GlobalCapital: How has your funding changed since March 1?
Alessandro Lolli, Intesa: I expect the dimension of bank balance sheets to increase worldwide. This is not a situation that is unique to Intesa or Italy. Many corporates worldwide have been given the opportunity to not repay loans, at least for a few months, and this will lead to an expansion of bank balance sheets.
And on top of that, banks are instrumental in channelling the emergency liquidity provided by central banks to replace the cash flows that are absent from corporate borrowers for many months.
These companies are not likely to return to 100% productive capacity from their state of near paralysis in a matter of weeks; it will take time. So, bank balance sheets have to rise. This means there is going to be an increasing reliance on central bank funding to fill the gap and, I believe, there is a stigma in not using this money. It’s cheap and big.
From Intesa’s perspective that means our allowance with the ECB has increased from €54bn to €90bn. We are going to take a significant portion of that because, as publicly stated by our CEO Carlo Messina, we have committed ourselves to lend to the real economy around €50bn in the coming months.
Banks need liquidity which will be provided by the ECB via its TLTRO and they will also need capital, which can be issued as capital or alternatively with government guarantees, which reduce your capital need. Intesa has much more flexibility than others as, at €17bn, we have the highest excess CET1 capital of any European bank.
More importantly banks have to issue bail in able debt, whether that be in the form of senior preferred or senior non-preferred. You have already seen the French banks go back to the market with senior preferred deals a few weeks ago and, on May 18, we became the first Italian bank to re-enter the senior preferred market since the Covid outbreak with a successful five-year transaction.
How helpful is the ECB's Targeted Longer-Term Refinancing Operations (TLTRO)?
Very helpful. It’s big, it's long and it’s cheap.
Of course, it’s secured funding so you need to pledge collateral but there again, banks will have a lot of loans that have been guaranteed by the state.
The ECB has also done a lot of work in terms of facilitating the process by simplifying the process of creating usable collateral. They have increased the scope of what can be pledged as collateral and reduced the haircut.
A lot of the recent headlines have been focused on the ECB’s quantitative easing programme but the real benefit for the economy has been due to the broadening of assets eligible for the TLTRO, this along with QE has also been extremely relevant in terms of providing the big bazooka.
Other than central bank funding, do you anticipate a change in the mix of the instruments that make up your market funding?
No, we are not expecting a change in the mix. The major change in our funding was set out in February when we announced we were going to start issuing senior non-preferred bonds. We have a funding plan of €5bn-€7bn to be issued between now and December 2021 and this is not going to change.
How has your balance sheet changed in the first quarter?
In the first quarter the balance sheet rose by €7bn-8bn and I would expect a stronger dynamic in the second and third quarter. This pattern of asset growth I expect to be seen across the world.
Do you have any visibility on how deferred loan payments and non-performing loans (NPLs) are likely to evolve?
At the end of April, we had already received requests for 30,000 mortgage and loan suspensions worth €38bn, out of which around €24bn were to our corporate and SME clients. At the end of April we had also received around 100,000 requests from SMEs for loans to be covered by state guarantees, and these were worth around €3bn.
We have already deleveraged more than €35bn NPLs and we can rely on €1.5bn of additional buffers for the future impact of Covid-19. Our NPL stock has declined sharply over the past 18 quarters and we’ve achieved 88% of our NPL deleveraging target that was planned before the impact of Covid.
We deleveraged €1.3bn in the first quarter, taking the gross NPL ratio down by more than 10 percentage points since the peak of September 2016 to 6% based on European Banking Authority criteria.
Do you expect to issue more additional tier one (AT1) and tier two following the changes to Pillar 2 requirements?
We have around €1bn of tier one and €1bn of tier two to issue which I would say are very normal and ordinary amounts for us. We can issue debt but going back to what I said about our flexibility, with €17bn of excess CET1 we can be very choosy in deciding when to tap the market.
We issued a dual tranche perpetual €750m non-call five and €750m non-call 10 year AT1 in February with the coupon of roughly 4% being the lowest ever in the euro area. So having done these transactions this helped improve our capital flexibility. Of course, these coupons we paid in February were outliers as AT1 coupons have historically been at 7% or higher which, I would say, is the more normal level.
At the end of 2019 and early 2020 there had been maybe a bit of complacency, there was so much money that needed to be put to work and the search for yield was really huge, so that’s why we decided to tap the market then. Although we didn’t really have an urgent need, we decided to satisfy investor demand.
Have there been any major challenges while from working from home?
The bank treasury contains many critical components such as the payment system with a daily turnover of more than €40bn. Then we have money market activities in euros and other major currencies, the liquidity portfolio, where the liquidity coverage ratio is a critical metric. We also deal with short and long term funding, plus the asset liability management for the banking group where we manage a banking book of roughly €500bn.
So, as you can see, there were a lot of critical functions. We were well prepared, having learnt from our Hong Kong office’s experience where 20% of staff were in the office and remaining 80% were working offsite or at home since mid-January.
A lot of critical functions in the Milan office were rapidly migrated to ‘smart working’ and from mid-February there were just two out of a total Milan staff of about 200 people that were in the office, these two being responsible for our payment system.
And the magic is that it works, beyond the best expectations you could have had!
I’m not saying that it is ideal, but it’s a very practical system and it works. We’ve been using Skype, Zoom and Bloomberg to stay in touch. At the beginning people moved from 30 inch screens down to 19 or 20 inch — which was not ideal, but then they also had tablets and iPhones to work with.
Initially the most worrying aspect of this crisis was due to the implication for people’s health but there were no major challenges in terms of the smooth running of the financial operations.
Overall, I believe this collective staff experience is going to change the way we work and will become more a part of our future. The ‘new normal’ will be very different to how it used to be. Although we are forced to do something that seemed almost unthinkable at the beginning, we have now come to appreciate new possibilities.