Banca Mediolanum SpA

MIL:BMED

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Banca Mediolanum Q1, 2021 results. [Operator Instructions] Please be advised that today's conference is being recorded today. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Alessandra Lanzone, Head of Investor Relations. Please go ahead.

[Alessandra Lanzone, executive]

Good afternoon, ladies and gentlemen, and thanks for joining us at the presentation of our results for the first quarter of 2021. The presentation will be led by Massimo Doris, our CEO. And our CFO, Angelo Lietti, will join in during the Q&A session. Please make sure that you ask your questions according to the language of the language line you're connected to. And in order to give all analysts and investors the same opportunity to participate in the Q&A, I would like to stress that you limit your questions to a maximum of two. We will definitely give you the chance to ask your follow-up questions at the end.

And now I would like to hand the floor over to Massimo. Thank you.

[Massimo Doris, executive]

Welcome, everybody, and good afternoon. As you can see on Slide #5, our net income reached EUR 133.4 million for the quarter, clearly beating consensus and overtaking Q1 last year by far, an increase of 85%. Certainly, we had a nice benefit coming from the SIA shareholding fair value write up. However, the solid 26% increase in the operating margin, which came in at EUR 125.3 million, demonstrates just what an extraordinary healthy quarter we had as far as recurring business is concerned. In fact, it's our all-time quarterly record.

Gross commission income was up 12% to nearly EUR 416 million. Entry fees increased 17% on the back of the massive level of gross inflows gathered into mutual funds. Our #1 contributor to the top line, management fees, were up 14%, reaching EUR 296 million, an impressive EUR 14 million more than in Q4 last year, thanks to greater assets overall.

And while we are on the subject, as you can see, slide #7, please note that the commission income from recurring fees of EUR 342 million in Q2 corresponding to 206 basis points on average assets, down 1 basis point since the end of 2020 due to the overwhelming success of Intelligent Investment Strategy in the mix of incoming assets. In fact, this turned out to be EUR 800 million out of EUR 1.4 billion of mutual fund flows in the quarter, depressing the average annual basis point somewhat. Just as a reminder, assets passing through the Intelligent Investment Strategy are temporarily part in the money market fund while waiting to be shifted into equity funds.

So let's continue analyzing gross commission income, looking at net insurance revenues. The healthy increase of 47% is owing in large part to general insurance protection policies, which showed a 36% increase in premiums. Banking service fees, on the other hand, were down 21%, lacking the benefit of certificates we had in Q1 last year versus this year.

Moving down the income statement. Let's address acquisition costs, which were up 11%, perfectly in line with the higher entry and management fees income as well as insurance revenues. Net interest income totaled almost EUR 65 million, up 14%. This was thanks to higher interest income coming from our strong and ever increasing lending activities and to lower retail cost of funding versus Q1 last year that was impacted by the 2% promo, despite higher assets invested by a Double Chance with the initial [indiscernible] parked in a remunerated deposit account. However, the difference of EUR 5 million less in NII versus Q4 last year is due to lower volumes of treasury activity. By the way, in April, we had already repurchased the EUR 1.2 billion matured in Q1.

Net income and other investments were less negative than in the first quarter last year. However, impairment on loans increased 17% to EUR 7.3 million, in line with the 18% growth in our credit book, as you can see in Slide #13 and with no substantial negative effect from the persistent pandemic on our NPL. In fact our NPL ratio at the group level continued to be very low at 0.63% net or 1.24% growth against what one might expect with the cost of risk at 16 bps. And since we are on the subject, please note that the amount of loans currently under moratorium is very limited, in the ballpark of EUR 260 million.

Now moving down the P&L, Slide #5. G&A expenses total nearly EUR 142 million, up 3% versus Q1 last year in the presence of a double-digit increase in revenues. In fact, the cost/income ratio normalized by excluding performance fees from the calculation went down from 54% of the full year 2020 to 51% for the quarter. G&A costs attributable to Flowe were in the region of EUR 2 million, nothing of the magnitude of the customer acquisition costs in the second half of 2020, when we had a much greater-than-expected surge of new customers. And they were more than compensated by a EUR 2.9 million savings tied to the winding down of the business in Germany.

As far as the regular contributions to banking industry are concerned, the EUR 8.4 million amount, an apparent increase of EUR 3.5 million year-on-year, should actually be compared with the H1 last year, since we had to do an adjustment in Q2 to account for the higher share of deposits and higher country risk profile.

Now let's move below the line of our remarkably strong operating margin, which, by the way, has a lot of sustainable substance behind it, and which I'm sure you appreciate as the most impressive performance of our P&L in Q1. Among market effects, I would like to point out the revaluation of our shareholding in SIA in the run-up to their merger with Nexi. We had partially accounted for the expected future values of our shares to the tune of EUR 30 million in Q1 in the line item net income on investment at fair value. This, of course, had an impact on the income tax of Q1 being a domestic revenue and taxed at the full Italian rate, just like NII. This doesn't change our guidance for a run rate of around 20%, 21% going forward for our income tax rate.

Leaving the P&L in Slide #9, we see that assets under administration and management made a nice step-up to EUR 97.7 billion, gaining 5% since the start of the year. This increase was equally due to the positive market performance and to our brilliant performance in net inflows in Q1, as you already know and can go back and see Slide #11. The EUR 2.2 billion inflows we achieved in the first 3 months were a true accomplishment, especially considering that 2/3 were in extremely high-quality managed assets.

And if you move to slide #36, you can see that our family bankers were able to generate the same high-quality inflows in April as well, when over EUR 670 million were gathered into managed assets, bringing total managed inflows year-to-date 2020 will be satisfying EUR 2.1 billion. But what counts most is that over 80% of the funds flows -- inflows so far this year are earmarked for equity investments directly or indirectly through Intelligent Investment Strategy. This means we continue to have a peerless level inflows into equity which brought the equity content of our customers' assets up to 53%.

And since we are on the topic, be aware that our automatic investment services continue to feed millions in inflows into equity every month through installment plans and Double Chance, where there is currently more than EUR 1.3 billion into the deposit accounts, ready to be invested into equity over the next several months and through Intelligent Investment Strategy, which has almost EUR 3.5 billion in money market funds waiting to be shifted into equity.

On top of all this, look at our lending business that in Q1 jumped 37% over Q1 last year, and that increased even further in April, bringing total loans granted to nearly EUR 1.2 billion, up 39% in the first 4 months. So to wind up our business results through the end of April, general insurance premium grew 41%, exceeding EUR 48 million, while new business of stand-alone policies reached EUR 8.7 million, a surge of 45%.

Now changing gears completely, let's look at our capital ratios for the banking group in Slide #16. The common equity Tier 1 ratio at the end of Q1 was up to 20.7%. And this accounts for the entire distribution of dividends and does not capitalize Q1 net income. So it's evident that we have an extremely robust capital -- robust capital position. And our leverage ratio calculated as CET1 on the assets of the banking group comes out to be 6%, clearly indicating our strong financial footing.

Moving on, let me first make a comment on Spain where the pace of growth has significantly shifted. Our business took off in 2020 and continued with the same momentum in Q1 this year. Overall, we are having an excellent contribution from Spain, with the net income that was very resilient, coming in at EUR 7.7 million, as you can see in Slide #34.

All of the business indicators gained ground. Total assets reached EUR 7.8 billion, a solid gain of 8% since the start of the year. We managed assets at EUR 5.5 billion. Net inflows had an impressive numbers exactly as in Italy, reaching EUR 408 million for the quarter, EUR 254 million of which in managed assets, up 51%. Lending business was also extremely strong, bringing the credit book to EUR 805 million, an increase of 8% since the start of the year. The network saw another encouraging move up of 3% in headcount since the beginning of the year, reaching 1,360 family bankers, confirming the #1 slot in the FA Networks in Spain and the strength of our recruiting efforts.

And while we are on the subject, I'm really pleased to report that our recruiting efforts are paying off in Italy as well. Last year, we fine-tuned our recruiting approach to be even more articulated and targeted. And results are self-explanatory, as you can see in Slide #31. You might recall that in the entire year of 2020, we added 127 new family bankers. In the first quarter of this year alone, we were able to recruit 101.

Our family bankers' average portfolio reached EUR 21.1 million at the end of March. But what matters more is that the segment of our advisers with more than EUR 20 million in their portfolio has increased by 2 percentage points in only 3 months, reaching 40%. And just to provide some perspective, 10 years ago, this segment stood at 6%. In our focus on quality over the past decade, the numbers speak for themselves. We believe we can close the year with a net increase in the headcount of around 150, which will allow us to reach 4,250 family bankers.

I would like to stress here that the results we just illustrated come from the revised approach of our traditional recruitment method. I think it's important we make a distinction with the project we call NEXT, which targets the next generation of family bankers by pairing a high potential new graduate with a senior private banker of wealth adviser to assist them as a junior bank consultant. In fact, this project, which represents an extensive reworking of our service model and on the family banker customer relationship, clearly shares and supports the objective to boost organic growth over time, but its focus is mainly on pushing even further the productivity of every single private banker, while having the gigantic added benefit of solving the issue of generational renewal. A real plus, given the demographics of our network.

We started with a pilot phase in Lombardia, where 14 new graduates are currently in the training stage at our Mediolanum Corporate University with a dedicated program, allowing them to prepare for the FA license exam at the same time. And as a refresher course, remember that once licensed, they will become banker consultant and manage the private bankers' or wealth advisers' day-to-day duties and operations, while taking care of part of their customer base, thus freeing up time for the senior banker to focus on customers with larger portfolios as well as on developing new business. Keep in mind that the banker consultants are compensated with the percentage of the senior's commission.

In addition to the new trainees in Lombardia, a new group of 15 from Toscana are now ready to start training in a week's time. Our intention here is to roll out the program gradually all over the country over the next 3 to 4 years with the objective of bringing in some 300 banker consultants.

So now let me just say a few words on our Flowe app that is detailed in Slide #46. As you know, in less than a year, we reached 700,000 customers all over Italy with an incredible acceleration in the last 2 months of 2020, a level which was totally unexpected. And at this point, customer acquisition has leveled off. And our objective is now to encourage these customers to become more active in terms of transactions, payments and general engagement and to upgrade their status from free to the paying profiles.

Changing gears, as many of you have anticipated, it was finally time to launch a new alternative PIR offer, P-I-R, which we did during our virtual national convention mid-April. The new PIR is a 10-year closed-end fund that invests in private equity, private debt and venture capital, and is aimed mainly at our high-net-worth customers as a tool to even further diversify their asset allocation.

As you know, this is not a product for every customer, since it is highly illiquid, but does answer a demand for this sophisticated customer segment. We also took this as an opportunity to solidly refocus our and the general public's attention of the traditional PIR funds. At the end of this month, we have a dedicated a tour of events on plan all over Italy with our managers, along with experts and opinion leaders. These will be held virtually at first then in person as soon as things open up.

Before we move on to Q&A, I'd like to share some results from the latest Doxa Survey for 2020 that are very indicative of where we stand in the Italian banking industry with respect to customer perception. As you can see in slide #48, we came out #1 for customer satisfaction with an impressive score of 97%. But what really counts more here is our 71.6% in Net Promoter Score, where we also came out in proposition compared to a 12.4% of the traditional banks and a rather unenthusiastic 45.3% for the online banks. But we are even more excited with our first place in mobile app satisfaction with a score of 82%, given the necessity of action in this particular area today. And at any rate, you can see we were just to be outstanding in all indicators measuring the perception of value by bank customers.

I really appreciate your attention so far today, so we can move on to the Q&A session. Thank you very much.

[Operator]

[Operator Instructions] And your first question comes from the line of Hubert Lam from Bank of America.

[Hubert Lam, analyst]

I've got 2 questions. Firstly, on your cost/income ratio, you've achieved 51% for the quarter. Is this something you can maintain 51% for the rest of the year? Because I think that would be better than what you had guided to at the full year results? So that's the first question. The second question is on performance fees. If the year were to end today, how much performance fees would you be able to accrue?

[Massimo Doris, executive]

Yes. So Italian. [Foreign Language]

[Operator]

Your next question comes from the line of Angeliki Bairaktari from Autonomous Research.

[Angeliki Bairaktari, analyst]

First of all, your net flows in mutual funds and unit-linked are running, as you mentioned, a bit than EUR 2 billion in the first 4 months. That's an annualized rate of 10%, which is much higher than the rate we've seen in the past couple of years. Do you think this is a sustainable level for the rest of the year? That's my first question.

And then second question, you hired 101 family bankers in the first quarter, but acquisition costs were a lower share of management fees at only 50% sort of rebate versus 52% in the full year 2020. Should we expect a catch-up in acquisition costs in the coming quarters?

[Massimo Doris, executive]

[Foreign Language]

[Operator]

There are no further questions at this time. I will hand over to Roberto.

[Angelo Lietti, executive]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Operator]

Our next question comes from the line of Borja Ramirez from Citi.

[Borja Ramirez Segura, analyst]

So my apologies. I was on mute. I have 2 very quick questions, if I may. The first one is, if you could please provide details on the TLTRO take up and also the expected contribution in NII?

And my second question is if I -- in the previous presentations, you previously provided the excess capital in euro millions, but I wasn't able to find it in the Q1 presentation, and I would like to check if you could please provide this data for March.

[Massimo Doris, executive]

Okay. [Foreign Language]

[Operator]

There are no further questions at this time. I will hand over to Italian operator.

[Unknown Analyst]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Angelo Lietti, executive]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Operator]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Operator]

There are no questions on the English side. I will hand over to the Italian operator.

[Unknown Analyst]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Operator]

[Foreign Language]