particularly hit by the economic slowdown. The coverage ratios of these categories have been material improved as you can see. Just to give you an example, the coverage ratio of household mortgages increased by 500 basis points to 7%, where SME increased by 400 to 45% and CIB was up 800 basis points in the quarter standing at 42%. So this is a slide that gives you a better indication of the efforts then.
I will not comment on the Slide 18 about eth Group asset quality, that I think is better to go directly Italy. So, Page 19, and here you can clearly see the impact of the additional loan loss provision on the Italian loan portfolio where the coverage ratio is up by 320 bps. The coverage ratio of both the NPS and the other impaired loans has been significantly enhanced. Based on currently available data once again we estimate to one of the best coverage ratio here in Italy. (We'll echo) to say that clearly that the increase of coverage ratio is not due to a specific request from Bank of Italy. It is almost entirely our decision. Bank of Italy (doesn't allows a) sample of our portfolio and they came back to us with a very marginal request of additional provision. So, it is a managerial decision to improve our coverage.
Let's go to Page 20 as well an important slide. As it shows you that our coverage ratio including the collateral held against gross impaired loans is 140%, with the bulk of collateral being prime real estate assets. And I would like to remind that we have run the evaluation of the collateral at the end of 2012. So, we think that this slide is very realistic and is respect in the value of our collateral, the value of our coverage.
I will not comment too much on the next two slides these are just for your benefit in order to understand better the distribution of provision per segments of customers you can see Medium Enterprises segment has been the hardest hit by the crisis. Same on Slide 22 is divided by – we see provision by industrial sector, so again I leave to go through. This has been given to give you more understanding of our provisions.
Slide 23, as well not too much to comment. Only Italy is showing some increase in terms of gross impaired loans the rest is stable.
24 is a pretty dense slide. I don't want to go through. It will to take too much time. Again, enhancing asset quality is our number one priority and to ensure this we are implementing a strict criteria for new loans and proactively managing both the existing performance portfolio and the existing impaired portfolio.
In terms of new procedures and stricter, let's say, new lending criteria, just to give you an example, the 12 month default rate for new loans to medium enterprise halved from 2010 and 2012. We are also actively managing the existing performing portfolio, reducing our exposure to riskier asset classes more than the market. In the last two, three quarters, we have seen this trend where we are reducing more than the market. At the same time, we are creating – and we will see later on, optimization portfolio to minimize new inflows to impaired loans and to reduce overall exposure.
Page 25, not too much to say; it is the walk through the results of the quarter, just to remind EUR2.7 billion in the middle, EUR2 billion is the goodwill tax redemption, about EUR700 million related to deferred tax assets on loan loss provision in Italy.
Balance sheet structure, Page 26, as well, we can say that we have a very sound balance sheet. I will like just to remind here that our tangible shareholders' equity increased by over EUR11 billion in 2012, bring our leverage ratio to 17.1. It is one of the lowest in Europe. Tangible equity kept growing thanks to improvement in negative valuation reserves offsetting the loss in the fourth quarter.
Slide 27, I will not comment too much in opting new funding. Slide 28, we exceed our 2012 funding targets, rising closer to EUR35 billion and was partially profound in 2013, the target for 2013 is EUR29 billion, about EUR17 billion for Italy, of which we've already done 16%. We don't see specific criticalities considering the good liquidity situation of the Group.
Now to capital, Slide 29, as you can see, risk weighted assets continue to be well balanced throughout the Group, 34% in Italy, 25% in Germany and so forth. I'll mention at the very beginning risk weighted assets are down by considerably EUR33 billion year-on-year, primarily thanks to the ongoing optimization of CIB allocated capital, but also to unfortunately weaker new credit demand in Italy and partially in Germany.
Slide 30, just to show the big effort done by corporate investment banking division, it has been able to reduce risk weighted asset by EUR53 billion since 2010, a material amount and then the impact of the new Basel 2.5 regulations has been EUR17 billion.
Capital ratios are good and stable, we are on Page 31. Here you can see the positive impact of the drop in risk-weighted assets on our Basel 2.5 Core Tier 1 ratio, which stands today – stands at the end of the year, 10.84%, up quarter-on-quarter by 17 bps and this will reach 11.40% if take into account once again, the 9.1%, the sale in Pekao and the expected sale of ATF.
Let's now have a look at Page 32, our calculation of the fully loaded Basel 3 common equity ratio. As you can see, the conversion from Basel 2.5 had a 164 bps impact. In making this calculation, we've been once again very conservative and have taken into account, a lot of risks that could also not materialize; and we've also not included any future earnings impact or any other optimization actions. So it's a pure conversion from the two regulations. In addition, the 9.2% Basel 3 doesn't include again, Pekao and ATF, with this; it will go up to 9.4%.
We are now at Slide 33. As I said already, we are actively managing our assets with the aim to extract maximum value from our portfolio. In Kazakhstan we have signed an agreement for the disposal of ATF, the closing depending on the approval of the Kazakh central bank. It is expected hopefully soon. Successful sale will add 8 bps to the Common Equity Tier 1 fully phased at December 2012. Since December ATF is no longer consolidated.
Regarding Poland just to remember that we optimized the Group capital by selling 9.1% of Bank Pekao that anyway remains clearly for us a strategic investment, and we are fully committed to that and the transaction will lead to a positive impact in term again of common equity of 13 bps. Very important also thanks to its extremely strong capital position, UniCredit Bank AG in Germany will propose to its AGM to vote on the distribution of EUR1 billion extraordinary dividends to the holding, UniCredit S.p.A., in addition to the ordinary dividend of EUR1.5 billion dividend, so in total EUR2.5 billion. It's important to keep in mind that even after the proposed dividend distribution, UniCredit Bank AG will continue to maintain very high Core Tier 1 ratio (indiscernible) at 17.4%. Meanwhile UniCredit S.p.A. Core Tier 1 ratio will improve by 146 basis points. And this action shows the increasing capability of the group to manage its capital.
I will move now to Italy. We're almost to the end just to show Page 34, the effect of the Italy turnaround. Again, part of the increase – loan loss provision; all indicators are moving in the right direction. Gross operating profit is up by close to 17%. The operating costs are down 7% and the cost income ratio dropped more than 9% to reach 54.5%. So this is Italy Commercial Bank.
Slide 35 as well is a new slide. As I said already, one of the important action we are implementing in the context of the Italy turnaround is the creation of an optimization loan portfolio, which we have identified based on the risk return criteria. This portfolio is mostly composed, as you can see, of performing loans that we are going to manage ad hoc risk mitigation strategies, plus some non-performing loans.
The objective in the end is to minimize the expected loss and inflows to impaired loans and to increase the return on capital. The portfolio is currently EUR32 billion risk-weighted assets, including real estate, corporate, small business, and also household assets. And the plan by 2017 is to reduce it down to around EUR14 billion; so, from EUR32 billion to -- sorry, EUR13 billion. This obviously will impact positively on our cost of risk.
Now, I will conclude the presentation with an outlook about 2013, starting from confirmation that 2012 was really very difficult year. This difficult negative economic climate will have obviously an impact on our strategic planned financial objectives. This objectives when defined they were very stressed, but they did not factor in this precedented difficult economic environment and therefore they will be revised. However let me stress that old underlining actions, cost cutting reduction of risk weighted asset risk is stream lined to improve productivity, and efficiency, all these actions have been actively pursued and they are in place and we are continuously looking at new internal ways to improve our business.
In general we believe that at least the first half of 2013 will be similar to the second half of 2012. It's still difficult macroeconomic environment, especially in Italy obviously with EURIBOR as we say low and the cost of funding that will stay stable and pretty high. This obviously will have an effect on the net interest income, but what we are trying to do and will do is to offset this trend as much as we can taking specific action such as continuous effort of repricing and reviewing our product mix.
So we are confident to partially at least offset this negative trend especially in the first half of 2013. Definitely we continue to manage cost, as I said already at least with the target to keep them stable, where 2012 despite of additional investment that you have to do in order to complying with the regulators request and to sustain our investment for developing our business. We have launched a set of new action which should yield additional savings of EUR1.8 billion of net present value as we have already presented to you.
In term of provisions, we see provision going slightly down. Here I want to be clear, when we say it's slightly down, it means provision net of the EUR2.1 billion that we have done in addition this year. So, we have concluded the year with EUR9.5 billion. You take away the EUR2.1 billion. This is the starting point and we see so much light improvement from that number.
So it will be a challenging year. But we think that with what has been done up to now, by the Group we feel comfortable and we think we are ready to catch any potential upswing coming from a recovery that we may expect starting from the second half of this year. The diversification will help anyway, because (in certain) Europe region continue to perform in a positive way and we have also some business like asset gathering or asset under management that seems has started this year really well.
Before my short conclusion, I just want to confirm again that we aim for a minimum level of 9% fully-loaded Basel 3 common equity Tier 1 also in 2013. Going back to the dividend, I forgot to say that for this year, the share go ex-dividend in May 2013 and the payment will be made on the 23 of May 2013. So, ex-dividend (detail) may payment done on 23 of May.
In conclusion, it was a tough year, but I'm proud of the hard work done by everyone throughout the Group and really thanks all my colleagues for their strong contribution in the implementation of our strategic plans management actions. Thanks for this action we finished the year with almost EUR900 million and based on the strong confidence that Board has in our ability to generate sustained revenues for the future it will propose a EUR0.09 dividend to the AGM.
Our balance sheet is definitely stronger, much stronger than one year ago. Our capital is solid and our tangible equity is up EUR11 billion whereas the funding gap was reduced by further EUR33 billion. We have increased significantly our loan loss provision without affecting capital any percent and now have the highest coverage ratio in Italy and this will make definitely us stronger going forward. Finally, we're proactively managing assets throughout the Group as you have seen in order to improve value creation and this will continue also in 2013.
So, we don't believe -- I don't believe 2013 will be an easy year. But I'm sure that we're in a good position to take full advantage of potential improving economic climate.
I will stop here. Many thanks for listening and now we can open the stage for question. Let me remind everyone once again maximum two question at a time so that everyone can get a chance to ask. Thank you very much.
Operator: Francesca Tondi, Morgan Stanley.
Francesca Tondi - Morgan Stanley: Well done on the restructuring on sales in Kazakhstan and frankly on doing more clean-up. I think you've done well there. Two questions from my side. Your capital restructuring actually into Italy again very helpful so it should be paying 2.5 billion effectively than you've taken 1 billion from the (Macao) sale more dividends so looks as if partnering company's capital 200 basis points up. What drives it, is Italian regulator effectively getting little bit more (tougher) and saying – and telling you please bring more capital back into Italy is this something that you were planning. Clearly you had a lot of capital elsewhere if you can discuss little bit how you came to this decision why now and also perhaps the 200 basis points more or less better capital in the partnering company brings it what level please? And the second question is guidance and cost. You had 1.8 billion of value of cost restructuring which is nearly 12% of your cost base. I know you have investments, but I am very surprised that you can now give a better guidance in just last call say in 2013, can you please elaborate the comeback as clearly, the environment is difficult as you just said, what you can help with is cost, and as I said, I'm bit surprised, you can't give us guidance at least for this year for more than that, it doesn't mean it's going to be more than in 2013 or '14 if you can again elaborate, that will be great.
Andrea Maffezzoni - Head of Group IR: With respect to the capital allocation, movement of capital to the parent company. I think that on the regulator side not significant changes now compared to 12 months ago that the allocation of capital and circulation of liquidity still in Europe remains a bit complicated let's say, just to be polite. I think that we had a number of – we are working since many months on this opportunity selling Kazakhstan and hopefully introduction would be executed soon and it has been a very long process. Same the repatriation of capital from Germany has been a combination, a very good profitability up there and also a very good ability of the bank to manage risk-weighted assets down, so to the point that in spite of the fact that we distributed EUR2.5 billion of the core Tier 1 always should be the reality it goes up year-on-year. So, there was no ground at this point to not distribute capital and so forth. How to use this capital, ideally especially if the overall let' say climate, the overall perspective for the economy will improve a bit ideally, having capital in the holding helps in order to decide where to put capital and to better locate capital for business with direct geographies with high return. As you've seen, Central and Eastern Europe is growing, and we will be pleased in case of need to support further growth. So, not driven by regulator, but I think driven by an overall situation in the Group that makes possible now the better circulation and allocation of capital. About costs, the cost is a continuous focus on our side. We have been prudent for 2013 because we want to start to do investments to develop business. There's now some time that we have not invested too much. The deduction that we show, the famous EUR1.8 billion have been activated already – some in 2012, some in 2013, but once again, when you start something new in term of cost cutting or cost containment the effect is never immediate. For example, one of the action is an additional closure of 350 branches, additional closing. Clearly we will do 110 branches in 2013, out of this 350 additional, but the benefit we started second year, so there is also this effect of starting cost management, on improving cost attention to cost with not immediate benefit on the year. So, the guidance is a minimum level; maintain the same level for 2012. Clearly, if we do better, why not, we will do our best.
Francesca Tondi - Morgan Stanley: How much of the EUR1.8 billion you think will come through in 2013?
Andrea Maffezzoni - Head of Group IR: 2013, not too much because if you look, the Italy, Germany, Austria and also what we call Newton, is about mostly reorganization of network and reorganization of the corporate centers. Also; Newton, is a discussion ongoing with some IT providers. We should sign a contract hopefully by mid-2013, but the time the contract will be in place, we will be already up to the end of this year. Then looking, starting 2014, we will have clearly the benefit and Newton is one of the major contributor to this effort to cut cost.
Francesca Tondi - Morgan Stanley: Yeah. So, effectively, 2014 guidance could be lower than '13 for costs?
Andrea Maffezzoni - Head of Group IR: Yes, yeah.
Francesca Tondi - Morgan Stanley: Okay, that's very clear. And one more follow-up question, you said, look, on capital, having capital in the parent company gives you flexibility or where to allocate it. You mentioned CEE. The CEE and the Bank Austria; that already has a lot of capital. So, are you thinking that is where it's going to go or are you thinking actually its more Italy where the capital is needed?
Andrea Maffezzoni - Head of Group IR: For example – I will give you an example. For (Central) Western Europe, there was a potential issue in Turkey, meaning, the minimum capital requirement was supposed to be 14% as there the limit. In Turkey, it makes sense to invest. Now, it could be that we don't need to invest this capital because it could be that the capital requirement of 14% will be dropped to 12%, so we are waiting for news, but this was a potential example of investments in (accounts are) still growing.
Operator: Ronny Rehn, KBW.
Ronny Rehn - KBW: My two questions two questions would be on the details of the Bank of Italy review, if you could give us a little bit insight into how much exposure they have reviewed and the small recommendations that they have given where they were and which area? And secondly, you mentioned that you might review the strategic plan. I just wanted to ask you whether you already have a date set for a new strategic plan based on the current macro scenario?
Andrea Maffezzoni - Head of Group IR: Now for Bank of Italy we didn’t have any physical inspection by them as it has been done for other banks. They have examined a sample of 550 customers chosen by them. Total exposure I think it was – looking now Mr. Decio - EUR2.5 billion more or less.
Alessandro Maria Decio - CRO: It was, yes, about EUR2.8 billion.
Andrea Maffezzoni - Head of Group IR: EUR2.8 billion for 550 customers again chosen by them. (The analogy) has been done by us through the CRO division with checking of the audit division in terms of application of our internal policy for lending and so forth and then by Bank of Italy with number of meetings with them in order to define the potential gap in term of provisions. Here I said during the presentation, the gap was very limited. I think it was in the range of EUR60 million; so $60 million. Again, this is why is said, has nothing to do with EUR2.1 billion additional provision that we have done by ourselves. Another important point, we have not been requested to review down our collaterals as it happened in other's cases. So, opposite being in the position to review up in some cases the value of our collateral because we had value of – fair value very hold and below the current value. 2013, strategic plan, second question, we don't have a date. I think that until the market will continue to be extremely volatile and not predictable, it doesn't make too much sense to come in front of you with a new plan, so we need to have some clarity in term of macro.
Ronny Rehn - KBW: Can I ask one quick question? It is concerning you as much as the sector. You have about EUR80 billion of impaired loans and the Bank of Italy review covered EUR2.5 billion, and on those EUR2.5 billion they asked you to put an additional 2 percentage points of coverage essentially. I mean, do you think the review was broad enough to assess the health of the balance sheet in Italy in general, not only concerning you, and is the 2% (of existing) coverage something to go by in terms of general guidance that might result if they review the whole book of NPLs?
Andrea Maffezzoni - Head of Group IR: I'm sure that Bank of Italy approach is very, very strict and the EUR2.8 billion has been utilized and to extrapolate the effect of the entire portfolio. So we have been request EUR60 million if (would dare) in some way extrapolate for the entire portfolio there would have been probably an effect of additional provision between EUR300 million to EUR400 million again still by far below what we had done. But internal process has been very intense let's say confrontation also in positive terms and has been done with very strict approach from Bank of Italy especially in analyzing the value of collateral is a key point right now.
Operator: Matteo Ramenghi, UBS.
Matteo Ramenghi - UBS: I have two questions first again on the string of capital from Germany I think is quite impressive and as far as I know none of your international competitor has been able to do the same. And I was wondering as a read-through for the sector, you think is very much specific to you, because you have such a strong capital position in Germany or is a change in the European approach somehow and then secondly on Central Europe, so Czech Republic and Poland mainly there is a margin compression for all the banks operating there. Do you think is just cyclical because of the low level of interest rates and the growth slowing down or this mark maturing and therefore is more structural trend and perhaps that’s also why you have been taking some action in terms of the organization of the operations? Thank you.
Andrea Maffezzoni - Head of Group IR: With the first question, I don’t know if it’s a change of regulators – what I can say is that it should be a very, very good year. 2012 there have been – if you look the bottom line and the profitability, they have been the best bank in Germany. They did better than Deutsche, Commerzbank et cetera in terms of profitability. As I said also they've done an excellent work in terms of risk-weighted asset management, so there was no objection from Bafin to transfer this money to the (Alden). In spite of what (indiscernible) we have a very good relationship with Bafin and it was doing very, very smooth process – maybe, I don't know but this is more of a dream rather than a fact that maybe also the approaching of the European supervision could have some impact on all of this. But we'd see in some months what I'm saying is very true or not. Poland, contrary to Russia, for example, of Turkey, it is true Poland is more mature. So we will have some pressure in term of margins as a result of economic slowdown, it is important. Central Bank has reduced significantly rates in the last months. So this is compressing clearly our margins. But it's obvious that Poland is gradually becoming a mature market even though again the growth expected for Poland is still at least twice as much, the one expected for Western Europe. So it is clear that also in Poland we have to develop our business model as we are doing – considering this evolution in the market.
Operator: Alberto Cordara, Merrill Lynch.
Alberto Cordara - Merrill Lynch: A couple of questions. The first one is related to the credit losses. If I look at the credit losses that you've been reporting in the quarter EUR4.6 billion and I subtract EUR2.1 billion that are related to the (fin cap) I get to a level of EUR2.5 billion so the run rate in the quarter is EUR2.5 billion. If I multiply this 2.5 times four I get to about EUR10 billion operating losses next year. But for example in the guidance 2013 will be materially better. So, I just wanted to ask you what this is macroeconomic assumption that on the basis of which you believe you can do much better than EUR10 billion because there are rate if I look at Q4 should be EUR10 billion? The other issue is related to these questions of capital optimizations I mean if we look at it but – to me it looks not materially different than what we have done on any previous year, because if I look 2011 I think you have been moving from Germany, EUR1.3 billion to the parent in 2010 it was EUR1.6 billion and then Poland every year you have a dividend paid back to the parent which is EUR230 million. So what is different here is that you have an additional dividend of EUR1 billion which is extraordinary paid back to UniCredit parent. So, I'm not sure why you wanted to put this so much in evidence, but this is just in our comment?
Andrea Maffezzoni - Head of Group IR: I think on the second question it was not our intention to overstress at this point. It is one of the action that you have done in order to improve our capital allocation and return of capital. Again I think has been much more difficult to sell in Kazakhstan than transferring 1 billion from Germany. But in any case as has been said also by the previous analyst not that frequently we have seen in Europe this happening. So, it is important for us and maybe it is important for the rest of the market. And then I am looking to total amount 2.5 billion from Germany, I think, is a very good dividend. We will continue in this direction looking for other opportunities.
Alberto Cordara - Merrill Lynch: May I ask you what are earnings of HVB at year end?
Andrea Maffezzoni - Head of Group IR: They are 100%, approximately 1.4, 1.5. Then we said about the loan loss provision, for us in terms of macro in Italy we see GDP declining year-on-year minus 1.1%. We still think was first half bit better second half but again not enough for sure to turn the GDP to positive. The other countries we see some improvement as well in the second part of the year. The 4.6 billion of provisions, 3.8 billion is Italy the rest is the rest of the group. While we see some, as we said, mild recovery because, again, the 2.1% are exception and the rate of year-end is for us a peak, so what we see already in January and February, so real numbers are confirming our forecast for 2013. We see in reality some improvement.
Alberto Cordara - Merrill Lynch: But what about – sorry if I can ask you another one for this – what about (indiscernible) of 1.1% should it be the decline Italy is going south by let's say 1% of each which is 1.8%?
Andrea Maffezzoni - Head of Group IR: We assume our target based on our internal analysis if will be 1.8%, we'll see what will be the effect. What I can say that we are seeing also on balance on average of the current consensus about Italy, the average consensus is as well 1% or 1.1%, I don't demand exactly, 0.9% currently. We're estimating 1.1%. So, it's a situation that we are monitoring almost daily. The effort done in Italy is huge. Just to give you an idea, the optimization portfolio that we show in the slide is not just a number. Here we have 1,000 people, I think, more or less, working daily on this portfolio, both risk side and business side. The portfolio is segregated from the rest of the portfolio. So, there is a machine working on that and when you said that we are reducing our exposure faster than the market is not our number but is Bank of Italy statistics. So, it's a number coming from outside. So for a number of reason we are quite confident, then the rest of the portfolio is just to give you an idea that is not included here, is an excellent portfolio with cost of risk that is better than averages that we see in Germany. So, it's not the old portfolio in trouble, most of the portfolio has a cost of risk around 20 basis points.
Operator: Azzurra Guelfi, Citigroup.
Azzurra Guelfi - Citigroup: Can I ask you two questions on capital. It's good to see the movement back from Germany to Italy, but I have two detailed questions. One is, could you share with us, what is the expected loss deduction in the Basel III deduction that you're assuming of EUR4.1 billion? Also, the other question is on risk weighted asset. How much do you think you can still do in terms of optimization on risk weighted assets going forward?
Andrea Maffezzoni - Head of Group IR: Can you repeat the second question, about risk weighted asset, if you can speak a bit loudly maybe.
Azzurra Guelfi - Citigroup: It's about how much you can still do in terms of optimization of risk weighted assets in 2013, in order to derivate even more capital, if possible? Then, if I can add one thing, it's about the deposit trend, so, I go to the third question, so there just to deposit trending in the corporate division, please?
Andrea Maffezzoni - Head of Group IR: So, Marina Natale will reply.
Marina Natale - CFO: In terms of risk weighted assets we have seen room not only because we have opportunity to structure some securitization, but those are because we have some risk category where we can improve in terms of quality modeling and these will help us in reducing the amount. For sure, what has been done, the EUR52 billion mentioned by Federico and EUR36 billion in one year will – is a big chunk and it's not going to materialize again. But this is, let's say we will be able to do something also in 2013. You asked also something about Basel 3 expected losses reduction understand the first question and on these, next year, we will have new (indiscernible) for the shortfall due to the setbacks Basel 3, but these is already reflected in the pro forma we have shown to you that the 164 basis points does include the change of regulation in terms of shortfall. We don't have projection in December so it's real pro forma, so we don't have earnings alongside side and we don't have also the evolution of the shortfall for the next year, but the change in terms of regulation is already reflected in the 164 basis points.
Azzurra Guelfi - Citigroup: Can you tell us how much are these reductions, the one that you have currently including?
Marina Natale - CFO: For the detail about each deduction or are you looking only for the shortfall on loss provisions versus expected losses?
Azzurra Guelfi - Citigroup: The shortfall, but…
Marina Natale - CFO: The latter.
Azzurra Guelfi - Citigroup: Yeah, but if you want to share all.
Marina Natale - CFO: No. I would not go to all the list but falling, so what is embedded in the 164 basis points, we are presenting as already stated by Federico, we are including all the potential changes, also those which might not materialize if the (indiscernible) regulators will apply different approach for the Italian banks.
Operator: Jean Neuez, Goldman Sachs.
Jean Francois Neuez - Goldman Sachs: I just wanted to ask a quick question on the Basel 3 again, if you wouldn't mind, just to understand if you – in the Basel 3 when you say fully loaded, it's also taking the full impact of DTA now or whether you assume a rolling off of these over time in the fully loaded number? And then with regards to the outlook following those provisions obviously in Italy, so you are talking about slightly down overall probably for the group into 2013. I was just looking at the gross NPL formation and that seems to still accelerate right now. So I just was trying to reconcile this means you are essentially expecting a deceleration of NPLs in 2013. Have you got a guidance for the growth in NPLs next year than in Italy?
Marina Natale - CFO: On Basel 3 I will continue, so it's a fully loaded. That does mean the full impact as of today without spreading across in the future months and years big on the full phasing approach and DTA are deducted together with a significant equity investment. I (indiscernible) also that we are deducting also (Europe) DTA in the fully loaded Basel 3, which are not yet rolled by Bank of Italy as required deduction, but we think that they might ask for these formally for the deduction of DTA (Europe) and the goodwill redemption, tax redemption we performed at year-end does reflect under Basel III approach net of DTA (Europa).
Andrea Maffezzoni - Head of Group IR: The provisions and impaired loans that we estimate, well we can say the peak of impaired loans, probably year-end. So, say third quarter more or less 2013 year-end. We estimate at the same time a decrease of the provision considering the level that we have reached up to now. Keep in mind also that it is obvious that the last quarter you tend to classify and to be as much as possible conservative. So, peak versus the end of the year and confirming some recovery in term of provisions.
Alessandro Maria Decio - CRO: If I made, I think hopefully we will continue to have growth in terms of NPLs such as because of migration effects on the portfolio. The data where we are getting comfort is that in terms of growth on the first classes of migration past due doubtful and internally that's been slowing down compared to last year. So, the trend, yes, indeed is still growing, but the Basel growth is slower compared to last year. And if you compare our part of growth versus the market, we are growing less than the market. So we are getting comfort on the fact that we are putting in place actions which are allowing us to reduce exposures on clients which maybe running into the full, but again if you only look at the NPL trend by natural migration of a classified loans you will still continue to have growth in 2015, average market expectation is in the range of 15% that we do in Italy.
Jean Francois Neuez - Goldman Sachs: Maybe one quick additional, do you feel that you can sell quite a lot of NPL right now after this sort of cleanup effort or not yet?
Andrea Maffezzoni - Head of Group IR: We don’t see yet real market in this respect we are in a market and we will not be against doing that, but we don’t see an effective demand at least despite the process not yet what should be developing.
Operator: Giovanni Carriere, Autonomous Research.
Giovanni Carriere - Autonomous Research: So two questions, first one on NII if you could clarify your guidance a bit more, because if I annualize your Q4 I get to about $13.3 billion so 6% down, you say down could you elaborate particular an impact of the different driver here. So hedging the impact of rolling over wholesale and retail maturities and so on and so forth. The other one sorry really to go back to provisions, so it’s a matter I think of questions asked, still don’t understand your guidance. If I go to Slide 44 I see that run rate of increase in new NPL inflows is about EUR3.5 billion in the second half of the year. So if I assume the same rate and you are telling me that the economy at some point will improve, so it's quite pessimistic covered at 45%, I come up with about EUR6 billion of provisions for 2013 and that doesn't include – obviously, when you close NPLs, you probably make money on long-term of the collateral. So that would be much lower than the guidance you're giving. So, I mean which of this one it is? Are you expecting an increase in the speed or do you think the (indiscernible) to go up or it's simply that my math is just off?
Andrea Maffezzoni - Head of Group IR: The net interest income; we are very cautious, mostly would say about loans evolutions or volumes. Because we see volumes going down – and this is not only Italy, it is also Germany; Western Europe in particular. We have rates low clearly. When we said that we are in place actions to try to offset at least partially, the trend I'm referring to repricing on one side, I'm referring also to the fact that, for example, on the deposit side. We have reduced drastically what we are paying to our customers. Starting from the end of December, we have reduced deposits also putting them into term deposit in a significant way. Today, it's very difficult to grow over 1%, 1.5% for one-year term deposit, for example. This means so maybe losing some very volatile deposits, even though so far so good. But this strong action of repricing deposit is working. So, we want to be cautious because as most of the volume side, should volumes recover clearly the picture would be a bit different. There was a question about…
Giovanni Carriere - Autonomous Research: Would you say the disposal rates would bottom then?
Andrea Maffezzoni - Head of Group IR: Well, we called probably I mean like a make a joke was the risk of going somewhere in the sense that in terms of rates when you have rates, you're right well about in 10% difficult it will go down. Volume has really link to -- and Italy is linked also to the political situation ongoing. I can tell you that we have a number of customers that will be ready probably to do some investment us to start asking credit, but in this moment they want to look at the political situation. Germany is modeling to as well as expectation and the fact that the companies are very cash-rich so demand is not yet back. So, almost bottom I would say yes. We could see especially again in the second half of this year something – some improvement. Then there was a question…
Marina Natale - CFO: The question was about the run rate, I understand that probably you're looking at the last quarter why you should look at the run rate to the extra as we record provision as to be in fact to be deducted from the full year, therefore you should look at EUR9.6 billion and these might be looked as the level of provision which weighs on the development of the (market) but also take into account all the effort (indiscernible) in focusing on certain perimeter portfolio should help to reduce the level of loan loss provision.
Andrea Maffezzoni - Head of Group IR: Just keep also in mind that every day the total risk-weighted asset in Italy they are decreasing compared to the rest of the group, so there is also compensation on the other side in Germany, Austria and it is interesting we don't see criticalities in this respect.
Operator: Ignacio Cerezo, Credit Suisse.
Ignacio Cerezo - Credit Suisse: Couple of questions on the optimization portfolio if you can give us some information about the revenue and contribution of that portfolio today NPLs and what kind of additional provisions basically you think you are going to incur on that portfolio you are giving the 7.1 billion expected loss but what kind of provision you have already on that one?
Andrea Maffezzoni - Head of Group IR: I am going to the slide there was – this is a portfolio with negative return adjusted from the cost of risk as you see we put the top of the slide RACE is minus 8.3%. So, for sure, we will lose some revenues but net of cost of risk the more we cut in some way the better it is. Then in parallel because the Bank is now making a double effort one side optimization of this portfolio, but on the other side, as I said, we have an excellent portfolio that can be further developed. For example, in this week we are doing quite effective commercial campaign. We have a preapproved number of credits, number of loans in combined efforts between business and risk. We're approaching some 1,000 companies in order to give them the letter with the loan because we know these companies very well. They have very positive experience. They are managing the crisis in an excellent way and in this respect we like to remind that the export driven companies are showing good numbers some of them if not many of them better for 2012 than 2011. We have 30% market share in terms of export almost, so there was a number of potentials that we can catch considering our current position in Italy, so bank, at the end of the day, with capital, with liquidity and with a very good market penetration, with a very good market penetration on customers export driven, so it's better efforts, so should we lose revenues here, there is a possibility to increase revenues on the rest of the portfolio. Again if you look at the page about the turnaround Italy, it's quite surprised, that Italy is growing 2.4% in terms of revenues including all of those sufficient commissions, but it shows that still is possible to do business.
Alessandro Maria Decio - CRO: If I may add a couple of words regarding on optimization portfolio, before provision is obviously driven on one hand by the immigrations which are again would be rising in our view from deterioration in the alpha portfolio as well as deterioration of already classified portfolio and by percentage of recoveries. We think that, as a result of the effort that we will be doing on minimizing expected loss and exposure on the alpha portfolio, we can be having a benefit of about EUR400 million lower provision compared to initial evolution of the portfolio on the next year and about EUR1.2 billion throughout the management of this portfolio in a risk optimization way throughout 2017. In addition to this, we do believe that we have further room for impacting provision trend by increasing our percentage of recoveries (indiscernible) we would be able to sustain initial trend to have end again an increase of recovery rate to have in fact reduction of provisions for 2013 this is again an initial trend.
Ignacio Cerezo - Credit Suisse: The NPL ratio on this portfolio is how much?
Andrea Maffezzoni - Head of Group IR: We have seen the numbers you have 38. As it was shown in the numbers out of the EUR45 billion of volumes, you have EUR33 million which are perfectly (indiscernible) fully performing and EUR12 billion which are classified, but not yet non-performing. In other words, we still have active lines with the client that could be past due with the regularity or doubtful or risk weighted.
Operator: Andrea Filtri, Mediobanca.
Andrea Filtri - Mediobanca: Two questions. One on provisions and one on CEE. On provisions particularly, how much more cleanup do you think you can do without impacting capital and could you target the risk coverage of the provisions that actually generate the shortfall, the expected loss to eliminate the deduction from Basel 3 capital? And in your mind, do you have still a tough 2013 cleanup and a progressive normalization of 2014 provisions? The other question is on CEE, very quickly, can we expect further surprises on disposals of noncore franchises as you've done for Kazakhstan?
Andrea Maffezzoni - Head of Group IR: On the provision side, I don't like too much the 'cleanup' wording meaning, we have decided to increase provisions to increase coverage, but there was not – whether to jump to the provision in the fourth quarter is linked only to that ambition, increasing coverage, was not special price about not to identify the customers in the past, it is just to be – to be clear.
Andrea Filtri - Mediobanca: Then I meant, with the increased coverage, without impacting capital?
Andrea Maffezzoni - Head of Group IR: Yeah, exactly. Looking forward, we think we cannot give precise guidance, but we think and we believe we can gradually increase coverage year after year, 2015 for example. In terms of other asset disposal. Well, I cannot say or name the asset, otherwise M&A doesn’t work. But obviously we are looking for opportunities. We know which assets are performing in accordance with our ambition which are not. So as a mix of, it can be sale, it can be also activity such as we have done – we are doing in Czech Republic and Slovakia where we merged two banks. In any case, we're in a very clear benefit in term of cost income, because we closed on one corporate center. So the number of things ongoing, again not easy in this market, but we are determined to continue.
Andrea Filtri - Mediobanca: On the question on the expected loss, is it practically possible that you target to raise the coverage on the positions of the generator, the expected loss so that you eliminate the capital pressure?
Andrea Maffezzoni - Head of Group IR: Well, that was not let me say the rationale upon which the coverage enhancement action that we put in place, but very clearly on the momentum which you increased coverage on portfolios which are under advance, under – you're also automatically reducing the shortfall by the same nature. So, yes indirectly having action of increasing coverage is actually reducing the impact on the shortfall and it's bound to be also worth remembering that once we have in Italy, indeed still a shortfall, we have still situation in Germany, where actually the shortfall is positive, and in other words our provisioning is actually higher compared to expected loss. Therefore rated positive – it's a positive input.
Operator: (indiscernible), Deutsche Bank.
Unidentified Analyst - Deutsche Bank: I have – my two questions will relate to your exit from ATF. As far as I know, UniCredit has in the past provided a guarantee that is covering a substantial portion of ATF's non-performing loans. Can you please tell us what is going to happen to this guarantee once UniCredit exits the holding and what is the amount of guarantee or what was the amount of guarantee at the time of the exit? This is my first question. And the second question is, if you could clarify what were the capital adequacy and NPL ratios of ATF Bank at the time of sale?
Marina Natale - CFO: About the disposal of ATF and the guarantee, yes, the guarantee amounting to approximately $600 million – is being guaranteed to ATF and for the next two years this will remain in place. Please remind that the economic impact on the guarantee has been already reflected in the books of (indiscernible) which is the shareholders of ATF. Therefore, no impact from this guarantee will result. The impact of the transaction are those we have reported year-end; 260 million, of which 215 million don't generate any impact on capital because already deducted from capital under Basel III approach. So, this is the total impact of the disposal of ATF.
Andrea Maffezzoni - Head of Group IR: Then for the gross ratio coverage etcetera, Page 23 you will see is gross ratio 55.3% and the coverage 55%.
Unidentified Analyst - Deutsche Bank: I think you're talking about UniCredit but I was interested in learning about these ratios for ATF bank?
Andrea Maffezzoni - Head of Group IR: Yeah. This one is…
Marina Natale - CFO: Is at the bottom-right of the Page 23.
Unidentified Analyst - Deutsche Bank: 23, okay.
Marina Natale - CFO: You have all the detail about the ratio coverage and amount.
Unidentified Analyst - Deutsche Bank: Just to clarify on you answer about the guarantee. As far as I understand the guarantee was covering over EUR1 billion worth of loans, why are you saying it's only EUR100 million?
Marina Natale - CFO: The guarantee was covering was the (right) I mean the value by the impact on the accounts already embedded in previous years in Austria were the amounts I mentioned.
Unidentified Analyst - Deutsche Bank: Alright and you say, the guarantee will remain for two years is that right?
Marina Natale - CFO: Yes.
Andrea Maffezzoni - Head of Group IR: So, thank you everyone. Thanks for listening us and see you soon. Thank you. Have a nice evening.