Banca Mediolanum SpA

MIL:BMED

Earnings Call Transcript 2019-Q1

[Alessandra Lanzone, executive]

Good afternoon, everyone, and thanks for joining us today at the presentation of our first quarter results for 2019. The presentation as usual will be led by Massimo Doris, CEO of Banca Mediolanum; while our President, Ennio Doris; and our CFO, Angelo Lietti will join the Q&A session.

So I'll hand this off directly to Massimo Doris right away. Thank you.

[Massimo Doris, executive]

Good afternoon, everyone, and welcome to the conference. First of all, I have to say that after such a challenging and tumultuous 2018, the first quarter of this year has felt like payback for having successfully structured and implemented the repricing of Ireland-based funds at the start of the year, and for having made adjustments on a variety of elements that result in the revenues that are far less volatile. The upshot is we have delivered on our promises to our investors in terms of stabilizing revenues and containing costs, and we are certain that the steps we've taken and the progress we've made are appreciated.

Having said that, net income for the quarter came in at EUR 72.1 million, a solid increase of 21% over the same period last year, as you can see on Slide #5. And what is even more telling, our operating margin turned out to be almost EUR 89 million, a significant 43% gain to the tune of some EUR 27 million over Q1 last year, clearly demonstrating our capacity to keep strengthening our operating efficiency.

The health of our operating margin continues to be boosted by commission income, which was up 12% for the quarter. And in this slide, we can give a lot of the credit to the change in the fee structure of our Irish funds, which contributes to the stabilization of net revenues. In fact, the investment management fees, adjusted as part of the repricing, contributed EUR 37 million in the line item other fees, and with no impact on acquisition costs. On the other hand, management fees were 2% lower year-on-year, reflecting lower average asset versus Q1 last year while they were flat versus Q4 since average assets were flat, even though the level of mutual funds asset recuperated completely by the end of March.

And as you can see in Slide #7, commission income from recurring fees ended up being EUR 281 million, 15% higher than the previous quarter or 212 basis points on average assets.

Going back to total commission income, banking service fees continued to benefit from the fees on certificates, which we offered our customers in Q1 as well, although fewer in number. Keep in mind, certificates are just one option for those of our customers seeking a further diversification in their investments. In fact, they represent just 1% of our assets.

Let's look at net interest income, which reached EUR 51 million, increasing 27% year-on-year. Actually, as you can see in Slide #8, net interest income in Q1 was slightly lower than in Q4, and this is due to a higher retail cost of funding as well as lower average treasury assets. However, be aware that by the end of March, we had front-loaded the entire EUR 3 billion in govies due to mature at the very end of 2019. And as a result of this move, we are now guiding for a higher NII to the tune of some 20% over 2018.

Back at Slide #5. G&A expenses for the quarter totaled about EUR 131 million, flat year-on-year, but as always, the difference will be made up over the year, bringing us to a 4% increase by year-end just as we had previously stated. Focusing on the market effects line items, you can see the consequence of the new methodology to calculate performance fees in Ireland. From now on, there won't be any major contribution in the first 3 quarters except for the accounting of any fees generated by capital gains of those customers who took advantage of profit-taking. Remember that the moment of truth for performance fees is now December 31.

Now moving on to Slide #10. Assets under administration and management totaled EUR 78.7 billion at the end of the quarter, more than recuperating the loss in assets at the end of 2018.

As a matter of fact, as you can see in Slide #11, we generated EUR 1.1 billion in total net inflows, 14% higher than Q1 last year, of which EUR 795 million were in managed assets, thus a very good quality mix. As we've already stated, this year, we expect to be able to generate at least the same level of inflows as we did in 2018, even considering the fact that PIR products are blocked for the time being.

When discussing inflows, there are a couple of subjects I commented on last time that I would like to pick up again. First of all, with respect to the budget law's requirements for the PIR products and the consequent blocking of new PIR sales, the time frame for the -- for any adjustment to the law is in limbo, thus it is difficult to say when this will be resolved; two, our level of inflows into managed assets shows no sign of any MiFID II-related slowdown. Thanks to our preparation and full transparency from day 1 with our customers, we believe this would be a minor issue for us. The proof of course will be this summer when the first customer reports come out, but we're confident we will stand the test. At the same time, we are forging ahead at a good pace with our objectives to further broaden our revenue streams. As for the lending business, we registered a strong increase in mortgages and loans to the tune of 27% year-on-year, which built our credit book up to EUR 8.7 billion, as you can see in Slides #22 and 23.

Mortgages continue to represent the bulk of the book, reaching EUR 6.5 billion. And for those of you who weren't aware, practically all of our mortgages are floaters in a market dominated by fixed rate. Moreover, the salary-backed loans are moving along with already EUR 404 million contributing to the book.

Taking a look at general insurance, our project designed to boost the sales of standalone policies was launched at the beginning of April. Our effort here is to fill the void in our customers' coverage in terms of P&C, health and disability as well as term policies, so that our customers' assets are protected from serious unfortunate events. And our objective is to grow new business some tenfold in 5 years.

Just like we did with mortgages a couple of years ago, we introduced dedicated experts who work alongside our Family Bankers. We now have some 70 general insurance experts, and we'll be adding numbers to these along the way. This has made a significant impact on the early success of the project. In fact, we were already able to see the first results of the test phase in Q1, with an encouraging 54% increase in new business, although numbers are still very small.

Switching gears to Slide #12, you can see our updated capital ratios. The common equity Tier 1 ratio at the end of the quarter was 18.6%.

Let me make a quick comment now on the foreign markets. Our business in Spain delivered a strong set of results. On Slide #31, you can see net income came in at EUR 4.1 million in the first quarter, an increase of 51%, mainly impacted by the same factors as in Italy, namely higher recurring fees. Assets increased 11% year-on-year, totaling EUR 5.2 billion with managed assets at EUR 3.7 billion. The sales network saw healthy growth, with an additional 69 Family Bankers year-on-year, with a total headcount standing at 1,008.

And now, as far as Germany is concerned, what we can say is that we have 4 binding offers in hand, and they are currently under review.

Before closing, I'd like to comment on our April net inflows, which totaled EUR 343 million, bringing the year-to-date figure to EUR 1.48 billion, up 7% versus last year, notably strong in managed assets, where we continue to have the vast majority in mutual funds and unit linked policies. I would consider these flows to be very respectable, especially given the concentration in the second half of April of the Easter and national holidays. In fact, the last 2 weeks of April this year were particularly hit by the vacation effect.

A point though that I never tire of stressing is the quality of our inflows into managed assets. In fact, as you can see in Slide #38, illustrating the Assoreti classification of managed assets for quarter 1 -- for the quarter. 100% of our managed assets inflows is made up of mutual funds and unit linked policies. This is a sharp contrast with the other Italian networks, whose flows into mutual funds and unit linked are only marginal. As a matter of fact, 75% of their managed flows are in traditional policies. This is the umpteenth demonstration of our way of working and of the strength of our advisory model. Facing financial crisis is where we differentiate ourselves from all the rest, and it's exactly where we are able to make significant gains in market share.

So, the last thing I'd like to leave you with this afternoon is that I'm truly satisfied with the quality of the results we've achieved. You know, all of the measures we're implementing in order to stabilize our revenue streams are clearly visible in the improvement of our operating margin. We managed to successfully modify our performance fees methodology while increasing our recurring fees. At the same time, successfully lowering the TER. Therefore, we didn't have any push-back from our customers. As a matter of fact, our customer base continued to grow at a solid pace and our inflows into managed assets show no sign of any slowdown.

We were able to extend and broaden our revenue streams by developing our capability to grant credit and to diversify the credit business through our acquisition of EuroCQS in the salary-backed loans, and to place greater focus on the high-value general insurance business. And the end game of all this is to build faster and more sustainable growth of our bottom line in the years to come. Thank you very much. We are now available for questions.

[Operator]

[Operator Instructions] [Foreign Language] Gian Luca Ferrari [Foreign Language]

[Gian Ferrari, analyst]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Gian Ferrari, analyst]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Gian Ferrari, analyst]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Alessandra Lanzone, executive]

[Foreign Language]

[Operator]

[Foreign Language] Elena Perini [Foreign Language]

[Elena Perini, analyst]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Alessandra Lanzone, executive]

[Foreign Language]

[Operator]

[Foreign Language] Alberto Villa [Foreign Language]

[Alberto Villa, analyst]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Alessandra Lanzone, executive]

[Foreign Language]

[Operator]

[Foreign Language] [Operator Instructions] And the first question comes from the line of Hubert Lam.

[Hubert Lam, analyst]

I've got 3 questions. Firstly, on NII, so you've got it to 20% higher year-on-year NII for 2019. I'm just wondering if that also should be -- if there's any impact on 2020 NII because of the front-loading of the government bond portfolio? Or should it just only affect 2019 and the 2020 numbers should not be affected by this change?

Second question is on flows. Can you tell us how many certificates that you sold in the first quarter? And also, it seems like your Italian mutual fund flows are down year-on-year for the first 4 months. Is this due to the substitution effect of less mutual fund sales in exchange for higher certificate sales? And should we expect this change in mix to continue?

And the last question is on your CET1 ratio. It fell during the quarter. I was wondering if you can give us the reasons why and the moving parts behind that?

[Massimo Doris, executive]

[Foreign Language]

[Alessandra Lanzone, executive]

[Foreign Language]

[Operator]

And now the next question comes from the line of Andrew Crean.

[Andrew Crean, analyst]

2 questions. Firstly, why did banking services revenues go up from EUR 24 million to EUR 36 million in the quarter? Is there seasonality there or is that underlying growth? And secondly, I think you said your recurring revenues -- your new recurring revenues were about EUR 37 million in the quarter. That doesn't seem to me to equate to 48 basis points. And I'm just wondering whether you can give some detail behind that and address the issues whether there is some slow buildup in these new recurring revenues?

[Massimo Doris, executive]

[Foreign Language]

[Operator]

There are no further questions on the line, so I will hand it back to the Italian conference. Thank you. [Foreign Language]

[Alessandra Lanzone, executive]

[Foreign Language]

[Ennio Doris, executive]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Ennio Doris, executive]

[Foreign Language]

[Alessandra Lanzone, executive]

[Foreign Language]