FinecoBank Banca Fineco SpA

MIL:FBK

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon. This is the chorus call conference operator. Welcome and thank you for joining the FinecoBank First Half 2019 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 morning, everyone, and thanks for joining our second quarter 2019 results conference call. As you know, starting from May 10, Fineco is an independent public company. Let me remind that the exit from UniCredit Group has a small implication on Fineco's strategy and business model, and will actually allow us to be even more flexible and improve our time to market.

Fineco enjoyed the limited synergies with UniCredit and we continued to focus on maximizing shareholders' value through healthy sustainable long-term growth. Let's underline that Fineco's full independence has no [ small ] implications for its customers and no material impacts on its capital and liquidity strength nor on its profitability, thanks to the transitional arrangement agreed with UniCredit.

The second quarter reflects the main effects coming from the deconsolidation. In particular, the release of EUR 10 million of [ revisions ] after the full collateralization of UniCredit [ exposure ] ; different calculation methodology leading to an increase in the operational risk and to a decrease in core Tier 1 ratio to 17.8%, still at very solid levels. Let me underline that the decrease would be partially absorbed as soon as the bank would adopt the standardized model in the coming months. Leverage ratio pro forma at 4% after the issuance of the EUR 300 million AT1.

Let's now move to Slide 7 and start commenting on our first half results. Adjusted net profit in the first half 2019 [ landed ] to EUR 137.3 million, plus 9.7% year-on-year, reaching record results despite a more complex environment compared to last year. Once again, this set of results confirms the soundness of our business model's ability to deliver sustainable and industrial growth in every market condition and shows how some of the actions we have recently taken are already producing results.

We generated EUR 323.5 million of adjusted revenues in the semester, up 3.8% year-on-year supported by investing and banking area, while comparison on brokerage is affected by new regulations and low market volatility. Later on, we will deep-dive on the actions we have undertaken at the right time.

Operating cost stood at EUR 127.5 million, plus 2.3% year-on-year and cost income decreased at 39% despite the continuous expansion in asset and clients, thanks to a strong operating leverage into the scalability of our platform.

Please go through the following slides to analyze more in detail for the dynamics of our results. Let's start with net interest income dynamics on Slide 8. Net interest income increased by 3% year-on-year supported by strong volume growth, both high-quality lending and [sticky ] sight deposits, even more valuable given the current remuneration [indiscernible] offered by the system.

Volume dynamics more than offset the reduction in gross margins, as you can see at the bottom right of the slide. Average gross margins on interest-earnings assets lowered from 1.32% in the first half of 2018 to 1.26% in the first half of 2019. Cost of funding remains very low at 4 basis points due to deposits in foreign currencies.

Please let me remind that our cost of funding related to deposits in Europe, which represents 97% of our total deposits, is 0.

Let me please underline that we confirm our approach towards the buildup of diversified and low-risk investment portfolio also in the present rate environment. As a reminder, while the collateralization of the UniCredit gives us room to increase our Italian [ coverage ] holdings. As an independent company, we will be able to be even more efficient in our treasury management.

In 2019, we confirmed our guidance of a low single-digit increase in net interest income while for 2020, we see it [ slighter ] due to the latest evolution in the rates environment.

In the following slide, you can find the focus on our bond portfolio. As you can see, our strategy to run off the UniCredit bonds portfolio and move into a more diversified investment portfolio through a blend of European government bonds is progressing very well. Our bonds portfolio now includes also France, Spain, Ireland, U.S., Poland, Austria, Germany, Belgium, supranational agency and government bonds in addition to Italy.

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, while a parallel shift of minus 100 basis points would generate minus EUR 108 million of net interest income.

Fees and commission grews by 8.7% year-on-year, with management fees up 12.2%, thanks to a larger contribution of [ guided ] products & services, which moved [ half ] from 64% in the first half of 2018 to 69% in the first half of 2019, and to the new asset management company.

Let me highlight once again that our investing fees are strongly sustainable [ as for ] the most represented by recurring fees. [ Interest ] fees only weighed around 2% of investing revenues, and our business model does not rely on them and they are not aligned -- and they are aligned with the interests of clients. But they are just [ an ] anticipation of future profitability for the bank.

The profitability on asset under management calculated as management fee net of taxes on asset under management is equal to 47 basis points in the first half of 2019, with customers looking for more conservative solutions. We remind that we are further developing our investing offer through the launch of new Fineco Asset Management Solutions and the enlargements of insurance products.

As for 2019, we confirm our guidance of after-tax margins [ slight ] but revenues growing low double-digits on the back of volume effects on Fineco Asset Management contribution.

Trading income net of nonrecurring items is down by 18.3% year-on-year due to the lower market volatility and to the new ESMA regulations in place since the second half 2018.

As you can see in the chart on the right bottom, the first half of 2019 has confirmed its patterns of low market volatility. Nevertheless, the new option platform we have announced during our first quarter results is now fully up and running, and they are already producing tangible results on the brokerage side that should be further strengthened over the next quarters [.As ] this regards for brokers we expect [ and ] a low double-digit growth in the second half of 2019, that's both the first half of 2019 and the second half of 2018. For 2020, we see this growing trend to continue.

Moving to slide 11. We have a detailed review on cost evolution. As you can see, the first half of 2019 once again confirms our efficiency is part of our DNA and core in our banks, representing a clear and unique competitive advantage. Staff expenses were at EUR 44.1 million in the first half, plus 6.3% on a yearly basis, mainly due to the increase in the workforce related to the business development and cost related to the Fineco asset management, not fully in place in the first half of 2019, and the internalization of some services after the exit from UniCredit Group like, for example, the Audit Department.

Non-HR costs at EUR 8.3 -- EUR 8.4 million [ slight ] year-on-year despite the enlargement of assets and clients. In terms of future evolution, we confirm our guidance on a continuously declining cost income in the long run, thanks to the scalability of our platform and to the strong operating gearing we have. We expect cost [income to be in the ] low single-digits both in 2019 and 2020.

Let's now move on the to slide 12. Commercial loans grew 28.2% year-on-year with the usual strict control on credit quality. I'd like remind that our lending is offered exclusively to our loyal customer base of clients. And our deep internal IT culture allows us to fully leverage on big data analytics. This translates into commercial cost of risk that is very well under control at 14 basis points as of June 2019, due to the improvement in the quality of the credit. For 2019, we're expecting a stabilization of our cost of risk at around -- between 19, 21 basis points, much lower compared to the system.

Let's move now in analyzing our lending offer more in-depth at slide 13. Mortgages grew by more than 35% year-on-year, reaching EUR 979 million at the end of first half. Average loan-to-value on total outstanding at 53% and average maturity at 19 years.

Personal loans grew 12% year-on-year, with very attractive margins. Lombard loans exceeded EUR 1.1 billion in June, 2019, increasing by more than 35% in one year, driven by Credit Lombard. We are adjusting our 2019 guidance on volumes, and we don't want to undermine the quality of our lending [ in new ] production in a range of EUR 300 million, EUR 350 million as we prefer not to compete against the system, red [ zone's ] current rise by aggressive prices, high loan-to-value and longer maturities. On personal loans, new production in the range of EUR 200 million EUR 250 million per year. On Credit Lombard we expect EUR 500 million annual growth. As for the expected yields, please remind that in the case the market environment changes, we would have to move accordingly.

Moving to slide 14, Fineco confirmed their rock-solid capital composition on the wave of a safe balance sheet. Let me remind you once again that the full collateralization of the exposure with UniCredit fully neutralized any potential credit risk weighted assets and concentration limit, deriving from the exit from UniCredit group. The only negative impact are now that common equity Tier 1 ratio is related to the increase in the operational or risk-weighted assets from EUR 682 million to EUR 1.2 billion. That is exclusively due to the change of model for calculating operational risk, which is no longer the UniCredit -- the group advanced model.

Again, let me stress that this impact is only driven by applied methodologies, while the risk profile of Fineco has not changed at all.

As a result of this, our common equity Tier 1 ratio stood at 17%, 84%. In this respect, we are working on the migration of the -- to the standardized approach in the coming months, which is expected to absorb lower capital versus basic approach in the region of 100, 150 basis points as of December, 2019. Therefore, the current operational risk weighted assets figure should be taken as a worst-case scenario.

The leverage ratio, equivalent to 4.03% pro forma, including EUR 300 million Additional Tier 1 issued in July, 2019, which enables Fineco to proactively maintain the leverage ratio comfortably above 3%, way ahead of 2021 when this pressure will come into force and to better exploit our growth potential while, at the same time, working on our initiative to improve the asset mix of our clients. Finally, total capital ratio pro forma including EUR 300 million additional Tier 1s stood at 33.94% as of June, 2019.

On slide 15, you can find more details on the EUR 300 million additional Tier 1 placed on the July 2019. Let me remind you that this issuance allows us to proactively maintain our leverage ratio comfortably above 3%, well ahead of the 2021 regulatory entry [ into force ] of the 3% requirement.

On July 11, 2019, the bank successfully completed the placement of its first market issues of additional Tier 1 instruments for a total amount of EUR 300 million which have a fixed coupon of 5.875% for the first 5 years compared to initial price guidance of 6.5%. This tightening compared to the initial price guidance is one of the most significant [ scenes ] for this type of instruments as a result of an overall demand equal to 9x the offer. The issues recorded an order volume of EUR 2.7 billion, demonstrating recognition of our bank also in the fixed income segment and allowing to ask to take advantage of favorable market conditions.

On Slide 16, we're showing a review on the total financials asset's growing trend, supported by the healthy expansion in new inflows. We guided EUR 30 billion net sales in 2013, leading total financial assets [ of ] almost EUR 76 billion in the first half of 2019. Guided products increased the penetration rate to 69% on total assets under management from 67% on December 2018.

Let's now move on the Slide 19. Jumping into the Slide 19. Out of EUR 3.3 billion of net sales in the first half of 2019, 90% was organically generated through the existing financial plans or directly by the bank, and 10% came from recruitments made over the last 24 months. For 2019, we expect robust net inflows driven by structural trends and by the high quality of our proposition. The recent launch of some brand-new products and services, such as Plus and CORE Target is helping us in offsetting the aggregate propensity of clients to remain in a wait-and-see mood in this very complex market environment.

Now we will skip directly to Slide 22. Sustainability is at the heart of our business model and translates in transparency and fairness to customers as the cornerstone of our commercial strategy. As you know, we believe that making our clients satisfied is the only way to generate long-lasting relationships and produce sustainable results in the long run. As a consequence, Fineco ranks #1 among banks in terms of reputation, a key indicator as it allows to affirm us as a premium brand and generate a positive dividend on business results. This explains why we have decided to share with customers the benefits of the operational efficiency. We are generating through Fineco asset management by progressively lowering their total expense ratio in an environment characterized by pressure on margins. And while we have developed the sustainable fee structure based on the total absence of performance fees and upfront fees almost at the 0.

Let me remind that we engage customers leveraging on the quality of our services, not relying on short-term aggressive commercial offer, thus explaining our cost of funding close to 0. In the same way, organic growth is the main engine of our net sales as we focus on putting our advisers in the best position to answer to the financial needs of the Italian families.

Let's now move to the Slide 23. Delivering the highest possible shareholder value, the healthy, sustainable and organic growth is the main goal of our business model. Thanks to this approach, we -- over time, we have continuously delivered high-quality recurrent and predictable profitability over the cycle, producing a diversified and sustainable revenue growth in all market conditions. Our commitment is key to be a long-term win and to refrain from taking shortcuts in order to produce short-term results especially in a challenging macro environment characterized by pressure margins, lower expected returns and demand in regulation. We have already underlined our focus towards a quality offer and the attention we pay on building a fair and long-lasting relation with customers. So let me please highlight the other main aspect of this strategy, namely, it's safe and diversified the low risk asset, coupling with valuable and sticky deposits; solid capital position; a deep internal IT culture allowing us to leverage on cutting-edge technology, difficult to replicate and [ leaving ] our operating leverage and mix in the banking arena; this allows us to have a highly scalable, low-risk business to exploit the growth opportunity with a best-in-class time to market.

Let's now move on Slide 25. Let me please spend a few words on the main changes in our total assets following the deconsolidation from UniCredit group. As you may see from the graph, our balance sheet enjoyed a massive de-risking after the full collateralization of our UniCredit bond exposure, while total assets decreased after we extinguished term deposits with UniCredit and transferred EUR 1.2 billion liquidity at the Bank of Italy. In the pie on the right-hand side of the slide, you have the breakdown of our non-UniCredit bonds. As you can see, the diversification of our investment portfolio is continuing. We will increase exposure towards a blend of European covenant bonds and covered bonds.

Moving to Slide 31. Fineco Asset Management is key to further improve operational efficiency in several aspects, and to improve our ability to create a modern and innovative multi-management solution to satisfy the needs of our customers, financing our time to market in developing our full service to meet evolving customer needs and deal with market challenges, anticipating the trends of the industry. Just a few words on the latest investment solution recently launched by Fineco Asset Management: new decumulation products, allowing for a gradual investment in financial markets, a key solution in an environment, seeing customer with a low-risk propensity; multi-thematic funds specialized in capturing the most relevant secular trends reshaping the world; new building blocks, both vertical and based on risk profile have been launched and more supervised funds are in the pipeline.

On a final note on our Irish subsidiary. Let me please underline that among the several benefits Fineco Asset management's delivering, a key factor to focus on is the higher proficiency in risk management, thanks to the [ look-through ] on a daily basis on the sub-advisory funds underlined.

Let's now move on Slide 34. On this slide, a quick update on Fineco U.K. in the bottom box. In U.K. we acquired 4,700 clients with share of non-Italian continuously increasing and now up to 64%, of which 48%, native British. Considering the steady level of revenues constantly generated, we now started the second phase of this initiative with more boost on marketing and commercial activities.

I remind you that U.K. offers leverage as 100% on the Italian platform, meaning that we have no additional fixed cost.

Let me please give you an update on the office side. On the -- on one hand, ISA and multi-brand funds are under implementation and expected in the coming months. On the other, we continue to expand our multicurrency service and the banking offer, for example, with the launch in the coming month of the Easter payments.

A quick update on Patent Box. The closing of the process is still in the hands of the Revenue Agency. Let me remind you that we applied both for intellectual properties, as our platforms are internally developed, and also for the trademark. The fiscal benefits, we will cover 5 years from 2015 to 2019. Intellectual properties are renewable according to the international guidelines. We are confident to close the agreement by the -- with the Italian Fiscal Authority by year-end as the deadline for the 5 years validity of the norm expires in 2019. Alternatively, we cannot exclude, consider the option to self-determine the Patent Box benefit as set by the Decree "Decreto Crescita,” definitely approved in the law number 58 as of 28 of June, 2019.

As you know, in the second half of the year, we will start on preparing the launch of 2 brand-new platforms that will be available starting from 2020, and that will further strengthen the productivity of the bank. This will be the third evolutionary step in the history of our bank and will allow us to combine our cyborg advisory approach with big data analytics. This will help us to better deal with pressure margins by furthering improving the productivity of our network and the asset mix of our customers.

Slide 18. Before we open the call to questions, going back to slide 18, let me please give you some color about the July results, [ continue ] once again the attractiveness of our one-stop solution with customers massively using our best-in-class platform from brokerage and our open architecture patent.

Net sales were solid at EUR 420 million, and with a mix influenced by 2 temporary effects. The first one coming from clients selling their assets under custody component, minus EUR 350 million for profit taking mainly on Italian govies, following the reduction in interest rates.

July has been a very profitable month for brokerage, the best [ appear ] so far, confirming once again Fineco as a leader in Europe for number of executed orders. The second temporary effect come from the self-direct clients selling [ H20 ] funds. As a reminder, Fineco is one of the most important open architectural platforms in Europe, and also used by clients to buy funds on their own initiatives.

These 2 components led to strong inflows in deposits, which, in the coming months, are expected to be transformed again into asset under custody and asset under management. Also thanks to new initiatives the bank is undertaking.

Net of this temporary effect, net sales and deposits are in line with our expectations. Finally, net sales in guided products & services stood at EUR 191 million, with the penetration on [ asset under assets under ] up 69%, confirming the attractiveness of our advanced advisory solutions for our customers.

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

[Operator]

[Operator Instructions] The first question is from Gian Luca Ferrari with Mediobanca.

[Gian Ferrari, analyst]

Three questions from my side. The first one is on NII, you made a very clear guidance for this year and next year. I was more curious around the fact that you lowered a bit the yearly new production for mortgages and personal loans. I understood you said now we don't want to compete with banks and so on and so forth. But in reality, you're basically offering those kind of products to your existing customers, and by the way, the cost of risk at the moment has been a great achievement. So why not sustain a bit the NII with at least the same production you are guiding for in Q1, or even accelerating it?

The second question is on leverage. If I got it right, I think EUR 1 billion of new deposits is consuming more or less 15 basis points of leverage, maybe Lorena can help with this math. So in a couple of years' time, if you keep growing the bank like you are at the moment, you are doing at the moment, we could see the 4x leverage going back again in the 3x region. So I was wondering if given the growth you are having and the great results you are achieving with this respect, if it's not the case to revisit a bit the 70% dividend payout and to retain a bit more earnings to absorb the tremendous growth you are achieving.

And the last question is on the voluntary scheme in the second quarter, the EUR 4.3 million. If you could help us in trying to model that for full year '19?

[Alessandro Foti, executive]

Okay. So let me start from the net interest income. So the net interest income, we -- clearly, the guidance we are giving on mortgages and personal loans is not necessarily weak, is not necessarily a reduction in the guidance. We just gave a range because, clearly, it's extremely difficult to give exactly and a very precise number because it can be affected by many, many reasons. So we are giving a guidance in terms of range. This doesn't mean necessarily that we are going to go for the lower end of the range. At the same time, clearly, we don't think that the right time for sustaining the net interest income is to take on more risks. And so we are going to -- because it's a -- this clearly is a shortcut. And so we are going to continue on moving in that direction because we think that keeping in a quite very well under-control cost of risk remains absolutely key [ end client ] that with the philosophy of the bank.

Coming through the -- so coming to your points on the leverage ratio. So first of all, let me remind that our strategy focus is on transforming as much as we can possible deposits into asset under management, and we are setting up several initiatives, such as the launch of the new platform in order to further boost the productivity in the network. In any case, we -- just a sec.

In any case, in order to be more precise regarding the numbers, in order to maintain -- to keep leverage ratio at the 3.5%, that is the guidance we have given to the market throughout 2021. And we can have a growth in terms of deposits in the range between EUR 2.5 billion, EUR 2.7 billion per year that is absolutely perfectly coherent with our business strategy. And this, without cutting dividends and something else.

So I want to remind that the Fineco is characterized by an extremely capital-light business model. And so clearly, we're also maintaining a very generous dividend policy. We can generate organic capital and so again based on the -- on these numbers, we expect that a range between EUR 2.5 billion, EUR 2.7 billion of deposits on the year is going to keep the bank personally aligned with the 3.5% target LIBOR we have on the leverage ratio.

On the voluntary scheme, based on the latest -- on the most recent information, we don't expect any other request by the voluntary scheme, and so...

[Operator]

The next question is from Alberto Villa with Intermonte.

[Alberto Villa, analyst]

The first one is back on the NII, just to make clear for the guidance for 2020 and if we assume an increase in deposits in the region of EUR 2.5 billion , EUR 2.7 billion, what's your assumption in terms of our investment yield, and if we can expect significant change in the investment mix compared to the slide 25 pie chart you showed us of the non-UCG bond. Because I'm still struggling in finding -- I mean given the current market yield, it seems a bit challenging to achieve these targets.

And the second question is on the CET1 ratio. Can we expect by the end of the year the possibility you get a boost from partial internal model, if you can update us on that? And the third one is on the Patent Box. You said that you may go for the self calculation methodology if there is no agreement with the agency. I was wondering if you can give us an indication of what is the self calculation in terms of size of benefit for the company.

[Alessandro Foti, executive]

So just for -- coming back to the point on the net interest income. So we, again, we are confirming this guidance of -- for 2020, for a flat net interest income. Yet you can see that this is -- it's a little -- this probably is the first dividend we are able to get, thanks to the exit from the group because clearly -- not because, clearly, we are not going to change the structure of our investment. So I want to be very clear on the point that we -- our idea is not to increase the risk we are taking on board because, again, we don't think that this [ is right ] on pressure, on margins, on net interest income. So in terms of investment strategies, the approach is going to remain pretty much the same. The dividend from being -- from exiting from the group is just the result that I tried to give you the physical flavor of what I mean. So when -- being part of the group, for example, was nearly impossible to enter in any kind of repos agreement on our huge -- Fineco now has a very large Treasury Department because we [ have sit ] on more than EUR 23 billion of investment and something like that. And so clearly there are a lot of actions that you can take for making efficiency without taking more risks. But for example, if you want to enter in the repo agreement for extracting additional revenues from the portfolio, in the past the process was incredibly cumbersome because we had to go through an investment committee at the group level and assessing if the counter parties, or for example if you are entering into a repo agreement within a global city, then it is -- was requested to submit this to investment committee of the group. And in the case the group was -- has reached the maximum level of exposure [ or respect this global city ] was not possible for us to go throughout these transactions. So practically, Fineco being part of the group has not exploited fully all the potential that we're using that efficient management of the treasury department. Same story when you have to invest, for example, if I have an investment plan in which I have to invest a certain part of my liquidity and cost of these bonds [ it is the ] same story, [ to get through ] these incredibly cumbersome processes for getting authorization at the group level. But the risk at the end of the process is to discover the overall maximum amount of the group level has been exceeded and some being able -- and so the delay in investments, I don't know, 6 months clearly is going to create. So putting everything together, so clearly, we're working clearly quite intensively in order to transform the Fineco Treasury Department into a real efficient department, and the result is that, clearly, is that without changing the risk profile of what we are doing, our investment strategies, going to be able to offset the headwind represented by the most recent decline in the interest rates.

On CET1, yes, we are quite confident that by year-end, we are going to be able to move in the direction of the standardized model, [ respect ] the base model. And so as we explained during the presentation, we expect a possible increase [ respect ] for those 17.83% core Tier 1 ratio to have that in the range of additional 100, 150 basis points of core Tier 1 ratio.

On the Patent Box, clearly, we cannot give you precise numbers. What we can, in any case we can confirm it, that is going to be in a sizable amount in the region of several tens of millions of euros, and that's all, but clearly this is an evolving story because the fact that we -- in the case we go for a CET1 ratio, this doesn't mean that we are not going to be extremely cautious and conservative in what we are doing.

In any case, we confirm that the Patent Box, when it's going to be finalized is going to be a sizable effect. I want to remind also that looking forward, Fineco is continuously developing brand-new platforms. All these brand-new platforms are clearly becoming eligible for getting an additional tax break because the trademark is a one-off. For example, everything that's related to the intellectual properties is recurrent and Fineco is in a great position, considering the [ innovative ] business model we have, so a business model that's different from most part of the other banks. We are directly developing our platforms, so this is making this quite attractive, considering the future revolution of Patent Box.

[Operator]

The next question is from Elena Perini with Banca IMI.

[Elena Perini, analyst]

I have got essentially 2 questions on your AUM net-net inflows and your net commissions. How do you see the net inflow needs going forward during this year? Do you see any improvement in AUM net-net inflows? Or given the current environment, do you still see a cautious attitude from investors? And linked to this, you gave us a guidance on net interest income for 2020. As regards net fees after the low double-digit growth you expect for the current year, what is your perception for 2020?

[Alessandro Foti, executive]

So regarding the assets under management inflows, we don't expect any significant change in terms of approach and the mix by clients. But at the same time, we there will be a continuous improvement of the -- our product offer is making us confident that we are going to be able to get absolutely decent returns, also assuming that clients are remaining cautious. Because as we underlined, the Fineco Asset Management is working quite actively in developing new solutions. They are exactly in that kind of direction. We were mentioning the new generation of decumulation products and also a new generation of insurance products. So we -- and so I'm jumping directly to your questions on what we can expect in terms of net commissions developments. So for the year, we gave a guidance of -- everything related to investing, growing in the region of a low double digit, and we confirm the same guidance also for 2020.

Let me spend also a few words because when we are talking about fees and commissions, there is also brokerage. And brokerage has suffered quite a lot in the -- particularly in the first quarter because we had the combination of very low volatility. At the same time, still the impact of new ESMA regulation. As we explained, the bank has put in place a quite huge amount of effort and direction of developing a new generation of products and services, mainly in the direction of the option business, that as we are not -- and we are not discovering [ the hot water ] , but this is the most profitable activity, for example, for the U.S. brokers. So now the most part of the profitability is coming from the option business. And the results are starting on building up. And for this reason, we think -- first of all, we can confirm that the results generated by brokers in the first quarter can represent the bottom of our results. And also assuming a volatility remaining pretty low, we expect that brokerage is going to keep on growing in the region of a high single digit going forward exactly for these reasons because what has been put in place is paying off, is not -- is, clearly, is not a coincidence that July has been the first month -- the best month of the year for brokerage. July has been characterized by a little bit touch higher volatility, but the most part is explained by, clearly, by the completely changed structure of products and offer. And again, we have not discovered anything. We are not going to get another [ prize ] for innovation, but just we are -- we implemented what has been proven to be very successful in U.S. for dealing with retail clients.

[Operator]

The next question is from Anna Adamo with Autonomous Research.

[Anna Adamo, analyst]

I have 2 questions on capital, please. Firstly, Slide 14 of the presentation shows that credit risk RWAs have gone up by 10% versus Q1. What is driving this significant RWA inflation in the quarter? Is there any one-off nonrecurring items? The second question, I understand that Fineco pillar 2 requirement is 0 at the moment? Do you expect an increase in the pillar 2 following the exit from the UniCredit group? And if so, what's the timing on this?

[Alessandro Foti, executive]

Regarding the increase of the risk weighted assets, it's just related -- the largest part by far is explained by the change in the way we are calculating the operational risk. That is not the increased risk profile of the bank. So I want to be extremely clear on this point.

[Anna Adamo, analyst]

But there is an increase in credit risk, RWAs?

[Alessandro Foti, executive]

Lorena?

[Lorena Pelliciari, executive]

Okay. So the increase in credit and the counter party risk quarter-on-quarter is partially due to increasing lending that is absolutely in line with the previous quarter. But we had -- we have invested -- we have made some new investments in covenant bond, which has a slight capital consumption. And there are some nonrecurring line items that are related to the purchase of securities not settled by the end of June, which generate a commitment for unsettled financial assets. This effect will be completely recovered at the beginning of July.

[Alessandro Foti, executive]

It's just a temporary effect because we -- as the situation in which exactly at the end of the month, we had some activities that's not completely finalized at the cross of the [ transition ] generated this temporary effect. And on the pillar 2, we are still waiting for -- because -- first of all, to know exactly and [ who will ] be our regulatory body because Fineco is still under the control of the ECB. But considering that we are below the EUR 30 billion threshold of the balance sheet, probably, we are expected to return under the control of Bank of Italy in terms of some areas. And clearly, after that, we are going to receive the final request on the pillar 2. We cannot rule out to get some more requests, but clearly, this is absolutely, totally, is going to have a negligible effect in what we are doing because Fineco is in a such strong position. That's also assuming that we receive an additional request, again, that is absolutely -- is not an issue.

[Operator]

[Operator Instructions] Ladies and gentlemen, there are no more questions registered at this time.

[Alessandro Foti, executive]

Thank you very much. As usual, if you have some more request of data, financial details, we are as usual always available for answering to your any additional questions in the coming days. Thank you very much.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. And you may disconnect your telephones.