Banca Mediolanum SpA

MIL:BMED

Earnings Call Analysis

Banca Mediolanum's Record-Breaking 2023 Results

Banca Mediolanum celebrated an impressive 2023, with net income soaring by 62% to EUR 821.9 million and net interest income (NII) up by 85% to over EUR 752 million, due to a successful diversification strategy and effective interest rate adjustments. The bank's customer base grew, with a rise in primary customers contributing to credit book growth. Despite a changing rate environment, NII is predicted to increase by 6-8% in 2024, with a flattish outlook for 2025. Net commission income grew by 6% to nearly EUR 1.03 billion. This robust performance is supported by a resilient advisory model and a proactive approach from the bank's Family Bankers, leading to strong managed asset inflows of EUR 7.1 billion, even amid high interest rates and market volatility.

Banca Mediolanum Posts Record-Breaking Financial Performance for Full Year 2023

Under the leadership of CEO Massimo Doris, Banca Mediolanum has reported its full year 2023 results, which showcase a significant beating of projections with real growth across revenues, net income, and other key financial metrics. Despite an unpredictable economic environment, the bank demonstrates the strength and resilience of its business model and strategic initiatives.

Adapting to a Rising Interest Rate Environment

With strategic foresight, Banca Mediolanum capitalized on higher interest rates and expanded its credit book by favoring variable rates in mortgages and treasury activities. As a result, net interest income (NII) saw an astronomical 85% increase to over EUR 752 million, surpassing prior predictions. The bank expects this enhanced NII to stabilize at this new, heightened level, underpinning a robust top-line contribution in the future.

Revised Guidance Reflecting Market Expectations

In light of changing market conditions, specifically average 3-month Euribor rates adjustments to 3.4% for 2024 and 2.5% for 2025, Banca Mediolanum has updated its NII guidance from a previously anticipated 10% increase, to a more modest hike of 6% to 8% for 2024, with expectations for a flat NII in 2025.

Commission Income Surges Past EUR 1 Billion

The bank's net commission income grew by 6%, reaching nearly EUR 1.03 billion, a milestone driven by growth in recurring fees from higher average Assets Under Management (AUM), which benefitted from a positive though volatile market. In particular, management and investment fees rose to over EUR 1.3 billion, an increase of 8% from the previous year, reflecting a higher-quality asset mix and improved margins.

Operating Margin and Cost-Income Ratio Indicate Strong Profitability

Banca Mediolanum's operating margin marked a new record at EUR 987.7 million, up 49%, which is a testament to the bank's core profitability and effective cost management. This translated into a favorable cost-income ratio that impressively continued its downward trajectory to 39.9% in 2023 from a restated 47% in 2022. Additionally, performance fees provided an unexpected boost, contributing EUR 54 million due to the market rally at year-end.

Exceptional Net Asset Inflows Despite Market Challenges

The bank achieved positive total net inflows of EUR 7.1 billion, with managed asset flows exceeding EUR 4 billion. This performance places Banca Mediolanum at the forefront of the industry, particularly noteworthy as the open-ended funds in Italy faced significant outflows. The bank credits its resilient inflows to its advisory strategy and the quality of services offered by Family Bankers, emphasizing diversification and open conversations about fixed income investments as part of a well-rounded asset allocation strategy. Banca Mediolanum is poised for continued success in managed asset inflows for 2024.

Earnings Call Transcript 2023-Q4

[Alessandra Lanzone, executive]

Good afternoon, everyone. It's a pleasure to be back with all of you. Before we begin, please remember to ask your questions in the language of the language line you're calling from. In any case, the answers will be provided in English -- sorry, in Italian with an English translation. So without further delay, I pass the floor to our CEO, Massimo Doris, that will guide us through the presentation today, accompanied by our CFO, Angelo Lietti. Massimo, over to you.

[Massimo Doris, executive]

Thank you, Alessandra. Good afternoon, ladies and gentlemen. It is with great pleasure that I'm here with you today to share the outstanding performance of Banca Mediolanum for the full year 2023, and I'm thrilled to report that we have delivered record-breaking results, surpassing even the most aggressive projections. The numbers speaks for themselves, with real growth in revenues, net income and key financial metrics. In fact, Banca Mediolanum has not only weathered the challenges posed in 2023 by unpredictable and rapidly changing economic landscape, but has emerged with unprecedented financial performance.

Our standard results showcased the resilience of our business model and strategic vision, and the effectiveness of our key initiatives. And they underscore the key message we conveyed at the 9-month point. The performance of the year is not a one-off, what serves as a launch pad for where we are headed, superior growth in the years ahead. In fact, the earnings potential that is embedded in our top line is considerable. We've seen that the renowned spike in our NII is actually a step-up. Remember that this is the fallout of our long-term diversification strategy, which includes the expansion of our credit book and of our decision to opt for variable rates in both mortgages and treasury activities. Going forward, our NII will stabilize at this step-up level, certainly providing a more substantial contribution to the top line than before.

In fact, our customer base is rapidly expanding with a growing percentage of primary customers who have stickier deposits and make up the core of our lending business, contributing to the projected growth of our credit book. Additionally, we are unlocking in the current high rates in our banking book by prioritizing fixed income over floating rates, and by replacing the bonds that expire with some that have longer maturities. On top of this, as we already discussed, as soon as interest rates cuts commerce, asset management products will regain their appeal as the #1 option for investors seeking higher returns, thus resulting in a greater increase in our commission income once again. We've always been highly aware of the importance of having a diversified revenue stream, and this is especially true in a changing interest rate environment.

And now one more thing, I know to be true. Banca Mediolanum has entered a new era. We have made a qualitative and quantitative leap that is unprecedented and here to stay. So now let me highlight some of the key accomplishments that have led to our remarkable success. As you can see Slide #4, we exceeded last year's restated earnings by 62% as net income reached EUR 821.9 million. One of the standout features of our performance has been the generation of a robust net interest income, which came in to over EUR 752 million, increasing 85%. Our capacity to adjust and make the most of changing interest rate conditions has been pivotal in delivering a strong NII. And the same can be said on the strategic positioning we've taken in variable assets -- in variable rate assets in both the Credit Book and Treasury portfolio to the tune of EUR 25 billion -- EUR 24 billion.

As we already discussed, all of the progress made over the course of 2023 will carry over into 2024. Our net interest income won't just hold firm, it will expand this year. Of course, we are well aware that given that inflation is expected to approach the ECB target over the next several months, the interest rate environment is going to change substantially in 2024, although some confusion persists in the market on the matter. And so following the current market expectations, we have revised our rate of sanction for the average 3-month Euribor from 3.63%, down to 3.4% for 2024 and 2.5% for 2025. This marks a material shift compared to last November when we gave a guidance of a 10% increase in NII for 2024. In light of all this, we are adjusting our NII guidance somewhat and now foresee an increase of 6% to 8%. And at this point, we anticipate a flattish NII for 2025, flat compared to 2024, of course.

We feel this is achievable given our proven ability to quickly adapt to the evolving interest rate landscape, optimizing the various moving parts and maximizing profitability while managing funding costs prudently. Remember, we have the flexibility and the room to decrease the cost of funding if needed. But on top of this, just keep in mind that we leverage on a well-diversified business model. And as rates decline, Assets Under Management increase in value, generating more recurring fees. As a matter of fact, the reduction in yields that occurred at the end of Q4 led to a positive effect on AUM, which on fixed income investments alone is creating additional fees that will largely offset the reduction in our NII guidance. Having said that, while NII was a standout contributor to our record results, our core revenue source, including fees and commissions, continue to expand.

Net commission income, in fact, grew by 6%, surpassing the EUR 1 billion mark for the first time to nearly EUR 1.03 billion. Particularly, the healthy growth in our recurring fees coming from higher average AUM was backed by positive markets, though agitated at times and by sound management asset inflows which were remarkably resilient despite the new and most unfamiliar competition from govies. In fact, Management and Investment Management fees together totaled over EUR 1.3 billion, surpassing last year's figure by 8%. And with a higher quality asset mix, pushing margins even higher. In fact, on a pre-IFRS-17 like-for-like basis, the recurring fees on average assets would be 214 basis points, 2-1-4. Don't forget that our advisory model drives our customers to invest in equity products for the long-term investment horizons on a regular basis and through our automatic investment services. This explains why the equity component of our customers managed assets has reached an arrival 61%, 6-1%. As you can see Slide #15.

Going back to the P&L. I'd like to highlight yet another exceptional and record-setting outcome. Our operating margin showed to EUR 987.7 million. Once again, marking a sizable increase up 49%. This indicates that our core profitability growth trajectory remains unaffected by any turbulence in the operating environment. Thanks to the positive operating jaws, the cost-income ratio continued its downward trend over the course of the year, reaching 39.9% compared to a restated 47% in 2022. Below operating margin, our net income also got some help from performance fees in 2023. In fact, a few of our funds had extremely good returns due to the rally of the market toward the end of the year. Consequently, our performance fees line item, registered and unanticipated EUR 54 million. Now going to Slide #5.

I'd like to make a quick comment on the business results for the year, which you, of course, have already seen. We registered positive total net inflows of EUR 7.1 billion, with Managed Asset flows ending up at over EUR 4 billion, which puts Banca Mediolanum at the top of the industry by far, as is our trademark when the going gets tough. I'm sure you are aware that Assogestioni has recently reported that the open-ended funds in Italy suffered outflows of EUR 20 billion. As you know, these exceptional resilience even in the market's most negative phases is largely due to our advisory strategy. In particular, to the exceptionally high level of installment plans we've always offered further enhanced by our signature automatic investment services that feature a gradual automatic conversion from money market funds or interest-bearing deposit accounts into equity funds and now bond funds in Double Chance as well. But I also give an enormous amount of credit to the disciplined, nimble and proactive approach of our Family Bankers and to the strong franchise they have with their customers.

Together with the high diversification investment strategy, we advocate. This approach also explains why our net flows have been less impacted than our peers by the competition from govies. Indeed, our Family Bankers have seized the current high interest rate environment as a chance to initiate conversations with customers with the aim of explaining the value of fixed income investments for the medium term and to then propose alternative options as well, such as mutual funds with attractive yields. To support their efforts, we have provided dedicated tools to show the interest rate value of fixed income funds compared to BTPs alone. As a matter of fact, we are certain that govies alone are not a comprehensive solution unless integrated into a well-rounded and diversified asset allocation, where equity, of course, stands out as the optimal choice for long-term investments.

In a nutshell, we have demonstrated in an unusually high interest rate scenario to be able to generate positive and high-quality managed asset inflows, just think what we can achieve when rates begin to normalize. Indeed, even though the market context remains a bit tough and uncertain for the asset gathering industry, we are confident that the well positioned -- we are well positioned to thrive in terms of managed asset inflows in 2024 as well. We envision that our flows will end up somewhere between last year's and the year before. Therefore, our guidance for 2024 is for some EUR 5 billion in Managed Assets Inflows. In the final analysis, solid net flows in addition to sticky deposits gave favorable markets a big hand in pushing our total assets to the record level of EUR 118.07 billion at the end of the year, growing an impressive 14%.

On the other side, our credit book progressed 4%, passing the EUR 17 billion mark even though loans rented were down 26% year-on-year due to the impact of high interest rates on the appetite of our customers for Mortgages and Personal Loans. However, the quality of our loan portfolio continues to be top notch with a net NPE ratio of 0.79%. And a 12-month rolling cost of risk of 19 basis points, in line with the expectation of some 20 bps.

And lastly, General Insurance Policies were flattish compared to previous year, coming in at nearly EUR 182 million, although new business on Protection Policies was up 16%. Lastly, on Slide 6, you can see that our growth drivers are trending positively. Bank customers totaled 1,799,100, up a hefty 7%. Our going success -- our ongoing success in expanding the customer base is fueled by a very strong acquisition and retention rates. In fact, the acquisition of new bank customers has made notable progress with 185,000 new customers at the end of the year, 10% higher than the previous year, powered by targeted market efforts aimed at acquiring primary customers.

Likewise, the network's expansion remained on track, thanks to the recruitment and training of professionals coming from other sectors as well as to the new Banker Consultants that were gradually added to the franchise. The number of Family Bankers at the group level reached a total of 6,216, an increase in the headcount of 3% for the year. The initiative we refer to as NEXT is playing a significant role in enhancing the Italian network. As shown in Slide #38, at the beginning of February, this year, there were already 232 Banker Consultants working as licensed financial advisers, together with the senior Private Bankers or Wealth Advisors. And adding on to this, a total of 136 Banker Consultants in training, are in the process of completing their executive master at our MCU Corporate University.

Our objective for 2024 is to reach a total of 400 Banker Consultants by the end of the year. To give you an idea of the benefit generated the some 80 senior bankers who have been working with the Banker Consultants for at least 11 months have gone from outperforming their peer group by 10% in terms of total net inflows to 62%. And the acquisition of new customers has greatly accelerated, more than doubling versus their peer group.

Lastly, I would like to take a moment to focus on our Automatic Investment Services, which serves as another fundamental factor driving our growth. Indeed, at the end of December, there was a reservoir of over EUR 2.9 billion part in the money market funds of the Intelligent Investment Strategy Service, and in the deposit of Double Chance. All assets that are ready to be transferred automatically mainly into equity funds on a monthly basis over the next few years, ensuring a baseline level of upcoming inflows and margins that we know we can count on regardless. And as far as our installment plans are concerned, please take into account that there are almost EUR 1.6 billion that automatically go into mutual funds on an annualized basis.

Now I'd like to shift our attention, your attention to the balance sheet ratios in Slide #7. Our consistently high return on equity, registering 25.7% for 2023, reflects our exceptional financial performance. This indicator showing a 10-year average of 20.4%, underscores our commitment to delivering value and efficiency to our stakeholders. Our bank's capital position remains rock solid, providing a firm foundation for future growth and commanding resilience in the face of economic uncertainties. This strength positions us as a reliable and solid financial partner for our customers and investors alike. Our CET1 ratio moved up to 22.3%, while our leverage ratio rose to 6.9%. Now you know how important it is for us to deliver value to our investors and our commitment to shareholder returns is reflected in the general dividends we have always distributed.

In light of the jump in the size of our business and most notably of the sustainable nature of its profitability, this morning, the Board of Directors approved the proposal for the distribution of a dividend balance of EUR 0.42 per share. Therefore, the 2023 dividend per share comes to a total of EUR 0.70 when added to the interim dividend of EUR 0.28 paid in November, and is 40% higher compared to 2022 corresponding to a total of EUR 519 million. This sets a new very high base dividend for the years to come. No doubt, our dedication to maximizing long-term value for our shareholders is unwavering.

Right now, I'd like to quickly review our business in Spain, going over to Slide #33. The 2024 results for Spain aligned with the overall performance of the group business. The operating margin jumped an impressive 85%. And net income showed an outstanding growth of 74% versus 2022, reaching EUR 61.9 million. Total assets increased 19% since the start of the year, finally surpassing the EUR 10 billion mark, hitting EUR 10.5 billion, of which EUR 7.3 billion are managed assets, up 19% as well.

Net inflows ran to a total of EUR 865 million, with net inflows into managed assets have been up to a positive EUR 529 million. In addition to this, we made substantial headwind in other areas in 2023. The credit book made material progress, increasing 15% to EUR 1.35 billion, mainly thanks to higher volumes of mortgages granted in contrast with the market. Family Bankers were up slightly 1% to 1,640. Keep in mind, we have been concentrating on the quality and productivity of all the FAs who came on board in the past few years. Lastly, the number of customers in Spain surpassed 231,300, a notable jump of 11%.

Changing gears and closing up with a look at recent flows, January fared well with a respectable performance relatively speaking and also considering seasonality. Total Net Inflows registered EUR 645 million, with Managed Assets reaching EUR 287 million. Maybe it is worth mentioning that the process of transforming the EUR 1.9 billion of matured time deposits connected to the promo offer in January 2023, into Managed Assets is going smoothly, moving faster and more successfully compared to the promo offer we did in 2020. 47% of the new money that customers participating in the promo offer brought into the system is now in Managed Assets.

We are also experiencing fewer outflows, thanks to the stricter conditions we introduced. And like we already said we have a very positive stance for 2024, expecting inflows into Managed Assets to reach EUR 5 billion. We have similar commercial initiatives related for the current year, that support our focus on customer acquisition, taking into account what our competitors are doing as well as the competition from government bonds. For instance, we are currently 1 month into a 5% promo offer on 6-month time deposit as well as Double Chance that goes until the end of March with exactly the same conditions as the 4% offer last year. The funding costs associated with these initiatives are already embedded in our NII guidance.

To wrap things up, I'd like to summarize a few key points. Last year posed unique challenges to the financial industry, and our outstanding performance in such conditions is a testament to the dedication and resilience of our company as a whole. The trust of our customers and the strategic vision that guides our every endeavor. As we celebrate these extraordinary results, we remain forward-looking and committed to sustainable growth. We are entering a new year with many unknowns. From a macro point of view, the stability surrounding the global scenario remains elevated, with geopolitical tensions and conflicts in the Red Sea in the forefront. Not to mention the elections in Europe and the U.S.

We are centrally mindful of the ongoing challenges and uncertainties, and we are aware that the financial landscape is precarious. But we believe that our strategic foresight and adaptability will continue to help us navigate the future complexities and capitalize on emerging opportunities to sustain our growth trajectory. Actually, we are powering a new chapter of growth. We are entering a new era for Banca Mediolanum, an era defined by unprecedented and sustainable financial performance that will further enhance shareholder value. Thank you sincerely for entrusting us with your support.

Well, now we are open for the Q&A.

[Alessandra Lanzone, executive]

Yes. We are now open to Q&A. Please try and limit your questions to no more than two in order to give anyone the chance to participate. I promise that we'll get back to any questions that you still may have, that were not uncovered. And please also try and speak reasonably slowly in order to help translation. Now it's time to start. And this time, we are going to start from the English line.

[Operator]

[Operator Instructions] We will now take the first question coming from the line of Hubert Lam from Bank of America.

[Hubert Lam, analyst]

I've got two of them. Firstly, on the impressive growth of your dividend is very, 20% increase is probably way better than what people expected. Sorry to you sound greedy, but where should we think about it going from now? Is the increase driven by your strong earnings of 62% last year? Or -- and/or also the recognition that your capital ratio of 22% is probably too high for what it is. And that going forward, your -- I think you have not needing as much capital as you need to have? Or is it just based on how earnings are in a particular year? I guess what I'm thinking of is how should we think of your thoughts in terms of how the dividend grows over time, should it be more than EUR 0.01 or EUR 0.02 increase that you've historically done even after this big jump last year. That's the first question.

And the second question on flows. Thank you for the new guidance you've given on flows on Managed Assets for this year. Should we think about it more that it's going to be geared towards the second half of the year in which the flows start to come accelerate? I guess in the near term, as you said January was off to an okay start due to some seasonality, rates are still high and you still have another BTP for [indiscernible] issuance in February. Is your guidance for the $5 billion, is it more geared towards the second half coming through rather than the first half?

[Massimo Doris, executive]

[Foreign Language].

[Alessandra Lanzone, executive]

[Foreign Language].

[Operator]

We will now take the next question, coming from the line of Isobel Hettrick from Autonomous.

[Isobel Hettrick, analyst]

I also have two, please. So the first is on banking fees. We saw quite a big uptick in the fourth quarter of last year compared to the third quarter. So how should we think about the run rate of banking fees as we head into 2024? And then the second question is on G&A expenses. How do you anticipate the trajectory for these, both in 2024 and 2025.

[Massimo Doris, executive]

[Foreign Language]

[Alessandra Lanzone, executive]

[Foreign Language]

[Operator]

Thank you. There are no further questions on the English line. I would like to turn it over to the Italian call for questions. [Foreign Language]

[Elena Perini, analyst]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Alessandra Lanzone, executive]

[Foreign Language]

[Operator]

[Foreign Language]

[Gian Ferrari, analyst]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Alessandra Lanzone, executive]

[Foreign Language]

[Operator]

[Foreign Language]

[Giovanni Razzoli, analyst]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Alessandra Lanzone, executive]

[Foreign Language]

[Operator]

[Foreign Language]

[Alberto Villa, analyst]

[Foreign Language]

[Massimo Doris, executive]

Okay. [Foreign Language]

[Alberto Villa, analyst]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Alberto Villa, analyst]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Alessandra Lanzone, executive]

[Foreign Language]

[Operator]

[Foreign Language]

[Luigi De Bellis, analyst]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]

[Operator]

[Foreign Language]

[Alessandra Lanzone, executive]

[Foreign Language]

[Massimo Doris, executive]

[Foreign Language]