GlobalCapital: How has your funding changed since March 1?
Carlo Masini, Mediobanca: Our fiscal year ends on June 30 so by the beginning of March we had luckily completed nearly all the funding plan. The work we’ve been doing since has been mainly geared to working out how to reset our funding needs in the most efficient way, taking account of the special monetary policy measures taken on by the ECB. The ECB has improved the terms of its Targeted Longer-Term Refinancing Operations (TLTRO), but has also put in place non-targeted financing with the LTRO.
The other big factor, which usually happens in times of volatility, is that the Mediobanca Group is seen as a safe haven for Italian investors, which means we have seen significant retail inflows into our wealth management business, but also through our private banking business and our Monaco-based Compagnie Monégasque de Banque subsidiary.
As a result, we now have higher and more stable funding which made has put us in a comfortable funding and liquidity position going forward. Moreover, counterbalancing capacity* increased materially thanks to policy measures on collateral and by issuing and retaining consumer finance ABS.
How helpful is the TLTRO?
Masini: The three year term provides medium term stable funding which is especially helpful when you take account of the net stable funding ratio. Moreover, it can be accessed at very competitive pricing levels so that it is very palatable, nonetheless I still think it is a temporary tool and do not want to make our life difficult in the future when it comes to an end.
The loan book is on average two to three years, but on the other hand, the longer part of our loan portfolio is in mortgages. Covered bonds are the main tool to access the longer part of our funding even though the amount issued is limited by the mortgage production.
Other than central bank funding, do you anticipate a change in the mix of the instruments that make up your market funding?
Masini: We don’t see any major changes. We’ve tried to keep all market channels open. Wealth management is really the winner in these volatile times, but we were also successful with retail bonds sold through our third party networks.
Our consumer finance securitizations are a very reliable instrument in volatile times, to be either retained or sold, as we did in December 2018 when we were able to place an ABS deal at the height of the Italian crisis. And given the sizeable mortgage production, covered bonds will also be a very helpful tool.
Paolo Labbozzetta, Mediobanca: Over the past years we’ve worked hard to broaden our funding channels by as much as possible and in the month before Covid-19 broke out we had been fortunate enough to have frontloaded our funding for the current fiscal year, with the funding plan being completed in the first week of March at pre-Covid spread levels.
Being proactive in funding and making sure all channels are at our disposal has allowed us to plan a difficult year with a degree of certainty. Having completed our funding plan we are certainly not in any hurry to access capital markets. We will try to cherry pick the most efficient channels with respect to cost and duration to keep the cost of funding under control and support our business lines.
We also declared in November 2019 in our four year business plan that we wanted to exploit capital optimisation. We wanted to issue senior non-preferred, which is exactly what we did back in January this year when market conditions were extremely favourable, with a lot of investor appetite and spread compression across the capital structure, especially between senior preferred and senior non-preferred. So we decided to front load that regulatory issuance, which means we are in no rush to tap the market at currently high credit spreads.
How has your balance sheet changed, has there been growth?
Masini: In our [third quarter] results our overall lending stock rose and the composition also changed. The lockdown prevented Italian consumers from going to shops, so that meant consumer lending was significantly slower.
But this was more than compensated for by a rise in corporate lending, and on a net basis, the loan book increased. Importantly we’ve maintained good asset quality and high levels of capital. The business profile of Mediobanca is resilient and we are paying very careful attention to our business plan.
What does this means in terms of risk-weighted asset (RWA) growth?
Masini: As you can see in the March 31 results we were able to keep RWA basically flat thanks to the diversification of our business and to the quality of our portfolio.
Do you have any visibility on how deferred loan payments and non-performing loans are likely to evolve?
Masini: In general for banks, the lockdown and deteriorating macro-economic environment are expected to increase problem loans and provisioning. Mediobanca can leverage on strong asset quality and credit management capabilities to manage the current situation keeping the balance sheet strong going forward.
What have national regulators and supervisors done to help alleviate these problems?
Labbozzetta: The ECB measures gave us certainty of funding and have meant that we cannot be exclusively reliant on the market. Generally speaking, the banking system as a whole has benefitted from a relaxation of regulatory constraints, whether that be from the ECB, the Single Resolution Board or the European Banking Authority. From Mediobanca’s perspective we have a chunky loss absorbency capacity and compared to our eligible liabilities we are at almost two times the amount required, so meeting our MREL (minimum requirement for own funds and eligible liabilities) requirement is not a big issue for us.
But, by giving more time for banks to meet their MREL requirements, it will for sure prevent banks from being forced go to the wholesale market to fund, and it gives more time for banks to be tactical and not hit the market when credit spreads are high.
And from an IFRS 9 point of view, the possibility to provision favourably for deferred loans that are subject to the debt moratorium has given banks a lot of breathing space to cope with the challenging macro-economic conditions — and not be pro-cyclical, in terms of taking credit out of the system. All these measures have given the banking system a lot of space and time to continue lending and prevent this temporary economic contraction from becoming more permanent.
But for sure the ECB measures are the most favourable and the sum of all the measures will prevent an increase in lending constraints — in contrast to the global financial crisis of 2008-2009.
Do you expect to issue more additional tier one (AT1) and tier two capital following the changes to Pillar 2 requirements?
Labbozzetta: Our strategy remains the same as that outlined in our four year business plan released in November 2019. Given the sound capital position we are running and planning to run in the next four years, we are not in a rush to change our AT1 and tier two strategy due to a relaxation of these rules as we are have a very comfortable core equity tier one ratio and MREL surplus.
Have there been any major challenges while from working from home?
Masini: Working from home has been hard but we adapted very quickly. The IT team were exceptionally effective in transitioning the whole bank to work remotely in an extremely efficient manner and hopefully this will stand us in good stead for the future. We have learnt it’s possible to work efficiently from home.
During the worst of the crisis we were able to switch to alternative dealing rooms for a very limited amount of people. We managed to ensure the operations continued smoothly while keeping everyone as safe as possible and we were quite successful in doing that.
Labbozzetta: As stated in our third quarter presentation we were able to operate with 70% of the Mediobanca Group staff working from home. We reduced working hours in the retail branches and the group granted and expanded healthcare coverage, such as psychological counselling services for the staff.
From a workforce point of view, the transition has been a smooth and effective process with no impact at all. That allowed us to ensure continuity of relationships with our CIB and retail clients, so in a way we were able to face this crisis with a ‘business as usual’ approach despite the very challenging situation.
* Counterbalancing capacity, or CBC, is the amount of non-encumbered eligible collateral that is necessary to participate in ECB refinancing operations (TLTRO, LTRO, MRO).