Banca Generali SpA

MIL:BGN

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banca Generali First Quarter 2019 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Gian Maria Mossa, CEO and General Manager of Banca Generali. Please go ahead, sir.

[Gian Mossa, executive]

Good morning, and welcome to our first quarter results conference call. 2019 started very well and I can anticipate that we see further improvements in the numbers in the second quarter.

We closed the first quarter with EUR 61.1 billion of total assets. That is the highest level ever for the bank, thanks to very, very good performance of the underlying assets and thanks to solid inflows. You already know that in the first quarter, net inflows, total net inflows, were at EUR 1.4 billion and considering also the inflows in April, we are very, very close to EUR 2 billion.

In terms of FA network, we exceeded 2,000 financial advisers. And probably even more important, we exceeded, in terms of portfolio average, EUR 30 million each. And you know that, for us, portfolio average is a proxy of the [ quota for ] our financial advisers.

On P&L, reported net profit at EUR 66.6 million. It is one of the best quarter ever for the bank, thanks to a growing diversification among the recurring revenues and a positive contribution of performance fees. Recurring net profit has slightly increased at EUR 32.4 million, and we maintained a solid capital position also after the first implementation of IFRS 16 that imply a one-off of 0.8%, 0.87% depending on the capital ratio we consider.

In the next slide, so slide -- Page 4, we have a focus on the new accounting principle, IFRS 16. That is the new accounting standard for the lease contract and it has become effective from this year, January 1. Basically, you have 2 main impacts. The first one is on the P&L and the second one is on the balance sheet.

On the P&L, the impact is negative in the first year of the contract, of the lease contract, and then you have a recovery in the second part of the contract because at the end of the day, it is a zero-sum game.

So looking at in the bottom of the page, on the left, you can see the impact on the P&L. You have a restatement of some items from rental cost to depreciation and you have some passive interest. Total impact is around EUR 400,000. On the balance sheet side, instead, we already said that the impact is about 0.8% for the CET1 and 0.87% for the total capital ratio.

Coming back to the results, Page 5, we have a snapshot of our P&L. So we have a very, very solid increase in the total banking income, plus 17%, and mainly driven by an increase in the net interest income as well as the gross fee, and as we said that performance fee played a very important role.

On the costs side, we have some one-off and an acceleration of the cost for the implementation of the strategy. So net is 7 plus, an increase of 7.5%, net of one-off and IFRS 16 is 5.8%. In this quarter, we have also positive contribution from the items below the operating line. So net-net, the net profit is EUR 66.6 million.

At Page 6, we can see the breakdown of the net profit in 2 main components, as we said, the recurring profits and the variable profits. Variable profits increased from EUR 17 million to EUR 34 million, thanks to the sharp recovery in the market.

While looking at -- focusing on the recurring profits, we have a positive impact from the net interest income. So the recovery of the -- the normalization of the yield and a temporary drag from the management fees due to the dip in general, and we will see later during the presentation also the recovery in the management fees.

So now in the next session, we will see as usual all the single items, starting from the net financial income, Page 8. Like-for-like basis, as you can see in the chart, the net interest income increased by EUR 1 million. This EUR 1 million is partly offset by the implementation of IFRS 16.

So the net result for the quarter is EUR 15.9 million, with a marginal increase in the yield of net interest income from 0.7% to 0.71%; on year-on-year, 0.64% to 0.71%. In the quarter, we had also some trading gains linked to -- mainly to the trading on currencies.

Page 7 (sic) [ Page 9 ] is useful to understand what's happening on the yield of the different part of our total assets. First of all, we reached EUR 10 billion of total assets. And as expected, the liquidity in the quarter went down below EUR 1 billion, as announced in the previous conference call, in favor of the banking book.

In the table below, you can see below the bar chart, you can see the different yields. Two positive aspects. The first one is that the cost of retaining cash decreased from 0.25% to 0.21% and the yield in financial assets increased at 0.8%. And I'm very positive on the positive contribution of net interest income in the next quarters. We continue to maintain a very conservative approach. You can see maturity and duration for both total portfolio as well as held to collect and sell, with a maturity of 1.4 and duration 1.0.

Page 10, there is a focus on management fees. Management fees are slightly down on a quarterly basis due to the impressive correction of the market at the end of December. So first quarter at EUR 155 million. I think that's really interesting to focus on the monthly trend. So there is a focus on the, say, trend in the monthly management fees. And you can see, in January, there was a contraction from EUR 52.3 million to EUR 50.6 million, and then a progressive recovery up to, in March, EUR 52.8 million.

And we are very optimistic on the management fees also for the second quarter, thanks to the expansion of the assets and rebalancing in the mix of the products. And the total profitability on the management fees in March was 1.42%, so in line with our business plan.

Page 12 (sic) [ Page 11 ], we can see the other fees. The other fees increased at EUR 17.8 million. So on a year-over-year basis, we have an increase of around 7% despite a significant reduction in the entry fee linked to the managed portfolio. You know that the strong fee in the insurance and the asset management products are strongly linked to the performance of the market. So after the correction in January and February, these entry fees were very, very poor. Despite the negative contribution overall, other fees climbed at EUR 17.8 million, basically thanks to an acceleration, a significant acceleration in advisory fees.

On the other entry fees, in particular, the focus on certificate and structured products, you know that it is part of our business plan. In the first 3 months, we've had the new issue for EUR 50 million. In April, in just 1 month, we almost doubled the total issue. So there is an acceleration on the deployment of this new initiative on the network, and I'm very confident over the next quarter on the positive contribution from fee as well.

Next page, Page 12, performance fees. As I say, positive contribution for the quarter. Also, the second quarter started pretty well. In the first quarter, the total performance fee was at EUR 35.2 million. That equals to 8 basis points on total managed assets. The new performance fee mechanism apply to almost 50%. And as I said, in April, we had a very positive contribution of both offering, the first -- [ to work our ] performance fee and then the new Lux fee in there. And more or less, in April, the contribution was 50-50.

Page 13, we see the cost, starting from fee expense, that overall decreased by EUR 2.4 million, so from EUR 96.7 million to EUR 94.3 million. Payout to the network, in the first quarter, there is a strong seasonality, some one-off, so it's difficult to comment on a single data. And let's say that, overall, we are confident and confirm our target for the full year. And for the payout to third parties, you see how we continue to reduce the overall cost of the third party, let's say, for sub-advisory mandate to our asset management [ Luxembourg S.A. ].

Page 14, we can see operating costs. So the total cost suffered 2 main things. The first one is a one-off, one-off for moving the headquarter and a one-off for IFRS 16, and then an acceleration of the strategy. We -- again, due to this seasonality, I think that it's important to confirm our year-end guidance in the range of 3% to 5% increase in the core operating cost.

On the right side of the presentation -- of the page, you see the breakdown of core operating cost and this is useful to you to understand the restatement. As you see, we have higher depreciation for EUR 4.4 million and offset by lower rental cost of EUR 4.7 million. And on top of that, there are passive interests that we already commented in the net interest margin.

Page 15, we have some ratios. Operating cost on total assets reached the lowest level, 0.33%. And cost/income confirms the efficiency of the bank with a cost/income adjusted, so excluding performance fee and some one-off cost, at 40%.

Page 16, we have the capital position. First of all, we confirm ratios well above the [ required ] ratios. Second, as we said, there is a one-off impact due to the full implementation of IFRS 16. And third, very conservatively, we assume 100% of earnings, of first quarter earnings, as a retention for covering the dividend policy, the new dividend policy of EUR 1.25 as a floor as dividend paid for 2019.

So to sum up and looking positively at the second quarter, I like to say that we see an acceleration of most of the revenue sources, and in particularly, positive news on management fees. We saw a normalization in March and we see an acceleration -- we have seen an acceleration during this quarter.

Positive, very positive trend in April and in May for the fee-linked structured products and a strong acceleration also in our advisory fees, coupled with the guidance, cost control of the guidance of 3% to 5% in the [ said ] core cost.

Now moving on to total asset and inflows. As we already said, we reached the highest level for the bank in terms of total assets, EUR 61.1 billion. And we said that in April, we see -- April, May, we see a further expansion on total assets. And I think that it's very positive to see managed solution where we have a well-balanced mix between a-la-carte funds, with an acceleration of our Lux IM offerings; and the wrappers, with increasing interest in the -- in insurance wrappers.

Page 19, a look at the net inflows. Net inflows for the quarter up to EUR 1.4 billion. Two very positive aspects. The first one is about assets under administration because as we say that there is a growing interest in assets -- I would say in the assets under advisory and structured product.

And second, if you look at the total net inflows by acquisition channel, that is the chart in the middle of the page, you can see that the total contribution of the existing network reached 75%, probably one of the highest level ever for the bank; and the negative contribution of the FAs that left -- who left the company is at minus 4%, and is probably one of the lowest level ever for the bank. So very, very low churn rate, high [ capitalization ] of our existing sales force and a growing contribution of the historical financial advisers.

The last information in this page is about the new assets under advisory. And here, we are well above our expectation, with a number for the first quarter about EUR 3 billion, that is almost 5% of our total assets, with an increase of more than -- almost EUR 0.7 billion in the first quarter, and where the profitability, let's say, continue to maintain very solid in the range 45, 50 basis points as a gross fees.

Page 20, you see the network. We exceed 2,000 financial advisers. And as already said, we exceeded the portfolio average, EUR 30 million. And moreover, even more important, more than 90% of total AUM are managed by financial advisers with more than EUR 15 million. That is roughly the minimum level to provide this kind of advisory in the long run, in the long term. And almost 68% of financial advisers exceed this level of EUR 15 million. And this is, as you know, something unique for the bank compared to the benchmark and to the competitors.

On the right of the slide, we see the recruitment trends. In the first quarter, 19 new colleagues. And again, as you know, in this first part of the year, we continue to maintain a conservative approach, waiting for the full disclosure of cost for the competitors. And when we are confident to normalize the path for growth of -- from recruitment, we confirm the guidance of 100, 120 financial advisers for the end of the year.

Page 21, with a focus on actual numbers. As already said, we are very close to the EUR 2 billion from the beginning of the year. In April, total new inflows reached EUR 545 million. Here, you have plenty of new positive aspects. First of all, we have 35% in the managed assets and we're growing interest in our Lux IM platform. Second, we continue to see positive trend in advisory fee contract. And third, as already mentioned, more than EUR 40 million in the new issue of structured products.

On the right of the page, you see also recruitment for April at 7 new financial advisers, with a total new recruitment from the beginning of the year at 26 new colleagues.

So to sum up, first of all, in the 4 -- in the first 4 months, we see a tremendous interest in the advisory fee contract, well above our expectation. So a significant acceleration of one of our driver of our strategic plan, and we have several initiatives to maintain this track also for the year. Second, well mixed in the assets under administration, so stock and bonds with a growing interest in structured products and part of this AUC under the advisory contract. And a progressive return of interest in asset managed products, in particular in our Lux IM offer.

Page 23, we start with the business update. The first part is on our Luxembourg platform. We exceeded, in the first 4 months, EUR 15 billion of total assets. In particularly, at the end of April, we reached EUR 15.5 billion. This is the highest level ever for the bank. This is due mainly to 2 reasons. The first one, an impressive performance of our product in the first 4 months, up 9.4%, as well as a growing interest in terms of new inflows with net inflows of our Lux IM up to almost EUR 600 million. Third, you can see in the bottom of the slide, the growing contribution of our new offering at 54% of total AUM.

Page 24, as promised, you see an information of the cost of our Lux IM. We compared our offering with the top peers, so the listed peers, the top 4, 5 players in Assoreti ranking plus the top 10 asset manager in third party or international asset managers. And you can see the ongoing charge, the weighted average for Banca Generali of the Lux IM is about 2% against an average of these 15 players, so peers and third-party asset managers, of about 2.2%, with a minimum of 1.8% and a maximum of 3.1%.

On the left of the page, you see the asset breakdown by asset class. As you know, these 51 investment strategies aimed at driving a more diversified portfolio. So all the strategies are built to increase the diversification for our clients. And you can see that is a well-balanced portfolio between equities, fixed income, multi-asset strategies as well as liquid alternatives. So cut a long story short, we are very comfortable on our Luxembourg platform. We see raising interest and we are almost ready to launch the third wave to complete the offering.

The second focus is on our digital mindset pillar. And again, here, we are well above our expectation and there was a tremendous acceleration in the release of the strategy. As you know, on the front end, until now, we were considered the best-in-class from a financial advisory perspective, but not from the client. And now, I can say that we are ready to be best-in-class also for clients.

We have just released our new bank -- mobile banking app and they say that the rating and the revenues -- the reviews are very, very positive. And you know that we have been working on this new app for mobile banking for the last 18 months, so we are very proud of this release. We complete the deployment also of the fully digital onboarding process to open current account, and we concluded the piloting test with Saxo for the cash product and we started to -- the rollout on the network. So in June, we will start to be, I would say, up and running also with the Saxo initiative.

The third part, Page 26, is about the 3 strategic operations of the last year, just to give you an update, starting from Valeur. The closing is expected by the end of June, the beginning of July. And we are seeing a very high interest and very positive feedback, both from clients and bankers in Switzerland. There's a great interest in the brand, in the project. So we are confident to accelerate in the second part of the year also on this part of the pillar. And you know that the strategy gives us a new revenue engine, so to export our model also internationally from Switzerland.

Nextam Partners, also we have good news. First of all, the closing is expected by the end of June and beginning of July. And in the next 2 weeks, we'll be with the network to present to the new strategies, and so the new portfolio management lines developed in cooperation with Nextam. So we are ready to start also this very, very important part of the project to relaunch also the portfolio management line.

And last but not the least, we started the process to buy 20% of the stake in BG Saxo from the government. The internal pilot was successfully completed, as I already said, and we are ready to launch the rollout on the network. And again, here we will have some extra positive news from the new release of the app version of Saxo in the second part of the year.

So all the projects are progressing very well in the right direction. The feedback from the networks, so the financial advisers as well as clients, are very good. So I can say that the second quarter started very well, and I'm positive to achieve the numbers starting from the year.

Thank you, and now we are ready for answering to all the questions.

[Operator]

[Operator Instructions] The first question is from Gian Luca Ferrari from Mediobanca.

[Gian Ferrari, analyst]

I have 3 questions. The first one is on the net interest income. I understood the one-off effect of the IFRS 16. What should we expect for full year '19? Is something around EUR 65 million a proper assumption? The second one is on the mix of inflows. Year-to-date, most of the flows went into life traditional and banking. We also saw a bit of decline in the margins of the asset management business, 141 basis points. I was wondering if, in April, you are seeing some changes and some normalization in terms of flows with most of the flows going back in asset management products and maybe with a higher risk profile from clients in terms of asset allocation.

The last question is more -- something a bit provocative. I saw your chart where you're comparing your pricing with that of peers, and you are in the low end of the range. It seems that some of your competitors are even repricing and, at the moment, we are not seeing any attrition in terms of outflows. So the question is, why don't you raise fees then?

[Gian Mossa, executive]

Thank you, Gian Luca. Let's say that -- starting from the last question. I mean I normally consider the short term and the long term. In the short term, it's difficult to see the full effect of some strategic choices. I don't think -- I'm pretty sure that it's not the right time to increase prices. We have to increase the quality of services. And if you look at all the asset manager, so the international players or the best-in-class are reducing prices. So my impression that there is a major focus on the short term than in the long term. And as you know, instead for the bank, the long term comes first. There is no free lunch, honestly speaking.

And second, on net interest income, I'm very confident to overachieve your EUR 65 million target. I'm definitely sure it would be much higher. And on the mix of the inflows, consider that in the first quarter, we decided to focus on the traditional life insurance and to launch in the best way the advisory service, the advisory fee-based contract, which is mainly in driven by asset under administration. Now that the project is fully in place and with the stabilization of the -- also the, I have to say, on the client side, we started seeing also positive inflows, in particular, in the Lux IM and the stabilization in portfolio management solution.

So I see a rebalancing in terms of products. I still see a more conservative approach in terms of asset allocation. So I don't see the case for an increase in the equity exposure in the following -- in the next months. In terms of profitability, I see room to increase the profitability of the first quarter, over the first quarter. And the numbers for April and May confirms the positive trend in general terms in the asset management products.

[Operator]

The next question is from Filippo Prini with Kepler.

[Filippo Prini, analyst]

Two questions. The first one is on trading profit. Could we take that the figures that you realized in the first quarter as basically the total amount, more or less, that you're planning to generate on a full year basis? And the second one, just a clarification on the Slide 23 of the presentation on the evolution of Luxembourg-based assets. I see that you're planning to increase by -- these assets by EUR 400 million at the end of the year, with most of the increase from the new Lux IM. Does it mean that you do not plan any runoff of the existing -- the BG selection in [ BGC covering in the meanwhile ]?

[Gian Mossa, executive]

On the -- I'll start from the second question and then I'll leave the floor to Tommaso Russo for the first one. And let's say that we have a projection of outflows of EUR 100 million per month in the selection. So EUR 1.2 billion in full year. And we are pretty confident to cover every euro of outflows in the selection with EUR 1.52 in the Lux IM retail distribution. While we should have a positive contribution from the institutional asset classes, thanks to the expansion of the wrapper solutions. And the second question, Tommaso, please.

[Tommaso Russo, executive]

And the second -- on the second question, I mean the trading gains of EUR 4 million in the first quarter are mainly linked to some activity of clients which operates in currencies and is a normal operation of our clients. So I mean it depends, of course, [ it always lead to the market ]. So we can use it to establish the trend for the full year. But I think that in the first quarter, we are being very active in this activity. So maybe it could be a little bit lower than [ what we posted before ].

[Gian Mossa, executive]

Exactly. As you know, we expect a lower contribution on the P&L [ in the same -- ] profit and loss in the banking book. As Tommaso said, it's not exactly traditional banking book activity, but it is partly linked to the trading activity on the currency market of our clients. And again, we see positive signs compared to our initial projection and -- but we don't see, still, the same contribution of the last year.

[Operator]

The next question is from Elena Perini with Banca IMI.

[Elena Perini, analyst]

Just on performance fees, I was wondering if you could update us with the amount you gathered in April because you talked about the mix, which is approximately 50-50 between the new method and the old one. So I was wondering about the amount.

[Gian Mossa, executive]

Yes. Let's say that the April performance fee are driven mainly by the very good performance of the products, most of them reached the high watermark level. So in April, we are above EUR 20 million. And let's say that 70%, 75% of the total assets are at or very close at the high watermark level. So between minus 1% and 0. And as you know, the new performance fee mechanism, the Lux IM mechanism, is based on 12-months high watermark. So if the markets confirm this level, there is an opportunity to see further acceleration of performance fee for the -- say, the next quarter. The projection of the selection instead is almost 0. So more to come probably from Lux IM and not from selection, depending on the volatility of the market of course.

[Operator]

[Operator Instructions] Mr. Mossa, there are no more questions registered at this time.

[Gian Mossa, executive]

Okay. Thank you all for the participation on the conference call. Bye.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.