Intesa Sanpaolo S.p.A.

Enrico Cucchiani – CEO Carlo Messina – CFO

Matteo Ramenghi – UBS Andrea Filtri – Mediobanca Carlo Digrandi – HSBC Matteo Ghilotti – Equita Azzurra Guelfi – Citigroup Giovanni Carriere – Autonomous Research Benjie Creelan-Sandford – Macquarie Ignacio Cerezo – Credit Suisse Enrico Cucchiani – MD and CEO Christian Carrese – Intermonte

Good afternoon, ladies and gentlemen, and thank you for joining us on this call to discuss Intesa’s results for the first quarter of 2013. This is Enrico Cucchiani speaking and, as usual, I’m joined by Carlo Messina.

Before getting to the heart of the presentation, I would like to make some general remarks. Different strokes for different folks could be the title of this session, as the reading we had of the external environment in Q1 was probably much different from what others read.

Let us try to set the clock back to Q1 and let me share with you what we saw and as we can see on page 1. Cyprus was in full swing and with it, we experienced renewed concerns on the euro, on the stability of the banking system, on contagion, even on bank runs.

On the Italian front, the election outcome surprised everyone, even the Italians. Political paralysis settled in and, with it, also the fear of a poorly assorted and incompetent government succeeding nothing less than Prime Minister Monti, a highly respected figure by the market.

It took 53 days to appoint a new president after several failed attempts. After 53 days, the new president, well, turned out to be Napolitano again, and this, of course, was highly reassuring.

Furthermore, it took 65 days to have a new government, and by now, by this time, we were at the end of April. Both Cyprus and the internal political instability turned out to be unexpected uncertainties of considerable magnitude.

The environment undoubtedly affected investor’s confidence and consumption, as well as domestic and foreign investments in Italy. Let me remind that the spread between Italian and German bonds went up 100 basis points from the end of January 2013 to a level of nearly 350 basis points just one month after the elections.

Based on Confindustria’s estimates, uncertainty carried a price tag of 1 percentage point in terms of lower GDP growth. How did we react to the unexpected?

Let’s turn to page 2. We strengthened the liquidity position by keeping an additional extraordinary cushion of EUR20 billion, all held in cash instruments yielding approximately 0% return.

We increased our non-performing loan coverage ratio by 60 basis points despite evidence of tangible improvement in NPL development and in sharp contrast with general industry practice. All these bears an opportunity cost of nearly EUR250 million pretax in the quarter, which equates to an opportunity cost of EUR170 million on a net basis.

Of the EUR250 million, EUR100 million come from holding EUR20 billion in cash and EUR150 million from increasing NPL coverage. It may seem costly but we believe we did the right thing.

In other words, it is like we saw a hurricane move in towards the shore and fear getting caught in the eye of it. Fortunately, the hurricane now seems to have passed by and we can release the breaks.

We paid sort of a voluntary and extraordinary private insurance for general safeguard. With a benefit of hindsight, we might consider our approach conservative and costly.

We believe, however, that the cost of being unprepared could have been much, much higher for all stakeholders. Fortunately, things now look better.

Let us now turn to page 3. The ongoing expansionary monetary policy of the Japanese central bank is impacting the markets around the world and keeping spreads low.

The magnitude of this intervention is unprecedented and that is why we call it QE cubed, and the spillovers and spreads are all positives, at least for the time being. A personal hope is that policymakers do not waste this unexpected bonanza, do not loosen up their sense of urgency, and use it as an excuse to delay structural reforms.

Now, at the same time, we are also seeing continuous and increasing attention from the ECB to grant liquidity to the system and to foster economic growth. Recent measures such as the ECB rate cuts or the announcements of unlimited liquidity until 2014 proved this commitment.

Also, the Italian political scenario is stabilizing. The reelection of President Napolitano with a very large majority is reassuring the markets.

The new government is shifting priorities with a better balance between fiscal rigor and growth stimulus. Page 4 captures Q1 highlights.

We are one of the few banks in the world already exceeding targets set by Basel 3 for 2018-2019 as we enjoy a 10.7% common equity ratio, up 10 basis points versus Q4 2012, while both LCR and NSFR are well above 100%. As indicated, we kept an extraordinarily liquidity cushion of EUR20 billion to deal with uncertainties of the magnitude I described.

This very, very prudent stance is the key reason of the net interest income reduction. On the positive, I’m happy to report that net fees and commissions are up 11.3% year-on-year and costs are down 5%, again, year-on-year.

I consider both these achievements remarkable and unique in the environment we deal with. The increasing NPL coverage ratio, already best-in-class, also reflects, as I said, the extraordinary set of circumstances the country was facing, and we did all this despite very positive signals from our own credit portfolio with NPL net inflows down for the first time since a long time by a remarkable 32.5% relative to Q4.

All in all, despite a very conservative stance and prudent approach, the action we took in the first quarter allowed us to perform consensus on operating income by 2%, on operating margin by 9%, on pretax income by 19%, and on net income by 12%. We can now turn to page 5 for an executive summary.

Q1 results are solid despite a EUR250 million opportunity cost previously outlined. As mentioned, Intesa is one of the few banks in the world already Basel 3 compliant.

The liquidity position is very strong. Unencumbered eligible assets stand at EUR84 billion, EUR17 billion above yearend level.

LCR is at 141% and the net stable funding ratio at 112%, well above the Basel 3 targets for 2018 and 2019, respectively. Loan-to-deposit ratio is down to 98%.

As mentioned, against industry-prevailing practice, NPL coverage ratio is up 60 basis points to 43.3%. Despite out of the ordinary prudence, net income is at a respectable EUR306 million, the highest level of the past four quarters on a normalized basis.

As mentioned before, the reduction in net interest margin of 7.3% versus last quarter was largely driven by our conservative approach to balance sheet and liquidity management. We also reported a strong increase in net fees and commissions, which are up 11.3% versus last year and 4.4% versus last quarter, if we exclude seasonal components such as performance fees.

We continue to aggressively reduce operating costs, which are down 5% versus the same period last year, while cost income is at 51%. All in all, we are well on track to deliver upon our commitment on dividends.

Let us now move on page 7 to focus on capital. In Q1, common equity improved by 10 basis points to 10.7%.

Core Tier 1 ratio increased by 10 basis points to 11.3%, up 120 basis points versus yearend 2011. Considering the new computation of insurance investment, the Core Tier 1 ratio stands at 10.7%.

Now, very important, all these ratios are after pro quota dividends which, to remind you, topped a remarkable EUR832 million in 2012, much higher than the level of most competitors We believe that a strong capital base is an important prerequisite for sustainable dividends, particularly under adverse scenarios. As a final remark, please note that our low level of leverage, which stands at 18.8, illustrates that we are in a good position to re-lever if the environment turns more positive.

We can now turn to page 8, where we can see that in terms of Basel 3, our common equity level stands out as one of the highest, in fact, the second the highest among our European peers. In fact, it is 370 basis points above non-SIFI requirements and 120 basis points above SIFI level.

We can now turn to page 9 to analyze liquidity. The liquidity position is very strong and it has further improved during the past quarter.

Unencumbered eligible assets with central banks net of haircuts rose to EUR84 billion as of March 31st, representing 127% in rate increase versus the position at the end of 2011. Furthermore, at the end of April this year, unencumbered eligible assets stood at approximately EUR88 billion with EUR20 billion held in cash instruments.

Liquid assets increased to EUR120 billion at the end of first quarter, a level also confirmed at the end of April, and 24% up versus the end of 2011. Let me also remind you that we have already covered all our 2013 wholesale maturing bonds and we did so by January, by the end of January.

And also, let me remind you that the liquidity coverage ratio and the net stable funding ratio, as I said, are well above 100%, and all these factors together make Intesa Sanpaulo already compliant with Basel 3 requirements. Page 10; loan-to-deposit ratios have been one of the key concerns of markets and financial analysts concerning Italian banks throughout 2011 and 2012.

Now, considering that we stood at a level north of 120%, the Italian level was north of 120%, much higher than the Eurozone average. Intesa has effectively addressed those concerns by bringing the loan-to-deposits ratio 6.7 percentage points down to 98%.

This reflects a disciplined approach to credit underwriting, coupled with selective deleveraging in segments with suboptimal risk return profiles, as well as an increase of EUR7 billion that is 2% in direct deposits. Let us now turn to asset quality and look at the NPL inflow trend on page 11.

As these two graphs demonstrate, we are now starting to see significant improvements in NPL inflows. Both NPL inflow and NPL net inflow gradually smoothen throughout 2012 and then started to follow a downward path in Q1 this year.

Most notable is the 32% drop in net nonperforming loans inflow, the first significant improvement since a long time. This I would say shows a clear impact of our proactive management actions along the full credit value chain.

In this improving situation, let us now look at our stance on the coverage ratio on slide 12. As you can see on the left-hand side, even in a situation with our credit trends are improving, NPL coverage, which was already eight percentage points above our Italian peers at the end of 2012, increased further to 43.3%, up 60 basis points versus yearend.

On the right-hand side, you can see the very high coverage level on doubtful loans, which stands at 60.6%, more than 10 percentage points higher than our domestic competitors. Also, this has increased in the first three months of the year by a further 10 basis points despite our improving credit trends.

This is clearly against prevailing market trends where we see lowered coverages, and this position that we’re taking happens despite the NPL inflows that as I said in the previous slide show sharp improvement and despite our much higher starting coverage. On this next slide, we can look in more detail to the provision figures.

In this slide on page 13, we clearly see how we deviated from market practice. We increased provisions by EUR193 million and we increased slightly the cost of risk and we increased coverage as I said by 60 basis points, I repeat despite better flows, despite higher initial coverage and despite what competitors have done.

We’ve done this simply because of the different reading of Q1 uncertainties or perhaps also because we were in the position that we could afford to do that. We now turn to page 14 to show the quality of our buffers.

Analyzing in more detail our total doubtful loans coverage, if you incorporate collateral and guarantees, you can see that the coverage level is at a he highly comfortable level of 123%. The recovery rate stands very high at 146% and this gives us additional comfort on our provisioning policies and on our provisioning buffer.

Let’s now move to Page 15 to look at our provisioning on performing loans. This page underlines an excellent coverage level, which we kept at 0.8% for the past 12 months and which is almost twice as high the average of our domestic competitors, and by far the highest in the market.

In other words, if we were to have a level in line with that of our competitors, we would have an additional EUR700 million, EUR800 millions in our pockets. That is what is our extra buffer is worth.

Let us now turn to page 17 to analyze the P&L. The Q1 waterfall analysis shows sound fundamentals as well as the impact of our decisive reaction to the challenging environment.

Operating income is at EUR4.1 billion, apparently down 8.3% versus last quarter, but up 3.8% in homogeneous terms. This performance has been driven by a 7.3% reduction in net interest income, largely due to the extraordinary liquidity buffer that we built.

Net fees and commissions that are up 4.4%, excluding the effect of performance fees; profits on trading doubling Q4 results of netting last quarter from buybacks which were worth EUR110 million in Q4 and hedging which was worth EUR342 million in Q4; finally, insurance delivering another positive performance, plus 45% versus Q4; and EUR80 million negative impact from principal investments. Personnel and administrative costs continued to register significant reductions, reflecting our aggressive cost management strategy.

Personnel costs are down 5.1% versus last quarter and admin costs have been reduced by 15%. Loan loss provisions at EUR1.2 billion reflect rigorous and conservative provisioning, leading to a pretax income of EUR0.8 billion, almost double the number reported the last quarter.

Net income stands at a solid EUR306 million and EUR392 million if normalized, reversing the negative trend registered in the past three quarters. On page 18, Q1 registered the highest normalized net income of the past four quarters, reversing the downward trend and exceeding by a factor of four the performance of the last quarter.

This is a clear sign of resilience in a very challenging economic environment. Now let me expand on net interest income on page 19.

In this quarter, net interest income was mainly affected by the extraordinary EUR20 billion liquidity buffer that we built to face the uncertain environment, extremely uncertain environment. In fact, more than 50% of the variation of net interest income versus Q4 was a result of this action.

Another key factor is the impact of having fewer days in the quarter, which accounts for an additional 20% of the net interest income variation. But this factor, of course, also applies to all competitors.

Looking at the variation versus Q1 2012, the extraordinary liquidity buffer has an even higher relevance on the change in net interest income coupled with a significant impact from spread reduction. All in all, comparing the net interest income for Q1 versus last year, you can see the impact of contingent factors which account for more than 70% of the reduction.

Let us now turn to page 20 to see results on commissions. The income from net fees and commissions in the quarter was very strong and increased both versus previous quarter, up 4.4% in net of performance fees and versus Q1 2012, up 11.3%.

This excellent performance proves our ability to extract value from the components which are under management control. Could I now please ask you to turn to page 21 to focus on costs.

In a traditionally rigid labor market like Italy, we continue to show an exceptional ability to manage costs. Operating costs are down 5% compared to Q1 2012; that is EUR110 million in nominal terms, while in real terms that is net of inflation and contractual increases, the impact is actually EUR160 million, equivalent to a 7.2% reduction.

Personnel costs are down 6.6% versus Q1 2012 and admin expenses by 4.5%. Cost income is at 50.9%.

Now, turn to page 22 to analyze cost trends. This slide illustrates that the pace of our cost reduction program in the past five quarters with a clear pattern of acceleration.

It is worth noting that we have reduced headcount by a further 1,200 in Q1 this year on top of the 5,000 staff reduction already delivered in 2012. And we have already agreed with the labor unions to an additional 1,000-1,300 staff exits in Italy.

Now some benchmarking on cost reduction on page 23. Compared to other European banks, Intesa has achieved by far the greatest reduction of operating costs in relative terms in this period.

We can now quickly look at Q1 performance in terms of contribution by key business units. Turn to page 24.

As you can see, all businesses in our portfolios show a positive contribution to pretax income for Q1 2013. Italian results are solid despite the low interest environment and are in fact more than double last quarter results.

Wealth management shows excellent growth compared to Q4 2012 excluding performance fees, reaching a total of EUR392 million across Private Banking, Insurance, Asset Management and Financial Advisors. Insurance is the largest contributor and shows an increase in excess of 62%.

Corporate and Investment Banking continues to be a very strong performer, registering a contribution of EUR571 million to Group results, which represents a 76.9% increase relative to Q4 2012. Our international subsidiaries have reported a positive contribution of EUR70 million during the first quarter.

The performance of wealth management over time gives us the chance to see an interesting analysis on our business mix evolution. We see this on page 25.

This slide shows our ability to react and adjust our business model to suit the market environment. The environment is rapidly changing as evidenced by the evolution of interest spreads; that is the difference between rates on loans and rates on deposits.

In the last few years, the banking industry margins were almost sliced in half. That is it went down 154 basis points, while at the same time NPLs have been growing by 30% per annum, and these, let me stress though, are industry figures not Intesa figures.

If we take as a metric, the total operating revenues net of loan provisions, we clearly see the business has shifted over the past two years from a net interest income intensive business into a free driven franchise. Also interesting to note that in Q1, net inflows in wealth management have been a respectable EUR4 billion.

Let us now turn to page 26 to quickly look at the return on sales. In the first quarter, pretax return on sales was 19% more than double the level reached during Q4 in 2012.

We now turn to the big picture and then analyze Intesa’s economic and financial KPIs versus our international competitors. Let us turn to page 27.

Notwithstanding the Italian recessionary environment, Intesa is performing favorably compared to its European peers on many operating performance indicators, most notably the profitability of its assets, which stands at 2.5% versus a peer group average of 2.2% and the cost income ratio, which is at 50.9% versus a peer average of 62.8%. Intesa’s higher cost of risk – let me underline the fact that is more than double the European average, okay, and it is the real drag on our performance.

Our cost of risk, I was saying, reflects both the Italian credit environment and our conservative provisioning policies. Our return on tangible equity increased by 1.4 percentage points versus Q4 and it is worth reminding you that during Q1 2013, we continue to consider low leverage strength given the current economic environment.

All in all, this slide proves that Intesa’s performance continues to be very solid, healthy and based on strong fundamentals. Let me recap the key highlights and wrap up with our views for 2013.

Please turn to page 29. The key highlights for our first quarter are, first, that ISP is one of the few banks in the world already exceeding target set for Basel 3 for 2018 and 2019, both in terms of common equity ratio which stands at 10.7%, second-best in the Eurozone and up 10 basis points versus Q4 2012, and also is already exceeding the liquidity targets both in terms of LCR and NSFR, which are both well above 100%.

As already highlighted, we built an extraordinary liquidity cushion of EUR20 billion to deal with unexpected and potentially very severe uncertainties. This stance was the main cause of the net interest income reduction.

We have at least in part compensated this with an increase in net fees and commissions, up 11.3% versus a year ago and also by slashing costs which are down 5% versus a year ago. In face of Q1 political uncertainties, we also increased NPL coverage ratio, which was already much higher than most of our domestic competitors, and we increased the coverage ratio by an additional 60 basis points.

This extra provisions buffer was built despite positive signals by our own credit portfolio with NPL net inflows down by 32.5% and despite general market practice. Please turn now to page 30 for the outlook.

While I outlined earlier that we are starting to see some light at the end of the tunnel, the environment is still uncertain and we prefer to stick to our original commitments That is, Core Tier 1 and common equity ratios will stand above 10%. Our conservative strategy will entail low leverage, prudent liquidity management and high provisioning.

Performance would continue to be our North Star with a very strong focus on cost management. Finally, our dividends will be at least equal to the 2012 level with the generous dividend yield at the current price there is.

Continue on page 31. Should the improvements in the market that we have started to see be confirmed, we are ready to move towards a less conservative strategy leveraging on a strong balance sheet our human capital and on the impact of the ongoing transformation program.

In line with these strategies since the external reasons that pushed us to build the extraordinary liquidity buffer have disappeared since these external reasons have disappeared, we are already and we will keep releasing the EUR20 billion liquidity buffer at 0% yield that we built in Q1, with clear benefits on P&L to accrue in the coming quarters. Based on this, we continue to view Intesa as a solid capable, committed and delivering bank and this is the way we intend to remain.

I thank you for your kind attention and we are now ready to take questions.

Yes, good afternoon to everyone. I have one question on loan growth and another one on Hungary.

On loan growth, I think you explained your plan to release the liquidity reserves. I was wondering how much of those are going into lending; and also, if your feeling is that, at this moment, most of the nonperforming loan flows are driven by revenue contraction as opposed to a bit of a credit crunch, which is happening at the moment?

On Hungary, I was just wondering if there is any update on your presence there. Thank you.

Let me take the first question on Hungary; no significant news to report other than an aggressive program is underway. If we have news worth reporting, we’ll report them in due time.

Carlo, you want to take on the investment of – the issue on [inaudible]?

On the issue of the investment of EUR20 billion cash that we have now, the first point of our potential investment is to use liquidity in order to increase asset under management. So, no push on deposits but push on asset under management.

Then the second point would be the reimbursement of a portion of the LTRO, especially the portion that we have with guarantee of government. It’s something like EUR20 billion, and then a slight increase in government bond portfolio and at the end if we have good demand from loan, it is possible also to use for lending.

Thank you.

Thank you very much. Next question, please?

Good afternoon to all. I’ll try to be quick.

Can you update us on how many branch closures are still pending in your plans? What is the Q1 ‘13 P&L contribution of carry trade and how far are you willing to expand it further?

I’m referring to slide 31. Why is the deposit hedged on EUR40 million Q-on-Q and should we expect this to develop for the rest of 2013 and 2014 assuming rates remain as they are right now?

How do you explain the positive development of new interest of bad loans despite the difficult scenario that you described at the beginning of the presentation and do you expect this to continue in Q2? And finally, if we can interpret your statement that you’re open to opportunities as a way to say that you’re open to external growth outside of Italy?

Thank you.

Can you repeat the last question please?

Yes. I was reading before that someone from the Company stated that Intesa is open to opportunities.

Can we interpret this as openness to looking for external growth outside of Italy?

Let me take the last two questions and then I’ll turn to Carlo for the others. The question on the drop on net NPL flows, I believe that it reflects – I mean, the drop was quite significant, almost by one-third.

I would say we were also positively surprised by the magnitude of the drop but not by the fact that they went down. This reflects a series of actions that we have put in place all along the credit value chain.

I would not – I think it is too early to claim victory. I generally tend to be very conservative, as you know, and the most conservative among all colleagues.

I would prefer to see the numerical evidence of a few quarters before drawing definite conclusions. But let us say that I find the development encouraging and I believe and I like to believe that it is directly associated to our action.

Concerning the fact, I mean, I think that your interpretation that we are open to external growth, non-organic growth opportunities, I think it is a little bit too liberal and I’ll confine my comment to that. I’ll pass it on now to Carlo.

Yes, so talking about the branch, we have already closed 461 branches, 93 in the first quarter 2013 and we plan to close another 632 branches over the next couple of years of which 217 in second quarter 2013. Then talking about the carry-trade; carry trade, if you look at the profit from tradings because the real impact in this quarter we had in the figures of profit of tradings.

There’s a specific slide in our detailed information presentation, is page number – just to be sure to give you; page number 12 is the page in which you can find the profit from proprietary trading and treasury, so the amount – sorry, it’s 44, it’s the 44 pages of all the presentation, you have the detail of the profit on tradings. All the proprietary trading and treasury results is related to disposal of government bond portfolio that we made in the first two months of the year.

So, having a negative impact on net interest margin but a very positive impact on profit from trading and this is the result of what we have already announced as our strategy. We are not managing net interest margin.

We are managing all the amount of revenue; so the combination of net interest margin and profit from trading. Then having [ph] in my hedging the reduction of the hedging is due to the reduction of the hedging facilities EUR7 billion.

You know that at the end of last year we had a capital gain of EUR340 million by the reduction of the hedging facility, the EUR7 billion and of course, if you have EUR7 billion of lower amount of hedging you have a lower amount of contribution to the net interest margin.

Next, please?

Good afternoon to everyone and just to return on the few slides that you distributed at the very beginning, you’re speaking about the opportunity cost of the liquidity. I was wondering, what do you think will be the timeframe to realize this opportunity cost?

That’s the first one. And the second one, you just said that you see the light or you’re starting to see the light at the end of the tunnel, probably you’re referring to asset quality.

But you are also referring at net interest income by any chance because some of your competitors are saying that we are probably kind of bouncing around the bottom here and now what we should be seeing is a much more positive trend going forward on a like-for-like basis. Thank you very much.

On the opportunity cost, I will let Carlo give you a more quantitative answer. In any case we are now already in the process of investing this EUR 20 million.

As far as the net interest income bouncing from the floor, I don’t know if it is bouncing from the floor or dancing on the floor. And I think that realistically speaking, we have to see if the dense gets into a bounce.

For the time being, what I see from the recent ECB decisions, I see it more densing [ph] on an inclined plate level rather than bouncing. Again, to quantify the return to normality on this EUR 20 billion cash.

I turn to Carlo. Thank you.

Considering the timeframe in our opinion, it is possible to say that in six months’ time, we will have a significant impact on our revenue base, not on net interest margin because as I told you our competitors are talking net interest margin. In our view net interest margin is only a part of what would be the impact of your asset liability management, also profit on trading and commission can be impacted by these maneuvers.

Thank you very much. Next question please.

Good afternoon. A couple of questions, first one is on labor cost, which showed a remarkable contraction quarter-on-quarter.

I wonder if this drop is fully sustainable going forward or not? The second question is on the slowdown that you recorded in the inflow of new impaired loans which was, let’s say, a very positive feature of these results.

I wonder if you can tell us if this is going on also in April and the first week of May. So my question if it was just the first quarter also a phenomenon related to a jump that we saw in the fourth quarter, or it’s a real phenomenon that is continuing also in the second quarter?

Thank you, Matteo for your questions. First question labor cost, is the drop sustainable?

Well, there are two forces at work, which work in opposite directions. Of course, there is a built-in inflation in the cost of labor as you know so that will push costs up.

On the other side, if you look at the dynamic you see that we have had released 5,000 people in 2012 then we have a further reduction in Q1 and an additional release of headcount planned and negotiated already with the unions. What does this tell you?

It tells you that, yes, generally there are forces pushing the costs up, but we are very determined in keeping costs in line, of course, in a responsible manner and consistently also with the Italian labor environment. But I think that if you look at the performance of Intesa in terms of cost management quarter-on-quarter, you can see that we are pretty persistent and we do not make too many claims about it or not too much blah, blah, blah, we just deliver and that is the way we are going to be also in the future.

On the slowdown in NPL in April, from what we can see, I would say that the trend is confirmed, but of course, I mean, you gather more substantial evidence around the end of the quarter. So again, I reiterate what I said before, pleased with the development, pleased with the magnitude of the development, but cautious before again drawing conclusions too fast.

Thank you, Matteo.

It’s Azzurra from Citi. I have a question on Slide 41, where you show your quarterly analysis of the NII.

It’s the first time in a few quarters that we see the contribution of spread going up. It’s just EUR2 million, but it’s sort of there for the last few quarter.

Can you elaborate how much is coming from repricing on the asset base and how much is coming from lower funding cost? The second question is on the sovereign portfolio, I’ve seen that the sovereign portfolio is basically unchanged quarter-on-quarter, but you had some gain from disposal.

How much did you dispose and so I guess that would be the same amount that you reinvested?

Thank you, Azzurra. Carlo, do you want to take this question, please?

So I think in my spread, this is the confirmation of what we told in the previous quarter that we have two portion of our net interest margin. One is the financial and it is really related with the profit on trading.

The other one is the commercial area in which we are having result from repricing and from management of cost of deposits. So, the first quarter result is mainly a combination of an increase in markup.

So, we had another 15 basis points increase in markup. So, having in mind our very strong repricing actions during 2012, we had another 15 basis points to our markup and a reduction in markdown of 1 basis point.

So, it is really a combination of an increase in markup, a slight reduction in markdown. The government bond portfolio, we increased the government bond portfolio by EUR2 billion.

So, this is the amount that we increased and the disposal of the portfolio was in the range of EUR10 billion and we reinvested these EUR10 billion in government bonds during the quarter.

Can I just ask you a follow-up on the markup? What was the amount of loans that you repriced if it’s possible during Q1?

In Q1, it is in the range of EUR30 billion.

Thank you.

Thank you, Azzurra. Next please.

Two quick questions. The first one, if you could please just go back for a second into the mechanics of how you built the EUR20 billion liquidity reserve, because if I look at the balance sheet compare Q4 and Q1, I mean, unfortunately we don’t have all the detailed disclosure, but the size of the balance sheet is smaller, trading is the same, AFS is the same; so just trying to find out what actually went up and what went down for you to build this EUR20 billion cash reserve within the quarter, and if you could confirm that it was built entirely within the quarter?

And number two, just simply, do you have any news on any potential changes on the treatment of your insurance stakes, because you continue to be penalized versus a lot of the banks is in Northern Europe with a straight deduction of your entire insurance stake, and obviously after CRD IV it sounds like there could be an option to change the treatment?

Thank you, Giovanni. Carlo, you want to take it, please?

So, if you look at the composition of our liability side, you can have a quick look on the total amount of deposits. The total amount of deposits is increasing by EUR8 billion during the quarter, but net of repos with the institutional investors that we reduced during the quarter, the increase is in the range of EUR15 billion.

So the relevant portion of the increase in the cash reinvestment is deriving from increase in deposit side. Then we had a reduction in loans that is in the range of EUR5 billion mainly related to institutional investors and large corporate and so at the end we had this EUR20 billion.

That’s clear. Thank you.

There was a question also by the insurance, Carlos.

Sorry, the point of the insurance is that we are waiting for the position of Bank of Italy for the Danish compromise because for us the Danish compromise could be something that can give us a significant advantage in the amount of deduction that we can have looking at the insurance area. Our common equity that now is 10.7%, in case of Danish compromise usage can be in the range of 11%.

So we can have another 30 basis points from the authorization from Bank of Italy to use this kind of a compromise.

Thank you.

Thank you, Giovanni. Next one please.

I just had another question in terms of the Basel 3 guidance. If I look at the Slide 19, there is an 89 basis points positive impact from optimization of capital and also from sovereign risk shock absorption.

Now, I’m just wondering, I mean, can you give some detail on how exactly you calculate that or when you think those savings will be achieved, and also why it increased 25 basis points quarter-on-quarter?

So if you look at the figures at the end of December, you have the main difference is related to the Bancassurance treatment because we are already embedding the insurance results into the Core Tier 1, so we have a reduction of the impact deriving from the fact that we are including the amount of insurance deduction in the Core Tier 1. And then we have a positive contribution from only a 50% inclusion of the benefits on the SME’s new rules from Basel 3 guidance.

Only 50% because we decide to be conservative in the approach of using this benefit.

Thank you very much. Next please.

Couple of questions, the first one is back to hedging. Can you clarify which is the absolute amount of current accounts which are hedged right now and what do you think actually that number can go to in coming quarters?

Second is, in terms of the coverage; it has been like a small increase 60, 70 basis points in the quarter, blended around 43%, 44% actually, where do you see that blended coverage going in the future? And then the third one is related to the liquidity buffer, but also around the sovereign yield reduction we are seeing, one thing actually is that you put that money to work, but how do you expect basically the ALCO contribution, contribution from the treasury portfolio to evolve going forward if the sovereign yields remain where they are which is 200, 250 basis points lower than last year?

Thank you.

Thank you, Ignacio. So having in mind, the hedging contribution, the hedging facility is now EUR49 billion and the average yield is 2.20.

So this is the amount of the facility and the yield that we have on the facility. Our forecast is to have a contribution of more than EUR1 billion during 2013 and EUR900 million in 2014 at the current interest rate level and EUR800 million in 2015.

So looking at the liquidity buffer, the liquidity buffer in the reimbursement of the government bond portfolio, it is for sure that we will have a reduction in the yield that we are earning from our portfolio because we are reimbursing it at current conditions that are lower than the condition of last year. So for sure we are seeing a reduction in the yields but we are compensating with a slight increase in the amount of our government bond portfolio.

Thank you very much Ignacio, I believe now we have –

It was a fair one on the coverage ratio, actually, long term number you are saying you can have or you have to have on the coverage ratio on the MBS?

So it is difficult to say because the coverage ratio will depend on what could be their inflows in the future. Our view is that we are very happy with this kind of coverage and we have to see in the future what could be the position of the inflows and outflows.

Let me on this point reiterate something that I think I believe we have said many times. We do want to have very prudent approach and I think we show that, always positioning ourselves at the most conservative end of the market and trying to acknowledge a problem as soon as we perceive it.

That is not at the end of the year, but as soon as we perceive it, we acknowledge it. We also build in some extra buffers, given the fact that we are in a recessionary environment and we believe that it is wise to do so for a number of reasons.

I mean, having buffers is a good countercyclical policy and having a strong capital position and good provisioning is a good recipe for the sustainability of dividends as well. On the other side, we are not interested in having extra provisioning for the sake of having extra provisioning.

So, it’s not that we do not to want to build in quasi equity or whatever. I mean, we believe in having an appropriate level of provisioning.

And we test the adequacy in several ways, and we always believe to be that it’s better to be on the north side. We have several indicators that tell us that we have ample provisioning.

We have above-market averages. We move also against the prevailing trends.

We are increasing provisioning and also we have a very high provisioning level on performing loans. For the time being, all is good.

I mean, we have good capital position, good provisioning and adequate profitability. This I think is a good guarantee and we are pleased with that.

The moment that we feel we can be a little bit more aggressive in this respect without compromising sustainability of performance and dividends we might do so, but for the time being we follow the road we followed so far. Thank you very much.

I believe we have two more questions. Next one please.

Just a quick question on what do you expect from the ECB trying to stimulate lending on SMEs and small business and what do you expect for your Group for the second part of the year, loans going slightly up or still gets back to a further decrease in terms of loans? Thank you.

So, having in mind the ECB maneuvers, we think that there is a possibility of having positive impact on real economies especially having in mind the possible securitization and the use of ECB in increasing liquidity for the SME sectors. Looking at our position and also looking at Italian economy because our position is related with real economy situation of the Italian environment.

It is difficult to say that our loss can increase in the last part of the year.

If I may add some general comments Christian, I have to say that I find it inappropriate when policy makers or whoever asks for banks to do a task that should not be called upon banks. In order to stimulate the economy, first of all, I think that the state, the public administration has to normalize payments and inject liquidity.

I mean, I think this is good for the economy and it is also good in terms of reestablishing trust between the state and the private sector and it’s good on ethical grounds. Then I think that there are other institutions that should intervene to support the economy, most notably pension funds.

In Italy, we have excessive fragmentation of pension funds that do not invest in the real economy in small companies because they are too small and because of regulatory constraints. I think it is up to them to contribute, to strengthen the capital position of small companies and also to buy part of the bonds that could fund these companies.

In addition, perhaps there’s also a quasi-public sector institution like CDP, Cassa Depositi e Prestiti that perhaps could think of doing something. We as banks are also prepared to consider participating in vehicles that will do that.

Now, getting back, I think there is a twist also in your question though concerning our propensity to increase lending level. Well, let me say that there should be another question, lending to whom?

There is no question that we are prepared to increase our market share and the wallet share with companies that are healthy and have good growth prospects but we are not going to be in the business of subsidies. And as a general principle I think that for a bank and for financial institutions it’s always a very bad thing to buy market share in a recessionary environment because I mean you have the illusion that you grow the top line short term but then you have an associated cost in terms of NPL that far outweighs the benefits of the growth.

So again, and we are looking for a balanced growth and of course we are ready to quickly move the dial as soon as we see the economy on a steady improvement path. Thank you very much, Christian.

Next please.

It’s a very quick one, I just wonder, if there is a maximum absolute amount of government bonds that you constrain yourself to? Thank you.

We have a limit for government bond exceeding three years maturities so the limit is the amount that we have now. So we cannot increase bonds for maturity exceeding three years for maturity exceeding three years.

For maturity that are lower than three years we can increase the amount in a significant way. But we are not increasing and we do not want to increase in a significant way.

But you don’t have a volume limit per se?

We have no volume limit within the three years maturity.

Let me also add that the average duration in our portfolio is 21 months and frankly we have always put at least as much focus on duration as on quantities. So I thank you very much.

I see that there are no more questions. I thank you for your kind attention and looking forward to our next session or next meeting.

Have a very good afternoon. Bye-bye.