Banca Mediolanum SpA

MIL:BMED

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Banco Mediolanum First Quarter 2022 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Alessandra Lanzone, Head of IR. Please go ahead.

[Alessandra Lanzone, executive]

Good afternoon, ladies and gentlemen, and welcome to the presentation of our Q1 results for 2022. Massimo Doris, our CEO, will be leading the presentation today; and Angelo Lietti, our CFO, will be joining us during the Q&A.

Please make sure that you ask your questions according to the language line you're connected to. Either way, answers will be in Italian with an English translation.

And now Massimo, would you like to kick this off?

[Massimo Doris, executive]

Yes, for sure. Thank you, Alessandra. And thanks, everyone, for taking the time of our schedule to follow us today.

So we are here to take a look at Q1, a challenging quarter for all of us from every point of view. And after such a record year, we can all agree we had a tough act to follow. Yet we accomplished extraordinary work over the quarter. The business results we were able to generate highlight our point of difference and the excellence we offer our customers, particularly when the world is uncertain, which is exactly when opportunities for investing are created. And that's what we really helped our customers to harness yet again in the first quarter.

So let's go look at the details. First off, the business result highlights, which set Banco Mediolanum apart as the clear leader with consistent staying power even under such a difficult environment. In Q1, the FTSE MIB declined by almost 9%, and so did the EuroStoxx50, while even the Dow Jones was down mid-single digits. And this definitely impacted the business performance of all banks and networks, with managed assets flows falling significantly compared to Q1 last year, even up to 50% or 60%. Meanwhile, to the contrary, our inflows into super high-quality managed assets soared 21% to EUR 1.7 billion, while total net inflows reached EUR 2.4 billion, a notable increase of 9%.

The geopolitical uncertainty had no impact at all on our flows, thanks to our capacity to manage customers' emotions during crisis times, in particular. Two factors come into play here: One, the close contact our family bankers keep up with their customers, as envisioned by our advisory strategy; and two, the reliability of our automatic investment services, namely Intelligent Investment Strategy, Double Chance and our installment plans. This outstanding commercial performance allowed us to temper the effect of market shocks on our assets in the first quarter.

In fact, at the end of the day, our total assets fell in value and attenuated EUR 2 billion versus an actual EUR 4.7 billion due to market effects alone, ending up at EUR 106.1 billion, a decrease of 2% since the beginning of the year. On the other hand, our credit book grew 3% to almost EUR 14.8 billion, also thanks to the solid increase of 5% in loans granted to customers compared to Q1 last year, coming in at EUR 894 million.

As usual, we were able to maintain a very low net NPL ratio at 0.71%. Therefore, the high quality of our credit book has been confirmed once again with annualized cost of risk of only 12 bps compared to an average of 47 bps at the European level according to the European Banking Authority. It might be helpful to note that this is calculated by comparing the 12 months rolling NPLs with the credit book as of March 31, 2022.

And finally, we also succeeded in building up our general insurance business concentrated in protection policies with a 17% increase in gross premiums and in line with our goal of providing customers coverage for events that put the income and personal saving at risk. We especially focused on stand-alone policies with annual premiums, which, by the way, have the benefit of both high margins and modest capital absorption.

Our strong business results, of course, helped our economic performance in Q1 immensely, which saw a net income of EUR 114.3 million, down 14% from the same period last year, solely due to market effects. In fact, our recurring business was solid and on the upswing and is best summed up by the contribution margin up 12% and even more so by the operating margin, the leading KPI driving our efforts, which was up 13% to EUR 142 million.

The only drawbacks on our P&L were, therefore, market effects that suffered an unfair comparison versus last year when we registered a significant benefit in fair value; whereas this year, we had a negative impact to the same degree.

But what continues to hold true and is clearly demonstrated in our P&L is that we are generating revenues that count, notably a solid net commission income on one end, up a healthy 11%, as a result of good fee contribution from all areas of business, including management and investment management fees despite the market and especially from banking service fees up 61%, thanks to high volumes of certificates which were very timely in Q1. And on the other hand, a resilient net interest income, up 9%, thanks to growth in retail lending, though down, versus Q4 due to lower yield on maturities rolled over at year-end.

So not only revenues that count, but that are growing at a quicker pace than our expenses, thereby underpinning our bottom line. Our cost/income ratio remained well under control at 49.2%, in part due to a cost base that is seasonally low in the first quarter, coupled with the market decline that was not yet fully reflected in average AUM, thus in recurring fees in Q1. At year-end, this ratio will very much depend upon the growth of revenues rather than costs. However, we can reasonably expect the ratio to stay consistently below 50% by 2024.

Speaking of recurring fees, note that the margins on average managed assets were at 203 basis points, mostly due to the expected shift in mix with an increased weight of money market funds from the Intelligent Investment Strategy service, and naturally also to the market strong volatility.

So switching gears from the income statement to the balance sheet, we see a robust and resilient CET1 ratio of 21%, with no capitalization of earnings at all in this quarter. Our leverage ratio of 5.7% is well above Basel III requirements and already compliant with MREL policy targets for 2024, namely 5.33% of leverage ratio exposure, although it is temporarily down versus full year '21 due to the front-loading of approximately EUR 2 billion of Italian govies in Q1 to benefit from the increase in yields.

Finally, I would like to highlight a few numbers that represent our leading growth and resilience drivers. First and foremost, our ongoing effort in customer acquisition resulted in a further jump of 49,100 new customers acquired in the quarter, also thanks to the success of the Selfy account, with some 6,000 new customers. And this led to an increase of 2% in our total bank customers to over 1,618,000. Despite the fact that numbers of bank customers are growing so rapidly, we can still boast a very high 95% retention rate.

And now turning to the network numbers. After a very good increase in the head count in 2021, the growth momentum continued in Q1, leading to a total of 5,855 family bankers at the group level, a further expansion of 2% since the beginning of the year, while the top tier private bankers and wealth advisors numbers remained stable.

Lastly, let me talk about our automatic investment services, the most significant growth and resilience driver, and the driver that really differentiates us. Just so you know, we have now EUR 5.17 billion sitting in money market funds of Intelligent Investment Strategy. Please note that the numerous automatic step-ins to equity funds in the quarter slightly reduced the level of the money market funds. On top of this, there are EUR 1.61 billion in the deposit accounts of Double Chance. A total between the 2, almost EUR 7 billion, are earmarked to be transferred to equity funds over the next few years on a monthly basis.

And in addition to that, consider that in Q1, flows into installment plans reached a total of a further EUR 1.6 billion annualized. And while we are on the subject of flows, allow me to remind you of what I said at the full year presentation at the beginning of February, namely, we believe that 2022 can be a repeat of our record 2021. And this remains our goal for the year, very challenging but remains our goal for the year despite the hard geopolitical situation, mainly because our advisory model that we pioneered decades ago is a proven model and responds better than anything else to whatever the markets throw at you.

Our Spanish business is becoming more and more a tangible example of the effectiveness of our model. In fact, Spain net income made a substantial contribution to the group bottom line of EUR 8.5 million in the first quarter, an increase of 11%. Total assets remained stable at EUR 9 billion, with net inflows into managed assets growing 10% year-on-year.

Now changing gears to the future. Nobody knows how long this crazy and immensely painful war in Ukraine is going to last. But one thing is certain: like all past crisis, this crisis too will come to an end. Putting aside all the terrible human suffering and consequences of this tragedy and focusing on just the market, sooner or later, the markets will recover and will pick up again.

Considering that our job has to do with managing people's money and, more specifically, with building our customers' wealth by attaining the most value from their investments, we will continue to help customers to take advantage of these markets. And our customers, who generally follow our advisory strategy, will benefit like they always have in the past crisis. We are by far the best structured and adapted to continue to support our customers in this respect. In fact, our advisory model guarantees a very high level of flows, thanks to our aggressive approach to equity and our proprietary automatic investments -- investing services.

Just look, for example, at our April net inflows in Slide #39. The markets didn't help at all in April either. And on top of this, the month was marked by a number of national holidays, often impacting the entire week. Yet, we were able to generate EUR 541 million of inflows into managed assets, with a 7.5% increase year-to-date versus last year. Given the total predominance of the equity component in the long-term investment solutions, these inflows are of an outstanding quality. Total inflow were strong as well, reaching EUR 3.2 billion since the beginning of the year, validating the trust of our customers.

So we'll continue to support our inflows by staying in close contact with our customers through our well-known dedicated communication tools, such as the series entitled "Uno Sguardo al Futuro," or in English, "A Look at the Future," that we produced and broadcast for our customers, analyzing the international economic environment created by the current crisis. By the way, the latest episode will be broadcast live tomorrow from the Salone del Risparmio both on Sky, Class CNBC and streaming on our social media at 7 p.m. and will be centered on the geoeconomic situation and on the topic of inflation.

We will also have the opportunity this month to get back to high-level in-person marketing activities, providing a powerful brand experience for our best customers and prospects. In fact, the Giro d'Italia, which we've sponsored for the past 20 years, kicked off a few days ago and lasts for the entire month. And is in the first real in-person -- it is the first real in-person, large-scale event since the advent of COVID. With a variety of get togethers we organize all along the race course, including the well-received Mediolanum dinner party at the end of each leg and the popular accompanied rides with 5 former cycling champions, the Giro is a fantastic vehicle for relationship building, brand building and customer acquisition.

And in conclusion, after 2 hard and complex years, a full recovery has been again interrupted by a challenging geopolitical and geoeconomic situation in this first part of 2022. But just like in the last 2 years when we achieved impressive record results, we are continuing to outperform.

Tough environments gives us unique opportunities to demonstrate our true strengths: A model that successfully combines state-of-the-art technology and platform with a qualified professional, our family banker; and an intelligent, studied and disciplined advisor strategy which provides real returns for our customers. And therefore, we are certain we can deliver continued and sustainable growth, both for the company and for our new and existing shareholders.

Thank you, everyone. We can now open the floor to questions.

[Operator]

[Interpreted] [Operator Instructions] We have the first question coming from Giovanni Razzoli, Deutsche Bank.

[Giovanni Razzoli, analyst]

[Interpreted] My first question is the following. When there are major changes, you've always said these reflect great opportunities for a group such as yours. I would like to know whether this time again, from a commercial point of view, the interest rate hike, especially with respect to BTPs are concerned, what impact might this have on your commercial policies? And which product are you implementing? Or what are you doing to benefit this type of movement?

Second question, which ties back to this one. During the quarter, you said that your BTP portfolio has been increased by EUR 2 billion. Can you give us like a guidance or an outlook with respect to the interest rate till the end of the year? Considering the interest rate backdrop that, in my opinion, will certainly give a great boost, considering that your bank business is rather relevant.

Then another question. The most positive elements of this quarter was the stability of the average fees in the first quarter, considering the market circumstances. I would like to understand whether the market being the same, can we expect that the average management fee is going to remain unchanged or not?

[Massimo Doris, executive]

[Interpreted] Talking about our commercial products and commercial range of products with respect to the interest rate hike, we have already moved ahead of time by investing our customers' funds in the equity market. With a high inflation and rising in interest rates, equity -- the equity market is the higher performing.

Having said this, however, during the year, we will also think about the bond market, the bond component. Because if it's true that with -- that equity funds are going to be pressed by -- sorry, fixed income market is going to get an impact from an increase in interest rate, still, with the passing of time, bonds will start yielding more and we are going to therefore give a better return. So in the second part of the year, we are going to focus on the fixed income market as well.

For the time being, however, investing our clients' funds in the equity market through the various products we've mentioned, that is the investment plan, the Double Chance product and the investment -- Intelligent Investment Strategy service, still remains the main guideline during this period of time.

As to net interest income, by the end of the year, we expect to reach a high single-digit growth, which is almost what we had now plus 9%. We expect to remain on the same level, more or less, on a yearly basis.

Talking about the average management fee, 203 basis points. The market being the same, I believe that we might shed 1 basis point for 1 main reason. New investments are not going to get into those classes that had a higher management fee that are no longer available but will be invested in the other classes, which will entail a slight decrease in average fees. But again, the market remaining -- showing no changes, I expect to see the fees remaining stable. Maximum, we can talk about a 1 basis point decline.

[Operator]

[Interpreted] The next question comes from the line of Luigi De Bellis, Equita SIM.

[Luigi De Bellis, analyst]

[Interpreted] Very quick questions. The first one is on inflation. Are you thinking of repricing your banking services to offset the inflation increase -- increases generated by inflation?

And the market impact in Q1, do you think it will generate opportunities for your sales network and recruitment opportunities, and therefore, maybe accelerate your recruitment policies?

And then a follow-up on your NII. At the current rates, what is the outlook for 2022, should the rates remain as they are now?

[Massimo Doris, executive]

[Interpreted] Very well. As to the pricing or repricing of our banking services, so far, we are not going to retouch them or touch them in any way. We're not going to touch the costs for our clients.

And then recruitment, you mentioned hiring. At times like these, if you wish, it's a bit more complex to recruit new bankers, both coming from other banks or other industries or entities, because clients maybe are more concerned. They tend not to follow the banker if he moves to a different bank or a different institution. I don't foresee any acceleration, but our target versus -- aiming at a slight growth, both in Italy and Spain, we are going to hit the target of a slight growth, not thinking of accelerations so far.

As for the NII, the net interest income for 2023, we have not yet come up with any simulation. Maybe you would like to add something? Our CFO?

[Angelo Lietti, executive]

[Interpreted] It is indeed going to be growing versus 2022 given the rate situation. However, we have not yet run any simulation for 2023 so far.

[Operator]

[Interpreted] No other question from the Italian line. I'll hand it over to my colleague, Sandro, for the English line.

[Operator]

[Operator Instructions] And the first question comes from the line of Angeliki Bairaktari from Autonomous.

[Angeliki Bairaktari, analyst]

Out of the EUR 1.4 billion cumulative AUM net flows that you have seen year-to-date, can you please let us know how much came from Double Chance?

And second question, what drove the very strong flows of certificates in the first quarter? And shall we expect similar level of sales in the rest of the year, please?

[Massimo Doris, executive]

[Interpreted] I'll answer the second question first, dealing with certificates. In the meantime, we're going to look for the Double Chance numbers for the first quarter. We had significant growth in certificates in the first quarter as compared to last year's first quarter.

Now first of all, last year's quarter, we had a very low level of certificates. So really, the comparison is outstanding. It was very low last -- the first quarter last year because the rates and the market volatility level made it difficult to create interesting products for our customers. So there were times when there was nothing available. Whereas this quarter, combining the interest rate situation with the market volatility, allowed us to really design very interesting products that were much more interesting and appealing to our customers. This is the first reason.

Second reason. If you are looking for income, if you're looking for coupons, bond funds in the first quarter were really plummeting because of interest rates going up. So it was complicated or not really beneficial to provide these products to income-seeking clients. Whereas the certificates were distributing a good coupon, and this is why this was the most interesting solution.

So comparing the 2 quarters, there was a very different situation. And then the coupon that can be paid out by a certificate compared to a fixed income fund for the time being, of course, this being the current situation.

Then you were asking about Double Chance. So we had inflows for EUR 1.4 billion. Double Chance is EUR 590 million.

[Operator]

There are no more questions from the English call. I'd like to hand back over to my colleague, Roberto, on Italian.

[Operator]

[Interpreted] We have a call from Alberto Villa with Intermonte.

[Alberto Villa, analyst]

[Interpreted] A couple of questions. First one on the outlook for cost for the full year, also with the picking up of activities, people working in presence, maybe your conventions, the tour of Italy. What is the cost trend we can expect for the year -- the full year?

And then tax rate was probably lower than I expected for the first Q. 21%, 22% is probably the guidance -- still the guidance you're providing us. Is it true?

[Massimo Doris, executive]

[Interpreted] Yes. Well, as to the cost outlook, we are around 9%. As we could see during Q1, it's a high single-digit level as far as costs are concerned.

As to the tax rate, indeed, we can expect a rate between 21% and 22%. For the quarter, it was -- this quarter, it was lower because of market effects. There was a negative impact stemming from the market, and it was just for Italy. If you look at Spain, the total net income was higher than last year because they did not suffer from the negative market impacts on fair value.

[Operator]

[Operator Instructions]

[Massimo Doris, executive]

[Interpreted] And I just wanted to add that above and beyond costs, that are indeed a significant portion to be taken into account, but we look at cost/income first and foremost, the current one and the forward-looking one. And as I said before, we expect a cost/income below 50% on a steady basis. And cost/income is computed without performance fees, not embedding performance fees. So that is -- so that we come up with a less volatile cost/income. And it's going to be -- and we confirm that it's going to be below 50%, starting from 2024 onwards.

[Operator]

Elena Perini, Intesa Sanpaolo.

[Elena Perini, analyst]

[Interpreted] I was a bit late in getting connected, so maybe you've talked about this. And I do apologize maybe if you are going to repeat the same answer. Did you give any updated guidance with respect to total inflows and managed assets inflows?

[Massimo Doris, executive]

[Interpreted] Our target is to reach the same flows level we had last year. After 3 months, we are already a little bit ahead compared to total flows, even more so on managed assets inflows. Certainly, it's going to be challenging, but the target -- the aim is to repeat what we did last year.

To date, if we consider assets under management, or rather managed assets, in addition of having already exceeded the level we had reached last year in April, if we compare with our peers, we see that they are half the way compared to what they had generated in the first 3 to 4 months last year, which means that our speed -- business speed is slightly more rapid than last year, but we are much, much faster than our peers.

[Operator]

[Interpreted] Are there any other questions? Adele Palama.

[Adele Palama, analyst]

[Interpreted] I have a request for clarification on the guidance you provided on operating costs. You're thinking of a decrease, 9% year-on-year in 2022. So there's no impact driven by inflation?

[Massimo Doris, executive]

[Interpreted] We expect a 9% growth versus last year.

[Adele Palama, analyst]

So a 9% growth. As to our costs, sir, that can be affected by inflation is very, very, very low. And so your 9% guidance is on all costs?

[Massimo Doris, executive]

[Interpreted] And I'm referring to G&A, yes. When I talk about 9%, I'm only referring to G&A.

[Operator]

[Interpreted] There are no other questions for the time being, so I hand it over to Mrs. Lanzone.

[Alessandra Lanzone, executive]

[Interpreted] Since there are no other questions from our audience, I would like to ask Massimo to conclude this conference with final remarks.

[Massimo Doris, executive]

[Interpreted] First of all, I would like to say that I'm really satisfied over this first quarter because of inflows and also for our income statement performance because if we take a look at our operating margin, we are talking about a plus 13%, which is very good. But I also have a very positive -- I'm very positive also with respect to the future. The market gives and takes. In past years, it had given a lot. Now it's taking away a lot. And sometime in the future, it's going to give once again.

To be able to be ready and willing to benefit from the market when it comes back, you really have to build the right foundations -- to lay the right foundations. In order to be able to benefit at the most and be ready, you need to have a wider customer base and you need to have a wider bankers network.

So our growth in terms of number of family bankers and our growth in terms of number of customers and talking about customers also, the success we are reaping from the direct channel, I'm talking about the Selfy account, is really laying the foundation to be ready to start off once again when markets are going to pick up based on a much wider foundation. And so we are going to reap even greater benefits from the growth that is certainly going to come back.

We all hope this crisis, especially with what concerns the war, is going to end as soon as possible. But we are not standing still. We are still supporting our clients. We are going to acquire new clients and we'll allow them to take the best advantage of what the market is offering -- is giving right now. So again, I am extremely constructive with respect to the future of Banca Mediolanum.

[Alessandra Lanzone, executive]

[Interpreted] Well, very well. Thank you, everybody, for participating. Unless there are further questions, no last minute questions, let me say goodbye to all of you. We are going to be back on August 4 for our first half results.

Thank you again, and have a nice evening. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]