Banca Generali SpA

MIL:BGN

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banca Generali First Quarter 2022 Financial 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]

A very strong and very positive of the recurring net profit, up by 43% year-on-year and closing at EUR 53.2 million. As I said, this is the result of the competition of all the repricing initiatives in the banking, insurance and asset management space, and this has compensated the negative effect of the market.

In terms of variable net profit, instead you see a lower contribution compared on a year-on-year basis at EUR 15.1 million, basically driven by lower performance fee.

Page 6. Let's start from net financial income. On this side, only positive news. The quarter stayed at EUR 22.5 million of net interest income. This is the strongest quarter over the last 5 quarters. And the trading gain stands at EUR 4.6 million with yield on net interest income at 0.6%.

Of course, thanks to the new scenario of the interest rate, here, we are more confident on the result of the full year. We closed last year in the range of EUR 83 million. And now we review our target for overall contribution of net interest income at around EUR 100 million. So it means an increase of almost around 20%.

Moving on next page, so Page #7, there is the focus on the total gross fees. Total gross fees are in line, of course, with the recurring net profit. So you have the recurring components, very strong, double-digit growth year-on-year, a slight reduction quarter-on-quarter; while variable fees, as you can see, down by almost 88% on a year-on-year basis. Total gross recurring fees on total assets stands at 1.17%, in line with our targets announced in the Investor Day.

Next page, now we will enter the growth piece. So 2 main components, the management fees and the other fees. Management fees, close to EUR 210 million. Again, also in this case, double-digit growth year-on-year. The average managed assets down just 1% the average quarter-on-quarter. Profitability here is at 1.43%. And it, again, is in line or even higher than the target we announced during our Investor Day. You remember very well, we set a target above 1.41% because we had a very conservative projection to the market dynamic. And unfortunately, now the trend is even worse than what we previously expected. But thanks to all the initiatives we launched last year, we continue to stay above this target, and we continue to be positive to achieve all the targets we announced.

Page 9, there is a new representation of other fees. You have, as you well know, 4 main components. The red part of the bar is about entry fees. Entry fees has 2 main components. One is about structured products and certificates. And the other one is the traditional banking fees. So it's more cyclical as a component, down from EUR 9.2 million to EUR 8.8 million.

Second block is about brokerage fees. More resilient to the market volatility at EUR 11.3 million, so pretty constant. And then advisory fee and other banking fees. Advisory fees is confirmed the same level as last year, which is, basically, thanks to new contracts while other banking fees are almost stable over a year. The overall margins and profitability of other fees, recurring fees, is around 0.17%, in line with the average of 2021.

So it is about revenues, now move on to the cost side, Page 10. This is a new representation of the total payout ratios. Let's start from the FAs network. We have the 2 main components, the ordinary payout and the cost of growth. Ordinary payout stands at 35%. That is slightly lower than the threshold that we set during our Investor Day, 36%. And you see also a lower cost of, let's say, growth. With this, an example of how efficient is our model, the cost of growth is strictly connected and correlated to the quality of the net inflows. So it now stands at 10.0%. So the overall payout ratio to the network is about 45%.

While payout to third-parties is pretty stable. Over time, we do expect a level of around 6%. Overall, here, you have the 2 components. One is brokerage and the other one is about third-party asset managers. Overall payout ratio is below 51%. Let's say that, in a very challenging scenario of the market, I do not expect significant acceleration of the payout. In case of normalization of the market, we're seeing that the range could be 52%, 53%.

Moving on the, let's say, other costs, so the internal cost of the bank, operating costs. Here, you can see that, on the left, you have the total operating cost with the breakdown of the core components and others. In the others, you have the one-off as well as the sales personnel costs. Sales personnel costs are a little bit higher. This is about the relationship managers of bank and employees. And this is due to the incentive scheme for the great result of the last year, while the core operating cost is up by 5.9% and also once having included the cost for growth and the BG claim project in Switzerland.

On the right, you see the breakdown of the core operating costs. And the first block is about the Swiss project, BG Suisse. And as you can see, the increase is from 0.4% to 1.5%. So a part of the growth of the core costs are linked to growth projects. For the other components, you know that in first quarter, we have some seasonality, but we are confident to be in line with our target. Of course, if the market remains challenged, we'll be closer to the lower band that the upper band.

Page 12, the efficiencies of our machine. All the ratios are at the top level in the market. We see a slight increase in the operating cost out of total assets just for the reduction of total assets, and then cost-to-income ratio, that once excluded the more volatile component, is even lower than in the past, 40.4%.

To sum up the first of the presentation, it's pretty impressive. The healthy trend of net recurring fees, as I mentioned, is strictly driven by the extraordinary job of optimization and efficiency of the pricing scheme of several products last year. Costs are under control. And then when we move below, say, in the operating items, you see lower provisions for contractual indemnities to the network. And then we have updated with an upward revision the discount rates, let's say, for the pension requirements. And this, of course, has a positive effect.

Last comment on the direct income taxes at 22.7%, we had a target of 22%, it's slightly higher due to the lower and expected contribution of the Luxembourg business strictly connected to the performance fee.

Now there is a new chapter named balance sheet and capital ratios. Just to give you an overall picture of Page 15 of our balance sheet, our balance sheet at the end of the first quarter stayed at EUR 17 billion or EUR 800 million higher than the end of the last year. And this is driven basically by client deposits, up by EUR 0.7 billion. And you see, as a consequence, the interest-bearing assets increased for the same amount.

Some positive aspects of our balance sheet. First of all, the loan portfolio, the cost of risk, first quarter, was 0. And the ratio NPL of total loans stayed at 4 basis points. For the financial assets, we have almost 60% of the portfolio that is linked to variable rate.

And you can see even better, in the next page, Page 16. If you look at on the bottom right of the page, you are pretty familiar with this slide, the duration of the portfolio. The overall duration stayed at 1.3. So we are ready to take advantage of any acceleration of the interest rates.

The last page, Page 17 is about capital ratios. These capital ratios are based on the new dividend policy applied with the new business plan. So you remember, we introduced 2 different ranges. The first one was about the recurring net profit, and it's in line with the previous range, the previous 3-year business plan, so 70%, 80%. And then we have widened the range for the performance fee in the range 50% and 100%. And of course, all the capital ratio are worked out with a very conservative approach, so considering the upper band of both ranges.

Total capital ratios closed at 17.3% with CET1 16.1% (sic) [ 16.2% ]. All the liquidity ratios are well above the requirement provided by the regulators. So again, a very strong balance sheet, a very conservative approach, ready to take advantage of any upward revision of the expectation on interest rates and already in place part of the benefits of the recent increase of the rate.

Now let's move on to the third chapter. This is about, let's say, total assets and commercial activity. Also in this, you will see new content. First of all, at Page 19 are the different representations of the total asset in the 3 traditional blocks. And on the left of the page, you have the asset under management, the asset under custody, so stock and bonds basically, and the current accounts of the clients. And then there is another information. Next information is about the asset under advisory stayed at 8.5% of the total assets.

On the right, you see the focus of this asset under management in 2 main components. The first one is managed solutions. So the part of the portfolio that is exposed to the market volatility stayed at EUR 42.5 billion or, let's say, EUR 1.7 million less than the end of the year. And then you have a more stable results in the traditional life policies staying at EUR 16.1 billion, where the decrease is driven by some maturities and some investments. The overall contribution of assets under management total asset stayed close to 70%, and the overall contribution of managed solution is still above 50%.

Next page, 2 deep dives, the part of the asset management products, both in-house and third-party; and the deep dive of the insurance products. Let's start from the asset management products. We have 2, let's call it, in-house families. The first one is about in-house funds. The second is about financial wrappers. What is encouraging and positive is that during these volatile moments, the financial advisers are more propense to increase delegation. So you can see the discretionary accounts, the financial discretion accounts, are more resilient to the crisis due to also positive inflows.

And then you see the reduction of third-party funds and the in-house funds is very similar, the reduction, and it's about EUR 800 million for the third parties, and it's about EUR 500 million for in-house fund. On the left bottom of the page, the ratios. So in-house funds out of total assets, 11.7%. In this case, it could be very useful also to consider the overall in-house funds. So summing up also the financial wrappers, and you see that the result is at 22.8%.

On the right, we already commented on traditional life policies. So the overall exposure of the bank to insurance products stands at 32%. And especially in this moments of the market, it is one element for our ability to over perform the competitors in this scenario, stands at 32% and the insurance wrappers are close to EUR 11 billion. And also, in this case, you see that these kind of products are less impacted by the crisis.

Now the same representation of the total assets is at Page 21 for the net inflows. So you know very well these numbers, we already announced to the market. The first quarter in terms of net inflows are almost in line with the first quarter of last year, EUR 1.5 billion compared to EUR 1.7 billion, but with a more conservative approach. Mix with the banking assets, this is twice the level of the first quarter, so EUR 0.6 billion compared to EUR 0.3 billion. The asset management component is well diversifying the different solutions. This is another element of strength of our bank, to have the opportunity to offer different solutions in a more volatile context.

Page 22 positive information because the contribution coming from the existing network is in line with the past, 1.1. What is below the targets or below the results of the last year is the contribution of net new recruits. But just because transferring assets in this moment, it's a little bit more complicated than in normal times. And outflows are in line with the historical levels. Recruitment trends, first quarter lower than the same period of last year, 33 new colleagues. And then we will see that in April, we have accelerated the recruitment activity.

Page 23, this is a deep dive on ESG solutions. It's another point of strength of our offering. We are at EUR 6.3 billion. And so you see that this kind of asset class is more resilient, just down by EUR 0.2 billion, thanks to an increase in penetration of these solutions. And this increase in penetration is also driven by constant positive net inflows, up by EUR 200 million in the first part of the year.

Page 24 is the breakdown of the communication of the results. So in April, again, EUR 0.5 billion, very sound and solid, with 60% coming from asset management products and with a negligible contribution of the banking assets. So very good quality with the results. In terms of breakdown, well diversified. And in terms of new recruits, as you can see, in April, we insert 17 new colleagues. So the result year-on-year is now stands at 50 new private banks.

Page 25, there is a focus on our financial advisory network. Another very strong element of Banca Generali is the constant growth of numbers of financial advisers without penalizing the quality expressed in terms of asset and portfolio average. So you see we continue to increase the sales force. This is driven by recruitment, of course, but even more by very low churn rate and very high retention rate.

Bottom line on the page, you see the numbers of teams. We continue to increase the number of teams. This is very important also for succession planning and goals. So it stands at 13% of the total assets with a portfolio average of teams of around EUR 85 million. And on the left, you have the breakdown for portfolio size of our financial advisers, wealth managers. So bankers with more than EUR 50 million stands at 36% of the total assets.

So now moving on the last section that is about business update. Before commenting at the business update, let me say that the quality of financial advisers in this situation matters most than in normal times. So we are confident to properly manage the trust with our clients. So all our financial advisers are very focused on the relationship with our clients even at the cost of losing some opportunities. It's really important to stay close to the clients in this moment and being very focused on our strategy for the next 3 years.

And Page 27, you see a sum up of what we announced during our Investor Day, so basically 3 clear pillars start from our vision. So a constant increase of the value services, the focus on innovation and sustainability as the engine to everything we do, clear guidelines and very concrete action.

As I said, we are almost ready to launch the first dedicated affluent client products, and I'm at Page 28. This is about a new product based on ESG approach. So it's about people. It's about our planet. And there is an automatic engine to reduce the risk exposure of our clients. So it's a very well-diversified portfolio with a risk engine mechanism and this is well thought for an affluent client. So as we introduced during our Investor Day, the offer will be more and more targeted on specific kind of clients. And again, sustainability is an important part of our strategy. So in this case, the product is 100%. It does not mean that it's exposed to 100% of the beat of the market because we built products with an engine to reduce exposure to clients during higher volatility period.

And last, but not least, so I want to leave you, before opening the Q&A session, with 3 main messages. The first one, and this is, to me, very important, is that we confirm all the strategic and financial targets over the next 3 years, and you see at Page 29, the presentation of the 3 first-level targets we shared together in February. Second, recurring earnings growth, it's very healthy and it's working pretty well. Of course, the impact of the market is negative, but we have been working significantly to offset at least part of this downside pressure, especially in terms of margins. And the third is that we have a very strong historical track record in managing this kind of moments, both thanks to a more diversified portfolio; and second, that is very connected to the first one, the quality of our professionals.

So now I leave the floor for your questions. Thank you.

[Operator]

[Operator Instructions] First question comes from Luigi De Bellis of Equita SIM.

[Luigi De Bellis, analyst]

I have some questions. The first one on the banking and the gross fees, solid trend across your business line. What do you expect the other quarters and for the year 2022 for the main blocks?

The second question on the NII. Can you provide the sensitivity to interest rate? And would the current interest rate curve guidance also for 2023?

The third question on the items below the operating line. Can you provide us a guidance for the net provision and contribution to banking funds for 2022?

The fourth question on the net inflows. We have seen for Banca Generali and the industry a resilient performance so far despite the negative performance of financial markets. In your view, why is this time different compared to the other past correction of the market?

And if I may, the last one, on the performance of your clients, a very tough equity and bond market in Q1. Can you elaborate on the performance of your products to customers in Q1 2022? And what kind of reaction and how are you managing the relation with your customers in this tough time?

[Gian Mossa, executive]

Thank you. I'd start with some answers, and then I leave the floor to Tommaso. Gross fees, in terms of margins, considering the market at the end of April, I continue to be optimistic to stay above the target we announced during our Investor Day that I remember is about 1.41. Of course, if you have in mind the new leg of negative performance, we'll be it, we have an advantage that our portfolio is very well diversified. So think of the traditional life insurance, think of the discretionary financial wrappers as well as the discretionary insurance wrappers, the significant buffer of current accounts. So of course, we'll be it.

But I think that in terms of performance, so I'll answer also to your fifth question, I think that we are, in relative terms, performing better than the average of the market. The overall performance is around minus 5, minus 6 at the end of April, and it's the equivalent of the performance of 2018. So of course, numbers are not good. And of course, there is also a dispersion of these numbers. So we run a comparative analysis and we are better positioned, especially in a part of the discretionary financial wrappers and, of course, also for the insurance contribution. So in relative terms, if you think of important clients, it's all about relative terms, not the absolute terms, and so there is a plus.

Let's say that we are still in the situation in which the relationship with clients is manageable, because we have the threshold we maintain as an average, as a critical situation, so we are pretty distant from that situation. And so we continue to consider this a correction. And so we can continue to dedicate time to the relationship of the existing sales force and the existing clients and part of the time to develop new business.

While the inflows are, in relative terms, stronger than in the past because, let's say, we are getting more and more used to such a correction in the market and also we are better organized to dedicate the right time to the existing clients and to commercial activities. And by the way, we are planning several initiatives for June, July. And also about the quality of the bankers. And remember that the commercial banks sold a lot of asset management insurance products with lower advisory in terms not only of transparency but also less propensity to see the client, explain what's happening. So the maintenance of the portfolio is crucial in this moment. So if you can go to clients before clients call you, this makes really the difference. And this is how are approaching our clients.

In terms of other fees, so the gross fees, management fees, margins should be pretty stable. Of course, the net interest fee, the net inflows, the mix will depend mostly from what you expected by the market. But again, the mix in network was good. So let's see what will happen in the next months in terms of performance. And in terms of other fees, positive in terms of brokerage fees, positive in terms of advisory fees in the way that are a little bit more resilient than management fees but will be earned.

Of course, banking fees are, of course, positive, let's say, front fees, structured products, certificates could be hurt in case of other mess of the market. So overall, I'm still positive. I think that we can stay at the same level as last year. But again, it depends mostly by what you expect from the market side. For the sensitiveness to the net interest income to rates and a comment of, let's say, the nonoperating lines, I hand over to Tommaso.

[Tommaso Russo, executive]

So the first question was about net interest margin. As we said before, the guidance for 2022 is to increase the net interest around, we expect, 20%, so in the range of EUR 100 million in absolute terms. The sensitivity that we gave is around EUR 70 million of increase in net interest margin, if we test a sudden increase of 100 basis point of the curve, a parallel shift upwards. And of course, going forward in 2023, we expect to have further benefit because our duration is very short. We have 1 year and 3 months. So this means that basically after 1 year, all the book is repriced. Also, the lending part is exposed to variable rates, so we have an important benefits also in 2023. We don't give us specific guidance, but we expect a further important benefit also in the next year.

For the net provision, well, our guidance, we expect to see in this range of EUR 35 million, EUR 37 million by year-end. And the contribution that we expect on resolution funds is around EUR 16 million per year. This is our internal focus. I think that's all.

[Operator]

The next question is from Giovanni Razzoli of Deutsche Bank.

[Luigi De Bellis, analyst]

A couple of clarifications on my side. One is on NII. I was wondering how much of the 12 basis point increase in the asset yield that we recorded year-to-date is related to the impact of inflation-linked securities. And as we haven't seen that much of increase in short-term rates so far, going forward, if the expectation on Euribor were to materialize, this amount, this 12 basis points of increase, may rise further. And the second question, back to your comments on NII, my perception is that you are very well positioned to a steepening and to a parallel shift of the yield curve. So now we have seen a steepening. In the future, we will expect a parallel shift. So I was wondering whether my understanding is correct or not.

And the last question on the impact of the rising rate environment on your commercial policy, I was wondering whether the rising rates that we have seen so far, especially in the 5, 10 years of tenure, offers you more commercial opportunity in the future. For instance, I don't know, some products that were out of [ phase ] last year now become more attractive, I don't know, Class 1 products, class certificates, and also become, for clients, more interesting to switch out of deposits into asset under custody, especially more managed assets. So my point, is this environment creating opportunities also in terms of fees rather than price for the potential negative impact of the NAV of fixed income funds.

[Gian Mossa, executive]

Thank you. Let me start from the second question. When I will introduce the first one, I will hand over to Tommaso. Let's say that in a competitive landscape, we are in the best position to take advantage from an increase in the interest rate, I would say, at least for 3 main reasons. The first one is about advisory. So when you start having positive interest rates, it's easier to provide an advisory service paid by the client. And we developed Robo 4 Advisor. We have a very, very strong competence center in the bank. So let's say that we have all the instruments, the capabilities and the professionals to accelerate the advisory service, the advisory fee model.

Second, we are best-in-class on certificates. And you are right, of course, if we have higher spread and higher rates, this is a place to be for the certificates. But as you know, I'm very conservative in accelerating the overall weight of certificates. I prefer to maintain a sort of constant disclosure and to negotiate on the secondary and then working both on the secondary and primary markets. But again, we have a competitive center.

And third, even more important, we haven't discussed yet, but if you are convinced of any permanent increase, let's say, of the interest rates, traditional life policy is the place to be. And you know how difficult it was to transform our commercial approach from a traditional life policy-driven proposition just to attract clients to, say, an advanced advisory fee model. So if you have in mind, let's say, at least a normalization of the yield, I see tremendous opportunities starting from next year for net inflows, first of all.

So for all these reasons, at this level, it's a great opportunity. It takes time. It needs some stabilization of the market because the first message we have been giving to the client, to the financial advisers, is to stay as close as possible to the existing clients.

In terms of net interest income, you are right. There is a portion of portfolio that is about inflation-linked boosted by what's going on. But the real effect, the strongest effect will be in the second quarter. In the first quarter, there is a tiny contribution. And for the details, Tommaso will give you more flavor of this.

[Tommaso Russo, executive]

Yes, we have an exposure to inflation-linked of around EUR 200 million, and we had a benefit in the first quarter of EUR 3.5 million in terms of interest margin. But of course, we expect that in the second quarter, we will have a further improvement in terms of benefit that we can have from the inflation-linked exposure that we have. If you look at our exposure, we think that, of course, the benefit will be made during the future because the parallel shift is really happening in the market. So the short-term interests are still negative. So the benefit of that, that we will have going forward, will be much higher. This is how we structure our balance sheet. Also, you have to remember that on the liability side, also the current accounts' fixed rate is 0. So we don't have any automatic review of the interest rate of the clients. So the markup and markdown will increase in the next quarter.

[Operator]

Next question comes from Angeliki Bairaktari of Autonomous Research.

[Angeliki Bairaktari, analyst]

First of all, a question on an article that came out by Bloomberg a few weeks ago with regards to some trade receivables that you have distributed to some of your customers. There was an article that alleged that customers were sitting on potential losses on those trade receivables. And considering the history of last year, Banca Generali buying back securitizations with underlying health care receivables from the same arranger, if I understand correctly, could we see a repeat of that this year? If your customers are facing significant losses, would you consider stepping in and buying those trade receivable securitizations this year? That's my first question.

And second question, I understand that the management fee margin declined by 4 basis points. You mentioned that around 2 basis that was due to a more cautious allocation out of equities and into flexible funds. Can you give us percentage of your managed assets currently split into equities versus flexible and balanced and versus fixed income funds at the moment? And where do you expect the equity exposure to land? I remember a few quarters ago, obviously, the market was very different, you were guiding for an increase in equity allocation within total managed assets. Is it fair to now assume that there could be a further decline in equity allocation in the second quarter?

[Gian Mossa, executive]

Thank you. First of all, on the securitization side, let's say that based on the information provided by CFE, the critical situation as we can define that, seems restricted to specific exposure to Sudan and Cuba. And there is no intention on the current situation to consider any repurchase of the assets. Again, 2 different stories, at least with the information we have today. So in this moment, I'm fully committed to manage a reduction, a market effect of minus EUR 3 billion, EUR 4 billion. So our attention is mainly there. So it's an asset class, the trade finance, and it can be subject to market volatility. And at the moment, CFE has confirmed that it's very limited to these 2 countries.

In terms of asset allocation, this is a very good question because you are right, the whole industry and the whole market increased equity exposure over the last 2 years, both for commercial activity but, even more important, the market effect. And the equity exposure today stays at close to 27%, between 27%, 27.5%. Consider that this is the overall exposure, so out of 100%. And consider this number worked out at the end of April. May started very bad, so I don't know exactly the numbers of today.

The flexible products, I don't know whether Tommaso has that because we work out the overall equity exposure, seeing that if you -- because the discretion accounts, for example, almost 50% are, we have different flexible products, both in-house and third-parties. Now we are looking at the number, the alternatives, yes, we have structured alternatives and flexible and balanced. So I don't have, in this moment, the overall exposure. We will give you the details after the call. I'm sorry, but I have in mind the overall asset allocation but working out the equity exposure of the underlying.

[Angeliki Bairaktari, analyst]

And if I may just follow up on the management fee margin near term, I hear your guidance that you don't expect this to fall below the 141 basis points target or floor that you indicated with the business plan in February. But in terms of second quarter, if we assume that the markets are at the current levels that we see them in May, which are obviously below March, is it fair to assume that there could be another leg down from the 143 basis points that we saw for the first quarter?

[Gian Mossa, executive]

No, the 143 has been worked out with the market condition as of the end of April. So okay, there are 1 week of downturn in May, but let's say that these are pretty updated numbers. Tommaso?

[Tommaso Russo, executive]

The first quarter, there is, I mean, a big effect because, in the quarter, there is an effect of almost 1 basis point linked to the real effect in this that we have in the quarter. So there is seasonality first quarter that we will recover in the second, in the third and in the fourth. So we don't expect effectively actively to have a change in terms of profitability in the second quarter, at least with the present market condition.

[Operator]

Gentlemen, at this time, there are no questions registered.

[Gian Mossa, executive]

Okay. Thank you for participating in our conference call. And I hope to see you soon. Thank you.