FinecoBank Banca Fineco SpA

MIL:FBK

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the FinecoBank First Quarter 2018 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Alessandro Foti, CEO of Fineco. Please go ahead, sir.

[Alessandro Foti, executive]

Good afternoon, everyone, and thanks for joining our first quarter 2018 results conference call.

Net profit in the first quarter reached EUR 59 million, a remarkable plus 41.1% (sic) [ 14.1% ] year-on-year and EUR 155.1 million of revenues, plus 9.5% more compared to the previous year with all product areas positively contributing.

Operating expenses were EUR 69 (sic) [ 63.6 ] million in first quarter 2018, well under control, despite the continuous expansion in asset and clients.

Cost/income ratio down at 41%, minus 1.8 percentage points year-on-year. Thanks to our strong operating leverage and scalability of the platform.

As usual, the first month of the year were affected by some seasonality, such as financial planners' social security contribution. So not particularly relevant in commenting the operating performance.

Please now go through the following slides to analyze more in details all the dynamics of our results.

On Slide 6. Now we have the -- on the net interest income. And in the first quarter 2018, net interest income was up more than 9% compared to 1 year ago, supported by double-digit growth in volumes, both sticky sight deposits and lending.

I would like -- I would highlight once again our strong commitment in building a very high-quality lending portfolio, thanks to a strategy focused on offering this product exclusively to our loyal and very well known base of clients.

Finally, let me highlight that net interest income quarterly comparison was affected by a restructuring of an UniCredit bond in arrears. The IFRS9 system adoption and following restructuring of the bond produced 2 combined effects. The valuation at fair value of this bond generated a positive impact on our balance sheet of around EUR 9 million, while the restructuring of this bond, which has a residual maturity of around 1 year generated a negative effect of EUR 1.8 million in our first quarter 2018 net interest income.

Net of this discontinuity, net interest income would be up by 1% quarter-on-quarter and 2.4% year-on-year.

In the following slide, you can find the development of our government bonds portfolio. As anticipated during our full year results conference call, our intention is to further diversify our investment portfolio through the nonrenewal of expiring UniCredit bonds and the increase of European government bonds in addition to the already announced focus on lending activity.

Let me also remind our sensitivity to a potential increase in interest rates, a parallel shift of 100 basis points would generate EUR 119 million of additional net interest income.

On Slide 8. Fees and commissions strongly up year-on-year, a double-digit growth mainly boosted by investing fees. In particular, management fees grew 10.7% year-on-year, thanks to the improvement in the asset mix as asset under management increased 11.2% year-on-year with a strong contribution of Guided Products & Services, which recorded a growth by 22.6% year-on-year.

The quarterly comparison was likely affected by negative market performance and by around minus EUR 0.8 million related to the new long-term incentive plan to financial planners accounted in this line starting from 2018.

Also Brokerage performed very well, to -- thanks to higher volatility compared to 2017 and to the enlargement of the product profile.

Core revenues in first quarter 2018 ranked as the third best period, but we will deep dive on this later on.

Moving to Slide 9. We have a detailed overview on cost evolution. And as you know, the focus on efficiency is core in our bank.

Staff expenses were at EUR 20.5 million in first quarter of 2018, 6.9% more compared to the same period 2017 due to the increase in the workforce related to the business growth.

Other administrative expenses at EUR 40.8 million. As anticipated, the first quarter was affected by the usual seasonality related to higher pressure of financial planners' social security contribution, such as Enasarco association and FIRR termination compensation fund as the payments are subject to an yearly cap.

Moving to Slide 10. Fineco confirmed that it's strong capital position with a transitional common equity Tier 1 ratio at 20.15% and the common equity Tier 1 ratio fully loaded at 20.08%. Total capital ratio transitional at 28.49%, including the additional Tier 1 issued at the beginning of 2018.

Let me highlight that the bank is working on the look-through implementation to drill down the underlying assets provided by clients as collateral to Credit Lombard. This will allow a lower risk-weighted asset absorption according with the real underlying assets.

On Slide 11, we show an overview of the total financial assets' growing trend supported by the healthy expansion in new inflows. EUR 24.6 billion net sales since the end of 2012 led total financial asset to EUR 68.1 billion as of March 2018, confirming Fineco's potential to consolidate its position and take advantage from structural trends in place in Italy, the increasing demand for advanced advisory services and growing digitalization.

This is also confirmed by our market share on total financial assets steadily increasing at 1.61% at -- as of December 2017.

Moving to Slide 12. We summarize the breakdown of total financial assets.

As you know, we are strongly focused on the quality and the sustainability of our assets gathered in coherence with the ongoing initiatives to improve the productivity of the network. The asset mix is constantly moving in the right direction with a definitely better mix.

As of April 2018, financial assets totaled at EUR 69.3 billion, plus 10% year-on-year of which EUR 33.6 billion represented by asset under management.

Guided Products increased their penetration rate to 65% on total assets under management.

On the right side of the slide, asset under management grew EUR 9.5 billion from the end of 2014. Leveraging on our cyborg-advisory approach, the growth skewed towards Guided Products & Services increased by EUR 12.9 billion in the period with a strong acceleration in 2017.

Net sales breakdown. We released today very solid commercial data also for April. We gathered EUR 2.24 billion of net sales in the first 4 months, an increase of 13% compared with the same period of last year. The monthly mix was characterized by a higher liquidity component and by a temporary slowdown in Guided Products as both clients and personal financial advisors were in a wait-and-see mood for the launch of some brand-new products and services at the end of April.

We will provide you a deep dive on our new Plus and Core Target Multiramo solutions later on in the presentation.

Let me just underline that they will be particularly suitable in periods with high market volatility and very effective in overcoming emotional reaction by clients during phases of market remodel.

Net sales gathered through our financial advisors were at EUR 2.05 billion as of April, plus 15% year-on-year. They are strongly committed in moving clients into added value solutions, helping clients in managing their wealth with a long-term approach, bearing in mind the client's investment target.

As you know, moving to Slide 14, our growth strongly leverage on the organic component, thanks to the unmatched quality of our services.

In the first quarter of 2018, out of EUR 1.7 billion of net sales, 83% was organically generated through the existing financial planners or directly by the bank and 17% came from recruits made in the last 24 months.

As you know, in our view, this growing strategy is strongly sustainable in the long run, also from a future cost/sustainability perspective, positioning the bank in the sweet spot to cope with future pressure on margins and potential challenges.

For us, recruitment is exclusively aimed to improve the quality of the network through selected new recruits.

As of March 2018, the stock of recruitment costs to be amortized in our future P&L amounted to EUR 24 million, stable compared to 1 year ago, confirming the future cost sustainability.

Now I would skip directly to Page 18 to the next section before moving to the last part of the presentation.

Brokerage. It is worth spending few words on brokerage, confirmed as a strong contributor to our revenue generation. As you can see in the chart at the bottom, core revenues in the first quarter 2018 ranked the third best quarter since 2013, but the best quarter with this level of volatility, thanks to the continuous enlargement of the client base and market share combined with a broader products offer, allowing clients to find volatility also when there is none on the market.

Let's now move to the last part of the presentation on Slide 23.

As you know, since the beginning, our strategic decision has been to manage internally IT and operations. This is part of our DNA and the relentless process of know-how improvement made in the last 20 years represent a unique competitive advantage for us. This successful choice translates into high level of efficiency and huge platform scalability, resulting in a strong competitive advantage. Thanks to our proprietary back-end internal development and automated processes, we can benefit from a lean and efficient cost structure and time to market in delivering what our clients need.

As you can see in the graph at the bottom of the slide, this strategy allows us to benefit from a strong operating gearing as there is a strong correlation between growth in total financial assets, clients and profits.

Cost/income ratio is the only KPI that is constantly decreasing despite the continuous expansion of our business.

Slide 24. Commercial loans grew 117% year-on-year, with the usual strict control on credit quality. Let's remind that our lending is offered exclusively to our loyal customer base and our deep internal IT culture allows us to fully leverage on big data analytics. This translate into cost of risk very well under control as you can see in the right side.

In -- first quarter 2018 is not fully comparable with the previous periods due to the introduction of new accounting standards. However for 2018, we expect stabilization of the cost of risk at the full year 2017 levels.

Let's move now in analyzing lending initiatives more in depth. As you can see in Slide 25, lending offer is very well welcomed by our clients. Mortgages reached a production of EUR 621 million in the first quarter, more than 20% up compared to the previous quarter. This is a very good result with almost 5,800 mortgages granted with an average loan-to-value of 52% and an average maturity of 19 years.

For 2018, we expect an yearly new production of around EUR 500 million as we prefer to maintain a cautious approach without entering into red zones characterized by aggressive prices, high loan-to-value and longer maturities.

We expect also a normalization of yields in 2018 on around 90/95 basis points.

Personal loans grew more than 35% year-on-year and margins remain very attractive. Our expectation in terms of new production is around EUR 200 million per year, which means EUR 100 million net in terms of delta stock. We have an expected yield in the range of 400, 450 basis points.

Lombard loans at EUR 728 million, more than doubled compared to 1 year ago. We've accelerating growth of the new credit loan burden. In 2018, our expectation is to grow around an additional EUR 500 million with an average yield of around 110 and 120 basis points.

Moving on Slide 27. Just few words on the new asset management company. The project entered its final phase and the company is expected to run at full steam ahead of schedule. All the formal steps have been done. We are just waiting to receive the formal approval by Central Bank of Ireland.

Slide 28. New products and services. As previously announced at the end of April, we launched Plus, an evolution of our cyborg-advisory model. This brand-new integrated advisory platform, very flexible, offers very high customization in building client's portfolio, maintaining a digital and paperless approach. Plus is a holistic multi-asset and multipurpose. Financial advisors can include all the products available, not only asset under management, but also asset under custody and even liquidity.

As the platform is fully developed in-house, it's 0 cost for the bank and perfectly integrated with client's current account. Moreover, it can be used as a financial education tool to drive clients in a process of financial awareness.

With a fee on top in a range between 20 and 100 basis points, with a differentiated pricing for asset under management, asset under custody, ETFs, these products will help us making asset under custody profitable and will speed up the transformation into asset under management.

We also recently launched Core Multiramo Target, a new multiline policy, which combines safety from traditional insurance policy with the investment opportunity coming from market volatility. This solution is particularly suitable in periods with high market volatility and is very effective in overcoming emotional reactions by clients during phases of market turmoil.

Slide 30. Further opportunities. Finally, we are tapping new interesting opportunities on Slide 30. As you know, we started to offer our banking and brokerage service in U.K. and the first outcomes are, as expected, very encouraging. We reached over 1,800 clients with a very interesting mix, as 51% is represented by Italian U.K. residents and 49% non-Italians, of which 36% are native British. As you know, in our estimates, we do not include neither revenues or cost, but this project represents a concept car for the future evolution of our bank as we know -- as we now have a perfect blueprint that could be redeployed in other European countries. We applied for Patent Box in December 2015, both for intellectual properties as our platform's internally developed. And also for trademark, talks with the Italian Fiscal Authority are entered in the final phase, and we are very confident about the possible outcome. This process is expected to be closed in the coming months and fiscal benefits with over 5 years from 2015 to 2019. Intellectual properties are renewable according to international guidelines.

Thanks for your time, and now we can open the call to questions.

[Operator]

[Operator Instructions] The first question comes from Gian Luca Ferrari, Mediobanca.

[Gian Ferrari, analyst]

I have a couple of questions. First one is the launch of this new Multiramo life insurance product. I was wondering if you had the chance -- your legal department had the chance to read into the ruling of the Italian Supreme Court related to the fact that unit-linked policies and potentially also the multiramo, the hybrid products, could be defined as financial products and not insurance products. So if you can comment a bit on this? Second and last question is, a bit more color if you can on the RWA reduction coming from the look-through of the collaterals. Any sense of how this could impact your RWA?

[Alessandro Foti, executive]

So regarding the recent pronouncement by Italian Cassation, that is -- regarding this point, first of all, I want to redirect you to the recent -- to the just recent sent statement by ANIA. That is the association of the insurance companies, that has taken very clear position, explaining that this pronouncement is related to one specific topic and is not involving the overall, the generally speaking, the industry. In any case, the -- regarding coming to our product, in this case, the main rationale behind in terms of -- the selling rationales behind is probably represented by the fact that there is a component that is the -- [indiscernible] that is the -- that is not affected clearly because this component is a capital guarantee product and so clearly is, in any cases, not involved with any kind of this situation. And second, clearly because this product is giving to the clients the possibility to accumulate from a capital guarantee product with a very high return progressively into the equity market. And so it's the second reason why our clients are extremely interested in this product because they have the opportunity to enter progressively the market taking advantage of -- [from] volatility. So this is what's going on, on that side for combined together these 2 components is absolutely relevant for the future development of this product.

Regarding the impact of the look-through on risk-weighted asset, I want to be sure that there is not a misunderstanding because the implementation of the look-through is going clearly -- is going to decrease the consumption of risk-weighted assets. And we expect because clearly -- cautiously, we expect that we are -- that our hypothesis is implemented to look through approach more or less on 50% of Credit Lombard collateral and so this is expected to generate an lower reduction of Core Tier 1. So a positive impact of between 150 and 180 basis points on the core Tier 1 ratio.

[Operator]

[Operator Instructions] The next question comes from Elena Perini with Banca IMI.

[Elena Perini, analyst]

I have only one question about your Irish Company -- your Irish project. And I would like to ask you, if you are worried about -- you have a cooperative compliance scheme with the Revenue Agency, so you should not have any particular worries. But if you have some kind of concern about the fact that recently Banca Mediolanum received a notification from the Italian tax police regarding also some fiscal years, wherein an agreement was already reached with the Italian Revenue Agency. So if you are confident that your agreement could be a definitive one with no potential risk in the future.

[Alessandro Foti, executive]

Yes, many thanks for your questions. This is the reason why in the -- during presenting our Irish project, we have been so accurate in describing our -- the fact that the bank has been admitted back to the cooperative compliance scheme because the cooperative compliance -- I want to remind that at the moment that we have only 5 companies in Italy that been admitted to cooperative compliance scheme. One is UniCredit, our parent company. Then there is Fineco. Then we have Leonardo and Ferrero and Prada. And the other are waiting to be admitted. This new approach is clearly -- is expected to shelter us completely by this kind of situation because, for example, if you are under this kind of scheme, there is no possibility for the fiscal police to prosecute the company because the only interaction is going to be with the fiscal -- with the Italian Fiscal Authority. And so there -- and there is no -- and the second, again, I want to repeat that the main advantage is that you can sit at a table in advance with the Fiscal Authority discussing everything. And when everything is completely agreed, there is no possibility to receive any future possible claims. You were mentioning Mediolanum. Mediolanum is not part of this Cooperative Compliance scheme, and this is the reason why they are now -- they have this kind of issue on their table.

[Operator]

The next question comes from Giuseppe Mapelli with Equita.

[Giuseppe Mapelli, analyst]

I've 2 questions. The first one is on your Fineco Plus platform. Can you share with us what is the reaction of the clients. I know that you just launched these new products but -- and the first reaction could be useful for us to understand what could be the reaction on these -- on this product. And then my second question is on Fineco asset management. If you can give us some color and elaborate a little bit more about the process that is going on, at which stages we are currently?

[Alessandro Foti, executive]

Regarding Plus, the reaction of clients, considering that we're talking about just 10 days, has been absolutely very well above our expectations. So it's pretty clear that we -- this is the perfect product both for clients and financial planners because, again, is extremely flexible because you can approach the clients from every different angle of view. It's absolutely great in terms of the customer experience and so the reaction is absolutely outstanding. And for this reason, we have even great expectations for them looking forward. On the FAM processes, particularly now the situation that everything has been finalized and we are just waiting for the final signature by the Irish Central Bank that is expected to come very soon. So everything -- all the process regarding the different filing sent has been finished. No problems emerged and so now that is exclusively on the table of Irish Central Bank for the final signature. And so we confirm that we are confident that we are going to be up and running ahead of schedule.

[Operator]

The next question comes from Filippo Prini with Kepler.

[Filippo Prini, analyst]

Two questions. The first one is on cost. If you can confirm your guidance from cost for the full year, excluding the EUR 5 million additional coming from new product factory in Ireland. And the second one is on the Patent Boxes. I see that you're still waiting for the final answer from the tax authority by end of the year, but if you can assume that is to be something that has an impact quite material on your next-generation.

[Alessandro Foti, executive]

So regarding cost, the answer is yes. We are confirming our guidance. So clearly, we expect in terms of costs considering -- so that is a growth in the range of between 3% and 4% year-on-year. And we've been -- on top of that, the EUR 5 million related to the Fineco asset management in Ireland. And so, again, we are confirming continuously declining cost/income ratio. Regarding what's going on, on the Patent Box. With -- the most recent development, we had a conversation with the Fiscal Authority. I leave the floor to Lorena Pelliciari, our CFO, for the update. Please, Lorena?

[Lorena Pelliciari, executive]

Yes, in -- we started a discussion with the Revenue Agency with a focus on fostering brand in October 2017. The feedback we received was positive. The evaluation method was shared. And in the following weeks, the agency will focus on the function and analysis for the attribution of extra revenue for the software. What we expect regarding the intellectual properties is, could be material, but we don't have now the possibility to give you a precise guidance on that because we need to close the process with the agency.

[Alessandro Foti, executive]

Yes, so everything is -- more or less has been -- the most part has been agreed. I confirm what Lorena -- she is saying that the impact when it's finalized is going to be material on the P&L of the bank and also very important to consider that in the -- considering that the most part is going to be represented by intellectual properties related to software. This is not exclusively related to the 5 years' period, but is going to be on running basis according with international standard rules. And so this is the reason why it is so important and this is the reason why is -- because Fineco is in a unique position because, again, thanks to our approach based on the internalization of the operational infrastructure is Fineco is one of the few probably banks that is in the position to capture this kind of opportunity.

[Operator]

[Operator Instructions] Mr. Foti, there are no more questions registered at this time.

[Alessandro Foti, executive]

Thank you very much for attending our conference call, and I'll talk to you later. Bye.